As filed with the Securities and Exchange Commission on November 24, 2010.

Registration No. 333-161632

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

Amendment No. 7

to

Form S-1

 

 

Bedminster One

135 Route 202/206

Bedminster, New Jersey 07921

(908) 731-0700

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

 

 

Glenn H. Stevens

President and Chief Executive Officer

GAIN Capital Holdings, Inc.

Bedminster One

135 Route 202/206

Bedminster, New Jersey 07921

(908) 731-0700

(Name, address including zip code and telephone number, including area code, of agent for service)

 

 

 

 

Approximate date of commencement of proposed sale to the public:   As soon as practicable after the effective date hereof.

 

 

 

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.   o

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering.   o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering.   o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(Do not check if a smaller reporting company)

 

 

 

TABLE OF CONTENTS

 

 

 

You should rely only on the information contained in this prospectus. We, the selling stockholders and the underwriters have not authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We, the selling stockholders and the underwriters are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus or a free-writing prospectus is accurate only as of its date, regardless of its time of delivery or any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

 

For investors outside the United States: Neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.

 

Unless otherwise stated, all references to “us,” “our,” “GAIN,” “GAIN Capital,” “we,” the “Company” and similar designations refer to GAIN Capital Holdings, Inc. and its subsidiaries. Our logo, trademarks and service marks are the property of GAIN Capital Holdings, Inc. Other trademarks or service marks appearing in this prospectus are the property of their respective holders.

 

PROSPECTUS SUMMARY

	•	increasing recognition of currency trading as an alternative investment and as a tool for portfolio diversification by retail traders, authorized traders and investment professionals globally;
	•	improved access to the forex market, reduced transaction costs and more efficient execution;
	•	increased availability of investor education relating to the forex market and trading opportunities;
	•	expansion of marketing efforts by many leading firms in the forex industry;
	•	increasing media coverage of the forex market; and
	•	rising global broadband and wireless penetration.

	•	February 2009 — We introduced trading of gold and silver in the spot market.
	•	August 2009 — For our customers located outside of the United States, we introduced trading in oil contracts-for-difference, including “Brent Crude Oil” and “West Texas” contracts-for-difference.
	•	September 2009 — We launched a new version of our active trader platform, FOREXTrader PRO, featuring an updated user interface designed to improve overall usability and deliver faster trade execution, enhanced charting tools and improved chart-based trading capabilities.
	•	February 2010 — We introduced website trading into the FOREX.com offering, which provides streamlined trading, research and account management features in a secure, web-based environment. The availability of website trading complements our downloadable active trader platform, FOREXTrader PRO, and is an important part of our long-term strategy to attract a more diverse customer base, including novice traders who desire an easy-to-use trading experience that also includes education, research and customer support tools in a secure, customer-friendly website, and self-directed retail investors in the United States who are already accustomed to trading via the websites of their online brokerage firms.
	•	February 2010 — We introduced a version of the FOREX.com website designed for smartphones and web-enabled mobile devices. This version provides customers and registered practice trading account users with secure account access to trade and manage their accounts from their mobile devices as well as access to quotes, charts, news and research and an extensive learning section featuring articles and video tutorials.
	•	March 2010 — We launched GAIN GTX, our institutional electronic communications network, for our institutional customers consisting of commercial and investment banks, hedge funds, institutional asset managers, corporate treasuries and proprietary trading firms. GAIN GTX allows our institutional customers to enter forex bids and offers or to buy or sell instantly at competitive prices from leading participating banks including forex dealers, clearing banks and prime brokers.
	•	April 2010 — We launched a new Arabic language service under our FOREX.com U.K. division to service growing demand from retail traders in the Middle East.
	•	June 2010 — We further expanded our product offering to include equity index contracts-for-difference. Equity index contracts-for-difference give our customers outside the United States access to trade popular global equity indices located in the United Kingdom, Germany, France and United States.
	•	July 2010 — We launched a full-featured iPhone application that provides our customers and registered practice trading account users with mobile trading capabilities along with real-time news, charts, research and account information.

	•	The Retail Forex Market has Only Recently Become Accessible to Retail Investors, and Accordingly, We Have a Limited Operating History Upon Which to Evaluate Our Performance.   Our prospects may be materially adversely affected by the risks, expenses and difficulties frequently encountered in the operation of a new business in a rapidly evolving industry characterized by intense competition and evolving regulatory oversight and rules.
	•	Our Operations May be Restricted by Existing and Evolving Regulatory Requirements .  We operate in a heavily regulated environment that imposes significant compliance requirements and where failure to comply may result in regulatory actions and sanctions against us. For example, in August 2010 the Commodity Futures Trading Commission released new rules relating to the regulation of retail forex trading, including minimum security deposits, registration, risk disclosures relating to profits, record keeping, financial reporting, minimum capital and other operational standards. In addition, jurisdictions such as Japan and the United Kingdom have imposed additional regulatory requirements on our business operations in those jurisdictions.
	•	The Susceptibility of Our Revenue and Profitability to Changes in Domestic and International Market and Economic Conditions .  Our revenue and profitability is influenced by trading volume and currency volatility, which are directly impacted by disruption and volatility in domestic and international markets and economic conditions that are beyond our control.
	•	The Risk That Our Risk-Management Policies and Procedures May not be Effective and May Expose us to Unidentified or Unanticipated Risks .  We depend upon our risk-management policies to identify, monitor and control a variety of risks. Some of our methods for managing risk are discretionary in nature and based upon internally developed controls and observed historical market behaviors. Such policies may not adequately prevent losses or anticipate changes in the market.

	•	The Impact on Our Business from Potential Trading Losses .  A substantial portion of our revenue and operating profits is derived from our role as a market maker. In such role, we are exposed to significant pricing and liquidity risks, as well as to risks relating to possible inaccuracies in our proprietary pricing mechanism, which may result in trading losses.
	•	The Risk of Corruption or Disruption of Our Proprietary Technology .  Our success in the past has largely been attributable to our proprietary technology. We rely on our proprietary technology to receive and properly process internal and external data in order to run our business. Any disruption or corruption of our proprietary technology may result in service interruptions or other negative consequences.
	•	The Loss of Our Key Personnel.   Our key employees have significant experience in the forex industry and have made significant contributions to our business and operations. Our continued success is dependent upon the retention of these employees.
	•	Our Dependence on Wholesale Forex Trading Partners and Prime Brokers in Order to Continually Provide Our Market Making Services .  Given the level of our customers’ trading volume, we depend upon third-party financial institutions to provide us with access to forex market liquidity and competitive wholesale forex pricing spreads. In the event that we no longer have access to the competitive wholesale forex pricing spreads and/or levels of liquidity that we currently have, we may be unable to provide competitive forex trading services, which will materially adversely affect our business, financial condition and results of operations and cash flows.
	•	A Risk of Default by Financial Institutions Holding Our Funds and Other Counterparties with Whom We do Business.   Our forex market making operations require a commitment of capital that involves risk of losses because of the potential failure or default by the counterparties with whom we do business.

	•	Forex Trading Products

	•	Contracts-For-Difference

	•	Listed Exchange Products

We intend to continue to selectively pursue attractive acquisition and alliance opportunities. In the past, we have successfully expanded the breadth of our product and service offerings by acquiring companies with complementary products and services, such as our acquisitions of RCG GAIN Limited (now known as GAIN Capital-Forex.com U.K., Ltd.), Fortune Capital Co. Ltd. (now known as Forex.com Japan Co., Ltd.) and a U.S. registered broker-dealer of equity securities (now known as GAIN Capital Securities, Inc.). More recently, we acquired assets of MG Financial LLC, a forex trading firm, on September 14, 2010 and on October 5, 2010, we entered into an asset purchase agreement with Capital Market Services, LLC, and affiliated entities, to acquire the retail forex trading accounts of this forex trading firm. Additionally, we will consider acquisitions and alliances in key geographic markets to establish or increase our presence and accelerate our growth. Following this offering, we believe we will have the ability to use our common stock as an additional currency with which to pursue future acquisitions.

 

Capture Additional Market Share as a Result of Increased Regulatory Requirements

 

Regulators in the United States and other jurisdictions have established and continue to establish, a series of new regulations that impact retail forex brokers, including substantial increases in minimum required regulatory capital, increased oversight of third-party introducing brokers and regulations regarding the execution of trades. While complying with these regulations may increase our operational costs, we believe that these regulations have given retail investors more confidence in retail forex as an asset class and in retail forex firms that are able to comply with them. We believe that these regulations have reduced the number of firms offering retail forex services, even as the number of retail forex customers and the retail forex trade volume has grown. As the retail forex industry consolidates, scale and ability to comply with regulation will become increasingly important for retail forex brokers, presenting opportunities to larger firms, such as us, that can meet the more stringent regulatory requirements.

 

Corporate Information

 

We were incorporated in Delaware in October 1999 as GAIN Capital, Inc. In order to expand, either directly or through wholly-owned subsidiaries, into business activities not regulated by the Commodity Futures Trading Commission or the National Futures Association, on August 1, 2003, all outstanding capital stock of GAIN Capital, Inc. was converted into capital stock of GAIN Capital Group, Inc. pursuant to an agreement and plan of merger by and among GAIN Capital Group, Inc., GAIN Merger Sub Inc. (a wholly-owned subsidiary of GAIN Capital Group,

Common stock offered by us		407,692 shares

Common stock offered by the selling stockholders		10,592,308 shares

Total common stock offered in this offering		11,000,000 shares

Common stock to be outstanding immediately after this offering		31,145,758 shares

Over-allotment option		1,650,000 shares offered by selling stockholders

Use of proceeds		We intend to use the proceeds we receive from this offering only to cover historical and expected costs from this offering. We will not receive any of the proceeds from the sale of shares by the selling stockholders. See “Use of Proceeds.”
Proposed New York Stock Exchange symbol		“GCAP”
Risk factors		See “Risk Factors” beginning on page 18 of this prospectus and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in shares of our common stock.

	•	4,716,878 shares of common stock issuable upon the exercise of outstanding stock options as of November 23, 2010 at a weighted average exercise price of $2.32 per share;

	•	1,910,286 shares of common stock issuable pursuant to outstanding restricted stock units as of November 23, 2010;

	•	3,298,507 shares of common stock issuable upon the exercise of outstanding warrants as of November 23, 2010 at a weighted average exercise price of $0.49 per share;

	•	an aggregate of 1,400,000 shares of common stock that will be reserved for future issuance under our 2010 Omnibus Incentive Compensation Plan as of the closing of this offering; and

	•	an aggregate of 500,000 shares of common stock that will be reserved for future issuance under our 2011 Employee Stock Purchase Plan.

																						Nine Months Ended
		Year Ended December 31,																				September 30,
		2005 (1)				2006 (2)				2007 (2)				2008 (2)				2009 (2)				2009 (2)				2010 (2)
		(in thousands, except share and per share data)
Consolidated Statements of Operations Data:
REVENUE
Trading revenue		$	36,249			$	69,471			$	118,176			$	186,004			$	153,375			$	114,332			$	147,667
Other revenue			223				242				437				2,366				2,108				1,119				1,914
Total non-interest revenue			36,472				69,713				118,613				188,370				155,483				115,451				149,581
Interest revenue			1,519				3,145				5,024				3,635				292				228				243
Interest expense			(110	)			(2,431	)			(4,299	)			(3,905	)			(2,456	)			(1,848	)			(1,676	)
Total net interest revenue/(expense)			1,409				714				725				(270	)			(2,164	)			(1,620	)			(1,433	)
Net revenue			37,881				70,427				119,338				188,100				153,319				113,831				148,148
EXPENSES
Employee compensation and benefits			9,511				17,258				25,093				37,024				41,503				29,621				34,031
Selling and marketing			3,256				12,517				21,836				29,312				36,875				26,791				28,192
Trading expenses and commissions			7,279				10,321				10,436				16,310				14,955				10,431				18,601
Bank fees			507				935				2,316				3,754				4,466				3,415				3,170
Depreciation and amortization			494				897				1,911				2,496				2,689				2,013				2,568
Communications and data processing			424				873				1,659				2,467				2,676				1,950				2,209
Occupancy and equipment			530				1,045				1,616				2,419				3,548				2,391				2,963
Bad debt provision/(recovery)			836				574				1,164				1,418				760				593				514
Professional fees			761				1,295				1,380				3,104				3,729				2,549				2,623
Software expense			21				78				123				888				1,132				712				1,431
Professional dues and memberships			15				48				187				773				698				565				205
Write-off of deferred initial public offering costs			—				—				—				1,897				—				—				—
Change in fair value of convertible, redeemable preferred stock embedded derivative (2)			—				61,732				165,280				(181,782	)			(1,687	)			40,820				48,936
Impairment of intangible assets			—				165				—				—				—				—				—
Other			155				3,085				(627	)			1,424				1,746				1,091				3,846
Total			23,789				110,823				232,374				(78,496	)			113,090				122,942				149,289
INCOME/(LOSS) BEFORE INCOME TAX EXPENSE AND EQUITY IN EARNINGS OF EQUITY METHOD INVESTMENT			14,092				(40,396	)			(113,036	)			266,596				40,229				(9,111	)			(1,141	)
Income tax expense			5,881				9,063				21,615				34,977				12,556				11,423				18,192
Equity in earnings of equity method investment			(3	)			(43	)			—				(214	)			—				—				—
NET INCOME/(LOSS)			8,208				(49,502	)			(134,651	)			231,405				27,673				(20,534	)			(19,333	)
Net income/(loss) applicable to noncontrolling interest			—				—				—				(21	)			(321	)			(15	)			(402	)
Net income/(loss) applicable to GAIN Capital Holdings, Inc.		$	8,208			$	(49,502	)		$	(134,651	)		$	231,426			$	27,994			$	(20,519	)			(18,931	)
Effect of redemption of preferred shares			—				(39,006	)			—				(63,913	)			—				—				—
Effect of preferred share accretion			(63	)			2,205				—				—				—				—				—
Net income/(loss) applicable to GAIN Capital Holdings, Inc. Common Shareholders		$	8,145			$	(86,303	)		$	(134,651	)		$	167,513			$	27,994			$	(20,519	)			(18,931	)
Earnings/(loss) per common share:
Basic		$	1.96			$	(30.90	)		$	(70.89	)		$	130.12			$	21.41			$	(15.71	)		$	(14.26	)
Diluted		$	0.49			$	(30.90	)		$	(70.89	)		$	11.17			$	1.88			$	(15.71	)		$	(14.26	)
Weighted average common shares outstanding used in computing earnings/(loss) per common share:
Basic			4,157,464				2,792,895				1,899,386				1,287,360				1,307,379				1,306,265				1,327,124
Diluted			16,634,016				2,792,895				1,899,386				15,002,277				14,909,184				1,306,265				1,327,124
Pro forma (unaudited) (3)
Pro forma earnings/(loss) per common share:
Basic																		$	20.12			$	15.54			$	22.61
Diluted																		$	1.76			$	1.36			$	2.01

(1)		These amounts do not include the impact of the embedded derivative liability of approximately $37.6 million (unaudited) as of December 31, 2005 and the change in fair value for the year ended December 31, 2005 of $28.8 million (unaudited).
(2)		For each of the periods indicated, in accordance with Financial Accounting Standards Board Accounting Standards Codification 815, Derivatives and Hedging , we accounted for an embedded derivative liability attributable to the redemption feature of our outstanding preferred stock. This redemption feature and the associated embedded derivative liability will no longer be required to be recognized upon conversion of our preferred stock in connection with the completion of this offering.
(3)		These amounts do not include the impact of the change in fair value of our preferred stock embedded derivative, the effect of redemption of preferred stock and the effect of preferred stock accretion. For the year ended December 31, 2009 and the nine months ended September 30, 2010, the change in fair value of our preferred stock embedded derivative resulted in a gain of $1.7 million and a loss of $48.9 million, respectively.

		As of December 31,																				As of September 30,
		2005				2006				2007				2008				2009				2009				2010
		(in thousands unless otherwise stated)
Consolidated Statements of Financial Condition Data:
Cash and cash equivalents		$	22,482			$	31,476			$	98,894			$	176,431			$	222,524			$	197,938			$	258,012
Receivables from brokers		$	59,080			$	71,750			$	74,630			$	50,817			$	76,391			$	100,171			$	89,569
Total assets		$	83,740			$	113,491			$	180,628			$	264,816			$	351,940			$	315,710			$	405,361
Payables to brokers, dealers, futures commission merchants, and other regulated entities		$	4,577			$	5,248			$	2,163			$	1,679			$	2,769			$	1,732			$	5,857
Payables to customers		$	50,031			$	70,321			$	106,741			$	122,293			$	196,985			$	168,266			$	216,587
Convertible, redeemable preferred stock embedded derivative		$	—			$	99,286			$	264,566			$	82,785			$	81,098			$	123,604			$	130,034
Notes payable		$	—			$	27,500			$	49,875			$	39,375			$	28,875			$	31,500			$	21,000
Total shareholders’ equity/(deficit)		$	23,605			$	(154,242	)		$	(316,340	)		$	(172,154	)		$	(139,890	)		$	(188,831	)		$	(154,983	)

Selected Operational Data

 

		As of December 31,																				As of September 30,
		2005				2006				2007				2008				2009				2009				2010
		($ in thousands unless otherwise stated)
Number of opened retail accounts (4) :
Total			30,626				63,576				105,924				154,190				211,136				195,559				264,834
China			3,202				8,395				19,869				27,358				27,362				27,362				28,819
Number of tradable retail accounts:
Total			11,761				27,836				41,120				36,744				51,652				47,374				70,618
China			1,631				4,799				9,702				2,839				1				8				1,029
Adjusted net capital in excess of regulatory requirements (5)		$	20,065			$	15,296			$	44,856			$	98,571			$	71,087			$	68,604			$	60,565

																						Nine Months Ended
		Year Ended December 31,																				September 30,
		2005				2006				2007				2008				2009				2009				2010
		($ in thousands unless otherwise stated)
Number of traded retail accounts:
Total			13,896				28,270				43,139				52,555				52,755				43,565				52,486
China			2,416				5,533				11,568				11,647				7				6				269
Total trading volume (dollars in billions)
Total		$	231.9			$	447.4			$	674.5			$	1,498.6			$	1,246.7			$	928.3			$	1,093.9
China		$	24.4			$	50.8			$	103.4			$	172.4			$	0.4			$	0.2			$	0.7
Net deposits received from retail customers (dollars in millions):
Total		$	70.2			$	102.8			$	184.2			$	277.3			$	257.1			$	186.9			$	205.5
China		$	6.8			$	10.5			$	26.0			$	25.3			$	(1.4	)		$	(1.3	)		$	0.3
Retail revenue per million traded		$	156.3			$	155.3			$	175.2			$	124.1			$	123.0			$	122.6			$	154.1

(4)		Opened retail customer accounts represent accounts opened with us on a cumulative basis at any time since we commenced operations.
(5)		Adjusted net capital in excess of regulatory requirements represents the excess funds over the regulatory minimum requirements as defined by the regulatory bodies that regulate our operating subsidiaries.

Selected Geographic Data

 

																						Nine Months Ended
																						September 30,
		2005				2006				2007				2008				2009				2009				2010
Customer trading volume by region (dollars in billions)
U.S.		$	122.2			$	238.3			$	355.4			$	878.9			$	679.2			$	506.8			$	579.0
China (6)(7)			24.4				50.8				103.4				172.4				0.4				0.2	(7)			0.7	(8)
Canada			9.6				29.2				58.6				122.9				142.5				122.2				62.9
Europe, Middle East and Africa			27.9				42.9				64.3				153.1				179.5				126.5				182.3
Asia (ex-China)			33.8				42.7				54.0				96.4				159.1				110.0				194.5
Rest of World			14.0				43.5				38.8				74.9				86.0				62.6				74.5
Total		$	231.9			$	447.4			$	674.5			$	1,498.6			$	1,246.7			$	928.3			$	1,093.9

(6)		As a result of our review of our regulatory compliance in China, we decided to terminate our service offerings to residents of China and ceased our trading operations located in that country as of December 31, 2008.
(7)		For the year ended December 31, 2009, a small number of existing customer accounts, which were originally opened through our relationship with one of our introducing brokers prior to the termination of our service offering in China, continued to trade using our platform. The trading activity by these residual accounts resulted in the trading volume for the period. All of these accounts were closed as of December 31, 2009.
(8)		Based on our most recent review of the relevant regulatory requirements in China, we now believe that we can accept customers from China if the customers come to our website without being solicited by us to do so. As a result, we began accepting non-solicited customers from China in June 2010.

														Nine Months Ended
		Year Ended December 31,												September 30,
		2007				2008				2009				2009				2010
		(in thousands unless otherwise stated)
Net (loss)/income applicable to GAIN Capital Holdings, Inc.		$	(134,651	)		$	231,426			$	27,994			$	(20,519	)		$	(18,931	)
Change in fair value of convertible, redeemable preferred stock embedded derivative			165,280				(181,782	)			(1,687	)			40,820				48,936
Adjusted net income		$	30,629			$	49,644			$	26,307			$	20,301			$	30,005
Adjusted earnings per common share
Basic		$	16.13			$	38.56			$	20.12			$	15.54			$	22.61
Diluted		$	2.05			$	3.31			$	1.76			$	1.36			$	2.01

		As of September 30, 2010
										Pro Forma
		Actual				Pro Forma				As Adjusted
		(in thousands)
Consolidated Statement of Financial Condition Data:
Cash and cash equivalents		$	258,012
Total assets		$	405,361
Notes payable		$	21,000
Total convertible, redeemable preferred stock		$	130,034
Total shareholders’ deficit		$	(154,983	)

 

The pro forma as adjusted financial information is based upon the actual initial public offering price and other terms of this offering determined at pricing.

 

Investing in our common stock involves a substantial risk. You should consider carefully the following risks and other information in this prospectus, including our consolidated financial statements and related notes, before deciding whether to invest in our common stock. If any of the events highlighted in the following risks actually occurs, our business, results of operations or financial condition would likely suffer. In such an event, the trading price of our common stock could decline and you could lose all or part of your investment.

 

Risks Related to Our Business

 

The Retail Foreign Exchange, or Forex, Market Has Only Recently Become Accessible to Retail Investors and, Accordingly, We Have a Limited Operating History Upon Which to Evaluate Our Performance.

 

The retail forex market has only recently become accessible to retail investors. Prior to 1996, retail investors generally did not directly trade in the forex market and, we believe most current retail forex traders only recently viewed currency trading as an alternative investment class. We commenced doing business in October 1999 and our forex trading operations were launched in June 2000, at which time we began offering forex trading services domestically and internationally. Accordingly, we have only a limited operating history in a relatively new international retail forex trading market upon which you can evaluate our prospects and future performance. Our prospects may be materially adversely affected by the risks, expenses and difficulties frequently encountered in the operation of a new business in a rapidly evolving industry characterized by intense competition and evolving domestic and global regulatory oversight and rules.

 

Our Revenue and Profitability Are Influenced by Trading Volume and Currency Volatility, Which Are Directly Impacted by Domestic and International Market and Economic Conditions That Are Beyond Our Control.

 

During the past few years, there has been significant disruption and volatility in the global financial markets. Many countries, including the United States, have recently experienced recessionary conditions. Our revenue is influenced by the general level of trading activity in the forex market. Our revenue and operating results may vary significantly from period to period due primarily to movements and trends in the world’s currency markets and to fluctuations in trading levels. We have generally experienced greater trading volume in periods of volatile currency markets. In the event we experience lower levels of currency volatility, our revenue and profitability will likely be negatively affected. Like other financial services firms, our business and profitability are directly affected by elements that are beyond our control, such as economic and political conditions, broad trends in business and finance, changes in the volume of foreign currency transactions, changes in supply and demand for currencies, movements in currency exchange rates, changes in the financial strength of market participants, legislative and regulatory changes, changes in the markets in which such transactions occur, changes in how such transactions are processed and disruptions due to terrorism, war or extreme weather events. Any one or more of these factors, or other factors, may adversely affect our business and results of operations and cash flows. A weakness in equity markets, such as the current economic slowdown causing a reduction in trading volume in U.S. or foreign securities and derivatives, could result in reduced trading activity in the forex market and, therefore, could have a material adverse effect on our business, financial condition and results of operations and cash flows. As a result, period-to-period comparisons of our operating results may not be meaningful and our future operating results may be subject to significant fluctuations or declines.

 

Reduced Spreads in Foreign Currencies, Levels of Trading Activity and Trading Through Alternative Trading Systems Could Reduce Our Profitability.

 

Computer-generated buy and sell programs and other technological advances and regulatory changes in the forex market may continue to tighten spreads on foreign currency transactions. Tighter spreads and increased competition could make the execution of trades and market making activities less profitable. In addition, new and enhanced alternative trading systems have emerged as an option for individual and institutional investors to avoid directing their trades through market makers, which could result in reduced revenue derived from our market making business.

Our Risk-Management Policies and Procedures May Not Be Effective and May Leave Us Exposed to Unidentified or Unexpected Risks.

 

We are dependent on our risk-management policies and the adherence to such policies by our trading staff. Our policies, procedures and practices used to identify, monitor and control a variety of risks, including risks related to human error, customer defaults, market movements, fraud and money-laundering, are established and reviewed by the risk committee of our board of directors. Some of our methods for managing risk are discretionary by nature and are based on internally developed controls and observed historical market behavior, and also involve reliance on standard industry practices. These methods may not adequately prevent losses, particularly as they relate to extreme market movements, which may be significantly greater than historical fluctuations in the market. Our risk-management methods also may not adequately prevent losses due to technical errors if our testing and quality control practices are not effective in preventing software or hardware failures. In addition, we may elect to adjust our risk-management policies to allow for an increase in risk tolerance, which could expose us to the risk of greater losses. Our risk-management methods rely on a combination of technical and human controls and supervision that are subject to error and failure. These methods may not protect us against all risks or may protect us less than anticipated, in which case our business, financial condition and results of operations and cash flows may be materially adversely affected.

 

We May Incur Material Trading Losses From Our Market Making Activities.

 

A substantial portion of our revenue and operating profits is derived from our role as a market maker. In our role as a market maker, we attempt to derive a profit from the difference between the prices at which we buy and sell, or sell and buy, foreign currencies. Since these activities involve the purchase or sale of foreign currencies for our own account, we may incur trading losses for a variety of reasons, including:

 

 

These risks may affect the prices at which we are able to sell or buy foreign currencies, or may limit or restrict our ability to either resell foreign currencies that we have purchased or repurchase foreign currencies that we have sold.

 

In addition, competitive forces often require us to match the breadth of quotes other market makers display and to hold varying amounts and types of foreign currencies at any given time. By having to maintain positions in certain currencies, we are subjected to a high degree of risk. We may not be able to manage such risk successfully and may experience significant losses from such activities, which could have a material adverse effect on our business, financial condition and results of operations and cash flows.

 

We Are Exposed to Losses Due to Lack of Accurate or Timely Information.

 

As a market maker, we provide liquidity by buying from sellers and selling to buyers. We may frequently trade with parties who have different or more timely information than we do, and as a result, we may accumulate unfavorable positions preceding price movements in currency pairs in which we are a market maker. In a forex trade, participants buy one currency and simultaneously sell another currency. We refer to the two currencies that make up a forex trade as a currency pair. The first currency noted in the pair is the base currency and the second is the counter currency. Should the frequency or magnitude of these unfavorable positions increase, our business, financial condition and results of operations and cash flows would be materially adversely affected.

We Depend on Our Proprietary Technology. Any Disruption or Corruption of Our Proprietary Technology or Our Inability to Maintain Technological Superiority in Our Industry Could Have a Material Adverse Effect on Our Business, Financial Condition and Results of Operations and Cash Flows. We May Experience Failures While Developing Our Proprietary Technology.

 

We rely on our proprietary technology to receive and properly process internal and external data. Any disruption for any reason in the proper functioning, or any corruption, of our software or erroneous or corrupted data may cause us to make erroneous trades, accept customers from jurisdictions where we do not possess the proper licenses, authorizations or permits, or require us to suspend our services and could have a material adverse effect on our business, financial condition and results of operations and cash flows. In order to remain competitive, our proprietary technology is under continuous development and redesign. As we develop and redesign our proprietary technology, there is an ongoing risk that failures may occur and result in service interruptions or other negative consequences such as slower quote aggregation, slower trade execution, erroneous trades, or mistaken risk-management information.

 

Our success in the past has largely been attributable to our proprietary technology that has taken many years to develop. We believe our proprietary technology has provided us with a competitive advantage relative to many forex market participants. If our competitors develop more advanced technologies, we may be required to devote substantial resources to the development of more advanced technology to remain competitive. The forex market is characterized by rapidly changing technology, evolving industry standards and changing trading systems, practices and techniques. We may not be able to keep up with these rapid changes in the future, develop new technology, realize a return on amounts invested in developing new technologies or remain competitive in the future.

 

Systems Failures Could Cause Interruptions in Our Services or Decreases in the Responsiveness of Our Services Which Could Harm Our Business.

 

If our systems fail to perform, we could experience disruptions in operations, slower response times or decreased customer satisfaction. Our ability to facilitate transactions successfully and provide high quality customer service depends on the efficient and uninterrupted operation of our computer and communications hardware and software systems. These systems have in the past experienced periodic interruptions and disruptions in operations, which we believe will continue to occur from time to time. Our systems also are vulnerable to damage or interruption from human error, natural disasters, power loss, telecommunication failures, break-ins, sabotage, computer viruses, intentional acts of vandalism and similar events. We do not have fully redundant capabilities. While we currently maintain a disaster recovery plan, or DRP, which is intended to minimize service interruptions and secure data integrity, our DRP may not work effectively during an emergency. Any systems failure that causes an interruption in our services or decreases the responsiveness of our services could impair our reputation, damage our brand name and materially adversely affect our business, financial condition and results of operations and cash flows.

 

We May Not Be Able to Protect Our Intellectual Property Rights or May Be Prevented From Using Intellectual Property Necessary for Our Business.

 

We rely on a combination of trademark, copyright, trade secret and fair business practice laws in the United States and other jurisdictions to protect our proprietary technology, intellectual property rights and our brand. We also enter into confidentiality and invention assignment agreements with our employees and consultants, and confidentiality agreements with other third parties. We also rigorously control access to proprietary technology. We do not have any patents. It is possible that third parties may copy or otherwise obtain and use our proprietary technology without authorization or otherwise infringe on our rights. We also license or are permitted to use intellectual property or technologies owned by others. In the event such intellectual property or technology becomes material to our business, our inability to continue use such technologies would have a material adverse effect on our business. We may also face claims of infringement that could interfere with our ability to use technology that is material to our business operations.

 

In the future, we may have to rely on litigation to enforce our intellectual property rights, protect our trade secrets, determine the validity and scope of the proprietary rights of others or defend against claims of infringement or invalidity. Any such litigation, whether successful or unsuccessful, could result in substantial costs and the diversion of resources and the attention of management, any of which could negatively affect our business.

Our Cost Structure Is Largely Fixed. If Our Revenues Decline and We Are Unable to Reduce Our Costs, Our Profitability Will Be Adversely Affected.

 

Our cost structure is largely fixed. We base our cost structure on historical and expected levels of demand for our products and services, as well as our fixed operating infrastructure, such as computer hardware and software, hosting facilities and security and staffing levels. If demand for our products and services declines and, as a result, our revenues decline, we may not be able to adjust our cost structure on a timely basis and our profitability may be materially adversely affected.

 

Attrition of Customer Accounts and Failure to Attract New Accounts Could Have a Material Adverse Effect on Our Business, Financial Condition and Results of Operations and Cash Flows. Even if We Do Attract New Customers, We May Fail to Attract the Customers in a Cost-Effective Manner, Which Could Materially Adversely Affect Our Profitability and Growth.

 

Our customer base is primarily comprised of individual retail customers who generally trade in the forex market with us for short periods. Although we offer products and tailored services designed to educate, support and retain our customers, our efforts to attract new customers or reduce the attrition rate of our existing customers may not be successful. If we are unable to maintain or increase our customer retention rates or generate a substantial number of new customers in a cost-effective manner, our business, financial condition and results of operations and cash flows would likely be adversely affected. For the year ended December 31, 2009, we incurred sales and marketing expenses of $36.9 million. Although we have spent significant financial resources on sales and marketing expenses and related expenses and plan to continue to do so, these efforts may not be cost-effective at attracting new customers. In particular, we believe that rates for desirable advertising and marketing placements, including online, search engine, print and television advertising, are likely to increase in the foreseeable future, and we may be disadvantaged relative to our larger competitors in our ability to expand or maintain our advertising and marketing commitments. Additionally, our sales and marketing methods are subject to regulation by the Commodity Futures Trading Commission, or CFTC, and National Futures Association, or NFA. The rules and regulations of these organizations impose specific limitations on our sales methods, advertising and marketing. If we do not achieve our advertising objectives, our profitability and growth may be materially adversely affected.

 

Our Business Could Be Adversely Affected if Global Economic Conditions Continue to Negatively Impact Our Customer Base.

 

Our customer base is primarily comprised of individual retail customers who view foreign currency trading as an alternative investment class. If global economic conditions continue to negatively impact the forex market or adverse developments in global economic conditions continue to limit the disposable income of our customers, our business could be materially adversely affected as our customers may choose to curtail their trading in the forex market which could result in reduced customer trading volume and trading revenue.

 

We Are Subject to Litigation Risk Which Could Adversely Affect Our Reputation, Business, Financial Condition and Results of Operations and Cash Flows.

 

Many aspects of our business involve risks that expose us to liability under U.S. federal and state laws, as well as the rules and enforcement efforts of our regulators and self-regulatory organizations worldwide. These risks include, among others, disputes over trade terms with customers and other market participants, customer losses resulting from system delay or failure and customer claims that we or our employees executed unauthorized transactions, made materially false or misleading statements or lost or diverted customer assets in our custody. We may also be subject to regulatory investigation and enforcement actions seeking to impose significant fines or other sanctions, which in turn could trigger civil litigation for our previous operations that may be deemed to have violated applicable rules and regulations in various jurisdictions.

 

The volume of claims and the amount of damages and fines claimed in litigation and regulatory proceedings against financial services firms has been increasing and may continue to increase. The amounts involved in the trades we execute, together with rapid price movements in our currency pairs, can result in potentially large damage claims in any litigation resulting from such trades. Dissatisfied customers, regulators or self-regulatory

organizations may make claims against us regarding the quality of trade execution, improperly settled trades, mismanagement or even fraud, and these claims may increase as our business expands.

 

Litigation may also arise from disputes over the exercise of our rights with respect to customer accounts and collateral. Although our customer agreements generally provide that we may exercise such rights with respect to customer accounts and collateral as we deem reasonably necessary for our protection, our exercise of these rights may lead to claims by customers that we did so improperly.

 

Even if we prevail in any litigation or enforcement proceedings against us, we could incur significant legal expenses defending against the claims, even those without merit. Moreover, because even claims without merit can damage our reputation or raise concerns among our customers, we may feel compelled to settle claims at significant cost. The initiation of any claim, proceeding or investigation against us, or an adverse resolution of any such matter could have a material adverse effect on our reputation, business, financial condition and results of operations and cash flows.

 

We May Be Subject to Customer Litigation, Financial Losses, Regulatory Sanctions and Harm to Our Reputation as a Result of Employee Misconduct or Errors That Are Difficult to Detect and Deter.

 

There have been a number of highly publicized cases involving fraud or other misconduct by employees of financial services firms in recent years. Our employees could execute unauthorized transactions for our customers, use customer assets improperly or without authorization, carry out improper activities on behalf of customers or use confidential customer or company information for personal or other improper purposes, as well as improperly record or otherwise try to hide improper activities from us.

 

In addition, employee errors, including mistakes in executing, recording or reporting transactions for customers, may cause us to enter into transactions that customers disavow and refuse to settle. Employee errors expose us to the risk of material losses until the errors are detected and the transactions are unwound or reversed. The risk of employee error or miscommunication may be greater for products that are new or have non-standardized terms. Further, such errors may be more likely to occur in the aftermath of any acquisitions during the integration of or migration from technological systems.

 

Misconduct by our employees or former employees could subject us to financial losses or regulatory sanctions and seriously harm our reputation. It may not be possible to deter or detect employee misconduct and the precautions we take to prevent and detect this activity may not be effective in all cases. Our employees may also commit good faith errors that could subject us to financial claims for negligence or otherwise, as well as regulatory actions.

 

Misconduct by employees of our customers can also expose us to claims for financial losses or regulatory proceedings when it is alleged we or our employees knew or should have known that an employee of our customer was not authorized to undertake certain transactions. Dissatisfied customers can make claims against us, including claims for negligence, fraud, unauthorized trading, failure to supervise, breach of fiduciary duty, employee errors, intentional misconduct, unauthorized transactions by associated persons or failures in the processing of transactions.

 

Any Restriction in the Availability of Credit Cards as a Payment Option for Our Customers Could Adversely Affect Our Business, Financial Condition and Results of Operations and Cash Flows.

 

We currently allow our customers to use credit cards to fund their accounts with us and 76.7% of our customers deposits were funded in this manner for the nine months ended September 30, 2010. There is a risk that in the future, new regulations or credit card issuing institutions may restrict the use of credit and debit cards as a means to fund accounts used to trade in investment products. The elimination or a reduction in the availability of credit cards as a means to fund customer accounts or any increase in the fees associated with such use, could have a material adverse effect on our business, financial condition and results of operations and cash flows.

 

Our Customer Accounts May Be Vulnerable to Identity Theft and Credit Card Fraud.

 

Credit card issuers have adopted credit card security guidelines as part of their ongoing efforts to prevent identity theft and credit card fraud. We continue to work with credit card issuers to ensure that our services, including customer account maintenance, comply with these rules. When there is unauthorized access to credit card

data that results in financial loss, there is the potential that we could experience reputational damage and parties could seek damages from us.

 

Failure to Maintain the Anonymity of Our Institutional Customers on Our GTX Electronic Communications Network, or ECN, Could Harm Our Reputation and Result in a Material Adverse Effect on Our Business, Financial Condition and Results of Operations and Cash Flows.

 

We operate our GTX ECN as a fully anonymous trading environment that offers our institutional customers direct market access and trade execution capabilities. If outside individuals determine the identity of our institutional customers, we may be subject to customer claims against us for negligence, fraud, failure to supervise, employee error and intentional misconduct, among others. Any such claims may harm our reputation and result in a material adverse effects on our business, financial condition and results of operations and cash flows.

 

A Financial Services Firm’s Reputation Is Critically Important. If Our Reputation Is Harmed, or the Reputation of the Online Financial Services Industry as a Whole Is Harmed, Our Business, Financial Condition and Results of Operations and Cash Flows may be Materially Adversely Affected.

 

Our ability to attract and retain customers and employees may be adversely affected if our reputation is damaged. If we fail, or appear to fail, to deal with issues that may give rise to reputation risk, we could harm our business prospects. These issues include, but are not limited to, appropriately dealing with potential conflicts of interest, legal and regulatory requirements, ethical issues, money-laundering, privacy, client data protection, record keeping, sales and trading practices, and the proper identification of the legal, credit, liquidity, and market risks inherent in our business. Failure to appropriately address these issues could also give rise to additional legal risk to us, which could, in turn, increase the size and number of claims and damages asserted against us or subject us to regulatory enforcement actions, fines and penalties. Any such sanction would materially adversely affect our reputation, thereby reducing our ability to attract and retain customers and employees.

 

In addition, our ability to attract and retain customers may be adversely affected if the reputation of the online financial services industry as a whole or forex industry is damaged. In recent years, a number of financial services firms have suffered significant damage to their reputations from highly publicized incidents that in turn resulted in significant and in some cases irreparable harm to their business. The perception of instability within the online financial services industry could materially adversely affect our ability to attract and retain customers.

 

The Loss of Our Key Employees Would Materially Adversely Affect Our Business, Including Our Ability to Grow Our Business.

 

Our key employees, including Glenn Stevens, our chief executive officer, and Alexander Bobinski, our executive vice president, operations, have significant experience in the forex industry and have made significant contributions to our business. Henry Lyons, our chief financial officer, has significant experience with publicly traded companies and has made significant contributions to our company. In addition, Timothy O’Sullivan, our chief dealer, Samantha Roady, our chief marketing officer, and Andrew Haines, our chief information officer, have made significant contributions to our business. Our continued success is dependent upon the retention of these and other key executive officers and employees, as well as the services provided by our trading staff, technology and programming specialists and a number of other key managerial, marketing, planning, financial, technical and operations personnel. The loss of such key personnel could have a material adverse effect on our business. In addition, our ability to grow our business is dependent, to a large degree, on our ability to retain such employees.

 

Any Future Acquisitions May Result in Significant Transaction Expenses, Integration and Consolidation Risks and Risks Associated With Entering New Markets, and We May Be Unable to Profitably Operate Our Consolidated Company.

 

Although our growth strategy has not focused historically on acquisitions, we may in the future selectively pursue acquisitions and new businesses. Any future acquisitions may result in significant transaction expenses and present new risks associated with entering additional markets or offering new products and integrating the acquired

companies. Because acquisitions historically have not been a core part of our growth strategy, we do not have significant experience in successfully completing acquisitions. We may not have sufficient management, financial and other resources to integrate companies we acquire or to successfully operate new businesses and we may be unable to profitably operate our expanded company. Additionally, any new businesses that we may acquire, once integrated with our existing operations, may not produce expected or intended results.

 

The Expansion of Our Trading Activities Into Other Financial Products, Including Listed Securities, Contracts for Difference, or CFDs, Over-the-Counter, or OTC, Currency Derivatives and Gold and Silver Spot Trading Entails Significant Risk, and Unforeseen Events in Such Business Could Have An Adverse Effect on Our Business, Financial Condition and Results of Operations and Cash Flows.

 

All of the risks that pertain to our trading activities in the forex market also apply to our listed securities, CFDs, OTC currency derivatives and gold and silver spot trading and any other products we may offer in the future. These risks include market risk, counterparty risk, liquidity risk, technology risk, third-party risk and risk of human error. In addition, we have limited experience outside of the forex market and even though we expect to ease into these activities very slowly through internal growth or acquisition, any kind of unexpected event can occur that can result in great financial loss to us, including our inability to effectively integrate new products into our existing trading platform or our failure to properly manage the market risks associated with making-markets for new products. With respect to CFDs, the volatility characteristics of the CFD market may have an adverse impact on our ability to maintain profit margins similar to the profit margins we have realized with respect to forex trading. In addition, by further expanding our listed securities offerings, we are expanding from what is primarily a market making business model into a business model that includes brokerage activities that require reliance upon third-party clearing firms to hold our customers’ funds and execute our customers’ trades. The introduction of these and other potential financial products also poses a risk that our risk-management policies, procedures and practices, and the technology that supports such activities, will be unable to effectively manage these new risks to our business. In addition we would be subject to local securities laws for all of these offerings. Our non-U.S. operating subsidiaries, including, GAIN Capital-Forex.com U.K., Ltd., which is licensed with the Financial Services Authority in the United Kingdom, GAIN Capital Forex.com Australia Pty. Ltd., which is licensed with the Australian Securities and Investments Commission, and Forex.com Japan Co., Ltd., which is registered with the Financial Services Agency in Japan, offer and sell CFDs outside the United States to non-U.S. persons. Beginning January 1, 2011, the offering of commodities-related CFDs and spot gold and silver, will require a business license from the Ministry of Economy, Trade and Industry, or Japan METI, and the Ministry of Agriculture, Foresting and Fisheries, or Japan MAFF. We are currently in the process of applying for such licenses with the Japan METI and Japan MAFF. CFDs are not and may not be offered in the United States by us and are not eligible for resale to U.S. persons. They are not currently registered with the U.S. Securities and Exchange Commission or any other U.S. regulator. CFDs may not be enforceable in the United States. To the extent our current CFD product offerings constitute an offer or sale of securities under the U.S. federal securities laws, we will need to comply with those U.S. federal securities laws. To the extent our CFD offerings constitute OTC futures contracts or other financial derivative instruments, they are prohibited under the provisions of the U.S. Commodity Exchange Act. Failure to effectively manage these risks or properly comply with local laws or regulations relating to our product offerings, including U.S. federal securities laws, may expose us to fines, penalties or other sanctions that could have a material adverse effect upon our business, financial condition and results of operations and cash flows.

 

We May Be Unable to Effectively Manage Our Rapid Growth and Retain Our Customers.

 

The rapid growth of our business during our short history has placed significant demands on our management and other resources. If our business continues to grow at a rate consistent with our historical growth, we may need to expand and upgrade the reliability and scalability of our transaction processing systems, network infrastructure and other aspects of our proprietary technology. We may not be able to expand and upgrade our technology systems and infrastructure to accommodate increases in our business activity in a timely manner, which could lead to operational breakdowns and delays, loss of customers, a reduction in the growth of our customer base, increased operating expenses, financial losses, increased litigation or customer claims, regulatory sanctions or increased regulatory scrutiny.

In addition, due to our rapid growth, we will need to continue to attract, hire and retain highly skilled and motivated officers and employees. We may not be able to attract or retain the officers and employees necessary to manage this growth effectively.

 

We May Be Unable to Respond to Customers’ Demands for New Services and Products and Our Business, Financial Condition and Results of Operations and Cash Flows May Be Materially Adversely Affected.

 

The market for Internet-based trading is characterized by:

 

 

New services and products provided by our competitors may render our existing services and products less competitive. Our future success will depend, in part, on our ability to respond to customers’ demands for new services and products on a timely and cost-effective basis and to adapt to address the increasingly sophisticated requirements and varied needs of our customers and prospective customers. We may not be successful in developing, introducing or marketing new services and products. In addition, our new service and product enhancements may not achieve market acceptance. Any failure on our part to anticipate or respond adequately to customer requirements or changing industry practices, or any significant delays in the development, introduction or availability of new services, products or service or product enhancements could have a material adverse effect on our business, financial condition and results of operations and cash flows.

 

We Face Significant Competition. Many of Our Competitors and Potential Competitors Have Larger Customer Bases, More Established Name Recognition and Greater Financial, Marketing, Technological and Personnel Resources Than We Do Which Could Put Us at a Competitive Disadvantage. Additionally, Some of Our Competitors and Many Potential Competitors Are Better Capitalized Than We Are, and Are Able to Obtain Capital More Easily Which Could Put Us at a Competitive Disadvantage.

 

We compete in the OTC markets based in part on our ability to execute our customers’ trades at competitive prices, to retain our existing customers and to attract new customers. Our competitors range from numerous sole proprietors with limited resources to a few sophisticated institutions which have larger customer bases, more established name recognition and substantially greater financial, marketing, technological and personnel resources than we do. These advantages may enable them, among other things, to:

 

 

These larger and better capitalized competitors, including commercial and investment banking firms, may have access to capital in greater amounts and at lower costs than we do, and thus, may be better able to respond to changes in the forex industry, to compete for skilled professionals, to finance acquisitions, to fund internal growth and to compete for market share generally. Access to capital is critical to our business to satisfy regulatory obligations and liquidity requirements. Among other things, access to capital determines our creditworthiness, which if perceived negatively in the market could materially impair our ability to provide clearing services and attract customer assets, both of which are important sources of revenue. Access to capital also determines the degree to which we can expand our operations. Thus, if we are unable to maintain or increase our capital on competitive terms, we could be at a significant competitive disadvantage, and our ability to maintain or increase our revenue and earnings could be materially impaired. Also, new or existing competitors in our markets could make it difficult for us to maintain our current market share or increase it in desirable markets. In addition, our competitors could offer their services at lower prices, and we may be required to reduce our fees significantly to remain competitive. A fee reduction without a commensurate reduction in expenses would decrease our profitability. We may not be able to compete effectively against these firms, particularly those with greater financial resources, and our failure to do so could materially and adversely affect our business, financial condition and results of operations and cash flows. We may in the future face increased competition, resulting in narrowing bid/offer spreads which could materially adversely affect our business, financial condition and results of operations and cash flows.

 

Our International Operations Present Special Challenges and Our Failure to Adequately Address Such Challenges or Compete in These Markets, Either Directly or Through Joint Ventures With Local Firms, Could Have a Material Adverse Effect on Our Business, Financial Condition and Results of Operations and Cash Flows.

 

In 2009, we generated approximately 45.5% of our trading volume from customers outside the United States. Expanding our business in other emerging markets is an important part of our growth strategy. Due to certain cultural, regulatory and other challenges relevant to those markets, however, we may be at a competitive disadvantage in those regions relative to local firms or to international firms that have a well-established local presence. These challenges include:

 

 

In addition, in order to be competitive in these local markets, or in some cases because of restrictions on the ability of foreign firms to do business locally, we may seek to operate through joint ventures with local firms as we have done, for example, in Japan. Doing business through joint ventures may limit our ability to control the conduct of the business and could expose us to reputational and greater operational risks. We may also face intense competition from other international firms over relatively scarce opportunities for market entry. Given the intense

competition from other international brokers that are also seeking to enter these fast-growing markets, we may have difficulty finding suitable local firms willing to enter into the kinds of relationships with us that we may need to gain access to these markets. This competition could make it difficult for us to expand our business internationally as planned.

 

GAIN Capital Holdings, Inc. Is a Holding Company and Accordingly Depends on Cash Flow From Its Operating Subsidiaries to Meet Our Obligations. If Our Operating Subsidiaries Are Unable to Pay Us Dividends When Needed, We May Be Unable to Satisfy Our Obligations When They Arise.

 

As a holding company with no material assets other than the stock of our operating subsidiaries, nearly all of our funds generated from operations are generated by our operating subsidiaries. Historically, we have accessed these funds through receipt of dividends from these subsidiaries. Some of our subsidiaries are subject to requirements of various regulatory bodies, including the CFTC and NFA in the United States, the Financial Services Authority in the United Kingdom, the Financial Services Agency in Japan, the Securities and Futures Commission in Hong Kong and the Cayman Islands Monetary Authority in the Cayman Islands, relating to liquidity and capital standards, which limit funds available for the payment of dividends to the holding company. Accordingly, if our operating subsidiaries are unable, due to regulatory restrictions or otherwise, to pay us dividends and make other payments to us when needed, we may be unable to satisfy our obligations when they arise.

 

Risks Related to Regulation

 

We Operate in a Heavily Regulated Environment That Imposes Significant Requirements and Costs on Us. Failure to Comply With the Rapidly Evolving Laws and Regulations Governing Our Forex and Other Businesses May Result in Regulatory Agencies Taking Action Against Us, Which Could Significantly Harm Our Business.

 

In those jurisdictions in which we are regulated, including the United States, the United Kingdom, Japan, Australia, Hong Kong and the Cayman Islands, we are regulated by governmental bodies and/or self-regulatory organizations. We received local authorization to conduct our forex trading services in Australia in March 2010.

 

Many of the regulations we are governed by are intended to protect the public, our customers and the integrity of the markets, and not necessarily our shareholders. Substantially all of our operations involving the execution and clearing of transactions in foreign currencies, CFDs, gold and silver and securities are conducted through subsidiaries that are regulated by governmental bodies or self-regulatory organizations. In the United States, our forex trading activities are regulated by the CFTC and the NFA, and our securities activities are regulated by the U.S. Securities and Exchange Commission, or SEC, the Financial Industry Regulatory Authority, or FINRA. We are also regulated by applicable regulatory authorities and the various exchanges of which we are members. For example, we are regulated by the Financial Services Authority in the United Kingdom, the Australian Securities and Investments Commission in Australia, and the Securities and Futures Commission in Hong Kong, among others. In addition, we operate Forex.com Japan Co., Ltd., a Tokyo-based broker authorized by the Financial Services Agency in Japan. In addition, as a result of Japanese regulatory changes beginning January 1, 2011, our CFD product offerings and spot gold and silver will require a license from the Japan METI and Japan MAFF. We are currently in the process of applying for such licenses. A number of our customers also reside in Singapore. We are not currently licensed to trade forex in Singapore, but we have been in contact with the Monetary Authority of Singapore and plan to register for a license after successful completion of our initial public offering. If we are required by the Monetary Authority of Singapore to cease accepting customers prior to receiving a license, we will direct all existing customers to a white label partner. These regulators and self-regulatory organizations regulate the conduct of our business in many ways and conduct regular examinations of our business to monitor our compliance with these regulations. Among other things, we are subject to regulation with regard to: our sales practices, including our interaction with and solicitation of customers and our marketing activities; the custody, control and safeguarding of our customers’ assets; maintaining specified minimum amounts of capital and limiting withdrawals of funds from our regulated operating subsidiaries; making regular financial and other reports to regulators; licensing for our operating subsidiaries and our employees and the conduct of our directors, officers, employees and affiliates. Compliance with these regulations is complicated, time consuming and expensive. Our ability to comply with all applicable laws and regulations is dependent in large part on our internal compliance function as well as our ability to attract and retain qualified compliance personnel, which we may not be able to do. If a regulator finds that we have failed to comply with applicable rules and regulations, we may

be subject to censure, fines, cease-and-desist orders, suspension of our business, removal of personnel, civil litigation or other sanctions, including, in some cases, increased reporting requirements or other undertakings, revocation of our operating licenses or criminal conviction. In addition, we could incur significant legal expenses in defending ourselves against and resolving actions or investigations by such regulatory agencies. An adverse resolution of any future actions or investigations by such regulatory agencies against us could result in a negative perception of our company and cause the market price of our common stock to decline or otherwise have an adverse effect on our business, financial condition and results of operations and cash flows.

 

As a Result of Recent Regulatory Changes in Certain Jurisdictions, Our Operations and Profitability May Be Disrupted and We May Be Subject to Regulatory Action Taken Against Us if a Regulatory Authority Deems Our Operations Are Out of Compliance, or Requires Us to Comply With Additional Regulatory Requirements.

 

Recently, the legislative and regulatory environment in which we operate has undergone significant changes and there are likely to be future regulatory changes affecting our industry. Our ability to expand our presence in various jurisdictions throughout the world will depend on the continued evolution of the regulatory environment and our continued compliance. We currently have a limited presence in a number of significant markets and may not be able to gain a significant presence there unless and until regulatory barriers to international firms are modified. To the extent our current activities are deemed noncompliant with the law in a given jurisdiction, we may incur a disruption in services offered to current customers as we are forced to comply with additional regulations.

 

In August 2010, the CFTC released new rules relating to retail forex regarding, among other things, increased initial minimum security deposits, registration of introducing brokers, money managers and fund managers, increased risk disclosures, including disclosures relating to customer profits, record keeping, financial reporting, minimum capital and other operational standards. Our inability to offer customers who are U.S. residents leverage in excess of 50-to-1 for major currency pairs designated by the NFA and 20-to-1 for all other currency pairs (as compared to 100-to-1 previously), as required by these new CFTC regulations, may diminish the trading volume of these customers which may affect our revenue and profitability. In addition, the new disclosure requirements may impact our ability to attract and retain our retail customers. Furthermore, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, enacted in July 2010 will have broad effects on global derivatives markets generally. For example, this legislation may affect the ability of forex market makers to do business or affect the prices and terms on which such market makers will do business with us. These effects may adversely impact our ability to provide forex transactions to our customers and could have a material adverse affect on our business and profitability. Beginning in October 2010, the Dodd-Frank Act will require us to ensure that our customers resident in the United States have accounts with our NFA-registered operating entity and not our international entities. As a result, some of our customers may decide to transact their trading with a forex broker who is not subject to this requirement.

 

In the European Union, new laws have been proposed to regulate OTC derivatives. These proposals would, among other things, require mandatory central clearing of some derivatives, higher collateral requirements, and higher capital charges for certain OTC derivatives. These proposals are still at the consultation stage and details for many aspects of these legislative proposals have not yet been published. If the products that we trade are subjected to mandatory central clearing, exchange trading, higher collateral requirements or higher capital charges, this may have an impact upon the economics of our business and, thus, have a material adverse effect on our business, financial condition and results of operations and cash flows.

 

The Australian Securities and Investments Commission proposes to issue new guidance on advertising materials, to introduce disclosure benchmarks for OTC CFD providers, and to require OTC CFD providers to adopt written customer suitability policies. In Japan, new regulations, which became effective in August 2010, prohibit our ability to offer Japanese residents leverage for forex products in excess of 50-to-1 and in August 2011 the maximum allowable leverage for forex products in Japan will decrease to 25-to-1. For spot gold that we offer in Japan, beginning January 1, 2011, the maximum allowable leverage will be 20-to-1. A license from the Japan METI and the Japan MAFF will be required to offer these products. These changes may diminish the trading volume of these customers which may in turn affect our financial condition, results of operations and cash flows. These and other future regulatory changes could have a material adverse effect on our business and profitability and the forex industry as a whole.

 

In addition, the regulatory enforcement environment has created uncertainty with respect to certain practices or types of transactions that, in the past, may have been considered permissible and appropriate among financial services firms. More recently, certain practices have been called into question or with respect to which additional regulatory requirements have been imposed. For instance, we have received an inquiry from the Financial Services Agency in Japan concerning which of our operating subsidiaries supports customers resident in Japan. Although we only solicit residents of Japan directly from Forex.com Japan Co., Ltd., our registered Japanese broker, we have previously accepted customers resident in Japan in our other non-U.S. operating subsidiaries. We are currently responding to the inquiry and have voluntarily ceased accepting customers resident in Japan in any operating subsidiary other than Forex.com Japan Co., Ltd. If required by the regulator, we will transfer all existing customers resident in Japan to Forex.com Japan Co., Ltd. We can provide no assurances that such customers will remain with Forex.com Japan Co., Ltd. These legal or regulatory uncertainties and additional regulatory requirements could result in a loss of, or increase in the cost of, business and adversely affect our revenue, profitability and results of operations. Additionally, we may be found to have violated local regulation and, as a result, we may be subject to enforcement actions and penalties or customer claims.

 

Servicing Customers Via the Internet May Require Us to Comply With the Laws and Regulations of Each Country in Which We Are Deemed to Conduct Business. Failure to Comply With Such Laws May Negatively Impact Our Financial Results.

 

Since our services are available over the Internet in foreign countries and we have customers residing in foreign countries, foreign jurisdictions may require us to qualify to do business in their country. We believe that the number of our customers residing outside of the United States will increase over time. We are required to comply with the laws and regulations of each country in which we conduct business, including laws and regulations currently in place or which may be enacted related to Internet services available to their citizens from service providers located elsewhere. Any failure to develop effective compliance and reporting systems could result in regulatory penalties in the applicable jurisdiction, which could have a material adverse effect on our business, financial condition and results of operations and cash flows.

 

As We Operate in Many Jurisdictions Without Local Registration, Licensing or Authorization, We May Be Subject to Possible Enforcement Action and Sanction for Our Operations in Such Jurisdictions if Our Operations Are Deemed to Have Violated Regulations in Those Jurisdictions. Our Growth May Be Limited by Various Restrictions and We Remain at Risk That We May Be Required to Cease Operations if We Become Subject to Regulation by Local Government Bodies.

 

For the nine months ended September 30, 2010, approximately 69.9% of our trading volume was attributable to customers resident in a jurisdiction where we are regulated or where we deal with customers cross-border in a manner which does not require us to be regulated in that jurisdiction. We determine the nature and extent of services we can offer and the manner in which we conduct our business in the various jurisdictions based on a variety of factors.

 

In jurisdictions in which we are not currently licensed or authorized by local government bodies or self-regulatory organizations, we are generally restricted from:

 

 

These restrictions may limit our ability to grow our business in that jurisdiction or may result in increased overhead costs or degradation in service provision to customers in that jurisdiction. Accordingly, we currently have only a limited presence in a number of significant markets and may not be able to gain a significant presence there unless and until regulatory barriers to international firms in certain of those markets are modified. Consequently, we cannot assure you that our international expansion will continue and that we will be able to develop our business in emerging markets as we currently plan.

Furthermore, we may be subject to possible enforcement action and sanction if we are determined to have previously offered, or currently offer, our services in violation of local government’s regulations. In these circumstances, we are exposed to sanction by local enforcement agencies and our contracts with customers may be unenforceable. We may also be required to cease the conduct of our business with customers in the relevant jurisdiction and/or we may determine that compliance with the regulatory requirements for continuance of the business is too onerous to justify making the necessary changes to continue that business. For example, between 2006 and 2008, a significant portion of our trading volume, trading revenue, net income and cash flow were generated from residents of China. When we commenced offering our forex trading services to residents of China in October 2003, we believed that our operations were in compliance with applicable Chinese regulations. The regulatory rules and process in China are complex and are not as clear as those in many other jurisdictions. As a result of our review of our regulatory compliance in China during 2008, we decided to terminate all service offerings to residents of China and ceased our trading support operations located in that country. As of December 31, 2008, we no longer accepted new customers or maintained direct customer accounts from residents of China. However, due to an ongoing relationship with one of our introducing brokers, eight legacy accounts which were originally sourced through that introducing broker prior to the termination of our service offering in China, remained open. The trading activity by these legacy accounts resulted in an immaterial amount of trading volume to us and were all closed as of December 31, 2009. Pursuant to our most recent review of the relevant regulatory requirements in China, we now believe that we can accept customers from China if the customers come to our website without being solicited by us to do so. As a result, we began accepting non-solicited customers from China in June 2010. We may be subject to fines, penalties or sanctions as a result of our current and historical forex trading services through the Internet to Chinese residents, including our continuation of the eight legacy accounts in China during 2009.

 

The Canadian regulatory environment is complex and evolving, and our forex trading services may not be compliant with the regulations of each province and territory in Canada. If we have contravened Canadian regulatory requirements, we may be subject to enforcement actions and penalties, including disgorgement of profits and suspension of trading activities and customer claims. We may also be required to register our business in one or more provinces or territories, or to offer our trading services through white label partners. Any such enforcement actions, penalties, claims or new white label partnerships could have a significant adverse impact on our profitability in relation to the services we offer in Canada.

 

Approximately 5.8% of our customer trading volume for the nine months ended September 30, 2010 was generated from customers located in Canada, with approximately 4.12% of our customer trading volume generated from customers in the Province of Ontario, 0.53% generated from customers in the Province of Quebec and 0.06% generated from customers in the Province of British Columbia. In Canada, the securities industry is governed by provincial or territorial legislation, and there is no national regulator. Local legislation differs from province to province and territory to territory.

 

The Canadian regulatory environment is complex and evolving, and we cannot be certain that our forex trading services are currently compliant with the regulations of each province and territory. For example, in April 2008, we were advised by the British Columbia Securities Commission, or BCSC, that we were required to register as a dealer to offer our trading services directly to residents of that province. We have therefore conducted our business in British Columbia through Questrade, Inc, a registered investment dealer in Canada, since December 1, 2004. In addition, on October 30, 2009, the Ontario Securities Commission, or OSC, issued interim guidance pursuant to a staff notice which took the position that rolling spot foreign exchange contracts and similar over-the-counter derivative contracts sold using a trading platform similar to ours fall under the definition of securities, which would, absent exemptive relief, require, among other things, us to comply with the dealer registration and prospectus delivery requirements of Ontario securities law. In November 2010, we received correspondence from the OSC requesting information about our customers and business practices in Ontario and asking us to explain why our activities should not be considered in breach of dealer registration and prospectus delivery requirements under Ontario securities law. In its letter, the OSC states that it is acting in conjunction with the BCSC and the Quebec financial industry regulator, the Autorité des marchés financiers, or AMF, in its review of our activities.

 

We have also received notices from the AMF asserting violations of derivatives regulations in that province and an order to cease providing services in Quebec. We are currently responding to the regulators and have ceased

accepting new customers from Quebec and Ontario in relation to the services we offer in Canada. Effective November 22, 2010, we are directing all new customers resident in Quebec and Ontario to our white label partner, Questrade, Inc. If required by the regulators, we will also transfer all existing customers resident in Quebec and Ontario to Questrade, Inc. Accordingly, we anticipate that our profitability relating to our services in these provinces will decrease significantly and adversely affect our results of operations as we share a portion of the revenue generated from these customers with our white label partner. Our profitability relating to our Canadian business may be further impacted if we are required to enter into white label partnerships in the other provinces of Canada. If we deem it advisable, we may seek to register as a dealer in various Canadian provinces and territories to offer our trading services directly. In addition to the impact of our profitability from our white label partnerships, we may also be subject to enforcement actions and penalties including disgorgement of profits and suspension of trading activities as well as customer claims in any province or territory, including Ontario and Quebec, where our forex trading operations are considered to contravene Canadian regulatory requirements.

 

We Are Required to Maintain High Levels of Capital, Which Could Constrain Our Growth and Subject Us to Regulatory Sanctions.

 

Our regulators have stringent rules requiring that we maintain specific minimum levels of regulatory capital in our operating subsidiaries that conduct our spot foreign exchange, CFDs, gold and silver spot trading and securities business. Additionally, as a Futures Commission Merchant, or FCM, and a Retail Forex Exchange Dealer, or RFED, we are required to maintain adjusted net capital of $20.0 million plus 5.0% of the amount of customer liabilities over $10.0 million. As of September 30, 2010, we were required to maintain approximately $31.9 million minimum capital in the aggregate across all jurisdictions, representing a $9.2 million increase from our minimum regulatory capital requirement at September 30, 2009. Regulators continue to evaluate and modify regulatory capital requirements from time to time in response to market events and to improve the stability of the international financial system. Additional revisions to this framework or new capital adequacy rules applicable to us may be proposed and ultimately adopted, which could further increase our minimum capital requirements in the future.

 

Even if regulators do not change existing regulations or adopt new ones, our minimum capital requirements will generally increase in proportion to the size of our business conducted by our regulated subsidiaries. As a result, we will need to increase our regulatory capital in order to expand our operations and increase our revenue, and our inability to increase our capital on a cost-efficient basis could constrain our growth. In addition, in many cases, we are not permitted to withdraw regulatory capital maintained by our subsidiaries without prior regulatory approval or notice, which could constrain our ability to allocate our capital resources most efficiently throughout our global operations. In particular, these restrictions could adversely affect our ability to withdraw funds needed to satisfy our ongoing operating expenses, debt service and other cash needs and could limit any future decision by our board to declare dividends.

 

Regulators monitor our levels of capital closely. We are required to report the amount of regulatory capital we maintain to our regulators on a regular basis, and we must report any deficiencies or material declines promptly. While we expect that our current amount of regulatory capital will be sufficient to meet anticipated short-term increases in requirements, any failure to maintain the required levels of regulatory capital, or to report any capital deficiencies or material declines in capital could result in severe sanctions, including fines, censure, restrictions on our ability to conduct business and revocation of our registrations. The imposition of one or more of these sanctions could ultimately lead to our liquidation, or the liquidation of one or more of our subsidiaries.

 

Procedures and Requirements of the Patriot Act May Expose Us to Significant Costs or Penalties.

 

As participants in the financial services industry, we are, and our subsidiaries are, subject to laws and regulations, including the Patriot Act of 2001, that require that we know our customers and monitor transactions for suspicious financial activities. The cost of complying with the Patriot Act and related laws and regulations is significant. We face the risk that our policies, procedures, technology and personnel directed toward complying with the Patriot Act are insufficient and that we could be subject to significant criminal and civil penalties due to noncompliance. Such penalties could have a material adverse effect on our business, financial condition and results of operations and cash flows. In addition, as an online financial services provider with customers worldwide, we may face particular difficulties in identifying our customers and monitoring their activities.

Risks Related to Third Parties

 

We Are Dependent on Wholesale Forex Trading Partners to Continually Provide Us With Forex Market Liquidity. In the Event That We No Longer Have Access to the Prices and Levels of Liquidity That We Currently Have, We May Be Unable to Provide Competitive Forex Trading Services, Which Will Materially Adversely Affect Our Business, Financial Condition and Results of Operations and Cash Flows.

 

Given the level of our customers’ trading volume, in order to continually provide our market making services, we rely on third-party financial institutions to provide us with forex market liquidity. As of September 30, 2010, we maintain relationships with three established global prime brokers, including Deutsche Bank AG, or Deutsche Bank, UBS AG, or UBS, and the Royal Bank of Scotland plc, or RBS, as well as relationships with 13 additional wholesale forex trading partners, and access to other trading platforms and other wholesale forex trading partners, which give us access to over 25 potential liquidity providers. Through these relationships, our access to a pool of forex liquidity ensures that we are able to execute our customers’ trades in any of the 39 currency pairs or six CFD product offerings we offer and in notional amount they request. These wholesale forex trading partners, although under contract with us, have no obligation to provide us with liquidity and may terminate our arrangements at any time. In the event that we no longer have access to the competitive wholesale forex pricing spreads and/or levels of liquidity that we currently have, we may be unable to provide competitive forex trading services, which will materially adversely affect our business, financial condition and results of operations and cash flows.

 

We Depend on the Services of Prime Brokers to Assist in Providing Us Access to Liquidity Through Our Wholesale Forex Trading Partners. The Loss of One or More of Our Prime Brokerage Relationships Could Lead to Increased Transaction Costs and Capital Posting Requirements, As Well As Having a Negative Impact on Our Ability to Verify Our Open Positions, Collateral Balances and Trade Confirmations.

 

We depend on the services of prime brokers to assist in providing us access to liquidity through our wholesale forex trading partners. We currently have established three prime brokerage relationships with major financial institutions, including Deutsche Bank, UBS, and RBS, which act as central hubs through which we are able to deal with our existing wholesale forex trading partners. In return for paying a transaction-based prime brokerage fee, we are able to aggregate our customers and our trading positions, thereby reducing our transaction costs and increasing the efficiency of the capital we are required to post as collateral in order to conduct our market making trading activities. Since we trade with our wholesale forex trading partners through our prime brokers, they also serve as a third-party check on our open positions, collateral balances and trade confirmations. If we were to lose one or more of our prime brokerage relationships, we could lose this source of third-party verification of our trading activity, which could lead to an increased number of record keeping or documentation errors. Although we have relationships with wholesale forex trading partners who could provide clearing services as a back-up for our prime brokerage services, if we were to experience a disruption in prime brokerage services due to a financial, technical or other development adversely affecting any of our current prime brokers, our business could be materially adversely affected to the extent that we are unable to transfer positions and margin balances to another financial institution in a timely fashion. In the event of the insolvency of a prime broker, we might not be able to fully recover the assets we have deposited (and have deposited on behalf of our customers) with the prime broker or our unrealized profits since we will be among the prime broker’s unsecured creditors.

 

A Systemic Market Event That Impacts the Various Market Participants With Whom We Interact Could Have a Material Adverse Effect on Our Business, Financial Condition and Results of Operations and Cash Flows.

 

As a forex market maker, we interact with various third parties through our relationships with our prime brokers, wholesale forex trading partners, white label partners and introducing brokers. Some of these market participants could be overleveraged. In the event of sudden, large market price movements, such market participants may not be able to meet their obligations to brokers who, in turn, may not be able to meet their obligations to their counterparties. As a result, a system collapse in the financial system could occur, which would have a material adverse effect on our business, financial condition and results of operations and cash flows.

We Are Subject to Risk of Default by Financial Institutions That Hold Our Funds and Our Customers’ Funds.

 

We have significant deposits with banks and other financial institutions. Pursuant to CFTC and NFA regulations for our U.S.-regulated subsidiaries, we are not required to segregate customer funds from our own funds. As such, we aggregate our customers’ funds and our funds and hold them in collateral and deposit accounts at various financial institutions. In the event of insolvency of one or more of the financial institutions with which we have deposited these funds, both us and our customers may not be able to recover our funds. Because our customers’ funds are aggregated with our own, the extent to which they will be entitled to insurance by the Federal Deposit Insurance Corporation is uncertain. In any such insolvency we and our customers would rank as unsecured creditors in respect of claims to funds deposited with any such financial institution. As a result, we may be subject to claims by customers due to the loss of such funds and our business would be harmed by the loss of our funds.

 

We Are Subject to Counterparty Risk Whereby Defaults by Parties With Whom We Do Business Can Have an Adverse Effect on Our Business, Financial Condition and Results of Operations and Cash Flows.

 

Our forex market making operations require a commitment of capital and involve risks of losses due to the potential failure of our customers to perform their obligations under these transactions. Our margin policy allows customers to leverage their account balances by trading notional amounts that may be significantly larger than their cash balances. We mark our customers’ accounts to market each time a currency price in their portfolio changes. While this allows us to closely monitor each customer’s exposure, it does not guarantee our ability to eliminate negative customer account balances prior to an adverse currency price change. Although we have the ability to alter our margin requirements without prior notice to our customers, this may not eliminate the risk that our access to liquidity becomes limited or market conditions, including currency price volatility and liquidity constraints, change faster than our ability to modify our margin requirements. If our customers default on their obligations, we remain financially liable for such obligations, and although these obligations are collateralized, since the value of our customers’ forex positions is subject to fluctuation as market prices change, we are subject to market risk in the liquidation of customer collateral to satisfy such obligations. In light of the current turbulence in the global economy, we face increased risk of default by our customers and other counterparties. For example, during the second half of 2008, Lehman Brothers Holdings Inc. declared bankruptcy, and many major U.S. financial institutions consolidated, were forced to merge or were put into conservatorship by the U.S. federal government. Any liability arising from our forex operations could be significant and could have a material adverse effect on our business, financial condition and results of operations and cash flows.

 

Failure of Third-Party Systems or Third-Party Service and Software Providers Upon Which We Rely Could Adversely Affect Our Business.

 

We rely on certain third-party computer systems or third-party service and software providers, including trading platforms, back-office systems, Internet service providers and communications facilities. For example, for the nine months ended September 30, 2010, 32.8% of our forex trading volume was derived from trades utilizing our MetaTrader platform, a third-party trading platform we license that is popular in the international retail trading community and offers our customers a choice in trading interfaces. Additionally, we also rely on an agreement we entered into with Trading Central whereby Trading Central will provide us with investment research that we distribute to our customers. Any interruption in these third-party services, or deterioration in their performance or quality, could adversely affect our business. If our arrangement with any third party is terminated, we may not be able to find an alternative systems or services provider on a timely basis or on commercially reasonable terms. This could have a material adverse effect on our business, financial condition and results of operations and cash flows.

 

Our Computer Infrastructure May Be Vulnerable to Security Breaches. Any Such Problems Could Jeopardize Confidential Information Transmitted Over the Internet, Cause Interruptions in Our Operations or Give Rise to Liabilities to Third Parties.

 

Our computer infrastructure is potentially vulnerable to physical or electronic computer break-ins, viruses and similar disruptive problems and security breaches. Any such problems or security breaches could give rise to liabilities to one or more third parties, including our customers, and disrupt our operations. A party able to circumvent our security measures could misappropriate proprietary information or customer information,

jeopardize the confidential nature of information we transmit over the Internet or cause interruptions in our operations. Concerns over the security of Internet transactions and the safeguarding of confidential personal information could also inhibit the use of our systems to conduct forex transactions over the Internet. To the extent that our activities involve the storage and transmission of proprietary information and personal financial information, security breaches could expose us to a risk of financial loss, litigation and other liabilities. Our current insurance policies may not protect us against all of such losses and liabilities. Any of these events, particularly if they result in a loss of confidence in our services, could have a material adverse effect on our business, financial condition and results of operations and cash flows.

 

We Have Relationships With Introducing Brokers Who Direct New Customers to Us. Failure to Maintain These Relationships Could Have a Material Adverse Effect on Our Business, Financial Condition and Results of Operations and Cash Flows.

 

We have relationships with introducing brokers who direct new customers to us and provide marketing and other services for these customers. In certain jurisdictions, we are only able to provide our services through white label partnerships. For the nine months ended September 30, 2010, approximately 29.9% of our forex trading volume was derived from introducing brokers. Many of our relationships with introducing brokers are nonexclusive or may be terminated by the brokers on short notice. In addition, under our agreements with introducing brokers, they have no obligation to provide us with new customers or minimum levels of transaction volume. Our failure to maintain our relationships with these introducing brokers, the failure of the introducing brokers to provide us with customers or our failure to create new relationships with introducing brokers would result in a loss of revenue, which could have a material adverse effect on our business, financial condition and results of operations and cash flows. To the extent any of our competitors offers more attractive compensation terms to one of our introducing brokers, we could lose the broker’s services or be required to increase the compensation we pay to retain the broker. In addition, we may agree to set the compensation for one or more introducing brokers at a level where, based on the transaction volume generated by customers directed to us by such brokers, it would have been more economically attractive to seek to acquire the customers directly rather than through the introducing broker. For the nine months ended September 30, 2010, approximately 6.1% of our forex trading volume was derived from TradeStation Securities, Inc., or TradeStation, our largest introducing broker. However, TradeStation recently formed a wholly-owned subsidiary, TradeStation Forex, Inc., with the intent that by the end of 2010 TradeStation Forex Inc. will assume, own and conduct all TradeStation forex brokerage business and register with the CFTC. TradeStation Forex Inc.’s application for such CFTC registration and NFA membership was made with the NFA in June 2010. We may be unable to offset the loss of TradeStation with new introducing brokers, if at all. If we do not enter into the most economically attractive relationships with introducing brokers, our introducing brokers terminate their relationship with us or our introducing brokers fail to provide us with customers, our business, financial condition and results of operations and cash flows would be materially, adversely affected.

 

Our Relationships With Our Introducing Brokers May Also Expose Us to Significant Reputational and Other Risks as We Could Be Harmed by Introducing Broker Misconduct or Errors That Are Difficult to Detect and Deter.

 

It may be perceived that we are responsible for the improper conduct by our introducing brokers, even though we do not control their activities. Introducing brokers maintain customer relationships and delegate to us the responsibilities associated with forex and back-office operations. Furthermore, many of our introducing brokers operate websites, which they use to advertise our services or direct customers to us. It is difficult for us to closely monitor the contents of their websites to ensure that the statements they make in relation to our services are accurate and comply with applicable rules and regulations. While historically we have been responsible for the activities of our introducing brokers that were not members or associates of the NFA and subject to disciplinary action for failure to adequately supervise them, under the new NFA and CFTC rules, we are no longer responsible for the activities of any party that solicits or introduces a customer to us, as our introducing brokers will now be required to be members of the NFA and therefore directly supervised by the NFA. However, it may be perceived that we are responsible for any misleading statements about us made on websites of our introducing brokers and any disciplinary action taken against any of our introducing brokers in the United States and abroad could have a material adverse effect on our reputation, damage our brand name and materially adversely affect our business, financial condition and results of operations and cash flows.

We Have Relationships With White Label Partners Who Direct Customer Trading Volume to Us. Failure to Maintain These Relationships or Develop New White Label Partner Relationships Could Have a Material Adverse Effect on Our Business, Financial Condition and Results of Operations and Cash Flows.

 

We have relationships with white label partners who provide forex trading to their customers by using our trading platform and other services and, therefore, provide us with an additional source of revenue. For the nine months ended September 30, 2010, approximately 7.4% of our forex trading volume was derived from white label partners. Many of our relationships with white label partners are non-exclusive or may be terminated by them on short notice. In addition, our white label partners have no obligation to provide us with minimum levels of transaction volume. Our failure to maintain our relationships with these white label partners, the failure of these white label partners to continue to offer online forex trading services to their customers using our trading platform, the loss of requisite licenses by our white label partners or our inability to enter into new relationships with white label partners would result in a loss of revenue, which could have a material adverse effect on our business, financial condition and results of operations and cash flows. For the nine months ended September 30, 2010, trading volume generated through Questrade, Inc. represented approximately 1.3% of our total trading volume. Failure to maintain these relationships or failure of these white label partners to continue to offer online forex trading services would result in a significant loss of revenue to us. To the extent any of our competitors offers more attractive compensation terms to one or more of our white label partners, we could lose the white label partnership or be required to increase the compensation we pay to retain the white label partner. Our relationships with our white label partners also may expose us to significant regulatory, reputational and other risks as we could be harmed by white label partner misconduct or errors that are difficult to detect and deter. If any of our white label partners provided unsatisfactory service to their customers or are deemed to have failed to comply with applicable laws or regulations, our reputation may be harmed as a result of our affiliation with such white label partner. Any such harm to our reputation would have a material adverse effect on our business, financial condition and results of operations and cash flows.

 

Risks Related to the Offering

 

An Active Trading Market for Our Common Stock May Not Develop, Which May Cause Our Common Stock to Trade at a Discount From the Initial Offering Price and Make It Difficult for You to Sell the Shares You Purchase.

 

Prior to this offering, there has been no public trading market for our common stock. We cannot predict the extent to which investor interest in our company will lead to the development or maintenance of an active trading market. The initial public offering price per share of our common stock has been determined by agreement among us and the underwriters and may not be indicative of the price at which our common stock will trade in the public trading market after this offering. If an active trading market does not develop, there may be difficulty selling any shares of our common stock.

 

The Market Price of Our Common Stock May Be Volatile, Which Could Cause the Value of Your Investment to Decline.

 

Securities markets worldwide experience significant price and volume fluctuations. This market volatility, as well as the factors listed below, some of which are beyond our control, could affect the market price of our common stock:

 

 

 

If Securities or Industry Analysts Do Not Publish Research or Reports About Our Business, if They Change Their Recommendations Regarding Our Common Stock Adversely, or if We Fail to Achieve Analysts’ Earnings Estimates, the Market Price and Trading Volume of Our Common Stock Could Decline.

 

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of the analysts who cover us or our industry make unfavorable comments about our market opportunity or business, the market price of our common stock would likely decline. If one or more of these analysts ceases coverage of us or fails to regularly publish reports on us, we could lose visibility in the financial markets, which could cause the market price of our common stock or trading volume to decline. On our part, if we fail to achieve analysts’ earnings estimates, the market price of our common stock would also likely decline.

 

Because We Do Not Intend to Pay Dividends for the Foreseeable Future, Investors in the Offering Will Benefit From Their Investment in Shares Only if Our Common Stock Appreciates in Value.

 

We currently intend to retain our future earnings, if any, to finance the operation and growth of our business and do not expect to pay any dividends in the foreseeable future. As a result, the success of an investment in our common stock will depend upon any future appreciation in its value. Our common stock may not appreciate in value or even maintain the price at which investors in this offering have purchased their shares.

 

Certain Provisions in Our Amended and Restated Certificate of Incorporation May Prevent Efforts by Our Stockholders to Change Our Direction or Management.

 

 

Our Management and Other Affiliates Have Significant Control of Our Common Stock and Could Control Our Actions in a Manner That Conflicts With Our Interests and the Interests of Other Stockholders.

 

Upon completion of the offering, our executive officers, directors and our current investors and their affiliated entities together will beneficially own approximately          % of our outstanding capital stock, on a fully diluted basis, or          % if the underwriters exercise their overallotment option in full. Upon completion of this offering, VantagePoint Venture Partners IV(Q), L.P., VantagePoint Venture Partners IV, L.P., VantagePoint Venture Partners IV Principals Fund, L.P., VP New York Venture Partners, L.P., referred to herein as the VPVP Funds, 3i U.S. Growth Partners L.P., 3i Technology Partners III L.P., 3i Growth Capital (USA) D L.P., 3i Growth Capital (USA) E L.P. 3i Growth Capital (USA) P L.P., and Edison Venture Fund IV SBIC, L.P., collectively referred to herein as the Venture Funds, together will beneficially own approximately          % of our outstanding capital stock, on a fully diluted basis, or          % if the underwriters exercise their overallotment option in full. Two of our directors following the offering, Messrs. Sugden and Mills, are affiliated with their respective venture fund. As a result, these stockholders, acting together, will be able to exercise considerable influence over matters requiring approval by our stockholders, including the election of directors, and may not always act in the best interests of other stockholders. Such a concentration of ownership may have the effect of delaying or preventing a change in our control, including transactions in which our stockholders might otherwise receive a premium for their shares over then current market prices.

 

Pursuant to our amended and restated certificate of incorporation and amended and restated bylaws, until the earlier of (i) such time that the VPVP Funds own less than 50% of all shares of our common stock that the VPVP Funds own upon completion of this offering, (ii) immediately prior to our 2014 annual meeting of stockholders and (iii) such time that the VPVP Funds notify our board of directors that they no longer require that an individual designated by them serve on our board of directors, the VPVP Funds have the right to nominate one individual in the slate of director nominees for election at our 2011 annual meeting of stockholders. See “Principal and Selling Stockholders” and “Description of Capital Stock” for further information regarding ownership of our capital stock and our third amended and restated certificate of incorporation and amended and restated bylaws.

 

Our Internal Controls Over Financial Reporting May Not Be Effective and Our Independent Registered Public Accounting Firm May Not Be Able to Certify as to Their Effectiveness, Which Could Have a Significant and Adverse Effect on Our Business and Reputation.

 

We are evaluating our internal controls over financial reporting in order to allow management to report on, and our independent registered public accounting firm to attest to, our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002, as amended, and rules and regulations of the SEC thereunder, which we refer to as Section 404. We are in the process of documenting and testing our internal control procedures in order to satisfy the requirements of Section 404, which includes annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent registered public accounting firm that addresses the effectiveness of internal controls.

 

As we continue our evaluation, we may identify material weaknesses that we may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act of 2002, as amended, for compliance with the requirements of Section 404. We will be required to comply with the requirements of Section 404 for the year ending December 31, 2011. In addition, if we fail to achieve and maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404. We cannot be certain as to the timing of completion of our evaluation, testing and any remediation actions or the impact of the same on our operations. If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, our independent registered public accounting firm may not be able to opine as to the effectiveness of our internal control over financial reporting and we may be subject to sanctions or investigation by regulatory authorities, such as the SEC. As a result, there could be a negative reaction in the financial markets due to a loss of confidence in the reliability of our financial statements. In addition, we may be required to incur costs in improving our internal control system and the hiring of additional personnel. Any such action could negatively affect our results of operations and cash flows.

Shareholders May Be Diluted by the Future Issuance of Additional Common Stock in Connection With Our Incentive Plans, Acquisitions or Otherwise.

 

After this offering we will have approximately 18,240,667 shares of common stock authorized but unissued. Our certificate of incorporation authorizes us to issue these shares of common stock and options, rights, warrants and appreciation rights relating to common stock for the consideration and on the terms and conditions established by our board of directors in its sole discretion, whether in connection with acquisitions, in future common stock offerings or otherwise. We have reserved an aggregate of 1,900,000 shares for issuance under our 2010 Omnibus Incentive Compensation Plan and shares under our 2010 Employee Stock Purchase Plan. Any common stock that we issue, including under our 2010 Omnibus Incentive Compensation Plan, 2011 Employee Stock Purchase Plan or other equity incentive plans that we may adopt in the future, would dilute the percentage ownership held by the investors who purchase common stock in this offering.

 

This prospectus contains forward looking statements. These forward looking statements include, in particular, statements about our plans, strategies and prospects under the headings “Prospectus Summary,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” These statements are based on our current expectations and projections about future events and are identified by terminology such as “may,” “should,” “expect,” “scheduled,” “plan,” “seek,” “intend,” “anticipate,” “believe,” “estimate,” “aim,” “potential,” or “continue” or the negative of those terms or other comparable terminology. Although we believe that our plans, intentions and expectations are reasonable, we may not achieve our plans, intentions or expectations.

 

These forward-looking statements involve risks and uncertainties. Important factors that could cause actual results to differ materially from the forward looking statements we make in this prospectus are set forth in “Risk Factors” and elsewhere in this prospectus. We undertake no obligation to update any of the forward looking statements after the date of this prospectus to conform those statements to reflect the occurrence of future events, except as required by applicable law.

 

You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement on Form S-1, of which this prospectus forms a part, that we have filed with the SEC completely and with the understanding that our actual future results, levels of activity, performance and achievements may be different from what we expect and that these differences may be material. We qualify all of our forward looking statements by these cautionary statements.

 

This prospectus includes market and industry data and forecasts that we have derived from independent consultant reports, publicly available information, various industry publications, other published industry sources and our internal data and estimates. Independent consultant reports, industry publications and other published industry sources generally indicate that the information contained therein was obtained from sources believed to be reliable.

 

Our internal data and estimates are based upon information obtained from trade and business organizations and other contacts in the markets in which we operate and our management’s understanding of industry conditions. Although we believe that such information is reliable, we have not had this information verified by any independent sources.

USE OF PROCEEDS

 

We estimate that we will receive net proceeds from this offering of approximately $      million, based on an assumed initial offering price of $      per share, which is the midpoint of the estimated price range shown on the cover of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase (decrease) in the assumed initial public offering price of $      would increase (decrease) the net proceeds to us from this offering by $      million.

 

We intend to use the net proceeds we receive from this offering only to cover historical and expected costs from our initial public offering.

 

We will not receive any proceeds from the sale of shares by the selling stockholders.

DIVIDEND POLICY

 

We have never declared or paid cash dividends on our common or preferred stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any cash dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, general business conditions and other factors that our board of directors may deem relevant.

 

The following table sets forth our cash and cash equivalents and capitalization as of September 30, 2010:

 

 

 

 

You should read this table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere in this prospectus.

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $      would increase (decrease) each of additional paid-in capital and total stockholders’ equity in the pro forma as adjusted column by $      million.

 

The outstanding share information is based upon shares of our common stock outstanding as of          , 2010. This number excludes:

 

 

 

 

 

 

If you invest in our common stock in this offering, your interest will be immediately diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock after this offering.

 

The historical net tangible book value of our common stock as of September 30, 2010 was $      million, or $      per share of common stock. Historical net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the total number of shares of our common stock outstanding as of September 30, 2010. On a pro forma basis, after giving effect to the 2.29-for-1 stock split and conversion of all outstanding shares of our preferred stock into           shares of common stock immediately upon completion of this offering, our pro forma net tangible book value as of September 30, 2010 was $      million, or $      per share of common stock.

 

 

The following table illustrates this per share dilution:

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $      per share, which is the mid-point of the price range on the front cover of this prospectus, would increase (decrease) our pro forma as adjusted net tangible book value per share after this offering by $      and increase (decrease) the dilution to new investors in this offering by $     .

 

The following table summarizes, as of September 30, 2010, the differences between the number of shares of common stock purchased from us, after giving effect to the conversion of our preferred stock into common stock, the total effective cash consideration paid, and the average price per share paid by our existing stockholders and by our new investors purchasing stock in this offering at an assumed initial public offering price of $      per share, the midpoint of the estimate price range listed on the cover page of this prospectus, before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.