Keefe, Bruyette & Woods	JMP Securities
A Stifel Company
	The date of this prospectus is          , 2013

TABLE OF CONTENTS

 

 

THE OFFERING

 

 

 

 

 

FEES AND EXPENSES

The following table is intended to assist you in understanding the costs and expenses that an investor in this offering will bear directly or indirectly. However, we caution you that some of the percentages indicated in the table below are estimates and may vary.   The following table and example should not be considered a representation of our future expenses. Actual expenses may be greater or less than shown.   Except where the context suggests otherwise, whenever this prospectus contains a reference to fees or expenses paid by “you” or “us” or that “we” will pay fees or expenses, stockholders will indirectly bear such fees or expenses as investors in the Company.

 

Stockholder Transaction Expenses
Sales Load (as a percentage of offering price)			6.0	%	(1)
Offering Expenses (as a percentage of offering price)			2.0	%	(2)
Dividend Reinvestment Plan Fees		None		(3)
Total Stockholder Transaction Expenses (as a percentage of offering price)			8.0	%
Annual Expenses (as a Percentage of Net Assets Attributable to Common Stock)
Management Fee			2.92	%	(4)
Incentive Fees Payable Under the Investment Advisory and Management Agreement (20% of investment income and capital gains)			6.71	%	(5)
Interest Payments on Borrowed Funds			4.17	%	(6)
Other Expenses (estimated for the current fiscal year)			2.06	%
Total Annual Expenses (estimated)			15.86	%	(7)

 

 

(7)

“Total annual expenses” as a percentage of net assets attributable to common stock are higher than the total annual expenses percentage would be for a company that is not leveraged. We borrow money to leverage our net assets and increase our total assets. The SEC requires that the “Total annual expenses” percentage be calculated as a percentage of net assets attributable to common stock (defined as total assets less indebtedness and after taking into account any incentive fees payable during the period), rather than the total assets, including assets that have been funded with borrowed monies. The reason for presenting expenses as a percentage of net assets attributable to common stock is that our common stockholders bear all of our fees and expenses.

Example

 

The following example demonstrates the projected dollar amount of total cumulative expenses that would be incurred over various periods with respect to a hypothetical investment in our common stock. In calculating the following expense amounts, we have assumed that our borrowings and annual operating expenses remain at the levels set forth in the table above, and that you would pay a sales load of    % (the underwriting discount to be paid by us with respect to common stock sold by us in this offering).

 

 

 

While the example assumes, as required by the applicable rules of the SEC, a 5% annual return, our performance will vary and may result in a return greater or less than 5%. The incentive fee is assumed to be derived completely from capital gains and not interest income. As such, there is no hurdle to reach before this portion of the incentive fee is earned by our investment adviser. The table assumes that 20% of the 5% return is paid to our investment adviser. If we achieve sufficient returns on our investments, including through interest income and the realization of capital gains, to trigger an incentive fee of a material amount, our distributions to our common stockholders and our expenses would likely be higher. See “Investment Advisory and Management Agreement — Examples of Incentive Fee Calculation” for additional information regarding the calculation of incentive fees. In addition, while the example assumes reinvestment of all distributions at net asset value, participants in our dividend reinvestment plan will receive a number of shares of our common stock, determined by dividing the total dollar amount of the distribution payable to a participant by the greater of (a) the current net asset value per share of our common stock and (b) 95% of the market price per share of our common stock at the close of trading on the payment date fixed by our board of directors.

 

 

		Year Ended December 31, 2012				September 6, 2011 (commencement of operations) through December 31, 2011
Statement of Operations Data:
Interest income		$	3,772,910			$	229,767
Other income			40,000				-
Net investment income (loss)			1,378,764				(177,758	)
Realized gain on investments			327,091				-
Net unrealized  increase (decrease) of investments			1,981,004				(23,399	)
Net increase (decrease) in net assets resulting from operations			3,686,859				(201,157	)
Other Data:
Dollar-weighted average annualized yield			16.84	%			15.04	%
Number of portfolio companies at period end			13				3
Per Share:
Earnings (losses) per common unit (basic)		$	4.22			$	(1.03	)
Earnings (losses) per common unit (diluted)		$	4.10			$	(1.03	)
Net investment income (loss) per unit (basic)		$	1.58			$	(0.91	)
Net investment income (loss) per unit (diluted)		$	1.53			$	(0.91	)
Dividends declared per common unit (basic)		$	1.24			$	0.375

 

		As of December 31, 2012				As of December 31, 2011
Statement of Asset and Liabilities Data:
Gross investments		$	41,511,318			$	7,692,100
Cash and cash equivalents			7,639,801				2,756,475
Total assets			49,745,038				10,837,612
Borrowings			28,226,666				4,686,666
Total liabilities			29,777,936				5,079,149
Mezzanine equity			160,775				50,400
Total net assets			19,806,327				5,708,063

 

RISK FACTORS

 

Investing in our common stock involves a high degree of risk. Before you invest in our common stock, you should be aware of various risks, including those described below. You should carefully consider these risks, together with all of the other information included in this prospectus, before you decide whether to make an investment in our common stock. The risks set forth below are not the only risks we face. If any of the following risks occur, our business, financial condition and results of operations could be materially adversely affected. In such case, our net asset value and the value of our common stock could decline, and you may lose all or part of your investment.

 

We are a new company with limited operating history, and as a result, you will have a limited basis on which to evaluate our ability to achieve our business objective.

 

We were formed in February 2011 and commenced operations in September 2011. As a result, we are subject to all of the business risks and uncertainties associated with any new business, including the risk that we will not achieve our investment objective and that the value of your investment could decline substantially.

 

 

Our day-to-day investment operations will be managed by our investment adviser, subject to oversight and supervision by our board of directors.  As a result, we will depend on the diligence, skill and network of business contacts of the principals of our investment adviser.  These individuals have critical industry experience and relationships that we will rely on to implement our business plan. If our investment adviser loses the services of these individuals, we may not be able to operate our business as we expect, and our ability to compete could be harmed, which could cause our operating results to suffer.  In addition, we can offer no assurance that HCAP Advisors will remain our investment adviser.

 

The investment professionals of our investment adviser may in the future become affiliated with entities engaged in business activities similar to those intended to be conducted by us, and may have conflicts of interest in allocating their time. We expect that these investment professionals will dedicate a significant portion of their time to our investment activities; however, they may in the future engage in other business activities which could divert their time and attention from our investment activities.

 

Our business model depends to a significant extent upon strong referral relationships of the principals of our investment adviser, and their inability to maintain or develop these relationships, as well as the failure of these relationships to generate investment opportunities, could adversely affect our business.

 

We expect that the principals of our investment adviser will maintain their relationships with financial institutions, private equity and other non-bank investors, investment bankers, commercial bankers, attorneys, accountants and consultants, and we will rely to a significant extent upon these relationships to provide us with potential investment opportunities. If the principals of our investment adviser fail to maintain their existing relationships or develop new relationships with other sponsors or sources of investment opportunities, we will not be able to grow our investment portfolio.  In addition, individuals with whom the principals of our investment adviser have relationships are not obligated to provide us with investment opportunities, and, therefore, there is no assurance that such relationships will generate investment opportunities for us.

 

Our financial condition and results of operations will depend on our ability to manage our business and our future growth effectively.

 

Our ability to achieve our investment objective will depend on our ability to manage and grow our business.  This will depend, in turn, on our investment adviser’s ability to identify, invest in and monitor companies that meet our investment criteria.

 

Accomplishing this result on a cost-effective basis will be largely a function of our investment adviser’s structuring and execution of the investment process, its ability to provide competent, attentive and efficient services to us and our access to financing on acceptable terms.  The principals of our investment adviser will have substantial responsibilities under the investment advisory and management agreement.  Such demands on their time may distract them or slow our rate of investment.  In order to grow, our investment adviser will need to hire, train, supervise and manage new employees.  However, we can offer no assurance that any such employees will contribute effectively to the work of our investment adviser. Any failure to manage our future growth effectively could have a material adverse effect on our business, financial condition and results of operations.

 

 

We provide debt and equity capital primarily to small and mid-sized companies, which may present a greater risk of loss than providing debt and equity capital to larger companies.

 

Our portfolio will consist primarily of debt and equity investments in small and mid-sized companies.  Compared to larger companies, small and mid-sized companies generally have more limited access to capital and higher funding costs, may be in a weaker financial position and may need more capital to expand, compete and operate their business.  In addition, many small and mid-sized companies may be unable to obtain financing from the public capital markets or other traditional sources, such as commercial banks, in part because loans made to these types of companies entail higher risks than loans made to companies that have larger businesses, greater financial resources or are otherwise able to access traditional credit sources on more attractive terms.

 

A variety of factors may affect the ability of borrowers to make scheduled payments on loans, including failure to satisfy financial targets and covenants, a downturn in a borrower’s industry or changes in the economy in general. In addition, investing in small and mid-sized companies in general involves a number of significant risks, including that small and mid-sized companies:

 

 

 

 

 

 

 

 

Any of these factors or changes thereto could impair a small and mid-sized company’s financial condition, results of operation, cash flow or result in other adverse events, such as bankruptcy, any of which could limit a borrower’s ability to make scheduled payments on our loans.  This, in turn, could result in losses in our loan portfolio and a decrease in our net interest income and net asset value.

 

 

Substantially all of our portfolio investments will be in the form of securities that are not publicly traded. The fair value of securities and other investments that are not publicly traded may not be readily determinable. We will value these securities at fair value as determined in good faith by our board of directors and in accordance with generally accepted accounting principles in the United States, or “GAAP.” Our board of directors will utilize the services of independent valuation firms to aid it in determining the fair value of these securities. The factors that may be considered in fair value pricing our investments include the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings, the markets in which the portfolio company does business, comparison to publicly traded companies, discounted cash flow, enterprise value and other relevant factors. Because such valuations, and particularly valuations of private securities and private companies, are inherently uncertain, they may fluctuate over short periods of time and may be based on estimates, our determinations of fair value may differ materially from the values that would have been used if a ready market for these securities existed. Our net asset value could be adversely affected if our determinations regarding the fair value of our investments were materially higher than the values that we ultimately realize upon the disposal of such securities.

 

 

 

We could experience fluctuations in our operating results due to a number of factors, including the interest rate payable on the debt securities we acquire, the default rate on such securities, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our markets and general economic conditions. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods.

 

There may be significant potential conflicts of interest in the future which could impact our investment returns.

 

We will need to obtain exemptive relief from the SEC in order to co-invest with such affiliated investment vehicles in some circumstances.  If we apply for such relief, there are no assurances that we will receive the requested relief, and any such order will be subject to certain terms and conditions.  As a result, our investment adviser may in the future face conflicts in the allocation of investment opportunities as between us and such other entities.

 

A conflict of interest may arise with respect to our investment adviser’s actions under our $30 million secured revolving credit facility given that the lender under the credit facility is JMP Group, which has significant influence over our investment adviser.

 

Our ability to borrow under our $30 million secured revolving credit facility depends, in part, on the availability of funds to JMP Group under a similar credit facility with a third-party lender.

 

In order to provide us with our $30 million secured revolving credit facility, JMP Group amended its credit facility with a third party lender to include a revolving line of credit in an aggregate principal amount of up to $30 million, which, subject to certain terms and conditions, will provide JMP Group the funding to make the loans under our $30 million secured revolving credit facility. A default by JMP Group under its credit facility, which results in the acceleration of the debt thereunder, will constitute a default by us under our credit facility. Similarly, we may be unable to borrow under our credit facility during the revolving period if JMP Group is restricted from borrowing under its credit facility or if proceeds thereunder are otherwise unavailable for lending to us.

 

 

 

The incentive fee payable by us to our investment adviser may create an incentive for our investment adviser to pursue investments on our behalf that are risky or more speculative than would be the case in the absence of such compensation arrangement. Our investment adviser will receive the incentive fee based, in part, upon net capital gains realized on our investments. Unlike that portion of the incentive fee based on income, there is no hurdle rate applicable to the portion of the incentive fee based on net capital gains. As a result, the investment adviser may have a tendency to invest more capital in investments that are likely to result in capital gains as compared to income producing securities. Such a practice could result in our investing in more speculative securities than would otherwise be the case, which could result in higher investment losses, particularly during economic downturns.

 

Finally, the fact that the  incentive fee payable to our investment adviser is calculated based on a percentage of our return on invested capital may encourage our investment adviser to use leverage to increase the return on our investments. Under certain circumstances, the use of leverage may increase the likelihood of default, which would impair the value of our common stock.

 

 

We and our portfolio companies will be subject to laws and regulations at the local, state and federal levels. These laws and regulations, as well as their interpretation, may be changed from time to time. Accordingly, any change in these laws or regulations could have a material adverse effect on our business.

 

We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our shares of common stock less attractive to investors.

 

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the “JOBS Act”, and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002. We cannot predict if investors will find shares of our common stock less attractive because we will rely on these exemptions. If some investors find our shares of common stock less attractive as a result, there may be a less active trading market for our shares and our share price may be more volatile.

 

In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act, for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We are choosing to take advantage of the extended transition period for complying with new or revised accounting standards, which may make it more difficult for investors and securities analysts to evaluate us since our financial statements may not be comparable to companies that comply with public company effective dates and may result in less investor confidence.  We will remain an emerging growth company until the earlier of (a) the last day of the fiscal year (i) following the fifth anniversary of the completion of this offering, (ii) in which we have total annual gross revenue of at least $1 billion, or (iii) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30 th , and (b) the date on which we have issued more than $1 billion in non-convertible debt during the prior three-year period.

 

If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, stockholders could lose confidence in our financial and other public reporting, which would harm our business and the trading price of our common stock.

 

Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed to prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations. In addition, any testing by us conducted in connection with Section 404 of the Sarbanes-Oxley Act, or the subsequent testing by our independent registered public accounting firm (when undertaken, as noted below), may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses or that may require prospective or retroactive changes to our financial statements or identify other areas for further attention or improvement. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock.

 

 

We will be required to disclose changes made in our internal control on financial reporting on a quarterly basis and our management will be required to assess the effectiveness of these controls annually. However, for as long as we are an “emerging growth company” under the recently enacted JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404. We could be an emerging growth company for up to five years.  An independent assessment of the effectiveness of our internal controls could detect problems that our management’s assessment might not. Undetected material weaknesses in our internal controls could lead to financial statement restatements and require us to incur the expense of remediation.

 

Our status as an “emerging growth company” under the JOBS Act may make it more difficult to raise capital as and when we need it.

 

Because of the exemptions from various reporting requirements provided to us as an “emerging growth company” and because we will have an extended transition period for complying with new or revised financial accounting standards, we may be less attractive to investors and it may be difficult for us to raise additional capital as and when we need it.  Investors may be unable to compare our business with other companies in our industry if they believe that our financial accounting is not as transparent as other companies in our industry.  If we are unable to raise additional capital as and when we need it, our financial condition and results of operations may be materially and adversely affected.

 

Because we borrow money in connection with our investment activities, the potential for gain or loss on amounts invested in us is magnified and may increase the risk of investing in us.

 

Borrowings, also known as leverage, magnify the potential for gain or loss on invested equity capital. As we use leverage to partially finance our investments, you will experience increased risks associated with investing in our common stock.  If the value of our assets increases, then leveraging would cause the net asset value attributable to our common stock to increase more sharply than it would have had we not utilized leverage. Conversely, if the value of our assets decreases, leveraging would cause net asset value to decline more sharply than it otherwise would have had we not utilized leverage. Similarly, any increase in our income in excess of interest payable on the borrowed funds would cause our net investment income to increase more than it would without the leverage, while any decrease in our income would cause our net investment income to decline more sharply than it would have had we not borrowed. Such a decline could negatively affect our ability to make distributions to our stockholders.

(net of expenses)

		-10%				-5%				0%				5%				10%
C Corresponding return to stockholder			-30	%			-19	%			-9	%			2	%			12	%

 

Changes in interest rates may affect our cost of capital and net investment income.

 

We leverage our investments with borrowed money and plan to continue doing so.  As a result our net investment income will depend, in part, upon the difference between the rate at which we borrow funds and the rate at which we invest those funds. Thus, we can offer no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income in the event we use debt to finance our investments.

 

 

Provisions of the Delaware General Corporation Law and our certificate of incorporation and bylaws could deter takeover attempts and have an adverse impact on the price of our common stock.

 

The Delaware General Corporation Law and our certificate of incorporation and bylaws contain provisions that may have the effect of discouraging, delaying or making difficult a change in control of our company or the removal of our incumbent directors. The existence of these provisions, among others, may have a negative impact on the price of our common stock and may discourage third-party bids for ownership of our company. These provisions may prevent any premiums being offered to you for our common stock.

 

The investment advisory and management agreement with our investment adviser and the administration agreement with our administrator were not negotiated on an arm’s length basis and may not be as favorable to us as if they had been negotiated with an unaffiliated third party.

 

The investment advisory and management agreement with our investment adviser and the administration agreement with our administrator were negotiated between related parties.  Consequently, their terms, including fees payable to our investment adviser, may not be as favorable to us as if they had been negotiated with an unaffiliated third party.  In addition, we may choose not to enforce, or to enforce less vigorously, our rights and remedies under these agreements because of our desire to maintain our ongoing relationship with JMP Group and its respective affiliates.

 

Our board of directors may change our investment objective, operating policies and strategies without prior notice or stockholder approval.

 

Our board of directors has the authority to modify or waive certain of our operating policies and strategies without prior notice and without stockholder approval. However, absent stockholder approval, we may not change the nature of our business so as to cease to be, or withdraw our election as, a business development company. We cannot predict the effect any changes to our current operating policies and strategies would have on our business, operating results and value of our securities. Nevertheless, the changes may adversely affect our business and affect our ability to make distributions.

 

 

Our portfolio investments are generally not in publicly traded securities. As a result, the values of these securities are not readily available. We value these securities at fair value as determined in good faith by our board of directors. In connection with that determination, investment professionals from our investment adviser prepare portfolio company valuations based upon the most recent portfolio company financial statements available and projected financial results of each portfolio company. The participation of our investment adviser’s investment professionals in our valuation process could result in a conflict of interest as our investment adviser’s management fee is based on our gross assets.

 

Our investment adviser has the right to resign on 60 days’ notice, and we may not be able to find a suitable replacement within that time, resulting in a disruption in our operations that could adversely affect our financial condition, business and results of operations.

 

Our investment adviser has the right, under the investment advisory and management agreement, to resign at any time upon not less than 60 days’ written notice, whether we have found a replacement or not. If our investment adviser resigns, we may not be able to find a new investment adviser or hire internal management with similar expertise and ability to provide the same or equivalent services on acceptable terms within 60 days, or at all. If we are unable to do so quickly, our operations are likely to experience a disruption, our financial condition, business and results of operations as well as our ability to pay distributions are likely to be adversely affected and the market price of our shares may decline. In addition, the coordination of our internal management and investment activities is likely to suffer if we are unable to identify and reach an agreement with a single institution or group of executives having the expertise possessed by our investment adviser and its affiliates. Even if we are able to retain comparable management, whether internal or external, the integration of such management and their lack of familiarity with our investment objective may result in additional costs and time delays that may adversely affect our financial condition, business and results of operations.

 

 

Many of our portfolio companies will be susceptible to economic slowdowns or recessions and may be unable to repay our loans during such periods.   Therefore, our non-performing assets will likely increase and the value of our portfolio will likely decrease during these economic conditions.  Adverse economic conditions also may decrease the value of collateral securing some of our loans and the value of our equity investments.  Further, economic slowdowns or recessions could lead to financial losses in our portfolio and a decrease in revenues, net income and assets. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events could prevent us from increasing investments and harm our operating results.

 

A portfolio company’s failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially, termination of its loans and foreclosure on its secured assets, which could trigger cross-defaults under other agreements and jeopardize such portfolio company’s ability to meet its obligations under debt securities that we hold.  We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting portfolio company.  In addition, if one of our portfolio companies were to go bankrupt, even if we had structured our interest as senior debt, depending on the facts and circumstances, including the extent to which we actually provided managerial assistance to that portfolio company, a bankruptcy court might re-characterize our debt holding and subordinate all or a portion of our claim to that of other creditors.

 

The current state of the economy and financial markets increases the likelihood of adverse effects on our financial position and results of operations.

 

  The U.S. capital markets experienced extreme volatility and disruption over the past several years, leading to recessionary conditions and depressed levels of consumer and commercial spending. Disruptions in the capital markets increased the spread between the yields realized on risk-free and higher risk securities, resulting in illiquidity in parts of the capital markets. While recent indicators suggest improvement in the capital markets, we cannot provide any assurance that these conditions will not worsen. If these conditions continue or worsen, the prolonged period of market illiquidity may have an adverse effect on our business, financial condition, and results of operations. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events could limit our investment originations, limit our ability to grow and negatively impact our operating results.

 

  In addition, to the extent that weak economic conditions continue or worsen, the financial results of small to mid-sized companies, like those in which we intend to invest, may experience deterioration, which could ultimately lead to difficulty in meeting debt service requirements and an increase in defaults. Additionally, the end markets for certain small to mid-sized companies’ products and services have experienced, and continue to experience, negative economic trends.  The performances of certain small to mid-sized companies have been, and may continue to be, negatively impacted by these economic or other conditions, including the small to mid-sized companies in which we may invest.

 

We operate in a highly competitive market for investment opportunities.

 

We face competition from entities that also make the types of investments that we plan to make. We will compete with public and private funds, commercial and investment banks, commercial financing companies and, to the extent they provide an alternative form of financing, private equity funds. Many of our potential competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. For example, some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments than we do, which could allow them to consider a wider variety of investments and establish more relationships than us. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act will impose on us. We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations. Also, as a result of this competition, we may not be able to take advantage of attractive investment opportunities from time to time, and we can offer no assurance that we will be able to identify and make investments that are consistent with our investment objective.

 

We will not seek to compete primarily based on the interest rates we will offer, and we believe that some of our competitors may make loans with interest rates that will be comparable to or lower than the rates we offer. We may lose investment opportunities if we do not match our competitors’ pricing, terms and structure. However, if we match our competitors’ pricing, terms and structure, we may experience decreased net interest income and increased risk of credit loss.

 

 

Our investments may be risky, and you could lose all or part of your investment in us.

 

We anticipate that our portfolio will consist primarily of directly originated investments in subordinated and senior debt made to private or thinly-traded public U.S. small and mid-sized companies.  In addition, we may make non-control, equity co-investments in these companies in conjunction with our debt investments.

 

Subordinated debt investments.     We generally intend to structure our subordinated debt with a security interest that ranks junior to a company’s secured debt in priority of payment, but senior to a company’s preferred or common stock.  As such, other creditors will rank senior to us in the event of insolvency, which may result in an above average amount of risk and loss of principal.

 

Senior debt investments .    We will invest, to a lesser extent, in senior debt of small and mid-sized companies.  Senior debt investments will typically be secured by the assets of the portfolio company, including a pledge of the capital stock of the portfolio company’s subsidiaries, and will be senior to all other junior capital in terms of payment priority.  There is, however, a risk that the collateral securing these loans may decrease in value over time, may be difficult to sell in a timely manner, may be difficult to appraise and may fluctuate in value based upon the success of the portfolio company and market conditions, including as a result of the inability of the portfolio company to raise additional capital, and, in some circumstances, our lien could be subordinated to claims of other creditors. In addition, deterioration in a portfolio company’s financial condition and prospects, including its inability to raise additional capital, may be accompanied by deterioration in the value of the collateral for the loan. Consequently, the fact that a loan is secured does not guarantee that we will receive principal and interest payments according to the loan’s terms, or at all, or that we will be able to collect on the loan should we be forced to enforce our remedies.

 

Equity investments.     When we invest in subordinated debt or senior debt, we may acquire equity securities as well. In addition, we may invest directly in the equity securities of portfolio companies. Our goal is ultimately to dispose of such equity interests and realize gains upon our disposition of such interests. Accordingly, we may not be able to realize gains from our equity interests, and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses we experience.

 

The lack of liquidity in our investments may adversely affect our business.

 

We will generally make investments in private companies. Substantially all of these securities will be subject to legal and other restrictions on resale or will otherwise be less liquid than publicly traded securities. The illiquidity of our investments may make it difficult for us to sell such investments if the need arises. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we have previously recorded our investments. In addition, we may face other restrictions on our ability to liquidate an investment in a portfolio company to the extent that we or our investment adviser have  material non-public information regarding such portfolio company.

 

We have not yet identified any portfolio company investments that we will acquire using the proceeds of this offering.

 

We have not yet identified any potential investments for our portfolio that we will acquire using the proceeds of this offering and our investment adviser will begin to select our investments subsequent to the closing of this offering. As a result, you will be unable to evaluate any future portfolio company investments prior to purchasing our common stock and you will have no input with respect to such investment decisions. Although we intend to invest a substantial portion of the proceeds from this offering within six to nine months of the commencement thereof, we can give you no assurance that we will be able to invest substantially all of the proceeds of this offering in accordance with our investment objective in that timeframe, or at all.  These factors increase the uncertainty, and thus the risk, of investing in our common stock.

 

Pending use of the net proceeds from this offering as disclosed in the “Use of Proceeds” section, we will invest the net proceeds of this offering primarily in cash, cash equivalents, U.S. government securities and other high-quality investments that mature in one year or less from the date of investment. As a result, any distributions we make during this period may be substantially smaller than the distributions that we expect to pay when our portfolio is fully invested.

 

 

Our portfolio may be concentrated in a limited number of portfolio companies and industries, which will subject us to a risk of significant loss if any of these companies defaults on its obligations under any of its debt instruments or if there is a downturn in a particular industry.

 

Our failure to make follow-on investments in our portfolio companies could impair our investment in a portfolio company.

 

Following an initial investment in a portfolio company, we may make additional investments in that portfolio company as “follow-on” investments, in order to:

 

·

increase or maintain in whole or in part our equity ownership percentage in a portfolio company;

 

·

exercise warrants, options or convertible securities that were acquired in the original or subsequent financing; or

 

·

attempt to preserve or enhance the value of our investment.

 

We may elect not to make follow-on investments or otherwise lack sufficient funds to make those investments. We will have the discretion to make any follow-on investments, subject to any applicable legal requirements, including the RIC diversification requirements, and the availability of capital resources. The failure to make follow-on investments may, in some circumstances, jeopardize the continued viability of a portfolio company and our initial investment, or may result in a missed opportunity for us to increase our participation in a successful operation. Even if we have sufficient capital to make a desired follow-on investment, we may elect not to make a follow-on investment because we may not want to increase our concentration or level of risk, either because we prefer other opportunities (or because we are inhibited by compliance with business development company requirements or the desire to maintain our RIC tax status).

 

Because we will generally not hold controlling equity interests in our portfolio companies, we may not be in a position to exercise control over our portfolio companies or to prevent decisions by the management of our portfolio companies that could decrease the value of our investments.

 

Although we may do so in the future, we do not currently anticipate taking controlling equity positions in our portfolio companies. As a result, we will be subject to the risk that a portfolio company may make business decisions with which we disagree, and that the management and/or stockholders of a portfolio company may take risks or otherwise act in ways that are adverse to our interests. Due to the lack of liquidity of the debt and equity investments that we will typically hold in our portfolio companies, we may not be able to dispose of our investments in the event we disagree with the actions of a portfolio company and may therefore suffer a decrease in the value of our investments.

 

Defaults by our portfolio companies will harm our operating results.

 

A portfolio company’s failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially, termination of its loans and foreclosure on its assets.  This could trigger cross-defaults under other agreements and jeopardize such portfolio company’s ability to meet its obligations under the debt or equity securities that we hold.  We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms, which may include the waiver of certain financial covenants, with a defaulting portfolio company.

 

An investment strategy focused primarily on privately held companies presents certain challenges, including the lack of available information about these companies, a dependence on the talents and efforts of only a few key portfolio company personnel and a greater vulnerability to economic downturns.

 

We will invest primarily in privately held companies. Generally, little public information exists about these companies, and we will be required to rely on the ability of our investment adviser’s investment professionals to obtain adequate information to evaluate the potential returns from investing in these companies. If we are unable to uncover all material information about these companies, we may not make a fully informed investment decision, and we may lose money on our investments. Also, privately held companies frequently have less diverse product lines and smaller market presence than larger competitors. These factors could adversely affect our investment returns as compared to companies investing primarily in the securities of public companies.

 

 

Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in such companies.

 

We intend to invest primarily in subordinated debt and, to a lesser extent, senior debt and equity securities issued by our portfolio companies.  Many of the portfolio companies usually will have, or may be permitted to incur, other debt that ranks equally with, or senior to, the debt securities in which we invest. By their terms, such debt instruments may provide that the holders are entitled to receive payment of interest or principal on or before the dates on which we are entitled to receive payments.  Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders of debt instruments ranking senior to our investment in that portfolio company would typically be entitled to receive payment in full before we receive any distribution in respect of our investment. After repaying such senior creditors, such portfolio company may not have any remaining assets to use for repaying its obligation to us. In the case of debt ranking equally with debt securities in which we invest, we would have to share on an equal basis any distributions with other creditors holding such debt in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company.

 

There may be circumstances where our debt investments could be subordinated to claims of other creditors or we could be subject to lender liability claims .

 

Even though we may have structured certain of our investments as senior debt, if one of our portfolio companies were to go bankrupt, depending on the facts and circumstances and based upon principles of equitable subordination as defined by existing case law, a bankruptcy court could subordinate all or a portion of our claim to that of other creditors and transfer any lien securing such subordinated claim to the bankruptcy estate. The principles of equitable subordination defined by case law have generally indicated that a claim may be subordinated only if its holder is guilty of misconduct or where the senior loan is re-characterized as an equity investment and the senior lender has actually provided significant managerial assistance to the bankrupt debtor. We may also be subject to lender liability claims for actions taken by us with respect to a borrower’s business or instances where we exercise control over the borrower. It is possible that we could become subject to a lender's liability claim, including as a result of actions taken in rendering significant managerial assistance or actions to compel and collect payments from the borrower outside the ordinary course of business.

 

We may expose ourselves to risks if we engage in hedging transactions.

 

If we engage in hedging transactions, we may expose ourselves to risks associated with such transactions. We may utilize instruments such as forward contracts, currency options and interest rate swaps, caps, collars and floors to seek to hedge against fluctuations in the relative values of our portfolio positions from changes in currency exchange rates and market interest rates. Hedging against a decline in the values of our portfolio positions does not eliminate the possibility of fluctuations in the values of such positions or prevent losses if the values of such positions decline. However, such hedging can establish other positions designed to gain from those same developments, thereby offsetting the decline in the value of such portfolio positions. Such hedging transactions may also limit the opportunity for gain if the values of the underlying portfolio positions should increase. Moreover, it may not be possible to hedge against an exchange rate or interest rate fluctuation that is so generally anticipated that we are not able to enter into a hedging transaction at an acceptable price.

 

 

The success of our hedging transactions will depend on our ability to correctly predict movements in currencies and interest rates. Therefore, while we may enter into such transactions to seek to reduce currency exchange rate and interest rate risks, unanticipated changes in currency exchange rates or interest rates may result in poorer overall investment performance than if we had not engaged in any such hedging transactions. In addition, the degree of correlation between price movements of the instruments used in a hedging strategy and price movements in the portfolio positions being hedged may vary. Moreover, for a variety of reasons, we may not seek to establish a perfect correlation between such hedging instruments and the portfolio holdings being hedged. Any such imperfect correlation may prevent us from achieving the intended hedge and expose us to risk of loss. In addition, it may not be possible to hedge fully or perfectly against currency fluctuations affecting the value of securities denominated in non-U.S. currencies because the value of those securities is likely to fluctuate as a result of factors not related to currency fluctuations.

 

Regulations governing our operations will affect our ability to raise, and the method for raising, additional capital, which may expose us to risks.

 

Our business will require a substantial amount of capital in addition to the proceeds from this offering. For example, we may acquire additional capital from the issuance of senior securities, including other borrowings or indebtedness, from the issuance of additional securities or from securitization transactions. However, we may not be able to raise additional capital in the future on favorable terms or at all.  We may issue debt securities, other evidences of indebtedness or preferred stock, and we may borrow money from banks or other financial institutions, which we collectively refer to as “senior securities,” up to the maximum amount permitted by the 1940 Act. The 1940 Act will permit us to issue senior securities in amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after each issuance of senior securities. Our ability to pay distributions or issue additional senior securities may be restricted if our asset coverage were not at least 200%. If the value of our assets declines, we may be unable to satisfy this test. As a result of issuing senior securities, we will also be exposed to typical risks associated with leverage, including an increased risk of loss. If we issue preferred stock, it will rank “senior” to common stock in our capital structure, preferred stockholders will have separate voting rights and may have rights, preferences or privileges more favorable than those of holders of our common stock, and the issuance of preferred stock could have the effect of delaying, deferring or preventing a transaction or a change of control that might involve a premium price for holders of our common stock or otherwise be in your best interest.

 

To the extent that we are constrained in our ability to issue debt or other senior securities, we will depend on issuances of common stock to finance our operations. As a business development company, we will generally not be able to issue our common stock at a price below net asset value without first obtaining required approvals of our stockholders and independent directors. If we raise additional funds by issuing more common stock or senior securities convertible into, or exchangeable for, our common stock, the percentage ownership of our stockholders at that time would decrease and you may experience dilution.

 

Prior to this offering, we used a higher percentage of leverage than will be permitted once we are a business development company. As of December 31, 2012, we had an asset coverage ratio of 170%. In order to comply with the asset coverage ratio under the 1940 Act, we will use a portion of the net proceeds from the offering to immediately repay all of our outstanding borrowings. See “ Use of Proceeds. ”

 

If we do not invest a sufficient portion of our assets in qualifying assets, we could fail to qualify as a business development company or be precluded from investing according to our current business strategy.

 

We may not acquire any assets other than “qualifying assets” unless, at the time of and after giving effect to such acquisition, at least 70% of our total assets are qualifying assets. See “Regulation.”

 

We believe that most of the subordinated and senior debt investments that we intend to target should constitute qualifying assets. However, we may be precluded from investing in what we believe are attractive investments if such investments are not qualifying assets for purposes of the 1940 Act. If we do not invest a sufficient portion of our assets in qualifying assets, we could lose our status as a business development company, which would have a material adverse effect on our business, financial condition and results of operations. Similarly, these rules could prevent us from making follow-on investments in existing portfolio companies (which could result in the dilution of our position) or could require us to dispose of investments at inappropriate times in order to come into compliance with the 1940 Act. If we need to dispose of such investments quickly, it would be difficult to dispose of such investments on favorable terms. For example, we may have difficulty in finding a buyer, and even if we do find a buyer we may have to sell the investments at a substantial loss.

 

 

We may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income.

 

As a regulated investment company, we will be required to distribute annually at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses to maintain our eligibility for regulated investment company tax treatment.  For U.S. federal income tax purposes, we will include in taxable income certain amounts that we have not yet received in cash, such as contracted payment-in-kind, or PIK, interest, which represents contractual interest added to the loan balance and due at the end of the loan term. The increases in loan balances as a result of contracted payment-in-kind arrangements will be included in income in advance of receiving cash payment, and will be separately identified on our statements of cash flows. We also may be required to include in income certain other amounts that we will not receive in cash.

 

Any warrants that we receive in connection with our debt investments will generally be valued as part of the negotiation process with the particular portfolio company. As a result, a portion of the aggregate purchase price for the debt investments and warrants will be allocated to the warrants that we receive. This will generally result in our debt instruments having “original issue discount” for tax purposes, which we must recognize as ordinary income as such original issue discount accrues regardless of whether we have received any corresponding payment of such interest.  Other features of debt instruments that we hold may also cause such instruments to generate original issue discount.

 

Since in certain cases we may recognize income before or without receiving cash representing such income, we may have difficulty meeting the requirement to distribute at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses to maintain our eligibility for regulated investment company tax treatment. Accordingly, we may have to sell some of our assets, raise additional debt or equity capital or reduce new investment originations to meet these distribution requirements. If we are unable to obtain cash from other sources to satisfy such distribution requirements, we may fail to qualify for regulated investment company tax treatment and thus may become subject to corporate-level income tax.

 

We will be subject to corporate-level income tax if we are unable to maintain our qualification as a regulated investment company under Subchapter M of the Code or do not satisfy the annual distribution requirement.

 

In order to satisfy the requirements applicable to a regulated investment company, we must meet the following annual distribution, income source and asset diversification requirements to be relieved of federal taxes on income and gains distributed to our stockholders.

 

 

 

 

If we fail to qualify for or maintain regulated investment company status or to meet the annual distribution requirement for any reason and are subject to corporate income tax, the resulting corporate taxes could substantially reduce our net assets, the amount of income available for distribution and the amount of our distributions.

 

 

We will continue to need additional capital to finance our growth because we intend to distribute substantially all of our income to our stockholders following our election to be treated as a RIC. If additional funds are unavailable or are not available on favorable terms, our ability to grow will be impaired.

 

In order to satisfy the requirements applicable to a RIC, we intend to distribute to our stockholders at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses. As a business development company, we will generally be required to meet a coverage ratio of total assets to total senior securities, which include all of our borrowings and any preferred stock that we may issue in the future, of at least 200%. This requirement will limit the amount that we may borrow. Because we will continue to need capital to grow our loan and investment portfolio, this limitation may prevent us from incurring debt and require us to raise additional equity at a time when it may be disadvantageous to do so. While we expect to be able to borrow and to issue additional debt and equity securities, we cannot assure you that debt and equity financing will be available to us on favorable terms, or at all. In addition, as a business development company, we generally will not be permitted to issue common stock priced below net asset value without stockholder and independent director approval. However, if we do obtain the necessary approvals to issue securities at prices below net asset value, your investment will experience dilution as a result of such issuance. If additional funds are not available to us, we could be forced to curtail or cease our lending and investment activities, and our net asset value could decrease.

 

Shares of closed-end investment companies, including business development companies, may trade at a discount to their net asset value.

 

Shares of closed-end investment companies, including business development companies, may trade at a discount to net asset value. This characteristic of closed-end investment companies and business development companies is separate and distinct from the risk that our net asset value per share may decline. We cannot predict whether our common stock will trade at, above or below net asset value. In addition, if our common stock trades below net asset value, we will generally not be able to issue additional common stock at the market price unless our stockholders approve such a sale and our independent directors make certain determinations.

 

If our investments do not meet our performance expectations, you may not receive distributions.

 

We expect to make distributions on a monthly basis to our stockholders. We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time.  In addition, due to the asset coverage test applicable to us as a business development company, we may be limited in our ability to make distributions. See “Regulation – Senior Securities; Derivative Securities.” Also, restrictions and provisions in our current and any future credit facilities may limit our ability to make distributions. If we do not distribute annually at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term losses, we will fail to qualify as RIC and will be subject to corporate-level federal income tax, which may reduce the amounts available for distribution.  We cannot assure you that you will receive distributions at a particular level or at all.

 

 

We expect that the price of our common stock will fluctuate significantly, and you may not be able to resell your common stock at or above the offering price.

 

There is no public market for our common stock, and there may be no market for our common stock after the completion of this offering.  If a trading market for our common stock develops, the trading price of our common stock is likely to be volatile and subject to wide price fluctuations in response to various factors, including:

 

·

market conditions in the broader stock market in general, or in the lending industry in particular;

 

·

actual or anticipated fluctuations in our financial and operating results;

 

·

loss of a major funding source;

 

·

sales of large blocks of our securities;

 

·

additions or departures of key personnel;

 

·

regulatory developments;

 

·

litigation and governmental investigations; and

 

·

economic and political conditions or events.

 

These and other factors may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their common stock and may otherwise negatively affect the liquidity of our common stock.

 

 

We will have significant flexibility in investing the net proceeds of this offering. Accordingly, we may use the net proceeds from this offering in ways with which you may not agree or for purposes other than those contemplated at the time of the offering.

 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

In addition to factors previously identified elsewhere in this prospectus, including the “Risk Factors” section of this prospectus, the following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance:

 

This prospectus, and other statements that we may make, may contain forward-looking statements with respect to future financial or business performance, strategies or expectations. Forward-looking statements are typically identified by words or phrases such as “trend,” “opportunity,” “pipeline,” “believe,” “comfortable,” “expect,” “anticipate,” “current,” “intention,” “estimate,” “position,” “assume,” “plan,” “potential,” “project,” “outlook,” “continue,” “remain,” “maintain,” “sustain,” “seek,” “achieve” and similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “may” or similar expressions.

 

Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Forward-looking statements speak only as of the date they are made, and we assume no duty to and do not undertake to update forward-looking statements. These forward-looking statements do not meet the safe harbor for forward-looking statements pursuant to Section 27A of the Securities Act. Actual results could differ materially from those anticipated in forward-looking statements and future results could differ materially from historical performance.

 

 

USE OF PROCEEDS

 

We are offering                          shares of our common stock through the underwriters. The net proceeds of the offering are estimated to be approximately $          million (approximately $      million if the underwriters exercise their over-allotment option to purchase additional shares in full) assuming an initial public offering price of $          per share (based on the mid-point of the range set forth on the cover of this prospectus) after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

Pending such use, we will invest the remaining net proceeds of this offering primarily in cash, cash equivalents, U.S. government securities and high-quality debt investments that mature in one year or less from the date of investment. These temporary investments may have lower yields than our other investments and, accordingly, may result in lower distributions, if any, during such period. See “Regulation — Temporary Investments” for additional information about temporary investments we may make while waiting to make longer-term investments in pursuit of our investment objective.

 

 

DISTRIBUTIONS

 

To the extent we have income available, we intend to make monthly distributions to our stockholders beginning with our first full month after the completion of this offering. The timing and amount of our monthly distributions, if any, will be determined by our board of directors. Any distributions to our stockholders will be declared out of assets legally available for distribution.

 

We intend to elect to be treated, and intend to qualify annually thereafter, as a RIC under the Code, beginning with our first taxable year ending December 31, 2013. To obtain and maintain RIC tax treatment, we must distribute at least 90% of our net ordinary income and net short-term capital gains in excess of our net long-term capital losses, if any, to our stockholders. In order to avoid certain excise taxes imposed on RICs, we currently intend to distribute during each calendar year an amount at least equal to the sum of: (a) 98% of our net ordinary income for such calendar year; (b) 98.2% of our capital gain net income for the one-year period ending on October 31 of the calendar year; and (c) any net ordinary income and capital gain net income for preceding years that were not distributed during such years and on which we previously paid no U.S. federal income tax.

 

We currently intend to distribute net capital gains ( i.e. , net long-term capital gains in excess of net short-term capital losses), if any, at least annually out of the assets legally available for such distributions. However, we may decide in the future to retain such capital gains for investment and elect to treat such gains as deemed distributions to you. If this happens, you will be treated for U.S. federal income tax purposes as if you had received an actual distribution of the capital gains that we retain and reinvested the net after tax proceeds in us. In this situation, you would be eligible to claim a tax credit (or in certain circumstances a tax refund) equal to your allocable share of the tax we paid on the capital gains deemed distributed to you. See “Material U.S. Federal Income Tax Considerations.” We cannot assure you that we will achieve results that will permit us to pay any cash distributions, and if we issue senior securities, we may be prohibited from making distributions if doing so would cause us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if such distributions are limited by the terms of any of our borrowings.

 

We intend to maintain an “opt out” dividend reinvestment plan for our common stockholders. As a result, if we declare a cash distribution, each stockholder’s cash distributions will be automatically reinvested in additional shares of our common stock unless the stockholder specifically “opts out” of our dividend reinvestment plan so as to receive cash distributions. Stockholders who receive distributions in the form of shares of common stock will be subject to the same federal income tax consequences as if they received cash distributions. See “Dividend Reinvestment Plan” and “Material U.S. Federal Income Tax Considerations.”

 

 

FORMATION TRANSACTION

 

 

 

DILUTION

 

 

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

 

After giving effect to the sale of            shares of our common stock in this offering at an assumed initial public offering price of $      per share (based on the mid-point of the range set forth on the cover of this prospectus) and after deducting the sales load (underwriting discount) and estimated offering expenses payable by us, our pro forma net asset value as of December 31, 2012, would have been approximately $      million, or $      per share, representing an immediate dilution of $      per share to new investors who purchase our common stock in the offering at the initial public offering price. The following table shows this immediate per share dilution:

 

Assumed initial public offering price per share		$
Pro forma net asset value per share before this offering after giving effect to the formation transaction		$
Pro forma net asset value per share after this offering		$
Dilution per share to new investors		$

 

The foregoing does not reflect potential dilution from the exercise of our outstanding warrants.

 

 

Schedule of Investments

(as of December 31, 2012)

 

Portfolio Company	Investment   (1)	Origination Date		Outstanding Principal				Cost				Fair Value
Investments in Affiliated Portfolio Companies
Seafood Product Preparation and Packaging
Solex (9.7%)*	Senior Secured Term Loan, due 12/28/2016	12/31/2012		$	1,700,000			$	1,514,642			$	1,514,642
	(15.79%; LIBOR + 12.50% Cash/3.29% PIK)
	Common Equity								250,000				250,000
	(6.34% of fully diluted common equity)
	Common Equity Warrants								151,514				151,514
	(6.4% of fully diluted common equity)
Total Investments in Affiliated Portfolio Companies									1,916,156				1,916,156
Investments in Non-controlled, Non-affiliated Portfolio Companies
Hand Tool Manufacturing
Rostra Tool Company (23.8%)*	Junior Secured Subordinated Debt, due 12/15/2014	2/1/2012			4,540,116				4,454,880				4,454,880
	(Greater of 17.00%; 13.00% Cash/4.00% PIK or LIBOR + 13.50%
	LIBOR + 9.50% Cash/4.00% PIK)
	Common Equity Warrants								-				268,000
	(14.99% of fully diluted common equity)
Heavy and Civil Engineering and Construction
LNB Construction, Inc. (23.4%)*	Junior Secured Subordinated Debt, due 11/30/2014	8/21/2012			3,436,199				3,196,867				3,196,867
	(20.00%; 17.00% Cash/3.00% PIK)
	Options to Purchase Common Equity								193,750				1,434,000
	(16.5% of fully diluted common equity)
Industrial Fluid Filtration Services
CRS Reprocessing, LLC (14.9%)*	Senior Secured Term Loan, due 11/02/2015	11/1/2012			3,015,251				2,957,624				2,957,624
	(15.00%, 12.00% Cash/3.00% PIK)
Industrial Machinery Manufacturing
Douglas Machines Corp. (21.3%)*	Junior Secured Subordinated Debt, due 4/6/2017	4/6/2012			4,110,032				3,997,810				4,110,032
	(16.00%; 12.50% Cash/3.50% PIK)
	Common Equity Warrants								12,500				104,000
	(2.0% of fully diluted common equity)
Motor Vehicle Metal Stamping
JD Norman Industries, Inc (20.7%)* (2)	Junior Secured Subordinated Debt, due 10/31/16	11/3/2011			4,168,369				4,100,488				4,100,488
	(19.00%; 12.50% Cash/6.50% PIK)
Novelty Shops
Peekay Acquisition, LLC (Christals) (9.0%)*	Senior Secured Term Loan, due 12/27/2015	12/31/2012			2,000,000				1,678,500				1,678,500
	(18.00%; 15.00% Cash/3.00% Accommodation Fee)
	Common Equity Warrants (Christals Acquisition, LLC)								35,000				35,000
	(2.0% of fully diluted common equity)
	Common Equity Warrants (Christals Parent, LLC)								70,000				70,000
	(4.0% of fully diluted common equity)
Other Nondepository Credit Intermediation
WBL SPE I, LLC (4.7%)*	Senior Secured Term Loan, due 12/28/2015	12/28/2012			1,000,000				940,000				940,000
	(18.00% Cash)
Pawn Retail Outlets
Pawn Plus, Inc. (19.0%)*	Senior Secured Term Loan, due 12/31/2016	12/31/2012			3,900,000				3,630,193				3,630,193
	(Greater of 17.00%; 15.00% Cash/2.00% PIK or LIBOR + 14.50%;
	LIBOR + 12.50% Cash/2.00% PIK)
	Common Equity Warrants								133,524				133,524
	(3.9% of fully diluted common equity)
Pharmaceutical Merchant Wholesaler
Insight Pharmaceuticals, LLC (7.9%)*	Junior Secured Term Loan, due 08/25/2017	9/14/2011			1,544,828				1,533,109				1,560,276
	(13.25%; LIBOR + 11.75% with 1.50% LIBOR floor)
Safety Consulting Services
Safety Services Acquisition Corp. (28.1%)*	Junior Secured Subordinated Debt, due 7/5/2017	4/5/2012			5,433,000				5,353,111				5,433,000
	(15.0%; 12.50% Cash/2.50% PIK)
	Common Equity								100,000				131,000
	(0.65% of fully diluted common equity)
Software Publishing
Blackboard Inc. (9.7%)*	Junior Secured Term Loan, due 04/04/2019	11/8/2011			2,000,000				1,819,424				1,927,000
	(11.50%; LIBOR + 10.00% with 1.50% LIBOR floor)
Optimal Blue (17.3%)*	Junior Secured Subordinated Debt, due 03/28/2018	12/28/2012			3,500,000				3,430,778				3,430,778
	(14.50%; 12.50% Cash/2.00% PIK)
Total Investments in Non-controlled, Non-affiliated Portfolio Companies									37,637,558				39,595,162
Total Investments as of December 31, 2012 (209.6%)*								$	39,553,714			$	41,511,318

 

* Value as a percent of net assets

(1)	All debt investments are income producing.  Common equity and all warrants are non-income producing. All of our investments other than LNB Construction, Inc., are qualifying assets for purposes of Section 55(a) of the 1940 Act.
(2)	JD Norman Industries, Inc was in default of a financial covenant as of December 31, 2012 resulting in the accrual of interest at the default rate, which is presented above.  The non-default interest rate is 16.00% (12.50% Cash/3.50% PIK).
	The company is currently performing and is held on accrual status.

 

 

39

---

 

 

Schedule of Investments

(as of December 31, 2011)

 

Portfolio Company

Investment   (1)

Origination Date

Outstanding Principal

Cost

Fair Value

Investments in Non-controlled, Non-affiliated Portfolio Companies

Motor Vehicle Metal Stamping

JD Norman Industries, Inc (68.4%)*

Junior Secured Subordinated Debt, due 10/31/16

11/3/2011

4,000,000

3,927,353

3,902,100

(16.00%; 12.50% Cash/3.50% PIK)

Pharmaceutical Merchant Wholesaler

Insight Pharmaceuticals, LLC (34.9%)*

Junior Secured Term Loan, due 08/25/2017

9/14/2011

2,000,000

1,985,556

1,990,000

(13.25%; LIBOR + 11.75% with 1.50% LIBOR floor)

Software Publishing

Blackboard Inc. (31.5%)*

Junior Secured Term Loan, due 04/04/2019

11/8/2011

(11.50%; LIBOR + 10.00% with 1.50% LIBOR floor)

2,000,000

1,802,590

1,800,000

Investments in Non-controlled, Non-affiliated Portfolio Companies

7,715,499

7,692,100

Total Investments as of December 31, 2011 (134.8%)*

$

7,715,499

$

7,692,100

 

*	Value as a percent of net assets

(1)	All debt investments are income producing

 

Portfolio Asset Quality

 

We use a credit rating system which rates each debt investment on a scale of 1 to 5, with 1 being the highest credit quality rating and 2 being the rating for an investment generally performing in line with expectations. A rating of 3, 4 or 5 represents a deteriorating credit quality and increased risk. See “Business” for more detailed descriptions. As of December 31, 2012 and December 31, 2011, each of our debt investments carried a credit rating of 2 .

 

The following table shows the composition of our investment portfolio at December 31, 2012 and December 31, 2011:

 

		Cost				Percentage of Total Portfolio				Fair Value				Percentage of Total Portfolio
December 31, 2012:
Debt investments		$	38,607,425				97.61	%		$	38,934,280				93.79	%
Equity investments			946,288				2.39	%			2,577,038				6.21	%
		$	39,553,713				100.00	%		$	41,511,318				100.00	%
December 31, 2011:
Debt investments		$	7,715,499				100.00	%		$	7,692,100				100.00	%
Equity investments			-				0.00	%			-				0.00	%
		$	7,715,499				100.00	%		$	7,692,100				100.00	%

 

 

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Results of Operations for the Year Ended December 31, 2012 and the Period ended December 31, 2011

 

Interest and Other Income

 

		Year Ended December 31, 2012				Period from September 6, 2011 (Commencement of Operations) Through December 31, 2011
Interest income		$	3,772,910			$	229,767
Other income			40,000				-
Total interest and other income		$	3,812,910			$	229,767

 

For the year ended December 31, 2012, total interest and other income increased to $3.8 million from $0.2 million over the period from September 6, 2011 to December 31, 2011, primarily due to the increased average size of the investment portfolio. Other income was primarily comprised of due diligence and structuring fees collected from our portfolio companies.

 

For the year ended December 31, 2012 and the period from September 6, 2011 through December 31, 2011, our dollar-weighted average annualized yield on average investments was approximately 16.8% and 15.0%, respectively. We compute the yield on average investments as (a) total interest income divided by (b) the weighted average cost of our debt investments. We used month-end investment balances during the period to compute average investments.

 

Expenses

 

		Year Ended December 31, 2012				Period from September 6, 2011 (Commencement of Operations) Through December 31, 2011
Management fee expense		$	1,149,737			$	12,863
Interest expense			974,369				126,791
General and administrative			310,040				267,871
Total expenses		$	2,434,146			$	407,525

 

Total expenses for the year ended December 31, 2012 and the period from September 6, 2011 through December 31, 2011 consisted primarily of management fees and interest expense, and to a lesser extent, professional fees and general and administrative expenses.  Management fees for the year ended December 31, 2012 increased compared to the period from September 6, 2011 through December 31, 2011 as a result of the growth in average investments outstanding to $22.0 million from $5.0 million.  The management fees are comprised of base management fees and income incentive management fees and are paid quarterly in arrears.  The base management fees are calculated as a percentage of average gross investments less the average amount outstanding on the line of credit.  The income incentive management fees are earned subject to our pre-incentive fee net investment income being greater than 8% (annualized) net assets.  Interest expense for the year ended December 31, 2012 increased compared to the September 6, 2011 through December 31, 2011.  The increase is attributed to higher average borrowings outstanding on the senior secured revolving credit facility with JMP Group .

 

 

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Financial Condition, Liquidity and Capital Resources

 

Historically, our primary sources of funding have been our private placement of equity capital and from Harvest Capital Credit LLC's senior secured revolving credit facility with JMP Group. For more information on this credit facility, see "Borrowings" below. Harvest Capital Credit LLC held its initial equity closing on September 6, 2011, with commitments totaling $15.2 million. Since then we have had several more closings and as of December 31, 2012 commitments totaled $32.5 million, of which $17.7 million have been called. In advance of our acquisition of Harvest Capital Credit LLC, as described under the "Formation Transaction" section above, Harvest Capital Credit LLC intends to call the remaining unfunded equity commitments.

 

At December 31, 2012, we had cash and cash equivalents of approximately $7.6 million. As of December 31, 2012, we had available borrowing capacity of approximately $1.8 million under the credit facility with JMP Group, subject to existing terms and advance rates. 

 

For the year ended December 31 , 2012, net cash used in operating activities totaled approximately $29.1 million, primarily due to the funding of investments partially offset by interest collected on our loans, and net cash provided by financing activities totaled $34.0 million, primarily from capital received from investors and borrowings under the credit facility.

 

We expect to generate cash primarily from the net proceeds of this offering and any future offerings of securities and cash flows from operations, including interest earned from the temporary investment of cash in U.S. government securities and other high-quality debt investments that mature in one year or less.  We may also fund a portion of our investments through borrowings from banks and issuances of senior securities, including before we have fully invested the proceeds of this offering.

Our primary use of funds will be to make investments in eligible portfolio companies and to pay our expenses and distributions to holders of our common stock. Immediately after this offering, we expect to have cash resources of approximately $    million and $    million of outstanding indebtedness. This amount does not take into account the exercise, if any, of the underwriters’ over-allotment option. See “Use of Proceeds.”

 

After we have used our current capital resources, including the net proceeds from this offering, we expect to opportunistically raise additional capital as needed and subject to market conditions to support our future growth through future equity offerings, issuances of senior securities and/or future borrowings, to the extent permitted by the 1940 Act. We are not generally able to issue and sell our common stock at a price below net asset value per share. We may, however, sell our common stock, warrants, options or rights to acquire our common stock, at a price below the current net asset value of the common stock, if our board of directors determines that such sale is in our best interests and that of our stockholders, and our stockholders approve such sale. In any such case, the price at which our securities are to be issued and sold may not be less than a price which, in the determination of our board of directors, closely approximates the market value of such securities (less any distributing commission or discount).

 

In order to satisfy the Code requirements applicable to a RIC, we intend to distribute to our stockholders all or substantially all of our income except for certain net capital gains. In addition, as a business development company, we generally will be required to meet an asset coverage ratio of 200%. This requirement will limit the amount that we may borrow. Upon the receipt of the net proceeds from this offering, we will be in compliance with the asset coverage ratio under the 1940 Act. Prior to this offering, we used a higher percentage of leverage than will be permitted once we are a business development company. As of December 31, 2012, we had an asset coverage ratio of 170%. In order to comply with the asset coverage ratio under the 1940 Act, we will use a portion of the net proceeds from the offering to immediately repay all of our outstanding borrowings. See “ Use of Proceeds. ”

 

 

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Borrowings

 

Effective August 24, 2011, Harvest Capital Credit LLC entered into its senior secured revolving credit facility with JMP Group. The credit facility has a total size of $30 million, a maximum term of six years and revolving period of two years. The maximum available amount under the credit facility began at $20 million and increased at a rate of $2.5 million per quarter until the maximum size limit of $30.0 million was reached in July 2012.  The maximum amount outstanding is also limited by a covenant which restricts borrowings to no more than 2.0 times the Net Tangible Asset Value ("NTAV") of Harvest Capital Credit LLC. At the end of the two year revolving period, the outstanding balance amortizes evenly at 5% per quarter over the following 16 consecutive quarters with the final 20% due at maturity in August 2017. The credit facility currently carries an interest rate of the Prime rate plus 4.75%.  The credit facility has an unused line fee of 0.50% per year. As of December 31, 2012, the outstanding balance on the facility was $28.2 million.

 

The agreement governing the credit facility requires Harvest Capital Credit LLC to, among other things (i) make representations and warranties regarding the collateral as well our business, (ii) agree to certain indemnification obligations and (iii) agree to comply with various affirmative and negative covenants and other customary requirements for similar credit facilities. The credit facility documents also include usual and customary default provisions such as the failure to make timely payments under the facility and the occurrence of a change in control, which, if not complied with, could accelerate repayment under the facility, thereby materially and adversely affecting our liquidity, financial condition and results of operations. The credit facility is secured by all of Harvest Capital Credit LLC’s assets. Harvest Capital Credit LLC used the credit facility to fund a portion of its loan origination activities and for general corporate purposes.  Each loan origination under the credit facility is subject to the satisfaction of certain conditions.

 

Upon completion of this offering and the formation transaction, we will have a $30 million secured revolving credit facility with JMP Group on the same or substantially similar terms as the initial credit facility entered into between JMP Group and Harvest Capital Credit LLC. Each loan origination under this credit facility will also be subject to the satisfaction of certain conditions. Thus, we cannot be assured that we will be able to borrow funds under this secured revolving credit facility at any particular time or at all. The secured revolving credit facility will provide, subject to certain conditions and limitations, up to an aggregate principal amount of $30.0 million of revolving borrowings until December 31, 2013 and, after such time, the amount outstanding thereunder will become a term loan for an additional four years with 20% annual amortization during the term loan period. Borrowings under the secured revolving credit facility will bear interest at an annual rate equal to either (i) LIBOR plus 4.50%, with a LIBOR floor of 1.5%, or (ii) the Prime Rate plus 2.25%, at our election and subject to increases during a default under the credit facility. Prior to the consummation of this offering, the Harvest Capital Credit LLC secured revolving credit facility bore interest at an annual rate equal to either (i) LIBOR plus 7.0%, with a LIBOR floor of 1.5% or (ii) the Prime Rate plus 4.75%

 

 

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Off-Balance Sheet Arrangements

 

In the normal course of business, we are and will likely continue to be party to financial instruments with off-balance sheet risk. These consist primarily of unfunded commitments to extend credit, in the form of loans, to our portfolio companies. Unfunded commitments to provide funds to portfolio companies are not reflected on our statement of assets and liabilities. As of December 31, 2012, we had unfunded commitments totaling $3.5 million. These commitments will be subject to the same underwriting and ongoing portfolio maintenance as the statement of assets and liabilities financial instruments that we hold. Since these commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. We intend to have cash on hand or availability on our credit facility with the JMP Group to fund these commitments - if any. However, there can be no assurance that we will have sufficient capital available to fund these commitments as they come due.

 

Other Contractual Obligations

 

We have entered into certain contracts under which we have material future commitments. We have entered into the investment advisory and management agreement with our investment adviser in accordance with the 1940 Act. The investment advisory and management agreement will become effective in connection with the consummation of this offering. Under the investment advisory agreement, our investment adviser has agreed to provide us with investment advisory and management services. We will pay for these services (a) a management fee equal to a percentage of our gross assets and (b) an incentive fee based on our performance. See “Investment Advisory and Management Agreement.”

 

We have also entered into the administration agreement with JMP Credit Advisors. The administration agreement will become effective upon the closing of this offering. Under the administration agreement, JMP Credit Advisors has agreed to provide us clerical, bookkeeping and record keeping services at such facilities and provide us with other administrative services necessary to conduct our day-to-day operations. We will reimburse JMP Credit Advisors for the allocable portion (subject to the review of our board of directors) of overhead and other expenses incurred by it in performing its obligations under the administration agreement, including rent, the fees and expenses associated with performing compliance functions, and our allocable portion of the cost of our chief financial officer and chief compliance officer and their respective staffs. We will pay the fees associated with this and other outsourced arrangements on a direct basis without incremental benefit to our administrator. Under the administration agreement, the payments required to be made to the administrator during the first year of the term of the agreement will be capped such that the amounts payable to the administrator will not exceed $              . The existence of a cap, and the determination of a proper cap amount, in subsequent years will be determined by the mutual agreement of the members of our board of directors, on our behalf, and the administrator. See “Administration Agreement.”

 

Quantitative and Qualitative Disclosures about Market Risk

 

We are subject to financial market risks, including changes in interest rates. During the periods covered by our financial statements, the interest rates on the loans within our portfolio were all at fixed rates, or floating rates with a floor, and we expect that our loans in the future will also have primarily fixed interest rates. The initial commitments to lend to our portfolio companies are usually based on a floating LIBOR index and typically have interest rates that are fixed at the time of the loan funding and remain fixed for the term of the loan.

 

Our credit facility with JMP Group has a floating interest rate provision based on the Prime Rate or on a LIBOR index, which resets daily, and we expect that any other credit facilities into which we enter in the future may have floating interest rate provisions. We may use hedging instruments to protect us against interest rate fluctuations. Such instruments may include swaps, futures, options and forward contracts. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to the investments in our portfolio with fixed interest rates.

 

Because we currently fund, and will continue to fund, our investments with borrowings, our net income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest the funds borrowed. Accordingly, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net income. In periods of rising interest rates, our cost of funds would increase, which could reduce our net investment income if there is not a corresponding increase in interest income generated by floating rate assets in our investment portfolio.

 

 

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SENIOR SECURITIES 

 

Information about our senior securities is shown in the following table as of December 31, 2012, and December 31, 2011. PricewaterhouseCoopers LLP's report on the senior securities table is attached as an exhibit to the registration statement of which this prospectus is a part. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Borrowings” for more detailed information regarding the senior securities.

 

Class and Year		Total Amount Outstanding Exclusive of Treasury Securities (1)				Asset Coverage per Unit (2)				Involuntary Liquidating Preference per Unit (3)				Asset Market Value per Unit (4)
		(dollar amounts
		in millions)
Harvest Capital Credit LLC Credit Facility with JMP Group Inc.
2012 (as of December 31, 2012)		$	28.2			$	1,702				--				N/A
2011 (as of December 31, 2011)		$	4.7			$	2,218				--				N/A

 

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(1)	Total amount of senior securities outstanding at the end of the period presented.
(2)	Asset coverage per unit is the ratio of our total assets, less all liabilities and indebtedness not represented by senior securities, to the aggregate amount of senior securities representing indebtedness. Asset coverage per unit is expressed in terms of dollar amounts per $1,000 of indebtedness.
(3)	The amount to which such class of senior security would be entitled upon the involuntary liquidation of the issuer in preference to any security junior to it. The "—" indicates information which the Securities and Exchange Commission expressly does not require to be disclosed for certain types of senior securities.
(4)	Not applicable because senior securities are not registered for public trading.

 

 

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