UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KT
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from April 1, 2022 to December 31, 2022
Commission file number: 001-40564
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization)
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(IRS Employer Identification No.)
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(Address of principal executive offices)
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(Zip Code)
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(212 ) 905-4923
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Trading Symbol(s)
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Name of each exchange on which registered
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See
the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
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Large accelerated filer
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Accelerated filer
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Smaller reporting company
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Emerging growth company
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting
under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant
included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based
compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of June 30, 2022, the aggregate market value of the common stock ($0.01 par value per share)
of the registrant held by non-affiliates of the registrant was approximately $16,765,707 , based on
the closing sale price on the Nasdaq Global Market on that date of $9.78 per share.
As of March 31, 2023, the registrant had 6,214,672 shares of common stock
($0.01 par value per share) outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for its 2023 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days following
the end of the registrant’s fiscal year, are incorporated by reference into Part III of this transition report on Form 10-K.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements in this transition report on Form 10-K constitute forward-looking statements because they relate to future events or our
future performance or financial condition. The forward-looking statements contained in this transition report on Form 10-K may include statements as to:
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our future operating results and distribution projections;
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the ability of Silver Spike Capital, LLC (“SSC”) to attract and retain highly talented professionals;
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our business prospects and the prospects of our portfolio companies;
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the impact of interest and inflation rates on our business prospects and the prospects of our portfolio companies;
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the impact of the investments that we expect to make;
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the ability of our portfolio companies to achieve their objectives;
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our expected financings and investments and the timing of our investments in our initial portfolio;
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changes in regulation impacting the cannabis industry;
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the adequacy of our cash resources and working capital;
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the current and future effects of the COVID-19 pandemic on us and our portfolio companies; and
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the timing of cash flows, if any, from the operations of our portfolio companies.
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In addition, words such as “anticipate,” “believe,” “expect,” “seek,” “plan,” “should,” “estimate,” “project” and “intend” indicate forward-looking
statements, although not all forward-looking statements include these words. The forward-looking statements contained in this transition report on Form 10-K involve risks and uncertainties. Our actual results could differ materially from those
implied or expressed in the forward-looking statements for any reason, including the factors set forth in “Item 1A. Risk Factors” and elsewhere in this transition report on Form 10-K. Other factors that could cause actual results to differ
materially include:
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our limited operating history;
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changes or potential disruptions in our operations, the economy, financial markets or political environment;
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risks associated with possible disruption in our operations or the economy generally due to terrorism, natural disasters or the COVID-19 pandemic;
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future changes in laws or regulations (including the interpretation of these laws and regulations by regulatory authorities) and conditions in our operating areas, particularly with respect to business
development companies (“BDCs”) or regulated investment companies (“RICs”); and
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other considerations that may be disclosed from time to time in our publicly disseminated documents and filings.
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We have based the forward-looking statements included in this transition report on Form 10-K on information available to us on the date of this
transition report on Form 10-K, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future
events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q
and current reports on Form 8-K. The forward-looking statements contained in this transition report on Form 10-K are excluded from the safe harbor protection provided by Section 21E of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”).
Except where the context suggests otherwise, the terms “we,” “us,” “our,” “the Company,” and “SSIC” refer to Silver Spike Investment Corp. In addition, the terms “SSC,” “Adviser,” “investment adviser” and “administrator” refer to Silver Spike Capital, LLC, our external investment adviser and administrator.
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Business
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Organization
Silver Spike Investment Corp. (“SSIC”), incorporated in Maryland on January 25, 2021, is structured as an externally managed, closed-end, non-diversified management
investment company. We have elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (“1940 Act”). In addition, for U.S. federal income tax purposes we have elected to be treated, and
intend to qualify annually to be treated, as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986 (“the Code”), commencing with our taxable year ending March 31, 2022. See “—Material U.S. Federal Income
Tax Considerations—Taxation as a Regulated Investment Company.” Also, we are an “emerging growth company,” as defined in the JOBS Act, and intend to take advantage of the exemption for emerging growth companies allowing us to temporarily forego
the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002.
On February 8, 2022, we completed our initial public offering (“IPO”) of 6,071,429 shares of our common stock, par value $0.01, at a price of $14.00 per share. Our
common stock began trading on the Nasdaq Global Market on February 4, 2022 under the ticker symbol “SSIC.” We commenced operations on February 8, 2022, receiving approximately $83.3 million in total net proceeds from the offering, after deducting
estimated organizational and offering expenses.
On February 25, 2022, the underwriters of the IPO exercised their option to purchase an additional 142,857 shares of common stock from the Company. The partial
exercise of the over-allotment option closed on March 1, 2022, resulting in additional gross proceeds to the Company of approximately $2 million, before deducting offering expenses payable by the Company.
On November 8, 2022, our Board of Directors approved a change in our fiscal year end from March 31 to December 31.
Overview
We are a specialty finance company that may invest across the cannabis ecosystem through investments in the form of direct loans
to, and equity ownership of, privately held cannabis companies. All of our investments are designed to be compliant with all applicable laws and regulations within the jurisdictions in which they are made or to which we are otherwise subject,
including U.S. federal laws. We will make equity investments only in companies that are compliant with all applicable laws and regulations within the jurisdictions in which they are located or operate, including U.S. federal laws. We may make
loans to companies that we determine based on our due diligence are licensed in, and complying with, state-regulated cannabis programs, regardless of their status under U.S. federal law, so long as the investment itself is designed to be
compliant with all applicable laws and regulations in the jurisdiction in which the investment is made or to which we are otherwise subject, including U.S. federal law. We are externally managed by Silver Spike Capital, LLC (“SSC”) and seek to
expand the compliant cannabis investment activities of SSC’s leading investment platform in the cannabis industry. We primarily seek to partner with private equity firms, entrepreneurs, business owners and management teams to provide credit and
equity financing alternatives to support buyouts, recapitalizations, growth initiatives, refinancings and acquisitions across cannabis companies, including cannabis-enabling technology companies, cannabis-related health and wellness companies,
and hemp and cannabidiol (“CBD”) distribution companies. Under normal circumstances, each such cannabis company derives at least 50% of its revenues or profits from, or commits at least 50% of its assets to, activities related to cannabis at
the time of our investment in the cannabis company. We are not required to invest a specific percentage of our assets in such cannabis companies, and we may make debt and equity investments in other companies in the health and wellness sector.
Our investment objective is to maximize risk-adjusted returns on equity for our shareholders. We seek to capitalize on what we
believe to be nascent cannabis industry growth and drive return on equity by generating current income from our debt investments and capital appreciation from our equity and equity-related investments. We intend to achieve our investment
objective by investing primarily in secured debt, unsecured debt, equity warrants and direct equity investments in privately held businesses. We intend that our debt investments will often be secured by either a first or second priority lien on
the assets of the portfolio company, can include either fixed or floating rate terms and will generally have a term of between three and six years from the original investment date. To date, we have invested in first lien secured, fixed and
floating rate debt with terms of two to four years. We expect our secured loans to be secured by various types of assets of our borrowers. While the types of collateral securing any given secured loan will depend on the nature of the borrower’s
business, common types of collateral we expect to secure our loans include real property and certain personal property, including equipment, inventory, receivables, cash, intellectual property rights and other assets to the extent permitted by
applicable laws and the regulations governing our borrowers. Certain attractive assets of our borrowers, such as cannabis licenses and cannabis inventory, may not be able to be used as collateral or transferred to us. See “Item 1A. Risk
Factors—Risks Relating to Our Investments—Certain assets of our borrowers may not be used as collateral or transferred to us due to applicable state laws and regulations governing the cannabis industry, and such restrictions could negatively
impact our profitability.” In some of our portfolio investments, we expect to receive nominally priced equity warrants and/or make direct equity investments in connection with a debt investment. In addition, a portion of our portfolio may be
comprised of derivatives, including total return swaps.
Generally, the loans we invest in have a complete set of financial maintenance covenants, which are used to proactively address
materially adverse changes in a portfolio company’s financial performance. However, we may invest in “covenant-lite” loans. We use the term “covenant-lite” to refer generally to loans that do not have a complete set of financial maintenance
covenants. Generally, “covenant-lite” loans provide borrower companies more freedom to negatively impact lenders because their covenants are incurrence-based, which means they are only tested and can only be breached following an affirmative
action of the borrower, rather than by a deterioration in the borrower’s financial condition. Accordingly, to the extent we invest in “covenant-lite” loans, we may have fewer rights against a borrower and may have a greater risk of loss on such
investments as compared to investments in or exposure to loans with a complete set of financial maintenance covenants.
The loans in which we tend to invest typically pay interest at rates which are determined periodically on the basis of PRIME plus a premium. The
loans in which we have invested and expect to invest are typically made to U.S. and, to a limited extent, non-U.S. (including emerging market) corporations, partnerships and other business entities which operate in various industries and
geographical regions. These loans typically are not rated or are rated below investment grade. Securities rated below investment grade are often referred to as “high-yield” or “junk” securities, and may be considered a higher risk than debt
instruments that are rated above investment grade.
We have typically invested in and expect to continue to invest in loans made primarily to private leveraged middle-market companies with up to
$100 million of earnings before interest, taxes, depreciation and amortization, or “EBITDA.” Our business model is focused primarily on the direct origination of investments through portfolio companies or their financial sponsors. We expect
that our investments will generally range between $4 million and $40 million each, although we expect that this investment size will vary proportionately with the size of our capital base. We have an active pipeline of investments and are
currently reviewing over $841 million of potential investments in varying stages of underwriting.
The Investment Adviser
SSC will manage the Company and oversee all of its operations. SSC is registered as an investment adviser under the Advisers Act. Our Adviser serves pursuant to the
Investment Advisory Agreement in accordance with the Advisers Act, under which it receives a management fee as a percentage of our gross assets and incentive fees as a percentage of our ordinary income and capital gains from us.
Our Adviser also currently provides investment management services to several investment vehicles which are primarily special opportunities related to one or more
specific transactions. In focusing on a broader sector-based credit and equity opportunity, our primary investment focus differs from that of other investments made by SSC, as SSC’s other managed vehicles do not have the mandate to make
discretionary investments other than for the purpose of the specific investments for which they were formed. However, there may be overlap in terms of our targeted investments.
We benefit from our Adviser’s ability to identify attractive investment opportunities, conduct diligence on and value prospective investments, negotiate investments
and manage a portfolio of those investments. The principals and employees of our Adviser have broad investment backgrounds, with prior experience at investment funds, investment banks and other financial services companies, and have developed a
broad network of contacts within the private equity community. This network of contacts provides our principal source of investment opportunities.
The Adviser manages Silver Spike Sponsor, LLC which is the sponsor of Silver Spike Acquisition Corp., a special purpose acquisition company. Silver Spike Acquisition
Corp. completed its IPO in August 2019, and in June 2021 consummated a business combination with WM Holding Company, LLC, the leading technology and software infrastructure provider to the cannabis industry. In connection with the transaction,
Silver Spike Acquisition Corp. changed its name to WM Technology, Inc. (“WM Technology”). The transaction provided $579 million of gross proceeds to the combined company, implying a post-transaction equity value of approximately $1.5 billion, and
was the largest single financing in the cannabis sector to date.
The Adviser also manages Silver Spike Sponsor II, LLC and Silver Spike Sponsor III, LLC, which are the sponsors of Silver Spike Acquisition Corp. II and Silver Spike
III Acquisition Corp., respectively. Silver Spike Acquisition Corp. II and Silver Spike III Acquisition Corp. are special purpose acquisition companies that completed their IPOs in March 2021 and May 2021, respectively, and neither have yet
consummated a business combination.
In addition to our management team’s involvement with WM Technology, our management team has a history of success in the cannabis industry, including, but not
limited, to:
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Our Adviser’s CEO and founder, Scott Gordon, began investing in the cannabis health and wellness industry in 2013, and soon thereafter co-founded Egg Rock Holdings, LLC (“Egg Rock”). Egg Rock is the
parent company of Papa & Barkley Essentials, LLC, a leading consumer-focused family of cannabis and CBD products. Mr. Gordon currently serves as a director of Egg Rock.
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The key principals and members of senior management and the Investment Committee of our Adviser are Scott Gordon, our Chief Executive Officer and
our Adviser’s Partner and Chief Executive Officer, Umesh Mahajan, our Chief Financial Officer and our Adviser’s Partner and Co-Head of Credit, William Healy, our Adviser’s Partner and Head of Capital Formation and Dino Colonna, CFA, our
Adviser’s Partner and Co-Head of Credit.
Cannabis Market Overview
The cannabis industry has experienced significant growth over the last several years. Canada legalized cannabis for adult use in 2018, and thirty-seven states and
several territories, have legalized some form of whole-plant cannabis cultivation, sales and use for certain medical purposes. Twenty-one of those states and several territories have also legalized cannabis for adults for non-medical purposes.
The cannabis industry is amongst the fastest growing industries in the world. 2022 estimated U.S. state-legal cannabis retail sales reached $30.8 billion, up 15% year-over-year and is expected to reach approximately $58.6 billion by 2030.1 We believe continued legalization of cannabis and the normalization of cannabis and its many uses - therapeutic, recreational and general health and wellness, are
creating an attractive opportunity to invest in related businesses. At the same time, the cannabis industry is highly fragmented and subject to a complex regulatory framework, creating significant barriers to entry.
The transition of the cannabis and derivative products to a regulated and legal marketplace has been happening at a rapid pace over recent years, with full
legalization in Canada (2018) and legislative momentum continuing to expand the U.S. market. There have been hundreds of businesses launched across various sub-sectors of the cannabis industry, many of which have raised significant amounts of
capital, mainly from retail and family office investors, in both public and private markets. In addition, large multinational alcohol and tobacco companies have made strategic investments into the Canadian cannabis sector to diversify their core
business while protecting against potential market share loss to cannabis.
Broadly speaking, the cannabis industry is still in its early stages, and we believe that businesses with strong management teams, deep operational expertise and
financial acumen will thrive in this large and growing market. As cannabis markets continue to grow, there will be increased demand for capital on behalf of cannabis industry operators and ancillary companies serving the industry.
The cannabis capital markets, both credit and equity, are still currently dominated by small funds and family offices, which we believe lack the experience and
capital to navigate such a dynamic and complex environment. Furthermore, the vast majority of banks and institutional investment funds are not lending to the cannabis industry, given the current regulatory environment, creating a void in the
market for credit-based solutions.
Historically, cannabis firms have funded operations with equity, but as the industry matures and companies become more sensitive to equity dilution, we expect demand
for credit-based solutions to increase. Market turbulence also added to the significant decrease in both debt and equity capital markets activity in 2022.
The cannabis industry entered 2022 with a muted optimism from a partial or full federal reform perspective, but these hopes, once again, started to fade over the
first few months of the year as progress seemed to stall among congressional leaders. These lowered expectations of federal reform, coupled with a significant sell-off in the public cannabis company stocks, has substantially decreased both equity
and debt issuances, as well as merger and acquisition activity, in 2022.
Public and Private Cannabis Capital Raises:
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Year
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Equity
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Debt
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2018
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$11.6bn
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$2.5bn
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2019
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$8.1bn
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$3.2bn
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2020
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$2.7bn
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$1.7bn
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2021
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$7.2bn
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$5.7bn
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2022
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$1.8bn
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$2.5bn
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Source: Viridian Capital Advisors
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See equio.newfrontierdata.com/cannabis-dashboard/map/cannabis-market (last visited February 1, 2023).
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Public and Private Cannabis Mergers and Acquisitions:
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Year
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Deals
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2020
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91
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2021
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314
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2022
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174
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Source: Viridian Capital Advisors
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We expect overall capital markets activity to remain muted for the first half of 2023, unless federal reform momentum increases, but do expect demand for
credit-based solutions to increase compared to last year, as companies continue to prefer less dilutive forms of growth capital. The lack of competition and financing options for cannabis businesses is as stark as we have seen in recent years and
has created an opportune environment for us to make attractive growth capital investments from an advantageous position – the ability to drive terms and enhance structural protections while capturing above average risk-adjusted returns.
Potential Market Trends
We believe the middle-market lending environment provides opportunities for us to meet our goal of making investments that generate attractive
risk-adjusted returns based on a combination of the following factors, which continue to remain true in the current environment.
Limited Availability of Capital for Cannabis Companies. We
believe that regulatory and structural changes in the market have generally reduced the amount of capital available to U.S. middle-market companies, and, specifically, to cannabis companies. We believe that many commercial and investment banks
have, in recent years, de-emphasized their service and product offerings to middle-market businesses in favor of lending to large corporate clients and managing capital markets transactions. In addition, these lenders may be constrained in their
ability to underwrite and hold bank loans and high-yield securities for middle-market issuers as they seek to meet existing and future regulatory capital requirements. We also believe that there is a lack of market participants that are willing
to hold meaningful amounts of certain middle-market loans. As a result, we believe our ability to minimize syndication risk for a company seeking financing by being able to hold its loans without having to syndicate them, coupled with reduced
capacity of traditional lenders to serve the middle-market, present an attractive opportunity to invest in middle-market companies.
Robust Demand for Debt and Equity Capital. We believe
U.S.-based cannabis companies will continue to require access to debt capital to support growth, refinance existing debt, and finance acquisitions. We expect that private equity sponsors and entrepreneurs will continue to pursue acquisitions and
leverage their equity investments with secured and unsecured loans provided by companies such as us.
Attractive Investment Dynamics. An imbalance between the supply
of, and demand for, cannabis debt capital creates attractive pricing dynamics. We believe the directly negotiated nature of direct lending also generally provides more favorable terms to the lender, including stronger covenant and reporting
packages, better call protection, and lender-protective change of control provisions. Additionally, we believe our expertise in credit selection and in investing in the cannabis industry provides a strong basis for success.
Conservative Capital Structures. Given the limited access to credit for the cannabis industry, companies have been significantly funded with equity capital from entrepreneurs, family
offices and, to a lesser extent, private equity firms. The significant amount of equity invested in companies in the industry should provide us with opportunities to lend to companies that have a larger percentage of equity as a percentage of
their total capitalization than other middle-market companies. With more conservative capital structures, federally legal cannabis companies can have higher levels of cash flows available to service their debt. In addition, we expect federally
legal cannabis companies to have simpler capital structures than larger borrowers, which facilitates a streamlined underwriting process and, when necessary, restructuring process.
Attractive Opportunities in Investments in Loans. We invest in
senior secured or unsecured loans, subordinated loans or mezzanine loans, equity and equity-related securities. We believe that opportunities in loans are significant because of the floating rate structure of most senior secured debt issuances
and because of the strong defensive characteristics of these types of investments. Given the current low interest rate environment, we believe that debt issued with floating interest rates offer a superior return profile as compared with
fixed-rate investments, since floating rate structures are generally less susceptible to declines in value experienced by fixed-rate securities in a rising interest rate environment. Senior secured debt also provides strong defensive
characteristics. Senior secured debt has priority in payment among an issuer’s security holders whereby holders are due to receive payment before junior creditors and equity holders. Further, these investments are secured by the issuer’s assets,
which may provide protection in the event of a default.
Attractive Opportunities in Equity Investments. We believe that
opportunities to invest in the equity of federally legal cannabis businesses are significant. We expect that our ability to identify emerging businesses and to provide credit to the industry will provide us with proprietary equity investment
opportunities. Our management team’s experience investing in and operating businesses in the federally legal cannabis industry will help us identify high-quality businesses, and our management team’s expertise will be beneficial to our portfolio
companies.
Business Strategy
Our investment objective is to maximize risk-adjusted returns on equity for our shareholders. We seek to capitalize on what we believe to be nascent cannabis
industry growth and drive return on equity by generating current income from our debt investments and capital appreciation from our equity and equity-related investments. We have adopted the following business strategy to achieve our investment
objective.
However, there can be no assurances that we will be able to successfully implement our business strategy and, as a result, meet our investment
objective.
Our business strategy is to identify investment opportunities in businesses in the cannabis industry. All of our investments are designed to be compliant with all
applicable laws and regulations within the jurisdictions in which they are made or to which we are otherwise subject, including U.S. federal laws. We believe that there is an opportunity to take advantage of a newly emerging industry, with a
variety of established operators seeking access to capital and managerial expertise. We intend to leverage our team’s collective operating, technical, regulatory and legal expertise to build a strong business with competitive advantages to emerge
as a leading public company in the space.
As the industry continues to transition to a new legislative and regulatory framework, we believe that many companies will need a partner that can
assist in providing a level of operational and financial expertise to support their growth. Our team includes a variety of investment, operational and healthcare professionals who will provide operating, technical, regulatory and legal
expertise to evaluate investment opportunities. Our team includes Scott Gordon, Umesh Mahajan and Dino Colonna, all of whom have extensive expertise in cannabis-related industries. Our team consists of professionals who have decades of
experience in capital markets globally and have extensive scientific and medical knowledge of the plant and its many compounds, and includes entrepreneurs and founders of consumer-facing businesses.
Our plan is to leverage our management team’s networks of industry relationships, knowledge and experience to become the leading investor in the legal cannabis
industry. Over the course of their careers, the members of our management team have developed a broad network of contacts and corporate relationships that we believe will serve as a useful source of acquisition opportunities. We plan to leverage
relationships with management teams of public and private companies, investment professionals at private equity firms and other financial sponsors, owners of private businesses, investment bankers, restructuring advisers, consultants, attorneys
and accountants, which we believe should provide us with a number of investment opportunities.
Potential Competitive Advantages
We believe that our Adviser is one of only a select group of specialty lenders that has its depth of knowledge, experience, and track record in lending to businesses
in the cannabis industry. Our other potential competitive advantages include:
Our Adviser has deep industry and operating expertise on its management team and advisory board. Our
Adviser has the ability to tap into this expertise for each of our target investment opportunities. The expertise, knowledge and experience of these individuals allows them to understand and evaluate the business plans, products and financing
needs of businesses in the cannabis industry.
Direct origination networks that benefit from relationships with entrepreneurs, business brokers and private
equity firms. Our Adviser seeks to be the first contact for professionals focused on raising capital for businesses in the cannabis industry. Given the history of our Adviser’s management team and advisory board as operators and
investors in the industry, they have established relationships with the major investment banks and business brokers in the industry. Our Adviser also focuses on sourcing investment opportunities from private equity and venture capital firms that
have been active in the industry. Given our Adviser’s reputation in the industry, it also receives referrals directly from executive officers of businesses in the cannabis industry.
A dedicated staff of professionals covering investment origination and underwriting, as well as portfolio
management functions. Our Adviser has a broad team of professionals focused on every aspect of the cannabis industry and the investment lifecycle. Our Adviser has an investment team that manages and oversees our investment process from
identification of investment opportunity through negotiations of final term sheet and investment in a portfolio company. The team members serving our investment management and oversight functions have significant industry and operating
experience.
Investment Criteria
Consistent with our business strategy, our Adviser has identified the following general, non-exclusive criteria and guidelines that we believe are important in
evaluating prospective investment opportunities. We intend to focus on businesses that we believe:
• exhibit institutional-level operations and financial controls. We intend to
identify businesses in the cannabis space that have leading relying infrastructure and operations to survive and excel in this dynamic industry;
• have durable competitive advantages that are differentiated in the sector. We
intend to invest in businesses that not only benefit from secular tailwinds in the industry, but also exhibit hard-to-replicate competitive advantages amongst their peers; and
• are fundamentally sound with consistent operational performance and free cash flow
generation. We expect to identify businesses that have historically exhibited profitability and strong cash flow generation. Our management team has a proven track record accelerating growth of companies with strong past performance.
These criteria are not intended to be exhaustive. Any evaluation relating to the merits of a particular investment opportunity may be based, to the extent relevant,
on these general criteria and guidelines as well as other considerations, factors and criteria that our management may deem relevant.
Investments
We will seek to invest in portfolio companies primarily in the form of loans (secured and unsecured), but may include equity warrants and direct
equity investments. The loans typically pay interest with some amortization of principal. Interest is generally paid on a floating rate basis, often with a floor, on benchmark rates such as the PRIME rate. We will generally seek to obtain
security interests in the assets of our portfolio companies that serve as collateral in support of the repayment of these loans. This collateral may take the form of first or second priority liens on the assets of a portfolio company. In some
of our portfolio investments, we expect to receive nominally priced equity warrants and/or make direct equity investments in connection with a debt investment. In addition, a portion of our portfolio may be comprised of derivatives, including
total return swaps.
We expect that our loans will typically have final maturities of three to six years. However, we expect that our portfolio companies often may repay these loans
early, generally within three years from the date of initial investment.
We will seek to tailor the terms of the investment to the facts and circumstances of the transaction and the prospective portfolio company, negotiating a structure
that protects our rights and manages our risk while creating incentives for the portfolio company to achieve its business plan and improve its profitability. We will seek to limit the downside potential of our investments by negotiating covenants
in connection with our investments that afford our portfolio companies flexibility in managing their businesses, consistent with preservation of our capital. Such restrictions may include affirmative and negative covenants, default penalties,
lien protection, change of control provisions and board rights, including either observation or participation rights.
Investment Process
Investment Originations; New Opportunities Referred
We have a multi-channel sourcing strategy focused on entrepreneurs, venture capital firms, private equity firms and investment banks, as well as brokers who focus on
our industry. We seek to interact directly with operating businesses owned and advised by these groups, and we typically negotiate investment terms directly with potential portfolio companies. We focus on businesses with strong management teams
who have a successful history managing their companies. We have a nationwide network, and we have built relationships with these operators and investors. We have established SSC as a leading provider of financial solutions for the cannabis
industry.
When a new investment opportunity is identified, a member of our investment team typically speaks with the prospective portfolio company to gather information about
the business and its financing and capital needs. If, following this call, we see an opportunity as a potential fit with our investment strategy and criteria, we ask the prospective portfolio company to submit an information package, which
includes detailed information regarding the portfolio company’s products or services, capitalization, customers, historical financial performance, and forward looking financial projections.
Once received, the portfolio company’s information package is then reviewed by our investment team and a summary investment memorandum is shared with our Adviser’s
Investment Committee.
Preliminary Due Diligence and Executive Summary
The next phase of the due diligence process involves a structured call with the management team of the prospective portfolio company. A detailed discussion including
a discussion of the prospective portfolio company’s products or services, market dynamics, business model, historical financial performance and projections, management team, existing investors and capital structure and debt. Following the
management call, if the opportunity still appears to be worthy of consideration, an executive summary memorandum is prepared by the due diligence team for consideration and voting by our Adviser’s Investment Committee. The executive summary
memorandum is distributed to the Investment Committee, and the deal terms for the investment are defined. If approved by the Investment Committee, we issue a term sheet to the prospective portfolio company.
Confirmatory Due Diligence and On-Site Meeting
If the term sheet offered by us is accepted by the prospective portfolio company, the process of obtaining additional confirmatory due diligence begins. The
confirmatory due diligence process typically includes calls with the key constituents of the portfolio company, as well as key customers, suppliers, partners, or other stakeholders as may be deemed relevant by the due diligence team. Additional
financial analysis is performed, in order to confirm the assumptions that were made prior to term sheet issuance. During this process, we will engage senior members of our investment team and advisory board to discuss industry dynamics and
evaluate the business model of the portfolio company.
The final step in the confirmatory diligence process involves one or more on-site meetings, at which members of our due diligence team meet with the management team
of the prospective portfolio company for a final review of the portfolio company’s financial performance and forward-looking plans. These meetings are typically held at the business offices of the portfolio company; however, occasionally the
meeting will be held via video teleconference if travel to the portfolio company is not possible. One or more members of our Adviser’s Investment Committee will attend the on-site meeting, if possible.
Underwriting Report and Investment Committee Vote
Assuming that the confirmatory due diligence process reveals no issues that would cause the due diligence team to recommend against the proposed investment, the due
diligence team prepares a final Investment Committee Memorandum, which is distributed to our Adviser’s Investment Committee. The Investment Committee then meets to discuss and review the investment terms regarding the proposed investment.
Unanimous agreement of the Investment Committee is required to approve the transaction.
Investment Management and Oversight
One or two members of the investment team will be responsible for monitoring the portfolio company. Beyond the dedicated portfolio management team, all of our
management team members and investment professionals are typically involved at various times with our portfolio companies and investments. Our portfolio management team reviews our portfolio companies’ monthly or quarterly financial statements
and compares actual results to the portfolio companies’ projections. Additionally, the portfolio management team may initiate periodic calls with the portfolio company’s venture capital partners and its management team, and may obtain observer
rights on the portfolio company’s board of directors. Our management team and investment professionals anticipate potential problems by monitoring reporting requirements and having frequent calls with the management teams of our portfolio
companies.
Underwriting
Underwriting Process and Investment Approval
We intend to make our investment decisions only after consideration of a number of factors regarding the potential investment, including but not
limited to: (i) historical and projected financial performance; (ii) company- and industry-specific characteristics, such as strengths, weaknesses, opportunities and threats; (iii) composition and experience of the management team; and (iv)
track record of the private equity sponsor leading the transaction.
If an investment is deemed appropriate to pursue, a more detailed and rigorous evaluation is made along a variety of investment parameters, not all of which may be
relevant or considered in evaluating a potential investment opportunity. The following outlines the general parameters and areas of evaluation and due diligence we intend to utilize for investment decisions, although not all factors will
necessarily be considered or given equal weighting in the evaluation process.
Management Assessment
Our Adviser makes an in-depth assessment of the management team, including evaluation along several key metrics:
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The number of years in their current positions;
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Track record;
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Industry experience;
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Management incentive, including the level of direct investment in the enterprise;
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Background investigations; and
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Completeness of the management team (lack of positions that need to be filled).
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Industry Dynamics
An evaluation of the industry is undertaken by our Adviser that considers several factors. If considered appropriate, industry experts will be consulted or retained.
The following factors are analyzed by our Adviser:
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Sensitivity to economic cycles;
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Competitive environment, including number of competitors, threat of new entrants or substitutes;
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Fragmentation and relative market share of industry leaders;
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Growth potential; and
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Regulatory and legal environment.
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Business Model and Financial Assessment
Prior to making an investment decision, our Adviser undertakes a review and analysis of the financial and strategic plans for the potential investment. There is
significant evaluation of and reliance upon the due diligence performed by the private equity sponsor and third-party experts including accountants and consultants. Areas of evaluation include:
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Historical and projected financial performance;
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Quality of earnings, including source and predictability of cash flows;
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Customer and vendor interviews and assessments;
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Potential exit scenarios, including probability of a liquidity event;
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Internal controls and accounting systems; and
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Assets, liabilities and contingent liabilities.
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Private Equity Sponsor
Among the most critical due diligence investigations is the evaluation of the private equity sponsor making the investment. A private equity sponsor is typically the
controlling stockholder upon completion of an investment and as such is considered critical to the success of the investment. The private equity sponsor is evaluated along several key criteria, including:
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Investment track record;
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Industry experience;
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Capacity and willingness to provide additional financial support to the company through additional capital contributions, if necessary; and
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Reference checks.
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Portfolio Management
Involvement in our Portfolio Companies
As a BDC, we are obligated to offer to provide managerial assistance to our portfolio companies and to provide it if requested. In fact, we seek investments where
such assistance is appropriate. However, we limit the offered (and any provided) assistance to services that would generally help any business operate in legal compliance and with good corporate governance. We do not offer any services that could
be construed as assisting a borrower to grow, manufacture, or sell cannabis. The services are limited to: assistance relating to accounting and financial reporting best practices; assistance relating to tax planning and preparation;
recommendations on accounting and financial reporting technology and operating systems, and assistance in negotiating with vendors and licensors of such technology; providing analyses of existing financing arrangements, assistance in negotiating
additional debt financing or restructuring existing debt financing, and introductions to banks and other sources of capital; advice with respect to corporate best practices and corporate governance, including advice with respect to board
structure and governance and implementing corporate codes of ethics and guidelines for transactions with related parties; assistance in preparing a portfolio company to become a public company, including guidance on public company accounting and
financial reporting standards; assistance in corporate insurance planning, including analyses of appropriate coverage levels and insurance terms, and negotiating with insurance providers; assistance with human resources best practices; legal
counsel referrals; and guidance on cash management.
We also monitor the financial trends of each portfolio company to assess the appropriate course of action for each company and to evaluate overall portfolio quality.
We have several methods of evaluating and monitoring the performance of our investments, including, but not limited to, the following:
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Review of monthly and quarterly financial statements and financial projections for portfolio companies;
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Periodic and regular contact with portfolio company management to discuss financial position requirements and accomplishments;
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Attendance at board meetings;
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Periodic formal update interviews with portfolio company management and, if appropriate, the private equity sponsor; and
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Assessment of business development success, including product development, profitability and the portfolio company’s overall adherence to its business plan.
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Rating Criteria
In addition to various risk management and monitoring tools, we will use an investment rating system to characterize and monitor the credit profile and our expected
level of returns on each investment in our portfolio. We use a five-level numeric rating scale. This system is intended primarily to reflect the underlying risk of a portfolio investment relative to our initial cost basis in respect of such
portfolio investment (i.e., at the time of origination or acquisition), although it may also take into account the performance of the portfolio company’s business, the collateral coverage of the investment and other relevant factors. The rating
system is as follows:
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Investments rated 1 involve the least amount of risk to our initial cost basis. The borrower is performing above expectations, and the trends and risk factors for this investment since origination or
acquisition are generally favorable.
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Investments rated 2 involve an acceptable level of risk that is similar to the risk at the time of origination or acquisition. The borrower is generally performing as expected and the risk factors are
neutral to favorable. All investments or acquired investments in new portfolio companies are initially assessed a rating of 2.
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Investments rated 3 involve a borrower performing below expectations and indicates that the loan’s risk has increased somewhat since origination or acquisition.
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Investments rated 4 involve a borrower performing materially below expectations and indicates that the loan’s risk has increased materially since origination or acquisition. In addition to the borrower
being generally out of compliance with debt covenants, loan payments may be past due (but generally not more than 120 days past due).
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Investments rated 5 involve a borrower performing substantially below expectations and indicates that the loan’s risk has increased substantially since origination or acquisition. Most or all of the debt
covenants are out of compliance and payments are substantially delinquent. Loans rated 5 are not anticipated to be repaid in full and we will reduce the fair market value of the loan to the amount we anticipate will be recovered.
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In the event that we determine that an investment is underperforming, or circumstances suggest that the risk associated with a particular investment has
significantly increased, we will undertake more aggressive monitoring of the affected portfolio company. While our investment rating system will identify the relative risk for each investment, the rating alone does not dictate the scope and/or
frequency of any monitoring that we perform. The frequency of our monitoring of an investment will be determined by a number of factors, including but not limited to the trends in the financial performance of the portfolio company, the investment
structure and the type of collateral securing our investment, if any.
Valuation of Portfolio Investments and NAV Determinations
We will generally invest in illiquid loans issued by private middle-market companies. All of our investments are recorded at fair value as determined in good faith
in accordance with procedures established by our Board of Directors.
Authoritative accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available or reliable,
valuation techniques are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the investments or market and the investments’ complexity.
Investment transactions are recorded on the trade date and are carried at fair value. Realized gains or losses are measured by the difference between the net
proceeds received (excluding prepayment fees, if any) and the amortized cost basis of the investment using the specific identification method without regard to unrealized gains or losses previously recognized, and include investments charged off
during the period, net of recoveries. The net change in unrealized gains or losses primarily reflects the change in investment values, including the reversal of previously recorded unrealized gains or losses with respect to investments realized
during the period. We record current-period changes in fair value of investments that are measured at fair value as a component of the net change in unrealized gains (losses) on investments in the statements of operations.
Investments for which market quotations are readily available will typically be valued at the bid price of those market quotations. To validate market quotations, we
utilize a number of factors to determine if the quotations are representative of fair value, including the source and number of the quotations. Debt and equity securities that are not publicly traded or whose market prices are not readily
available are valued at fair value as determined in good faith by the Adviser, as the Company’s valuation designee (the “Valuation Designee”), based on inputs that may include valuations, or ranges of
valuations, provided by independent third-party valuation firm(s) engaged by the Adviser. Effective September 8, 2022, pursuant to Rule 2a-5 under the 1940 Act, the Board designated the Adviser as the Valuation Designee to perform the fair
value determinations for the Company, subject to the oversight of the Board and certain Board reporting and other requirements.
As part of the valuation process, the Adviser takes into account relevant factors in determining the fair value of our investments, including: the estimated
enterprise value of a portfolio company (i.e., the total fair value of the portfolio company’s debt and equity), the nature and realizable value of any collateral, the portfolio company’s ability to make payments based on its earnings and cash
flow, the markets in which the portfolio company does business, a comparison of the portfolio company’s securities to any similar publicly traded securities, and overall changes in the interest rate environment and the credit markets that may
affect the price at which similar investments may be made in the future. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, the Adviser considers whether the pricing indicated by the external
event corroborates its valuation.
The Adviser undertakes a multi-step valuation process, which includes, among other procedures, the following:
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With respect to investments for which market quotations are readily available, those investments will typically be valued at the bid price of those market quotations;
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With respect to investments for which market quotations are not readily available, the valuation process begins with the Adviser’s valuation committee establishing a preliminary valuation of each
investment, which may be based on valuations, or ranges of valuations, provided by independent valuation firm(s);
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Preliminary valuations are documented and discussed by the Adviser’s valuation committee and, where appropriate, the independent
valuation firm(s); and
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The Adviser determines the fair value of each investment.
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We conduct this valuation process on a quarterly basis.
We apply Financial Accounting Standards Board Accounting Standards Codification 820, Fair Value Measurement (“ASC 820”), which establishes a framework for measuring
fair value in accordance with U.S. GAAP and required disclosures of fair value measurements. ASC 820 determines fair value to be the price that would be received for an investment in a current sale, which assumes an orderly transaction between
market participants on the measurement date. Market participants are defined as buyers and sellers in the principal or most advantageous market (which may be a hypothetical market) that are independent, knowledgeable, and willing and able to
transact. In accordance with ASC 820, we consider the principal market to be the market that has the greatest volume and level of activity. ASC 820 specifies a fair value hierarchy that prioritizes and ranks the level of observability of inputs
used in determination of fair value. In accordance with ASC 820, these levels are summarized below:
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Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date;
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Level 2 – Valuations based on quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in
markets that are not active, or for which all significant inputs are observable, either directly or indirectly; and
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Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
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Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may
fluctuate from period to period. Additionally, the fair value of such investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values that
may ultimately be realized. Further, such investments are generally less liquid than publicly traded securities and may be subject to contractual and other restrictions on resale. If we were required to liquidate a portfolio investment in a
forced or liquidation sale, it could realize amounts that are different from the amounts presented and such differences could be material.
In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on
these investments to be different than the unrealized gains or losses reflected previously.
Quarterly NAV Determination
We will determine the NAV per share of our common stock on a quarterly basis. The NAV per share of our common stock is equal to the value of our
total assets minus liabilities divided by the total number of shares of common stock outstanding. Our liabilities will include amounts which we have accrued under our Investment Advisory Agreement, including the management fee, Incentive Fee on
Income and Incentive Fee on Capital Gains, the latter of which will be accrued based upon our realized capital gains on a cumulative basis from inception through the end of each fiscal year, if any, computed net of all realized capital losses
and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid Incentive Fee on Capital Gains.
Determinations in Connection with Certain Offerings
In connection with certain future offerings of shares of our common stock, our Board of Directors will be required to make the determination that we are not selling
shares of our common stock at a price below the then current net asset value of our common stock, exclusive of any distributing commission or discount (which net asset value shall be determined as of a time within 48 hours, excluding Sundays and
holidays, next preceding the time of such determination). Our Board of Directors will consider the following factors, among others, in making such determination:
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the net asset value of our common stock disclosed in the most recent periodic report that we filed with the SEC;
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our management’s assessment of whether any material change in the net asset value of our common stock has occurred (including through the realization of gains on the sale of our portfolio securities)
during the period beginning on the date of the most recently disclosed net asset value of our common stock and ending as of a time within 48 hours (excluding Sundays and holidays) of the sale of our common stock; and
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the magnitude of the difference between (i) a value that our Board of Directors has determined reflects the current (as of a time within 48 hours, excluding Sundays and holidays) net asset value of our
common stock, which is based upon the net asset value of our common stock disclosed in the most recent periodic report that we filed with the SEC, as adjusted to reflect our management’s assessment of any material change in the net
asset value of our common stock since the date of the most recently disclosed net asset value of our common stock, and (ii) the offering price of the shares of our common stock in the proposed offering.
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Moreover, to the extent that there is a possibility that we may (i) issue share of common stock at a price per share below the then current net asset value per share
at the time at which the sale is made or (ii) trigger the undertaking (which we provide in certain registration statements we file with the SEC) to suspend the offering of shares of our common stock if the net asset value per share fluctuates by
certain amounts in certain circumstances until the prospectus is amended, our Board of Directors will elect, in the case of clause (i) above, either to postpone the offering until such time that there is no longer the possibility of the
occurrence of such event or to undertake to determine the net asset value per share of common stock within two days prior to any such sale to ensure that such sale will not be below our then current net asset value per share, and, in the case of
clause (ii) above, to comply with such undertaking or to undertake to determine the net asset value per share to ensure that such undertaking has not been triggered.
These processes and procedures are part of our compliance policies and procedures. Records will be made contemporaneously with all determinations described in this
section and these records will be maintained with other records that we are required to maintain under the 1940 Act.
Competition
We will compete for investments with a number of investment funds (including private equity funds), as well as traditional financial services companies such as
commercial banks and other sources of financing. Many of these entities have greater financial and managerial resources than we do. We believe we are competitive with these entities primarily on the basis of the experience and contacts of our
management team, our responsive and efficient investment analysis and decision-making processes, the investment terms we offer, and our willingness to make smaller investments.
We believe that some of our competitors make loans with interest rates and returns that are comparable to or lower than the rates and returns that we target.
Therefore, we do not seek to compete solely on the interest rates that we offer to potential portfolio companies. For additional information concerning the competitive risks we face, see “Item 1A. Risk Factors — Risks Relating to Our Business and
Structure — We may face increasing competition for investment opportunities, which could reduce returns and result in losses.”
Human Capital
We do not have any employees. The day-to-day management of our investment portfolio is primarily the responsibility of our Adviser and its
Investment Committee, which currently consists of Scott Gordon, our Chief Executive Officer and our Adviser’s Partner and Chief Executive Officer, Umesh Mahajan, our Chief Financial Officer and our Adviser’s Partner and Co-Head of Credit,
William Healy, our Adviser’s Partner and Head of Capital Formation, Dino Colonna, CFA, our Adviser’s Partner and Co-Head of Credit and Derek Jeong, our Adviser’s Director. See “—Investment Advisory Agreement.”
We reimburse our administrator, SSC, for the costs and expenses incurred by SSC in
performing its obligations and providing personnel and facilities under the Administration Agreement (including costs and expenses incurred by SSC in connection with the delegation of its obligations under the Administration Agreement to a
sub-administrator). We are generally not responsible for the compensation of SSC’s employees or any overhead expenses of SSC (including rent, office equipment and utilities). However, we may reimburse SSC for an allocable portion of the
compensation paid by SSC to our CCO and CFO and their respective staffs (based on a percentage of time such individuals devote, on an estimated basis, to our business affairs). See “—Administration Agreement.”
Investment Personnel
The members of our Adviser’s Investment Committee will not be employed by us, and will receive no compensation from us in connection with their portfolio management
activities. The Investment Committee members receive compensation that includes an annual base salary, an annual individual performance bonus, and a portion of the incentive fee or carried interest earned in connection with their services.
Certain Investment Committee members, through their financial interests in the Adviser, are entitled to a portion of the profits earned by the Adviser, which includes any fees payable to the Adviser under the terms of the Investment Advisory
Agreement, less expenses incurred by the Adviser in performing its services under the Investment Advisory Agreement.
Certain investments may be appropriate for us and affiliates of our Adviser, and the members of our Adviser’s Investment Committee could face conflicts of interest
in the allocation of investment opportunities between such entities.
Below are the biographies for the Investment Committee members.
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Scott Gordon. Mr. Gordon has served as the Chairperson of our Board of Directors and our Chief Executive Officer since our
inception. Mr. Gordon is the founder and Chief Executive Officer of Silver Spike Capital, an investment platform dedicated to the cannabis industry that includes our Adviser. Prior to founding Silver Spike Capital, Mr. Gordon had been
the co-founder and chairman of Egg Rock Holdings, LLC (“Egg Rock”), the parent company of the Papa & Barkley family of cannabis products, with related subsidiary assets in manufacturing, processing, and logistics. Egg Rock also is
the parent company of Papa & Barkley Essentials, a hemp-derived CBD business based in Colorado. From 2016 to 2019, Mr. Gordon was also President of Fintech Advisory Inc., the investment manager for a multi-billion dollar family
office fund focused on long-term and opportunistic investments in emerging markets. From late 2013 to 2016, Mr. Gordon served as a Portfolio Manager at Taconic Capital Advisors, a multi-strategy investment firm. Prior to joining
Taconic, Mr. Gordon was a Partner and Portfolio Manager at Caxton Associates from 2009 to 2012. He was also a Senior Managing Director and Head of Emerging Markets at Marathon Asset Management from 2007 to 2009. Earlier in his career,
Mr. Gordon held leadership positions at Bank of America and ING Capital. Mr. Gordon was a founding member of the Emerging Markets business at JP Morgan where he worked upon graduating from Bowdoin College in 1983.
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Mr. Gordon is Chairperson of the Board of Directors and Chief Executive Officer of Silver Spike Acquisition Corp. II, a blank check company whose sponsor is an affiliate of the Adviser. Mr.
Gordon also serves as an independent director of WM Technology, Inc. (formerly, Silver Spike Acquisition Corp.), which operates Weedmaps, a leading online listings marketplace for cannabis consumers and businesses, and WM Business, a
comprehensive SaaS subscription offering sold to cannabis retailers and brands. From 2019 to June 2021, Mr. Gordon served as Chairperson of the Board of Directors and Chief Executive Officer of Silver Spike Acquisition Corp.
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Dino Colonna, CFA. Mr. Colonna, our Adviser’s
Partner and Co-Head of Credit, is primarily responsible for the day-to-day management of our investment portfolio. Since 2001, Mr. Colonna has managed traditional and alternative investment portfolios, and advised corporations and
institutional investors across the global capital markets. Prior to joining the Adviser, Mr. Colonna was managing partner at Madison Capital Advisors, a middle-market asset-backed lending and advisory firm focused on emerging growth
companies in the cannabis, life sciences and tech sectors. Prior to Madison Capital Advisors, Mr. Colonna spent four years as an investment banker at the top-ranked Equity Capital Markets team at Barclays in London, and six years as a
senior research analyst at Forest Investment Management, a global multi-strategy hedge fund. With Barclays, he advised on and structured over $8 billion of equity, derivative and debt transactions, and while at Forest Investment
Management, he specialized in credit and equity research, and was part of the portfolio management team managing an over $500 million multi-strategy portfolio. Mr. Colonna holds a CFA Charter, a B.S.B.A. from the University of
Delaware and an international M.B.A. from ESADE Business School (Spain).
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William Healy. Mr. Healy, our Adviser’s
Partner and Head of Capital Formation, is primarily responsible for the day-to-day management of our investment portfolio. Since 1986, Mr. Healy has advised and covered institutional clients in a variety of roles spanning corporate
finance, investment management, and investment banking in London, Brazil, and New York. Prior to joining the Adviser, he was President of Pantera Capital Management, a blockchain venture capital manager, from 2018 to May 2019. From
1998 to 2016, Mr. Healy managed several hedge fund and private equity dedicated institutional sales teams at Deutsche Bank and the firm’s wealth and asset management division. He began his career with The Chase Manhattan Bank based in
London, Brazil, and New York where he advised multinational corporations on cross-border funding of their Latin America-domiciled operations. From 1993 to 1998, he formed and managed the ING Barings emerging markets institutional debt
sales team where he covered clients and often traveled to Latin America, Europe, and Asia to structure, price, and pre-market many of the firm’s capital markets transactions. Mr. Healy received a BA, International Business from The
George Washington University, Washington DC. He is multi-lingual (English, Spanish, and Portuguese) and a Chartered Alternative Investment Analyst Association (CAIA) member. Mr. Healy also serves as a member of the board of directors
and president of Silver Spike Acquisition Corp. II and, from 2019 to June 2021, served as a member of the board of directors and president of Silver Spike Acquisition Corp.
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Umesh Mahajan. Mr. Mahajan is our Chief
Financial Officer and our Adviser’s Partner and Co-Head of Credit. Mr. Mahajan is primarily responsible for the day-to-day management of our investment portfolio. Prior to joining the Adviser, Mr. Mahajan was a Managing Director for
four years at Ascribe Capital, a credit fund focused on value investing in middle market companies. From September 2003 to August 2016, Mr. Mahajan worked at Merrill Lynch and Bank of America in various roles in their Global Markets
and Investment Banking divisions in New York. He specialized in credit and special situation investing as a Managing Director in the Global Credit and Special Situations group at Bank of America Securities and as a Vice President in
the Principal Credit Group at Merrill Lynch. Mr. Mahajan also worked in Merrill Lynch’s energy and power investment banking group for two years. From 1994 to 2001, Mr. Mahajan worked in J.P. Morgan’s investment banking team in
Asia. Mr. Mahajan holds a Bachelor of Technology in Electrical Engineering from the Indian Institute of Technology, Bombay and an MBA from The Wharton School of the University of Pennsylvania where he graduated as a Palmer Scholar.
Mr. Mahajan also holds a Certificate in ESG Investing from the CFA Institute.
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Investment Advisory Agreement
Management Services
Silver Spike Capital, LLC will manage the Company and oversee all of its operations. SSC is registered as an investment adviser under the Advisers Act. Our Adviser
serves pursuant to the Investment Advisory Agreement in accordance with the Advisers Act. Subject to the overall supervision of our Board of Directors, our Adviser manages our day-to-day operations and provides us with investment advisory
services. Under the terms of the Investment Advisory Agreement, our Adviser will:
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determine the composition of our portfolio, the nature and timing of the changes to our portfolio and the manner of implementing such changes;
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determine what securities and other assets we purchase, retain or sell;
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identify, evaluate and negotiate the structure of the investments we make;
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execute, monitor and service the investments we make;
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perform due diligence on prospective portfolio companies; and
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provide us with such other investment advisory, research and related services as we may, from time to time, reasonably require for the investment of our funds, including providing operating and managerial
assistance to us and our portfolio companies as required.
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From time to time, the Adviser may pay amounts owed by us to third-party providers of goods or services, including the Board of Directors, and we will subsequently
reimburse the Adviser for such amounts paid on its behalf. Amounts payable to the Adviser are settled in the normal course of business without formal payment terms.
Our Adviser’s services under the Investment Advisory Agreement are not exclusive and it is free to furnish similar services to other entities so long as its services
to us are not impaired.
Management Fee
We will pay our Adviser a fee for its services under the Investment Advisory Agreement consisting of two components: a base management fee and an incentive fee. The
cost of both the base management fee payable to our Adviser and any incentive fees payable to our Adviser will ultimately be borne by our common stockholders.
Base Management Fee
The base management fee is calculated at an annual rate of 1.75% of our gross assets (i.e., total assets held before deduction of any liabilities), which includes
any investments acquired with the use of leverage and excludes any cash and cash equivalents (as defined in the notes to our financial statements). The fair value of derivatives and swaps, which will not necessarily equal the notional value of
such derivatives and swaps, will be included in our calculation of gross assets. The base management fee is calculated based on the average value of our gross assets at the end of the two most recently completed quarters. For example, the average
value of our gross assets used for calculating the third quarter base management fee will be equal to our gross assets at the end of the second quarter plus our gross assets at the end of the third quarter, divided by two. The base management fee
for any partial month or quarter, as the case may be, will be appropriately prorated and adjusted for any share issuances or repurchases during the relevant month or quarter, as the case may be.
Incentive Fee
The incentive fee has two parts. The first part of the incentive fee, the Incentive Fee on Income, is calculated and payable quarterly in arrears based on our
“Pre-Incentive Fee Net Investment Income” for the immediately preceding quarter. For this purpose, “Pre-Incentive Fee Net Investment Income” means interest income, dividend income and any other income (including (i) any other fees (other than
fees for providing managerial assistance), such as commitment, origination, structuring, advisory, diligence and consulting fees or other fees that we receive from portfolio companies, (ii) any gain realized on the extinguishment of our own debt
and (iii) any other income of any kind that we are required to distribute to our stockholders in order to maintain our RIC status) accrued during the quarter, minus our operating expenses for the quarter (including the base management fee,
expenses payable under the Administration Agreement with SSC, and any interest expense and dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-Incentive Fee Net Investment Income includes, in the
case of investments with a deferred interest feature (such as OID, debt instruments with PIK interest and zero coupon securities), accrued income that we have not yet received and may never receive in cash. Pre-Incentive Fee Net Investment Income
does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. Pre-Incentive Fee Net Investment Income, expressed as a rate of return on the value of our net assets at the end of the
immediately preceding quarter, will be compared to a “hurdle rate” of 1.75% per quarter (7% annualized), subject to a “catch-up” provision measured as of the end of each quarter. Our net investment income used to calculate the Incentive Fee on
Income is also included in the amount of our gross assets used to calculate the 1.75% base management fee. The operation of the Incentive Fee on Income with respect to our Pre-Incentive Fee Net Investment Income for each quarter is as follows:
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No Incentive Fee on Income is payable to the Adviser in any quarter in which our Pre-Incentive Fee Net Investment Income does not exceed the “hurdle rate” of 1.75%;
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100% of our Pre-Incentive Fee Net Investment Income, if any, that exceeds the “hurdle rate,” but is less than or equal to 2.19% in any quarter (8.76% annualized), will be payable to the Adviser. We refer
to this portion of our Incentive Fee on Income as the catch up. It is intended to provide an Incentive Fee on Income of 20% on all of our Pre-Incentive Fee Net Investment Income when our Pre-Incentive Fee Net Investment Income exceeds
2.19% in any quarter;
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For any quarter in which our Pre-Incentive Fee Net Investment Income exceeds 2.19%, the Incentive Fee on Income shall equal 20% of the amount of our Pre-Incentive Fee Net Investment Income, because the
preferred return and catch up will have been achieved; and
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For purposes of computing the Incentive Fee on Income, the calculation methodology will look through derivatives or swaps as if we owned the reference assets directly. Therefore, net interest income, if
any, associated with a derivative or swap (which is defined as the difference between (i) the interest income and transaction fees received in respect of the reference assets of the derivative or swap and (ii) all interest and other
expenses paid by us to the derivative or swap counterparty) will be included in the calculation of Pre-Incentive Fee Net Investment Income for purposes of the Incentive Fee on Income.
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The following is a graphical representation of the calculation of the Incentive Fee on Income:
Quarterly Incentive Fee on Income Based on Pre-Incentive Fee Net Investment Income
(expressed as a percentage of the value of net assets)
Percentage of Pre-Incentive Fee Net Investment Income Allocated to SSC
The second part of the incentive fee, the Incentive Fee on Capital Gains, payable at the end of each fiscal year (or upon termination of the Investment Advisory
Agreement) in arrears, equals 20% of cumulative realized capital gains from inception to the end of each fiscal year, less cumulative realized capital losses and unrealized capital depreciation from inception to the end of each fiscal year, less
the aggregate amount of any previously paid Incentive Fees on Capital Gains for prior periods. In no event will the Incentive Fee on Capital Gains payable pursuant to the Investment Advisory Agreement be in excess of the amount permitted by the
Advisers Act, including Section 205 thereof. The Incentive Fee on Capital Gains determined at the end of our first fiscal year will be calculated for a period shorter than 12 months to take into account any realized capital gains computed net of
all realized capital losses and unrealized capital depreciation from inception.
For purposes of computing the Incentive Fee on Capital Gains, the calculation methodology will look through derivatives or swaps as if we owned the reference assets
directly. Therefore, realized gains and realized losses on the disposition of any reference assets, as well as unrealized depreciation on reference assets retained in the derivative or swap, will be included on a cumulative basis in the
calculation of the Incentive Fee on Capital Gains.
While the Investment Advisory Agreement neither includes nor contemplates the inclusion of unrealized gains in the calculation of the Incentive Fee on Capital
Gains, as required by U.S. GAAP, we accrue Incentive Fees on Capital Gains on unrealized gains. This accrual reflects the Incentive Fees on Capital Gains that would be payable to the Adviser if our entire investment portfolio was liquidated at
its fair value as of the balance sheet date even though the Adviser is not entitled to an Incentive Fee on Capital Gains with respect to unrealized gains unless and until such gains are actually realized.
| Example 1: |
Incentive Fee on Income for Each Quarter
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Scenario 1
Assumptions
Investment income (including interest, dividends, fees, etc.) = 1.25%
Hurdle rate(1) = 1.75%
Management fee(2) = 0.4375%
Other expenses (legal, accounting, custodian, transfer agent, etc.) = 0.2%
Pre-Incentive Fee Net Investment Income
(investment income – (management fee + other expenses)) = 0.6125%
Pre-Incentive Fee Net Investment Income does not exceed hurdle rate; therefore, there is no Incentive Fee on Income.
Scenario 2
Assumptions
Investment income (including interest, dividends, fees, etc.) = 2.65%
Hurdle rate(1) = 1.75%
Management fee(2) = 0.4375%
Other expenses (legal, accounting, custodian, transfer agent, etc.) = 0.2%
Pre-Incentive Fee Net Investment Income
(investment income – (management fee + other expenses)) = 2.0125%
Incentive Fee on Income = 100% × Pre-Incentive Fee Net Investment Income (subject to hurdle rate and “catch up”)(3)
= 100% × (2.0125% – 1.75%)
= 0.2625%
Pre-Incentive Fee Net Investment Income exceeds the hurdle rate, but does not fully satisfy the “catch-up” provision; therefore, the Incentive Fee
on Income is 0.2625%.
Scenario 3
Assumptions
Investment income (including interest, dividends, fees, etc.) = 3.25%
Hurdle rate(1) = 1.75%
Management fee(2) = 0.4375%
Other expenses (legal, accounting, custodian, transfer agent, etc.) = 0.2%
Pre-Incentive Fee Net Investment Income
(investment income – (management fee + other expenses)) = 2.6125%
Incentive Fee on Income = 100% × Pre-Incentive Fee Net Investment Income (subject to hurdle rate and “catch-up”)(3)
Incentive Fee on Income = 100% × “catch-up” + (20% × (Pre-Incentive Fee Net Investment Income – 2.19%))
Catch-up = 2.19% – 1.75%
= 0.44%
Incentive Fee on Income = (100% × 0.44%) + (20% × (2.6125% – 2.19%))
= 0.44% + (20% × 0.4225%)
= 0.44% + 0.0845%
= 0.5245%
Pre-Incentive Fee Net Investment Income exceeds the hurdle rate, and fully satisfies the “catch-up” provision; therefore, the Incentive Fee on
Income is 0.5245%.
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Represents 7% annualized hurdle rate.
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Represents 1.75% annualized base management fee.
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The “catch-up” provision is intended to provide our Adviser with an Incentive Fee on Income of 20% on all Pre-Incentive Fee Net Investment Income as if a hurdle rate did not apply when our Pre-Incentive Fee Net Investment Income
exceeds 2.19% in any quarter.
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Example 2:
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Incentive Fee on Capital Gains(*):
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Scenario 1
Assumptions
| Year 1: |
$20 million investment made in Company A (“Investment A”) and $30 million investment made in Company B (“Investment B”)
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| Year 2: |
Investment A sold for $50 million and fair market value (“FMV”) of Investment B determined to be $32 million
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| Year 3: |
FMV of Investment B determined to be $25 million
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| Year 4: |
Investment B sold for $31 million
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The Incentive Fee on Capital Gains would be:
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None
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| Year 2: |
Incentive Fee on Capital Gains of $6 million — ($30 million realized capital gains on sale of Investment A multiplied by 20%)
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None — $5 million (20% multiplied by ($30 million cumulative capital gains less $5 million cumulative capital depreciation)) less $6 million (Incentive Fee on Capital Gains paid in Year 2)
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| Year 4: |
Incentive Fee on Capital Gains of $200,000 — $6.2 million ($31 million cumulative realized capital gains multiplied by 20%) less $6 million (Incentive Fee on Capital Gains paid in Year 2)
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Scenario 2
Assumptions
| Year 1: |
$20 million investment made in Company A (“Investment A”), $30 million investment made in Company B (“Investment B”) and $25 million investment made in Company C (“Investment C”)
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| Year 2: |
Investment A sold for $50 million, FMV of Investment B determined to be $25 million and FMV of Investment C determined to be $25 million
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| Year 3: |
FMV of Investment B determined to be $27 million and Investment C sold for $30 million
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| Year 4: |
FMV of Investment B determined to be $24 million
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| Year 5: |
Investment B sold for $20 million
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The Incentive Fee on Capital Gains, if any, would be:
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None
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| Year 2: |
$5 million Incentive Fee on Capital Gains — 20% multiplied by $25 million ($30 million realized capital gains on Investment A less $5 million unrealized capital depreciation on Investment B)
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| Year 3: |
$1.4 million Incentive Fee on Capital Gains(1) — $6.4 million (20% multiplied by $32 million ($35 million cumulative realized capital gains less $3 million unrealized capital depreciation on Investment B)) less $5 million (Incentive
Fee on Capital Gains paid in Year 2)
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| Year 4: |
None
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| Year 5: |
None — $5 million (20% multiplied by $25 million (cumulative realized capital gains of $35 million less realized capital losses of $10 million)) less $6.4 million (cumulative Incentive Fees on Capital Gains paid in Year 2 and Year
3)(2)
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* The hypothetical amounts of returns shown are based on a percentage of our total net assets and assume no leverage. There is no guarantee that
positive returns will be realized and actual returns may vary from those shown in this example.
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As illustrated in Year 3 of Scenario 2 above, if we were to be wound up on a date other than our fiscal year end of any year, we may have paid aggregate Incentive Fees on Capital Gains that are more than the amount of such fees that
would be payable if we had been wound up on our fiscal year end of such year.
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As noted above, it is possible that the cumulative aggregate Incentive Fees on Capital Gains received by our Adviser ($6.4 million) is effectively greater than $5 million (20% of cumulative aggregate realized capital gains less net
realized capital losses or net unrealized depreciation ($25 million)).
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Payment of Our Expenses
Our primary operating expenses are a base management fee and any incentive fees under the Investment Advisory Agreement. Our investment management
fee compensates our Adviser for its work in identifying, evaluating, negotiating, executing, monitoring, servicing and realizing our investments.
Except as specifically provided below, all investment professionals and staff of the Adviser, when and to the extent engaged in providing investment advisory and
management services to us, the base compensation, bonus and benefits, and the routine overhead expenses of such personnel allocable to such services, are provided and paid for by the Adviser. We may bear our allocable portion of the compensation
paid by the Adviser (or its affiliates) to our CFO and CCO and their respective staffs (based on a percentage of time such individuals devote, on an estimated basis, to our business affairs). We may bear any other expenses of our operations and
transactions, including (without limitation) fees and expenses relating to:
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the cost of our organization and offerings;
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the cost of calculating our NAV, including the cost of any third-party valuation services;
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the cost of effecting sales and repurchases of shares of our common stock and other securities;
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fees and expenses payable under any underwriting agreements, if any;
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debt service and other costs of borrowings or other financing arrangements;
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costs of hedging;
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expenses, including travel expenses, incurred by the Adviser, or members of the investment team, or payable to third-parties, performing due diligence on prospective portfolio companies and, if necessary,
enforcing our rights;
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management and incentive fees payable pursuant to the Investment Advisory Agreement;
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fees payable to third-parties relating to, or associated with, making investments and valuing investments (including third-party valuation firms);
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costs, including legal fees, associated with compliance under cannabis laws;
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transfer agent and custodial fees;
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fees and expenses associated with marketing efforts (including attendance at industry and investor conferences and similar events);
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federal and state registration fees;
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any exchange listing fees and fees payable to rating agencies;
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federal, state and local taxes;
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independent directors’ fees and expenses, including travel expenses;
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cost of preparing financial statements and maintaining books and records and filing reports or other documents with the SEC (or other regulatory bodies) and other reporting and compliance costs, and the
compensation of professionals responsible for the preparation of the foregoing;
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the cost of any reports, proxy statements or other notices to our stockholders (including printing and mailing costs), the costs of any stockholder or director meetings and the compensation of investor
relations personnel responsible for the preparation of the foregoing and related matters;
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brokerage commissions and other compensation payable to brokers or dealers;
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research and market data;
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fidelity bond, directors’ and officers’ errors and omissions liability insurance and other insurance premiums;
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direct costs and expenses of administration, including printing, mailing and staff;
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fees and expenses associated with independent audits, and outside legal and consulting costs;
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costs of winding up;
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costs incurred in connection with the formation or maintenance of entities or vehicles to hold our assets for tax or other purposes;
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extraordinary expenses (such as litigation or indemnification); and
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costs associated with reporting and compliance obligations under the 1940 Act and applicable federal and state securities laws.
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Duration and Termination
The Investment Advisory Agreement was first approved by our Board of Directors on July 7, 2021. Unless earlier terminated as described below, the Investment Advisory
Agreement will remain in effect for two years from its initial approval, and from year-to-year thereafter, if approved annually by the Board of Directors or by the affirmative vote of the holders of a majority of our outstanding voting
securities, including, in either case, approval by a majority of our directors who are not interested persons.
The Investment Advisory Agreement will automatically terminate in the event of its assignment. In accordance with the 1940 Act, without payment of any penalty, we
may terminate the Investment Advisory Agreement with the Adviser upon 60 days’ written notice. The decision to terminate the Investment Advisory Agreement may be made by a majority of the Board of Directors or the stockholders holding a majority
(as defined under the 1940 Act) of the outstanding shares of our common stock. In addition, without payment of any penalty, the Adviser may generally terminate the Investment Advisory Agreement upon 60 days’ written notice.
Indemnification
The Investment Advisory Agreement provides that, absent willful misfeasance, bad faith or gross negligence in the performance of their respective duties or by reason
of the reckless disregard of their respective duties and obligations, our Adviser and its officers, managers, partners, members (and their members, including the owners of their members), agents, employees, controlling persons and any other
person or entity affiliated with it, are entitled to indemnification from us for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of our
Adviser’s services under the Investment Advisory Agreement or otherwise as our investment adviser.
Organization of Our Investment Adviser
Our Adviser is a Delaware limited liability company that registered as an investment adviser under the Advisers Act. The principal address of our Adviser is 600
Madison Avenue, Suite 1800, New York, NY 10022.
Board of Directors’ Approval of the Investment Advisory Agreement
On July 7, 2021, our Board of Directors, including a majority of the directors who were not “interested persons,” as defined in Section 2(a)(19) of the 1940 Act, of the Company, approved
the Investment Advisory Agreement for an initial term of two years. In its consideration of the approval of the Investment Advisory Agreement, our Board of Directors focused on information it had received relating to, among other things:
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the nature, quality and extent of the advisory and other services to be provided to the Company by the Adviser;
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comparative data with respect to advisory fees or similar expenses paid by other BDCs with similar investment objectives;
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the Company’s projected operating expenses and expense ratio compared to BDCs with similar investment objectives;
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any existing and potential sources of indirect income to the Adviser from its relationships with the Company and the profitability of those relationships;
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information about the services to be performed and the personnel performing such services under the Investment Advisory Agreement; and
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the organizational capability and financial condition of the Adviser and its affiliates.
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Based on the information reviewed and related discussions, our Board of Directors concluded that the fees payable to the Adviser pursuant to the Investment Advisory
Agreement were reasonable in relation to the services to be provided. Our Board of Directors did not assign relative weights to the above factors or the other factors considered by it. In addition, our Board of Directors did not reach any
specific conclusion on each factor considered, but conducted an overall analysis of these factors. Individual members of our Board of Directors may have given different weights to different factors.
Administration Agreement
We have entered into an Administration Agreement with SSC, under which SSC will provide administrative services for us, including office facilities and equipment and
clerical, bookkeeping and record-keeping services at such facilities. Under the Administration Agreement, SSC also will perform, or oversee the performance of, our required administrative services, which includes being responsible for the
financial records which we are required to maintain and preparing reports to our stockholders and reports filed with the SEC. In addition, SSC will assist us in determining and publishing our NAV, overseeing the preparation and filing of our tax
returns and the printing and dissemination of reports to our stockholders, and generally overseeing the payment of our expenses and the performance of administrative and professional services rendered to us by others. In addition, pursuant to the
terms of the Administration Agreement, SSC may delegate its obligations under the Administration Agreement to an affiliate or to a third-party and we will reimburse SSC for any services performed for it by such affiliate or third-party.
We reimburse our administrator, SSC, for the costs and expenses incurred by SSC in performing its obligations and providing personnel and
facilities under the Administration Agreement (including costs and expenses incurred by SSC in connection with the delegation of its obligations under the Administration Agreement to a sub-administrator). We are generally not responsible for
the compensation of SSC's employees or any overhead expenses of SSC (including rent, office equipment and utilities). However, we may reimburse SSC for an allocable portion of the compensation paid by SSC to our CCO and CFO and their respective
staffs (based on a percentage of time such individuals devote, on an estimated basis, to our business affairs). The Administration Agreement also provides that we shall reimburse SSC for certain organization costs incurred prior to the
commencement of our operations, and for certain offering costs. Such reimbursement is at cost, with no profit to, or markup by, SSC. Our allocable portion of SSC’s costs will be determined based upon costs attributable to our operations versus
costs attributable to the operations of other entities for which SSC provides administrative services. SSC may also provide on our behalf managerial assistance to our portfolio companies.
The Administration Agreement provides that, absent willful misfeasance, bad faith or gross negligence in the performance of their respective duties or by reason of
the reckless disregard of their respective duties and obligations, SSC and its officers, managers, partners, members (and their members, including the owners of their members), agents, employees, controlling persons and any other person or entity
affiliated with it are entitled to indemnification from us for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of services under the
Administration Agreement or otherwise as our administrator.
Unless earlier terminated as described below, the Administration Agreement will remain in effect for two years from its initial approval, and from year-to-year
thereafter, if approved annually by the Board of Directors or by the affirmative vote of the holders of a majority of our outstanding voting securities, including, in either case, approval by a majority of our directors who are not interested
persons. The Administration Agreement may be terminated at any time, without the payment of any penalty, on 60 days’ written notice, by the vote of a majority of our outstanding voting securities, or by the vote of the Board of Directors, or by
SSC.
In accordance with the Administration Agreement, and with the approval of the Board of Directors, the Company and SSC have entered into a
services agreement with SS&C as sub-administrator (the “Services Agreement”). Under the Services Agreement, SS&C has assumed responsibility for performing certain administrative services for us.
License Agreement
We have also entered into a license agreement with SSC pursuant to which SSC has agreed to grant us a nonexclusive, royalty-free license to use the name “Silver
Spike.” Under this agreement, we will have a right to use the “Silver Spike” name, for so long as SSC or one of its affiliates remains our investment adviser. Other than with respect to this limited license, we will have no legal right to the
“Silver Spike” name.
Material Conflicts of Interest
Our executive officers and directors, and certain members of our Adviser, serve or may serve as officers, directors or principals of entities that may operate in the
same or a related line of business as us or as investment funds managed by our affiliates. For example, SSC presently serves as a manager to several special purpose acquisition companies, or SPACs. These investment vehicles under management were
formed for the purpose of investing in specific private equity transactions, which differ from our mandate. SSC and its affiliates also manage private investment funds, and may manage other funds in the future, that have investment mandates that
are similar, in whole or in part, to ours. Accordingly, they may have obligations to investors in those entities, the fulfillment of which might not be in the best interests of us or our stockholders. For example, the principals of our Adviser
may face conflicts of interest in the allocation of investment opportunities to us and such other funds. The fact that our investment advisory fees are lower than those of certain other funds, could amplify this conflict of interest.
To the extent an investment opportunity is appropriate for us or any other investment fund managed by our affiliates, and co-investment is not possible, SSC will
adhere to its investment allocation policy in order to determine to which entity to allocate the opportunity. Any such opportunity will be allocated first to the entity whose investment strategy is the most consistent with the opportunity being
allocated, and second, if the terms of the opportunity are consistent with more than one entity’s investment strategy, on an alternating basis. Although our investment professionals will endeavor to allocate investment opportunities in a fair and
equitable manner, we and our common stockholders could be adversely affected to the extent investment opportunities are allocated among us and other investment vehicles managed or sponsored by, or affiliated with, our executive officers,
directors and members of our Adviser.
The 1940 Act prohibits us from making certain negotiated co-investments with affiliates, unless we receive an order from the SEC permitting us to do so. SSC and
certain of its affiliates expect to submit an exemptive application to the SEC to permit us to co-invest with other funds managed by SSC or its affiliates in a manner consistent with our investment objective, positions, policies, strategies and
restrictions as well as regulatory requirements and other pertinent factors. There can be no assurance that any such exemptive order will be submitted or obtained. Prior to receiving any such exemptive order from the SEC, SSC will offer us the
right to participate in all investment opportunities that it determines are appropriate for us in view of our investment objective, policies and strategies and other relevant factors. These offers will be subject to the exception that, in
accordance with SSC’s investment allocation policy, we might not participate in each individual opportunity, but will, on an overall basis, be entitled to participate equitably with other entities managed by SSC and its affiliates.
SSC’s policies are also designed to manage and mitigate the conflicts of interest associated with the allocation of investment opportunities if we are able to
co-invest, either pursuant to SEC interpretive positions or an exemptive order, with other accounts managed by our Adviser and its affiliates. Generally, under the investment allocation policy, a portion of each opportunity that is appropriate
for us and any affiliated fund, which may vary based on asset class and liquidity, among other factors, will be offered to us and such other eligible accounts, as determined by SSC. The investment allocation policy further provides that
allocations among us and other eligible accounts will generally be made in accordance with SEC interpretive positions or an exemptive order. SSC seeks to treat all clients fairly and equitably in a manner consistent with its fiduciary duty to
each of them; however, in some instances, especially in instances of limited liquidity, the factors may not result in pro rata allocations or may result in situations where certain accounts receive allocations where others do not.
Dividend Reinvestment Plan
We have adopted a dividend reinvestment plan that provides for reinvestment of our distributions on behalf of our stockholders, unless a stockholder elects to
receive cash as provided below. As a result, if our Board of Directors authorizes, and we declare, a cash distribution, then our stockholders who have not “opted out” of our dividend reinvestment plan will have their cash distributions
automatically reinvested in additional shares of our common stock, rather than receiving the cash distributions. Any fractional share otherwise issuable to a participant in the dividend reinvestment plan will instead be paid in cash.
No action will be required on the part of a registered stockholder to have their cash distributions reinvested in shares of our common stock. A registered
stockholder may elect to receive an entire distribution in cash by notifying ALPS Fund Services, Inc., the plan administrator and our transfer agent and registrar, in writing so that such notice is received by the plan administrator no later than
three days prior to the distribution payment date for distributions to stockholders (the “Payment Date”). Those stockholders whose shares are held by a broker or other financial intermediary may receive distributions in cash by notifying their
broker or other financial intermediary of their election. If the stockholder request is received less than three days prior to the Payment Date, then that distribution will be reinvested. However, all subsequent distributions to the stockholder
will be paid out in cash.
With respect to each distribution, the Board of Directors reserves the right to either issue new shares or purchase shares in the open market in connection with the
implementation of the dividend reinvestment plan. If newly issued shares are used to implement the plan and the most recently computed NAV per share exceeds the market price per share on the Payment Date, the number of shares to be issued to a
stockholder will be determined by dividing the total dollar amount of the distribution payable to such stockholder by the market price per share of our common stock at the close of regular trading on the Nasdaq Stock Market on the Payment Date,
or if no sale is reported for such day, the average of the reported bid and ask prices. If newly issued shares are used to implement the plan and the market price per share on the Payment Date exceeds the most recently computed NAV per share, the
number of shares to be issued to a stockholder will be determined by dividing the total dollar amount of the distribution payable to such stockholder by the greater of (i) the most recently computed NAV per share and (ii) 95% of the market price
per share (or such lesser discount to the market price per share that still exceeds the most recently computed NAV per share) at the close of regular trading on the Nasdaq Stock Market on the Payment Date, or, if no sale is reported for such day,
the average of the reported bid and ask prices. For example, if the most recently computed NAV per share is $15.00 and the market price per share on the Payment Date is $14.00, we will issue shares at $14.00 per share. If the most recently
computed NAV per share is $15.00 and the market price per share on the Payment Date is $16.00, we will issue shares at $15.20 per share (95% of the market price per share on the Payment Date). If the most recently computed NAV per share is $15.00
and the market price per share on the Payment Date is $15.50, we will issue shares at $15.00 per share, as the most recently computed NAV per share is greater than 95% of the market price per share on the Payment Date ($14.73 per share). If
shares are purchased in the open market to implement the plan, the number of shares to be issued to a stockholder shall be determined by dividing the total dollar amount of the distribution payable to such stockholder by the weighted average
price per share, excluding any brokerage charges or other charges, of all shares purchased by the plan administrator in the open market in connection with the distribution.
Stockholders who receive distributions in the form of our stock generally are subject to the same federal, state and local tax consequences as are stockholders who
elect to receive their distributions in cash; however, since their cash distributions will be reinvested, such stockholders will not receive cash with which to pay any applicable taxes on reinvested distributions. A stockholder’s basis for
determining gain or loss upon the sale of our stock received in a distribution from us will be equal to the fair market value of the stock so distributed to the stockholder at the time of the distribution. Any stock received in a distribution
will have a holding period for tax purposes commencing on the day following the day on which the shares are credited to the stockholder’s account.
There will be no brokerage charges or other charges for dividend reinvestment to stockholders who participate in the plan. We will pay the plan administrator’s fees
under the plan.
Participants may terminate their accounts under the plan by notifying our administrator by mail at 600 Madison Avenue, Suite 1800, New York, NY 10022, or by calling
our administrator at (212) 905-4923.
We may terminate the plan upon notice in writing mailed to each participant at least 30 days prior to any record date for the payment of any distribution by us. All
correspondence concerning the plan should be directed to our administrator by mail at 600 Madison Avenue, Suite 1800, New York, NY 10022, or by telephone at (212) 905-4923.
Emerging Growth Company
The Company is an emerging growth company as defined in the Jumpstart Our Business
Startups Act of 2012 (the “JOBS Act”) and is eligible to take advantage of certain specified reduced disclosure and other requirements that are otherwise generally applicable to public companies that
are not “emerging growth companies,” including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002. We expect to remain an emerging growth company for up to five years
following the completion of our IPO or until the earliest of:
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the last day of the first fiscal year in which our annual gross revenues exceed $1.235 billion;
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the last day of the fiscal year that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act which would occur if the market value of the shares of our common stock that is held by non-affiliates exceeds
$700.0 million as of the last business day of our most recently completed second fiscal quarter and we have been publicly reporting for at least 12 months; or
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the date on which we have issued more than $1.0 billion in non-convertible debt securities during the preceding three-year period.
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In addition, we will take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended
(the “Securities Act”), for complying with new or revised accounting standards.
Business Development Company Regulations
We have elected to be regulated as a BDC under the 1940 Act. The 1940 Act contains prohibitions and restrictions relating to transactions between BDCs and their
affiliates, principal underwriters and affiliates of those affiliates or underwriters. The 1940 Act requires that a majority of the directors be persons other than “interested persons,” as that term is defined in the 1940 Act.
In addition, the 1940 Act provides that we may not change the nature of our business so as to cease to be, or to withdraw our election as, a BDC unless approved by a
majority of our outstanding voting securities. The 1940 Act defines “a majority of the outstanding voting securities” as the lesser of (i) 67% or more of the voting securities present at a meeting if the holders of more than 50% of our
outstanding voting securities are present or represented by proxy or (ii) 50% of our voting securities.
As a BDC, we will not generally be permitted to invest in any portfolio company in which our Adviser or any of its affiliates currently have an investment or to make
any co-investments with our Adviser or its affiliates without an exemptive order from the SEC. SSC expects to submit an exemptive application to the SEC to permit us to co-invest with other funds managed by SSC or its affiliates in a manner
consistent with our investment objective, positions, policies, strategies and restrictions as well as regulatory requirements and other pertinent factors. There can be no assurance that any such exemptive order will be obtained.
Qualifying Assets
Under the 1940 Act, a BDC may not acquire any asset other than assets of the type listed in Section 55(a) of the 1940 Act, which are referred to as qualifying
assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company’s total assets. The principal categories of qualifying assets relevant to our business are any of the following:
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Securities purchased in transactions not involving any public offering from the issuer of such securities, which issuer (subject to certain limited exceptions) is an eligible portfolio company, or from any person who is, or has been
during the preceding 13 months, an affiliated person of an eligible portfolio company, or from any other person, subject to such rules as may be prescribed by the SEC. An eligible portfolio company is defined in the 1940 Act as any issuer
which:
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is organized under the laws of, and has its principal place of business in, the United States;
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is not an investment company (other than a small business investment company wholly owned by the BDC) or a company that would be an investment company but for certain exclusions under the 1940 Act; and
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satisfies any of the following:
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does not have any class of securities that is traded on a national securities exchange;
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has a class of securities listed on a national securities exchange, but has an aggregate market value of outstanding voting and non-voting common equity of less than $250 million;
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is controlled by a BDC or a group of companies including a BDC and the BDC has an affiliated person who is a director of the eligible portfolio company; or
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is a small and solvent company having total assets of not more than $4 million and capital and surplus of not less than $2 million.
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Securities of any eligible portfolio company that we control.
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Securities purchased in a private transaction from a U.S. issuer that is not an investment company or from an affiliated person of the issuer, or in transactions incident thereto, if the issuer is in bankruptcy and subject to
reorganization or if the issuer, immediately prior to the purchase of its securities was unable to meet its obligations as they came due without material assistance other than conventional lending or financing arrangements.
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Securities of an eligible portfolio company purchased from any person in a private transaction if there is no ready market for such securities and we already own 60% of the outstanding equity of the eligible portfolio company.
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Securities received in exchange for or distributed on or with respect to securities described in (1) through (4) above, or pursuant to the exercise of warrants or rights relating to such securities.
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Cash, cash equivalents, U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment.
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In addition, a BDC must be operated for the purpose of making investments in the types of securities described in (1), (2) or (3) above.
Control, as defined by the 1940 Act, is presumed to exist where a BDC beneficially owns more than 25% of the outstanding voting securities of the portfolio company,
but may exist in other circumstances based on the facts and circumstances.
The regulations defining qualifying assets may change over time. The Company may adjust its investment focus as needed to comply with and/or
take advantage of any regulatory, legislative, administrative or judicial actions.
Managerial Assistance to Portfolio Companies
In order to count portfolio securities as qualifying assets for the purpose of the 70% test, we must either control the issuer of the securities or must offer to
make available to the issuer of the securities (other than small and solvent companies described above) significant managerial assistance; except that, where we purchase such securities in conjunction with one or more other persons acting
together, one of the other persons in the group may make available such managerial assistance. Making available managerial assistance means, among other things, any arrangement whereby the BDC, through its directors, officers or employees, offers
to provide, and, if accepted, does so provide, significant guidance and counsel concerning the management, operations or business objectives and policies of a portfolio company.
Temporary Investments
Pending investment in other types of “qualifying assets,” as described above, our investments may consist of cash, cash equivalents, U.S. government securities or
high-quality debt securities maturing in one year or less from the time of investment, which we refer to, collectively, as temporary investments, so that 70% of our assets are qualifying assets. Typically, we will invest in U.S. Treasury bills or
in repurchase agreements, provided that such agreements are fully collateralized by cash or securities issued by the U.S. government or its agencies. A repurchase agreement (which is substantially similar to a secured loan) involves the purchase
by an investor, such as us, of a specified security and the simultaneous agreement by the seller to repurchase it at an agreed-upon future date and at a price that is greater than the purchase price by an amount that reflects an agreed-upon
interest rate. There is no percentage restriction on the proportion of our assets that may be invested in such repurchase agreements. However, if more than 25% of our total assets constitute repurchase agreements from a single counterparty, we
would not meet the diversification tests in order to qualify as a RIC for U.S. federal income tax purposes. Thus, we do not intend to enter into repurchase agreements with a single counterparty in excess of this limit. Our Adviser will monitor
the creditworthiness of the counterparties with which we enter into repurchase agreement transactions.
Senior Securities
We are permitted, under specified conditions, to issue multiple classes of debt and one class of stock senior to our common stock if our asset coverage, as defined
in the 1940 Act, is at least equal to 150% immediately after each such issuance. Under a 150% asset coverage ratio a BDC may borrow $2 for investment purposes of every $1 of investor equity. We are currently targeting a debt-to-equity ratio of
0.50x (i.e., we aim to have one dollar of equity for each $0.50 of debt outstanding).
In addition, while any senior securities remain outstanding, we may be prohibited from making distributions to our stockholders or repurchasing such securities or
shares unless we meet the applicable asset coverage ratios at the time of the distribution or repurchase. We may also borrow amounts up to 5% of the value of our total assets for temporary or emergency purposes without regard to asset coverage.
For a discussion of the risks associated with leverage, see “Item 1A. Risk Factors — Risks Relating to Our Business and Structure — Regulations that will govern our operation as a BDC and RIC may affect our ability to raise, and the way in which
we raise, additional capital or borrow for investment purposes, which may have a negative effect on our growth” and “Risk Factors — Risks Relating to Our Use of Leverage and Credit Facilities — If we borrow money, the potential for loss on
amounts invested in us will be magnified and may increase the risk of investing in us.”
Exclusion from CFTC Regulation
CFTC Rule 4.5 permits investment advisers to BDCs to claim an exclusion from the definition of “commodity pool operator” under the Commodity
Exchange Act (the “CEA”) with respect to a fund, provided certain requirements are met. In order to permit our Adviser to claim this exclusion with respect to us, we must limit our transactions in certain futures, options on futures and swaps
deemed “commodity interests” under CFTC rules (excluding transactions entered into for “bona fide hedging purposes,” as defined under CFTC regulations) such that either: (i) the aggregate initial margin and premiums required to establish such
futures, options on futures and swaps do not exceed 5% of the liquidation value of our portfolio, after taking into account unrealized profits and losses on such positions; or (ii) the aggregate net notional value of such futures, options on
futures and swaps does not exceed 100% of the liquidation value of our portfolio, after taking into account unrealized profits and losses on such positions. In addition to meeting one of the foregoing trading limitations, we may not market
ourself as a commodity pool or otherwise as a vehicle for trading in the futures, options or swaps markets. Accordingly, we are not subject to regulation under the CEA or otherwise regulated by the CFTC. If the Adviser was unable to claim the
exclusion with respect to us, the Adviser would become subject to registration and regulation as a commodity pool operator, which would subject the Adviser and us to additional registration and regulatory requirements and increased operating
expenses.
Common Stock
We will not generally be able to issue and sell our common stock at a price below NAV per share. We will, however, be able to sell our common stock, warrants,
options or rights to acquire our common stock, at a price below the current NAV 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). We may also make rights offerings to our stockholders at prices per share less than the NAV per share, subject to applicable requirements of the 1940 Act. See “Item 1A. Risk Factors — Risks Relating to Our Business and
Structure — Regulations that will govern our operation as a BDC and RIC may affect our ability to raise, and the way in which we raise, additional capital or borrow for investment purposes, which may have a negative effect on our growth.”
Code of Ethics
We have adopted a code of ethics pursuant to Rule 17j-1 under the 1940 Act and we have also approved the Adviser’s code of ethics that was adopted by it under Rule
17j-1 under the 1940 Act and Rule 204A-1 of the Advisers Act. These codes establish procedures for personal investments and restrict certain personal securities transactions. Personnel subject to the code may invest in securities for their
personal investment accounts, including securities that may be purchased or held by us, so long as such investments are made in accordance with the code’s requirements. The codes of ethics are available on the EDGAR Database on the SEC’s Internet
site at www.sec.gov and are available at our corporate governance webpage at ssic.silverspikecap.com.
Compliance Policies and Procedures
We and our Adviser have adopted and implemented written policies and procedures reasonably designed to prevent violation of the federal securities laws and are
required to review these compliance policies and procedures annually for their adequacy and the effectiveness of their implementation. Our CCO is responsible for administering these policies and procedures.
Proxy Voting Policies and Procedures
We have delegated our proxy voting responsibility to our Adviser. The proxy voting policies and procedures of our Adviser are set forth below. The guidelines are
reviewed periodically by our Adviser and our non-interested directors, and, accordingly, are subject to change.
Introduction
As an investment adviser registered under the Advisers Act, our Adviser has a fiduciary duty to act solely in the best interests of its clients.
As part of this duty, our Adviser recognizes that it must vote client securities in a timely manner free of conflicts of interest and in the best interests of its clients.
These policies and procedures for voting proxies for the investment advisory clients of our Adviser are intended to comply with Section 206 of,
and Rule 206(4)-6 under, the Advisers Act.
Proxy policies
Our Adviser will vote proxies relating to our portfolio securities in the best interest of our stockholders. Our Adviser will review on a
case-by-case basis each proposal submitted for a stockholder vote to determine its impact on the portfolio securities held by us. Although our Adviser will generally vote against proposals that may have a negative impact on our portfolio
securities, it may vote for such a proposal if there exists compelling long-term reasons to do so.
The proxy voting decisions of our Adviser will be made by the officers who are responsible for monitoring each of our investments. To ensure that
its vote is not the product of a conflict of interest, our Adviser will require that: (a) anyone involved in the decision-making process disclose to our Adviser’s CCO any potential conflict that he or she is aware of and any contact that he or
she has had with any interested party regarding a proxy vote; and (b) employees involved in the decision-making process or vote administration are prohibited from revealing how our Adviser intends to vote on a proposal in order to reduce any
attempted influence from interested parties.
Proxy voting records
You may obtain information, without charge, regarding how we voted proxies with respect to our portfolio securities by making a written request
for proxy voting information to: Chief Compliance Officer, Silver Spike Investment Corp., 600 Madison Avenue, Suite 1800, New York, NY 10022.
Other
We are subject to periodic examination by the SEC for compliance with the 1940 Act.
None of our investment policies are fundamental, and thus may be changed without stockholder approval.
We are required to provide and maintain a bond issued by a reputable fidelity insurance company to protect us against larceny and embezzlement. Furthermore, as a
BDC, we are prohibited from protecting any director or officer against any liability to us or our stockholders arising from willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such
person’s office.
Securities Exchange Act and Sarbanes-Oxley Act Compliance
We will be subject to the reporting and disclosure requirements of the Exchange Act, including the filing of quarterly, annual and current reports, proxy statements
and other required items. In addition, we will be subject to the Sarbanes-Oxley Act, which imposes a wide variety of regulatory requirements on publicly held companies and their insiders. For example:
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pursuant to Rule 13a-14 of the Exchange Act, our chief executive officer and chief financial officer will be required to certify the accuracy of the financial statements contained in our periodic reports;
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pursuant to Item 307 of Regulation S-K, our periodic reports will be required to disclose our conclusions about the effectiveness of our disclosure controls and procedures; and
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pursuant to Rule 13a-15 of the Exchange Act, our management will be required to prepare a report regarding its assessment of our internal control over financial reporting. When we are no longer an
emerging growth company under the JOBS Act, our independent registered public accounting firm will be required to audit our internal control over financial reporting.
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The Sarbanes-Oxley Act will require us to review our current policies and procedures to determine whether we comply with the Sarbanes-Oxley Act and the regulations
promulgated thereunder. We intend to monitor our compliance with all regulations that are adopted under the Sarbanes-Oxley Act and will take actions necessary to ensure that we are in compliance therewith.
The Nasdaq Stock Market Corporate Governance Regulations
The Nasdaq Stock Market has adopted corporate governance regulations that listed companies must comply with. We are in compliance with such corporate governance
regulations applicable to BDCs.
Material U.S. Federal Income Tax Considerations
The following is a description of the material U.S. federal income tax consequences of owning and disposing of shares of our common stock. The discussion below
provides general tax information relating to an investment in our shares, but it does not purport to be a comprehensive description of all the U.S. federal income tax considerations that may be relevant to a particular person’s decision to invest
in our shares. This discussion does not describe all of the tax consequences that may be relevant in light of the particular circumstances of a beneficial owner of shares, including alternative minimum tax consequences, Medicare contribution tax
consequences and tax consequences applicable to beneficial owners subject to special rules, such as:
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certain financial institutions;
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regulated investment companies;
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real estate investment trusts;
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dealers or traders in securities that use a mark-to-market method of tax accounting;
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persons holding shares of our common stock as part of a straddle, wash sale, conversion transaction or integrated transaction or persons entering into a constructive sale with respect to the shares;
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U.S. Holders (as defined below) whose functional currency for U.S. federal income tax purposes is not the U.S. dollar;
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entities classified as partnerships or otherwise treated as pass-through entities for U.S. federal income tax purposes;
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certain former U.S. citizens and residents and expatriated entities;
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tax-exempt entities, including an “individual retirement account” or “Roth IRA”; or
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insurance companies.
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If an entity that is classified as a partnership for U.S. federal income tax purposes holds shares, the U.S. federal income tax treatment of a partner will generally
depend on the status of the partner and the activities of the partnership. Partnerships holding shares and partners in such partnerships should consult their tax advisers as to the particular U.S. federal income tax consequences of holding and
disposing of our shares in light of their specific circumstances.
The following discussion applies only to an owner of shares that (i) is treated as the beneficial owner of such shares for U.S. federal income tax purposes and (ii)
holds such shares as capital assets.
This discussion is based on the Code, administrative pronouncements, judicial decisions, and final, temporary and proposed Treasury regulations all as of the date
hereof, any of which is subject to change, possibly with retroactive effect.
You are urged to consult your tax adviser with regard to the application of the U.S. federal income tax laws to your particular situation, as well as any tax
consequences arising under U.S. federal tax laws other than U.S. federal income tax laws and the laws of any state, local or non-U.S. taxing jurisdiction.
Taxation as a Regulated Investment Company
We intend to qualify as a regulated investment company under Subchapter M of the Code (a “RIC”) in the current and future taxable years. Assuming that we so qualify
and that we satisfy the distribution requirements described below, we generally will not be subject to U.S. federal income tax on income distributed in a timely manner to shareholders.
To qualify as a RIC for any taxable year, we must, among other things, satisfy both an income test and an asset diversification test for such taxable year.
Specifically, (i) at least 90% of our gross income for such taxable year must consist of dividends; interest; payments with respect to certain securities loans; gains from the sale or other disposition of stock, securities or foreign currencies;
other income (including, but not limited to, gains from options, futures or forward contracts) derived with respect to our business of investing in such stock, securities or currencies; and net income derived from interests in “qualified publicly
traded partnerships” (such income, “Qualifying RIC Income”) and (ii) our holdings must be diversified so that, at the end of each quarter of such taxable year, (a) at least 50% of the value of our total assets is represented by cash and cash
items, securities of other RICs, U.S. government securities and other securities, with such other securities limited, in respect of any one issuer, to an amount not greater than 5% of the value of our total assets and not greater than 10% of the
outstanding voting securities of such issuer and (b) not more than 25% of the value of our total assets is invested (x) in the securities (other than U.S. government securities or securities of other RICs) of any one issuer or of two or more
issuers that we control and that are engaged in the same, similar or related trades or businesses or (y) in the securities of one or more “qualified publicly traded partnerships.” A “qualified publicly traded partnership” is generally defined as
an entity that is treated as a partnership for U.S. federal income tax purposes if (i) interests in such entity are traded on an established securities market or are readily tradable on a secondary market or the substantial equivalent thereof and
(ii) less than 90% of such entity’s gross income for the relevant taxable year consists of Qualifying RIC Income. Our share of income derived from a partnership other than a “qualified publicly traded partnership” will be treated as Qualifying
RIC Income only to the extent that such income would have constituted Qualifying RIC Income if derived directly by us.
In order to be exempt from U.S. federal income tax on our distributed income, we must distribute to our shareholders on a timely basis at least 90% of the sum of (i)
our “investment company taxable income” (determined prior to the deduction for dividends paid) and (ii) our net tax-exempt interest income for each taxable year. In general, a RIC’s “investment company taxable income” for any taxable year is its
taxable income, determined without regard to net capital gain (that is, the excess of net long-term capital gains over net short-term capital losses) and with certain other adjustments. Any taxable income, including any net capital gain, that we
do not distribute to our shareholders in a timely manner will be subject to U.S. federal income tax at regular corporate rates.
A RIC will be subject to a nondeductible 4% excise tax on certain amounts that we fail to distribute during each calendar year. In order to avoid this excise tax, a
RIC must distribute during each calendar year an amount at least equal to the sum of (i) 98% of its ordinary taxable income for the calendar year, (ii) 98.2% of its capital gain net income for the one-year period ended on October 31 of the
calendar year and (iii) any ordinary income and capital gains for previous years that were not distributed during those years. For purposes of determining whether we have met this distribution requirement, (i) certain ordinary gains and losses
that would otherwise be taken into account for the portion of the calendar year after October 31 will be treated as arising on January 1 of the following calendar year and (ii) we will be deemed to have distributed any income or gains on which we
have paid U.S. federal income tax. Amounts distributed and reinvested pursuant to our dividend reinvestment plan will be treated as distributed for all U.S. tax purposes, including for purposes of the distribution requirement described above and
the excise tax.
If we fail to qualify as a RIC or fail to satisfy the 90% distribution requirement in any taxable year, we will be subject to U.S. federal income tax at regular
corporate rates on our taxable income, including our net capital gain, even if such income is distributed to our shareholders, and all distributions out of earnings and profits would be taxable to U.S. Holders as dividend income. Such
distributions generally would be eligible for the dividends-received deduction in the case of corporate U.S. Holders (defined below) and would constitute “qualified dividend income” for individual U.S. Holders. See “— Tax Consequences to U.S.
Holders — Distributions.” In addition, we could be required to recognize unrealized gains, pay taxes and make distributions (which could be subject to interest charges) before requalifying for taxation as a RIC. If we fail to satisfy the income
test or diversification test described above, however, we may be able to avoid losing our status as a RIC by timely curing such failure, paying a tax and/or providing notice of such failure to the U.S. Internal Revenue Service (the “IRS”).
In order to meet the distribution requirements necessary to be exempt from U.S. federal income and excise tax, we may be required to make distributions in excess of
the income we actually receive in respect of our investments. In particular, we may be required to make distributions in respect of taxable income we recognize as a result of investing in OID and PIK instruments, without having actually received
any amounts in respect of such taxable income.
Tax Consequences to U.S. Holders
The discussion in this section applies to you only if you are a U.S. Holder. A “U.S. Holder” is (i) an individual who is a citizen or resident of the United States;
(ii) a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States, any state therein or the District of Columbia; or (iii) an estate or trust the income of which is subject to U.S.
federal income taxation regardless of its source.
Distributions. Distributions of our ordinary income and net short-term capital gains will, except as described below with
respect to distributions of “qualified dividend income,” generally be taxable to you as ordinary income to the extent such distributions are paid out of our current or accumulated earnings and profits, as determined for U.S. federal income tax
purposes. Distributions (or deemed distributions, as described below), if any, of net capital gains will be taxable as long-term capital gains, regardless of the length of time you have owned our shares. A distribution of an amount in excess of
our current and accumulated earnings and profits will be treated as a return of capital that will be applied against and reduce your basis in our shares. If the amount of any such distribution exceeds your basis in our shares, the excess will be
treated as gain from a sale or exchange of our shares.
The ultimate tax characterization of the distributions that we make during any taxable year cannot be determined until after the end of the taxable year. As a
result, it is possible that we will make total distributions during a taxable year in an amount that exceeds our current and accumulated earnings and profits.
Distributions of our “qualified dividend income” to an individual or other non-corporate U.S. Holder will be treated as “qualified dividend income” and will
therefore be taxed at rates applicable to long-term capital gains, provided that the U.S. Holder meets certain holding period and other requirements with respect to our shares and that we meet certain holding period and other requirements with
respect to the underlying shares of stock. “Qualified dividend income” generally includes dividends from domestic corporations and dividends from foreign corporations that meet certain specified criteria.
Dividends distributed to a corporate U.S. Holder will qualify for the dividends-received deduction only to the extent that the dividends consist of distributions of
dividends eligible for the dividends-received deduction received by us, we meet certain holding period requirements with respect to the underlying shares of stock and the U.S. Holder meets certain holding period and other requirements with
respect to the underlying shares of stock. Dividends eligible for the dividends-received deduction generally are dividends from domestic corporations.
We intend to distribute our net capital gains at least annually. If, however, we retain any net capital gains for reinvestment, we may elect to treat those net
capital gains as having been distributed to our shareholders. If we make this election, you will be required to report your share of our undistributed net capital gain as long-term capital gain and will be entitled to claim your share of the U.S.
federal income taxes paid by us on that undistributed net capital gain as a credit against your own U.S. federal income tax liability, if any, and to claim a refund on a properly filed U.S. federal income tax return to the extent that the credit
exceeds your tax liability. In addition, you will be entitled to increase your adjusted tax basis in our shares by the difference between your share of such undistributed net capital gain and the related credit and/or refund. There can be no
assurance that we will make this election if we retain all or a portion of our net capital gain for a taxable year.
Because the tax treatment of a distribution depends upon our current and accumulated earnings and profits, a distribution received shortly after an acquisition of
shares may be taxable, even though, as an economic matter, the distribution represents a return of your initial investment. Distributions will be treated in the manner described above regardless of whether paid in cash or invested in additional
shares pursuant to our dividend reinvestment plan. Although dividends generally will be treated as distributed when paid, dividends declared in October, November or December, payable to shareholders of record on a specified date in one of those
months, and paid during the following January, will be treated for U.S. federal income tax purposes as having been distributed by us and received by shareholders on December 31 of the year in which declared. Shareholders will be notified annually
as to the U.S. federal tax status of distributions.
Sales and Redemptions of Shares. In general, upon the sale or other disposition of shares, you will recognize capital gain
or loss in an amount equal to the difference, if any, between the amount realized on the sale or other disposition and your adjusted tax basis in the relevant shares. Such gain or loss generally will be long-term capital gain or loss if your
holding period for the relevant shares was more than one year on the date of the sale or other disposition. Under current law, net capital gain (that is, the excess of net long-term capital gains over net short-term capital losses) recognized by
non-corporate U.S. Holders is generally subject to U.S. federal income tax at lower rates than the rates applicable to ordinary income.
Losses recognized by you on the sale or other disposition of shares held for six months or less will be treated as long-term capital losses to the extent of any
distribution of long-term capital gain received (or deemed received, as discussed above) with respect to such shares. In addition, no loss will be allowed on a sale or other disposition of shares if you acquire shares (including pursuant to our
dividend reinvestment plan), or enter into a contract or option to acquire shares, within 30 days before or after such sale or other disposition. In such a case, the basis of the shares acquired will be adjusted to reflect the disallowed loss.
Under U.S. Treasury regulations, if you recognize losses with respect to shares of $2 million or more if you are an individual, or $10 million or more if you are a
corporation, you must file with the IRS a disclosure statement on IRS Form 8886. Direct shareholders of portfolio securities are in many cases exempted from this reporting requirement, but under current guidance, shareholders of a RIC are not
exempted. The fact that a loss is reportable under these regulations does not affect the legal determination of whether your treatment of the loss is proper. Certain states may have similar disclosure requirements.
Backup Withholding and Information Reporting. Payments on our shares (including of reinvested dividends) and proceeds from
a sale or other disposition of shares will be subject to information reporting unless you are an exempt recipient. You will be subject to backup withholding on all such amounts unless (i) you are an exempt recipient or (ii) you provide your
correct taxpayer identification number (generally, on IRS Form W-9) and certify that you are not subject to backup withholding. Backup withholding is not an additional tax. Any amounts withheld pursuant to the backup withholding rules will be
allowed as a credit against your U.S. federal income tax liability and may entitle you to a refund, provided that the required information is furnished to the IRS on a timely basis.
Tax Consequences to Non-U.S. Holders
The discussion in this section applies to you only if you are a Non-U.S. Holder. A “Non-U.S. Holder” is a person that, for U.S. federal income tax purposes, is a
beneficial owner of shares and is a nonresident alien individual, a foreign corporation, a foreign trust or a foreign estate. The discussion below does not apply to you if you are a nonresident alien individual and are present in the United
States for 183 days or more during any taxable year; a nonresident alien individual who is a former citizen or resident of the United States; an expatriated entity; a controlled foreign corporation; a passive foreign investment company; a foreign
government for purposes of Section 892 of the Code or a tax-exempt organization for U.S. federal income tax purposes. You should consult your tax adviser with respect to the particular tax consequences to you of an investment in shares of our
common stock.
If the income that you derive from your investment in our shares is not “effectively connected” with a U.S. trade or business conducted by you (or, if an applicable
tax treaty so provides, you do not maintain a permanent establishment in the United States to which such income is attributable), distributions of “investment company taxable income” to you (including amounts reinvested pursuant to our dividend
reinvestment plan) will generally be subject to U.S. federal withholding tax at a rate of 30% (or lower rate under an applicable tax treaty). Provided that certain requirements are satisfied, this withholding tax will not be imposed on dividends
paid by us to the extent that the underlying income out of which the dividends are paid consists of U.S.-source interest income or short-term capital gains that would not have been subject to U.S. withholding tax if received directly by the
Non-U.S. Holder (“interest-related dividends” and “short-term capital gain dividends,” respectively).
If the income you derive from your investment in our shares is not “effectively connected” with a U.S. trade or business conducted by you (or, if an applicable tax
treaty so provides, you do not maintain a permanent establishment in the United States to which such income is attributable) you will generally be exempt from U.S. federal income tax on capital gain dividends and any amounts we retain that are
designated as undistributed capital gains. In addition, you will generally be exempt from U.S. federal income tax on any gains realized upon the sale or exchange of shares.
If the income you derive from your investment in our shares is “effectively connected” with a U.S. trade or business conducted by you (and, if required by an
applicable tax treaty, is attributable to a U.S. permanent establishment maintained by the Non-U.S. Holder), any distributions of “investment company taxable income,” any capital gain dividends, any amounts we retain that are designated as
undistributed capital gains and any gains realized upon the sale or exchange of shares will be subject to U.S. federal income tax, on a net income basis, at the rates applicable to U.S. Holders. If you are a corporation, you may also be subject
to the U.S. branch profits tax.
In order to qualify for the exemption from U.S. withholding on interest-related dividends, to qualify for an exemption from U.S. backup withholding (discussed below)
and to qualify for a reduced rate of U.S. withholding tax on our distributions pursuant to an income tax treaty, you must generally deliver to the withholding agent a properly executed IRS form (generally, Form W-8BEN or Form W-8BEN-E, as
applicable). In order to claim a refund of any Company-level taxes imposed on undistributed net capital gain, any withholding taxes or any backup withholding, you must obtain a U.S. taxpayer identification number and file a U.S. federal income
tax return, even if you would not otherwise be required to obtain a U.S. taxpayer identification number or file a U.S. income tax return.
Backup Withholding and Information Reporting. Information returns will be filed with the IRS in connection with certain
payments on the shares and may be filed in connection with payments of the proceeds from a sale or other disposition of shares. You may be subject to backup withholding on distributions or on the proceeds from a redemption or other disposition of
shares if you do not certify your non-U.S. status under penalties of perjury or otherwise establish an exemption. Backup withholding is not an additional tax. Any amounts withheld pursuant to the backup withholding rules will be allowed as a
credit against your U.S. federal income tax liability, if any, and may entitle you to a refund, provided that the required information is furnished to the IRS on a timely basis.
FATCA
Under Sections 1471 through 1474 of the Code (“FATCA”), a withholding tax at the rate of 30% will generally be imposed on payments of dividends on shares to certain
foreign entities (including financial intermediaries) unless the foreign entity provides the withholding agent with certifications and other information (which may include information relating to ownership by U.S. persons of interests in, or
accounts with, the foreign entity). Treasury and the IRS have issued proposed regulations that (i) provide that “withholdable payments” for FATCA purposes will not include gross proceeds from the disposition of property that can produce
U.S.-source dividends or interest, as otherwise would have been the case after December 31, 2018, and (ii) state that taxpayers may rely on these provisions of the proposed regulations until final regulations are issued. If FATCA withholding is
imposed, a beneficial owner of shares that is not a foreign financial institution generally may obtain a refund of any amounts withheld by filing a U.S. federal income tax return (which may entail significant administrative burden). You should
consult your tax adviser regarding the possible implications of FATCA on your investment in our shares.
All stockholders should consult their own tax advisors with respect to the U.S. federal income and withholding tax consequences, and U.S. federal
non-income, state, local and non-U.S. tax consequences, of an investment in our common stock. We will not pay any additional amounts in respect of any amounts withheld.
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Risk Factors
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Investing in our common stock involves a number of significant risks. In addition to the other information
contained in this transition report on Form 10-K, you should consider carefully the following information before making an investment in our common stock. The risks set out below are not the only risks we face. Additional risks and
uncertainties not presently known to us or not presently deemed material by us might also impair our operations and performance. If any of the following events occur, our business, financial condition and results of operations could be
materially and adversely affected. In such case, our NAV and the trading price of our common stock could decline, and you may lose part or all of your investment. The risk factors described below are the principal risk factors associated with
an investment in our common stock, as well as those factors generally associated with an investment company with investment objectives, investment policies, capital structure or trading markets similar to ours.
Summary Risk Factors
The following is a summary of the principal risks that you should carefully consider before investing in our common stock
and is followed by a more detailed discussion of the material risks related to us and an investment in our common stock.
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Economic recessions or downturns may have a material adverse effect on our business, financial condition and results of operations, and could impair the ability of our portfolio companies to repay debt or
pay interest.
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Global economic, political and market conditions, including those caused by the current public health crisis, have (and in the future, could further) adversely affect our business, results of operations
and financial condition and those of our portfolio companies.
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We have limited operating history and our Adviser is a recently registered investment adviser under the Advisers Act, with limited history of managing BDCs and limited history of making credit investments
in the nascent cannabis industry.
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A significant portion of our investment portfolio will be recorded at fair value as determined in good faith in accordance with procedures established by our Board of Directors and, as a result, there
will be uncertainty as to the value of our portfolio investments.
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Our ability to achieve our investment objective depends on our Adviser’s ability to support our investment process; if our Adviser were to lose key personnel or they were to resign, our ability to achieve
our investment objective could be significantly harmed.
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Our business model depends to a significant extent upon strong referral relationships, and the inability of the personnel associated with our Adviser to maintain or develop these relationships, or the
failure of these relationships to generate investment opportunities, could adversely affect our business.
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A failure on our part to maintain qualification as a BDC would significantly reduce our operating flexibility.
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Regulations that will govern our operation as a BDC and RIC may affect our ability to raise, and the way in which we raise, additional capital or borrow for investment purposes, which may have a negative
effect on our growth.
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Changes in laws or regulations governing our operations, including laws and regulations governing cannabis, may adversely affect our business or cause us to alter our business strategy.
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Provisions of the Maryland General Corporation Law and of our charter and bylaws could deter takeover attempts and have an adverse impact on the price of our common stock.
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We may be unable to invest a significant portion of the net proceeds from our initial public offering, or any follow-on offering of shares of our common stock, on acceptable terms within an attractive
time frame.
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Because we intend to distribute at least 90% of our taxable income each taxable year to our stockholders in connection with our election to be treated as a RIC, we will continue to need additional capital
to finance our growth.
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We may not be able to pay you distributions, and if we are able to pay you distributions, our distributions may not grow over time and/or a portion of our distributions may be a return of capital. We have
not established any limit on the extent to which we may use offering proceeds to fund distributions.
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We will be subject to corporate-level U.S. federal income tax if we are unable to obtain and maintain qualification as a RIC under Subchapter M of the Code or do not satisfy the annual distribution
requirement.
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Our investments in portfolio companies may be risky, and we could lose all or part of our investments.
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We intend to invest primarily in securities that are rated below investment grade by rating agencies or that would be rated below investment grade if they were rated. Below investment
grade securities, which are often referred to as “junk,” have predominantly speculative characteristics with respect to the issuer’s capacity to pay interest and return principal. They may also be illiquid and difficult to value.
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Some of the loans in which we may invest may be “covenant-lite” loans, which may have a greater risk of loss as compared to investments in or exposure to loans with a complete set of
financial maintenance covenants.
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The lack of liquidity in our investments may adversely affect our business.
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Shares of closed-end investment companies, including BDCs, may trade at a discount to their net asset value (“NAV”).
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The market price of our common stock may fluctuate significantly.
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Cannabis, except for hemp, is currently illegal under U.S. federal law and in other jurisdictions, and strict enforcement of federal laws would likely result in our inability to execute our business plan.
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Loans to relatively new and/or small companies and companies operating in the cannabis industry generally involve significant risks.
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Our investment opportunities are limited by the current illegality of cannabis under U.S. federal law, and change in the laws, regulations and guidelines that impact the cannabis industry may cause
adverse effects on our ability to make investments.
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Strict enforcement of U.S. federal laws regarding cannabis would likely result in our portfolio companies’ inability to execute a business plan in the cannabis industry, and could result in the loss of
all or part of any of our loans.
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The nascent status of the medical and recreational cannabis industry involves unique circumstances and there can be no assurance that the industry will continue to exist or grow as currently anticipated.
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Any potential growth in the cannabis industry continues to be subject to new and changing state and local laws and regulations.
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Portfolio companies may have difficulty borrowing from or otherwise accessing the service of banks, which may make it difficult to sell products and services.
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We, portfolio companies or the cannabis industry more generally may receive unfavorable publicity or become subject to negative consumer or investor perception.
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Third-parties with whom we do business may perceive themselves as being exposed to reputational risk by virtue of their relationship with us and may ultimately elect not to do business with us.
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Portfolio companies may be subject to regulatory, legal or reputational risk associated with potential misuse of their products by their customers.
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There may be a lack of access to U.S. bankruptcy protections for portfolio companies.
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U.S. federal courts may refuse to recognize the enforceability of contracts pertaining to any business operations that are deemed illegal under U.S. federal law, including cannabis companies operating
legally under state law.
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Risks Relating to Economic Conditions
Economic recessions or downturns may have a material adverse effect on our business, financial condition and results of
operations, and could impair the ability of our portfolio companies to repay debt or pay interest.
Economic recessions or downturns may result in a prolonged period of market illiquidity which could have a material 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, uncertainty with regard to economic recovery from recessions or downturns could also have a negative impact on our business, financial
condition and results of operations.
When recessionary conditions exist, the financial results of middle-market companies, like those in which we invest, typically experience deterioration, which could
ultimately lead to difficulty in meeting debt service requirements and an increase in defaults. Additionally, there can be reduced demand for certain of our portfolio companies’ products and services and/or other economic consequences, such as
decreased margins or extended payment terms. Further, adverse economic conditions may decrease the value of collateral securing some of our loans and the value of our equity investments. Such conditions may require us to modify the payment terms
of our investments, including changes in PIK interest provisions and/or cash interest rates. The performance of certain portfolio companies in the future may be negatively impacted by these economic or other conditions, which may result in our
receipt of reduced interest income from our portfolio companies and/or realized and unrealized losses related to our investments, and, in turn, may adversely affect distributable income and have a material adverse effect on our results of
operations.
Global economic, political and market conditions, including downgrades of the U.S. credit rating, may adversely affect our
business, results of operations and financial condition.
The current global financial market situation, as well as various social and political tensions in the United States and around the world (including the current
conflict in Ukraine), may contribute to increased market volatility, may have long-term effects on the United States and worldwide financial markets and may cause economic uncertainties or deterioration in the U.S. and worldwide. The impact of
downgrades by rating agencies to the U.S. government’s sovereign credit rating or its perceived creditworthiness as well as potential government shutdowns and uncertainty surrounding transfers of power could adversely affect the U.S. and global
financial markets and economic conditions. Since 2010, several European Union countries have faced budget issues, some of which may have negative long-term effects for the economies of those countries and other European Union countries. There is
concern about national-level support for the Euro and the accompanying coordination of fiscal and wage policy among European Economic and Monetary Union member countries. In addition, the fiscal policy of foreign nations, such as Russia and
China, may have a severe impact on the worldwide and U.S. financial markets. The United Kingdom’s decision to leave the EU (the so-called “Brexit”) led to volatility in global financial markets. On December 24, 2020, a trade agreement was
concluded between the EU and the United Kingdom (the “TCA”), which applied provisionally after the end of the transition period ending on December 31, 2020 and which formally took effect on May 1, 2021 and now governs the relationship between the
United Kingdom and the EU. There remains uncertainty as to the scope, nature and terms of the relationship between the United Kingdom and the EU and the effect and implications of the TCA, and the actual and potential consequences of Brexit.
Additionally, trade wars and volatility in the U.S. repo market, the U.S. high-yield bond markets, the Chinese stock markets and global markets for commodities may affect other financial markets worldwide. In addition, while recent government
stimulus measures worldwide have reduced volatility in the financial markets, volatility may return as such measures are phased out, and the long-term impacts of such stimulus on fiscal policy and inflation remain unknown. In addition, the
current conflict between Russia and Ukraine, and resulting market volatility, could adversely affect our business, financial condition or results of operations. In response to the conflict between Russia and Ukraine, the U.S. and other countries
have imposed sanctions or other restrictive actions against Russia. Any of the above factors, including sanctions, export controls, tariffs, trade wars and other governmental actions, could have a material adverse effect on our business,
financial condition, cash flows and results of operations and could cause the value of our common shares and/or debt securities to decline. We cannot predict the effects of these or similar events in the future on the U.S. and global economies
and securities markets or on our investments. We monitor developments in economic, political and market conditions and seek to manage our investments in a manner consistent with achieving our investment objective, but there can be no assurance
that we will be successful in doing so.
The ongoing invasion of Ukraine by Russia and related sanctions have increased global
political and economic uncertainty, which may have a material impact on our portfolio, our business and operations and the value of an investment in us.
The ongoing invasion of Ukraine by Russia and related sanctions have increased global political and economic uncertainty. In February 2022,
Russia invaded Ukraine and, in response, the United States, the United Kingdom, the European Union and many other nations announced a broad array of new or expanded economic sanctions, export controls and other measures against Russia,
Russian entities and individuals. Because Russia is a major exporter of oil and natural gas, the invasion and related sanctions have reduced the supply, and increased the price, of energy, which is accelerating inflation and may exacerbate
ongoing supply chain issues. There is also the risk of retaliatory actions by Russia against countries that have enacted sanctions, including cyberattacks against financial and governmental institutions, which could result in business
disruptions and further economic turbulence. Although we have no direct exposure to Russia or Ukraine, the broader consequences of the invasion may have a material adverse impact on our portfolio, our business and operations and the value of
an investment in us. The Russian invasion of Ukraine is uncertain and evolving as of the filing date of this transition report on Form 10-K, and its full impact on our portfolio companies after the date hereof is unknown.
Capital markets may experience periods of disruption and instability. Such market conditions may materially and adversely
affect debt and equity capital markets in the United States and abroad, which may have a negative impact on our business and operations.
From time-to-time, capital markets may experience periods of disruption and instability. During such periods of market disruption and instability, we and other
companies in the financial services sector may have limited access, if available, to alternative markets for debt and equity capital. Equity capital may be difficult to raise because, subject to some limited exceptions which will apply to us as a
BDC, we will generally not be able to issue additional shares of our common stock at a price less than net asset value without first obtaining approval for such issuance from our stockholders and our independent directors. In addition, our
ability to incur indebtedness (including by issuing preferred stock) is limited by applicable regulations such that our asset coverage, as defined in the 1940 Act, must equal at least 150% immediately after each time we incur indebtedness. We are
currently targeting a debt-to-equity ratio of 0.50x (i.e., we aim to have one dollar of equity for each $0.50 of debt outstanding). The debt capital that will be available, if at all, may be at a higher cost and on less favorable terms and
conditions in the future. Any inability to raise capital could have a negative effect on our business, financial condition and results of operations.
Given the extreme volatility and dislocation in the capital markets over the past several years, many BDCs have faced, and may in the future face, a challenging
environment in which to raise or access capital. In addition, significant changes in the capital markets, including the extreme volatility and disruption over the past several years, has had, and may in the future have, a negative effect on the
valuations of our investments and on the potential for liquidity events involving these investments. While most of our investments are not publicly traded, applicable accounting standards require us to assume as part of our valuation process that
our investments are sold in a principal market to market participants (even if we plan on holding an investment through its maturity). As a result, volatility in the capital markets can adversely affect our investment valuations.
Further, the illiquidity of our investments may make it difficult for us to sell such investments if required and to value such investments. Our use of leverage will
amplify these risks, and we may be forced to liquidate our investments at inopportune times or prices to repay debt. Consequently, we may realize significantly less than the value at which we carry our investments. An inability to raise capital,
and any required sale of our investments for liquidity purposes, could have a material adverse impact on our business, financial condition or results of operations. In addition, a prolonged period of market illiquidity may cause us to reduce the
volume of loans and debt securities we originate and/or fund and adversely affect the value of our portfolio investments, which could have a material and adverse effect on our business, financial condition, results of operations and cash flows.
We may be affected by force majeure events (e.g., acts of God, fire, flood, earthquakes, outbreaks of an infectious disease,
pandemic or any other serious public health concern, war, terrorism, nationalization of industry and labor strikes).
We may be affected by force majeure events (e.g., acts of God, fire, flood, earthquakes, outbreaks of an infectious disease, pandemic or any other serious public
health concern, war, terrorism, nationalization of industry and labor strikes). Force majeure events could adversely affect the ability of the Company or a counterparty to perform its obligations. The liability and cost arising out of a failure
to perform obligations as a result of a force majeure event could be considerable and could be borne by the Company. Certain force majeure events, such as war or an outbreak of an infectious disease, could have a broader negative impact on the
global or local economy, thereby affecting the Company.
General economic and market conditions, including those caused by inflation and a rising interest rate
environment, could materially affect the success of our activities and investments.
Any disruptions in the capital markets, as a result of inflation and a rising interest environment or otherwise, may increase the spread between
the yields realized on risk-free and higher risk securities and can result in illiquidity in parts of the capital markets, significant write-offs in the financial sector and re-pricing of credit risk in the broadly syndicated market. These and
any other unfavorable economic conditions 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.
In addition, market conditions (including inflation, supply chain issues and decreased consumer demand) have adversely impacted, and could in
the future further impact, the operations of certain of our portfolio companies. If the financial results of middle-market companies, like those in which we invest, experience deterioration, it could ultimately lead to difficulty in meeting debt
service requirements and an increase in defaults, and further deterioration in market conditions will further depress the outlook for those companies. Further, adverse economic conditions may in the future decrease the value of collateral
securing some of our loans and the value of our equity investments. Such conditions may in the future require us to modify the payment terms of our investments, including changes in PIK interest provisions and/or cash interest rates. The
performance of certain of our portfolio companies in the future may be negatively impacted by these economic or other conditions, which can result in our receipt of reduced interest income from our portfolio companies and/or realized and
unrealized losses related to our investments, and, in turn, may adversely affect distributable income and have a material adverse effect on our results of operations.
The COVID-19 pandemic caused severe disruptions in the global economy and disrupted financial activity
in the areas in which we or our portfolio companies operate.
The COVID-19 pandemic and restrictive measures taken to contain or mitigate its spread caused business shutdowns, cancellations of events and
restrictions on travel, significant reductions in demand for certain goods and services, reductions in business activity and financial transactions, supply chain interruptions and overall economic and financial market instability both globally
and in the United States. Despite actions of the U.S. federal government and foreign governments, these events have contributed to unpredictable general economic conditions that are materially and adversely impacting the broader financial and
credit markets and reducing the availability of debt and equity capital for the market as a whole. It is uncertain how long this volatility will continue, and as a result, even after the COVID-19 pandemic subsides, the U.S. economy and most
other major global economies may continue to experience a recession. Our business and operations, as well as the business and operations of our portfolio companies, could be materially adversely affected by a prolonged recession in the United
States and other major markets. Some economists and major investment banks have expressed concern that the continued spread of the virus globally could lead to a world-wide economic downturn, the impacts of which could last for some period
after the pandemic is controlled and/or abated.
The COVID-19 pandemic is ongoing as of the filing date of this transition report on Form 10-K, and its extended duration may have further adverse
impacts on our portfolio companies after the date hereof, including for the reasons described herein.
Any public health emergency, or the threat thereof, and the resulting financial and economic market
uncertainty could have a significant adverse impact on us and the fair value of our investments and our portfolio companies.
The extent of the impact of any public health emergency, such as the COVID-19 pandemic, on our and our portfolio companies’ operational and financial performance will depend on many factors, including the duration and scope of such public
health emergency, the actions taken by governmental authorities to contain its financial and economic impact, the extent of any related travel advisories and restrictions implemented, the impact of such public health emergency on overall supply
and demand, goods and services, investor liquidity, consumer confidence and levels of economic activity and the extent of its disruption to important global, regional and local supply chains and economic markets, all of which are highly
uncertain and cannot be predicted. In addition, our and our portfolio companies’ operations may be significantly impacted, or even temporarily or permanently halted, as a result of government quarantine measures, voluntary and precautionary
restrictions on travel or meetings and other factors related to a public health emergency, including its potential adverse impact on the health of any of our or our portfolio companies’ personnel. This could create widespread business
continuity issues for us and our portfolio companies. These factors may also cause the valuation of our investments to differ materially from the values that we may ultimately realize. Our valuations, and particularly valuations of private
investments and private companies, are inherently uncertain, may fluctuate over short periods of time and are often based on estimates, comparisons and qualitative evaluations of private information.
Any public health emergency, pandemic or any outbreak of other existing or new epidemic diseases, or the threat thereof, and the resulting
financial and economic market uncertainty could have a significant adverse impact on us and the fair value of our investments and our portfolio companies.
Risks Relating to Our Business and Structure
We have limited operating history and our Adviser is a recently registered investment adviser under the Advisers Act, with
limited history of managing BDCs and limited history of making credit investments in the nascent cannabis industry.
We were formed in January 2021 and commenced operations in February 2022. As a result of limited operating history, we are subject to many of the business risks and
uncertainties associated with recently formed businesses, including the risk that we will not achieve our investment objective and that the value of your investment could decline substantially. Our team also has limited history working together
in making credit investments.
Additionally, our Adviser is a recently registered investment adviser under the Advisers Act, with limited history of managing BDCs. The 1940 Act imposes numerous
constraints on the operations of BDCs that do not apply to other types of investment vehicles. For example, under the 1940 Act, BDCs are generally required to invest at least 70% of their total assets primarily in securities of qualifying U.S.
private or thinly traded companies. The failure to comply with these provisions in a timely manner could prevent us from qualifying as a BDC, which could be material. The Adviser’s limited experience in managing a portfolio of assets under such
constraints may hinder our ability to take advantage of attractive investment opportunities and, as a result, achieve our investment objective.
A general increase in interest rates will likely have the effect of increasing our net investment income, which would make it
easier for our Adviser to receive Incentive Fees on Income.
Any general increase in interest rates would likely have the effect of increasing the interest rate that we receive on many of our debt investments. Accordingly, a
general increase in interest rates may make it easier for our Adviser to meet the quarterly hurdle rate for payment of Incentive Fees on Income under the Investment Advisory Agreement and may result in a substantial increase in the amount of the
Incentive Fees on Income payable to our Adviser.
A significant portion of our investment portfolio will be recorded at fair value as determined in good faith in accordance
with procedures established by our Board of Directors and, as a result, there will be uncertainty as to the value of our portfolio investments.
Under the 1940 Act, we are required to carry our portfolio investments at market value or, if there is no readily available market value, at fair value as determined
in good faith in accordance with procedures established by our Board of Directors. Typically, there is not a public market for the securities of the privately held companies in which we will invest. As a result, we value these securities
quarterly at fair value as determined in good faith in accordance with procedures established by our Board of Directors. The fair value of such securities may change, potentially materially, between the date of the fair value determination and
the release of the financial results for the corresponding period or the next date at which fair value is determined.
The failure of major financial institutions, namely banks, or sustained financial market illiquidity,
could adversely affect our and/or our portfolio companies’ businesses and results of operations.
The failure of certain financial institutions, namely banks, may increase the possibility of a sustained deterioration of financial market
liquidity, or illiquidity at clearing, cash management and/or custodial financial institutions. The failure of a bank (or banks) with which we and/or our portfolio companies have a commercial relationship could adversely affect, among other
things, our and/or our portfolio companies’ ability to pursue key strategic initiatives, including by affecting our or our portfolio company’s ability to access deposits or borrow from financial institutions on favorable terms. In the event a
portfolio company, or potential portfolio company, has a commercial relationship with a bank that has failed or is otherwise distressed, such portfolio company may experience delays or other issues in meeting certain obligations or
consummating transactions. Additionally, if a portfolio company or its sponsor has a commercial relationship with a bank that has failed or is otherwise distressed, the portfolio company may experience issues receiving financial support from
a sponsor to support its operations or consummate transactions, to the detriment of their business, financial condition and/or results of operations. In addition, such bank failure(s) could affect, in certain circumstances, the ability of
both affiliated and unaffiliated co-lenders, including syndicate banks or other fund vehicles, to undertake and/or execute co-investment transactions with us, which in turn may result in fewer co-investment opportunities being made available
to us or impact our ability to provide additional follow-on support to portfolio companies. Our and our portfolio companies’ ability to spread banking relationships among multiple institutions may be limited by certain contractual
arrangements, including liens placed on their respective assets as a result of a bank agreeing to provide financing.
Certain factors that may be considered in determining the fair value of our investments include the nature and realizable value of any collateral, the portfolio
company’s earnings and its ability to make payments on its indebtedness, the markets in which the portfolio company does business, comparison to comparable publicly traded companies, discounted cash flow and other relevant factors. Because such
valuations, and particularly valuations of private securities and private companies, are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our determinations of fair value may differ materially from the
values that would have been used if a ready market for these securities existed. In addition, any investments that include OID or PIK interest may have unreliable valuations because their continuing accruals require ongoing judgments about the
collectability of their deferred payments and the value of their underlying collateral. Due to these uncertainties, our fair value determinations may cause our NAV on a given date to materially understate or overstate the value that we may
ultimately realize upon the sale of one or more of our investments. As a result, investors purchasing our common stock based on an overstated NAV would pay a higher price than the realizable value of our investments might warrant.
In addition, the participation of the investment professionals in the valuation process, and the indirect pecuniary interest of Scott Gordon, our
Chief Executive Officer and an interested member of our Board of Directors, and Umesh Mahajan, our Chief Financial Officer, William Healy and Dino Colonna in the Adviser could result in a conflict of interest as the management fee payable to
our Adviser is based on our gross assets and the Incentive Fees on Capital Gains payable to the Adviser will be based, in part, on unrealized losses.
Our ability to achieve our investment objective will depend on our Adviser’s ability to support our investment process; if our
Adviser were to lose key personnel or they were to resign, our ability to achieve our investment objective could be significantly harmed.
We depend on the investment expertise, skill and network of business contacts of the senior personnel of our Adviser. Our Adviser evaluates, negotiates, structures,
executes, monitors and services our investments. Key personnel of our Adviser have departed in the past and current key personnel could depart at any time. Our Adviser’s capabilities in structuring the investment process, providing competent,
attentive and efficient services to us, and facilitating access to financing on acceptable terms depend on the employment of investment professionals in adequate number and of adequate sophistication to match the corresponding flow of
transactions. The departure of key personnel or of a significant number of the investment professionals or partners of our Adviser could have a material adverse effect on our ability to achieve our investment objective. Our Adviser may need to
hire, train, supervise and manage new investment professionals to participate in our investment selection and monitoring process and may not be able to find investment professionals in a timely manner or at all. In addition, without payment of
any penalty, the Adviser may generally terminate the Investment Advisory Agreement upon 60 days’ written notice. If we are unable to quickly find a new investment adviser or hire internal management with similar expertise and ability to provide
the same or equivalent services on acceptable terms, our operations are likely to experience a disruption and our ability to achieve our investment objective and pay distributions would likely be materially and adversely affected.
Our business model depends to a significant extent upon strong referral relationships, and the inability of the personnel
associated with our Adviser to maintain or develop these relationships, or the failure of these relationships to generate investment opportunities, could adversely affect our business.
We expect that personnel associated with our Adviser will maintain and develop their relationships with intermediaries, banks and other sources, and we will rely to
a significant extent upon these relationships to provide us with potential investment opportunities. If these individuals fail to maintain their existing relationships or develop new relationships with other sources of investment opportunities,
we may not be able to grow or maintain our investment portfolio. In addition, individuals with whom the personnel associated with our 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. The failure of the personnel associated with our Adviser to maintain existing relationships, grow new relationships, or for those relationships to generate
investment opportunities could have an adverse effect on our business, financial condition and results of operations.
We may face increasing competition for investment opportunities, which could reduce returns and result in losses.
We compete for investments with other BDCs, public and private funds (including hedge funds, mezzanine funds and CLOs) and private equity funds (to the extent they
provide an alternative form of financing), as well as traditional financial services companies such as commercial and investment banks, commercial financing companies and other sources of financing. Many of our 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 capital 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 have. These characteristics could allow our competitors to consider a wider variety of investments, establish more relationships and offer better pricing and more
flexible structuring than we are able to do. We may lose investment opportunities if we do not match our competitors’ pricing, terms and structure. If we are forced to match our competitors’ pricing, terms and structure, we may not be able to
achieve acceptable returns on our investments or may bear substantial risk of capital loss. A significant increase in the number and/or the size of our competitors in this target market could force us to accept less attractive investment terms.
Furthermore, many of our competitors are not subject to, the regulatory restrictions that the 1940 Act imposes on us as a BDC.
Our ability to enter into transactions with our affiliates is restricted.
We are prohibited under the 1940 Act from participating in certain transactions with certain of our affiliates without the prior approval of our independent
directors and, in some cases, the SEC. Any person that owns, directly or indirectly, 5% or more of our outstanding voting securities is our affiliate for purposes of the 1940 Act, and we are generally prohibited from buying or selling any
securities (other than our securities) from or to such affiliate, absent the prior approval of our independent directors. The 1940 Act also prohibits certain “joint” transactions with certain of our affiliates, which could include investments in
the same portfolio company (whether at the same or different times), without prior approval of our independent directors and, in some cases, the SEC. If a person acquires more than 25% of our voting securities, we will be prohibited from buying
or selling any security (other than any security of which we are the issuer) from or to such person or certain of that person’s affiliates, or entering into prohibited joint transactions with such person, absent the prior approval of the SEC.
Similar restrictions limit our ability to transact business with our officers or directors or their affiliates. As a result of these restrictions, except in situations described below, we may be prohibited from buying or selling any security
(other than any security of which we are the issuer) from or to any portfolio company of a private fund managed by our Adviser without the prior approval of the SEC, which may limit the scope of investment opportunities that would otherwise be
available to us.
We may also invest alongside funds managed by our Adviser and its affiliates in certain circumstances where doing so is consistent with applicable law and SEC staff
interpretations. For example, we may invest alongside such accounts consistent with guidance promulgated by the staff of the SEC permitting us and such other accounts to purchase interests in a single class of privately placed securities so long
as certain conditions are met, including that our Adviser, acting on our behalf and on behalf of other clients, negotiates no term other than price.
A failure on our part to maintain qualification as a BDC would significantly reduce our operating flexibility.
If we fail to continuously qualify as a BDC, we might be subject to regulation as a registered closed-end investment company under the 1940 Act, which would
significantly decrease our operating flexibility. In addition, failure to comply with the requirements imposed on Business Development Companies by the 1940 Act could cause the SEC to bring an enforcement action against us. For additional
information on the qualification requirements of a BDC, see “Item 1. Business — Business Development Company Regulations.”
Regulations that will govern our operation as a BDC and RIC may affect our ability to raise, and the way in which we raise,
additional capital or borrow for investment purposes, which may have a negative effect on our growth.
In order to qualify for the tax benefits available to RICs and to minimize corporate-level U.S. federal income taxes, we intend to distribute to our stockholders at
least 90% of our taxable income each taxable year, except that we may retain certain net capital gains for investment, and treat such amounts as deemed distributions to our stockholders. If we elect to treat any amounts as deemed distributions,
we would be subject to income taxes at the corporate rate on such deemed distributions on behalf of our stockholders.
As a BDC, we are required to invest at least 70% of our total assets primarily in securities of U.S. private or thinly traded public companies, cash, cash
equivalents, U.S. government securities and other high-quality debt instruments that mature in one year or less from the date of investment.
As a BDC, we may issue “senior securities,” including borrowing money from banks or other financial institutions only in amounts such that our asset coverage, as
defined in the 1940 Act, equals at least 150% after such incurrence or issuance. We are currently targeting a debt-to-equity ratio of 0.50x (i.e., we aim to have one dollar of equity for each $0.50 of debt outstanding). These requirements limit
the amount that we may borrow, may unfavorably limit our investment opportunities and may reduce our ability in comparison to other companies to profit from favorable spreads between the rates at which we can borrow and the rates at which we can
lend. If the value of our assets declines, we may be unable to satisfy the asset coverage test, which could prohibit us from paying distributions and could prevent us from being subject to tax as a RIC. If we cannot satisfy the asset coverage
test, we may be required to sell a portion of our investments and, depending on the nature of our debt financing, repay a portion of our indebtedness at a time when such sales may be disadvantageous.
Because we will continue to need capital to grow our investment portfolio, these limitations may prevent us from incurring debt and require us to raise additional equity at a time when it may be disadvantageous to
do so. As a result of these requirements we need to periodically access the capital markets to raise cash to fund new investments at a more frequent pace than our privately owned competitors. We generally are not able to issue or sell our common
stock at a price below NAV per share, which may be a disadvantage as compared with other public companies or private investment funds. When our common stock trades at a discount to NAV, this restriction could adversely affect our ability to raise
capital. We may, however, sell our common stock, or warrants, options or rights to acquire our common stock, at a price below the current NAV of the common stock if our Board of Directors and independent directors determine that such sale is in
our best interests and the best interests of our stockholders, and our stockholders as well as those stockholders that are not affiliated with us approve such sale in accordance with the requirements of the 1940 Act. In any such case, the price
at which our securities are to be issued and sold may not be less than a price that, in the determination of our Board of Directors, closely approximates the market value of such securities (less any underwriting commission or discount). We
cannot assure you that equity financing will be available to us on favorable terms, or at all. If additional funds are not available to us, we could be forced to curtail or cease new investment activities.
We also may make rights offerings to our stockholders at prices less than NAV, subject to applicable requirements of the 1940 Act. If we raise additional funds by
issuing more shares of our common stock or issuing senior securities convertible into, or exchangeable for, our common stock, the percentage ownership of our stockholders may decline at that time and such stockholders may experience dilution.
Moreover, we can offer no assurance that we will be able to issue and sell additional equity securities in the future, on terms favorable to us or at all.
In addition, we may in the future seek to securitize our portfolio securities to generate cash for funding new investments. To securitize loans, we would likely
create a wholly owned subsidiary and contribute a pool of loans to the subsidiary. We would then sell interests in the subsidiary on a non-recourse basis to purchasers and we would retain all or a portion of the equity in the subsidiary. An
inability to successfully securitize our loan portfolio could limit our ability to grow our business or fully execute our business strategy and may decrease our earnings, if any. The securitization market is subject to changing market conditions
and we may not be able to access this market when we would otherwise deem appropriate. Moreover, the successful securitization of our portfolio might expose us to losses as the residual investments in which we do not sell interests will tend to
be those that are riskier and more apt to generate losses. The 1940 Act also may impose restrictions on the structure of any securitization.
The Incentive Fee on Capital Gains may be effectively greater than 20%.
As a result of the operation of the cumulative method of calculating the Incentive Fee on Capital Gains that we will pay to our Adviser, the cumulative aggregate
capital gains fee that will be received by our Adviser could be effectively greater than 20%, depending on the timing and extent of subsequent net realized capital losses or net unrealized depreciation. For additional information on this
calculation, see the disclosure in footnote 2 to Example 2 under “Item 1. Business — Investment Advisory Agreement — Management Fee — Incentive Fee.” We cannot predict whether, or to what extent, this anticipated payment calculation would affect
your investment in shares of our common stock.
Our Board of Directors may change our investment objective, operating policies and strategies without prior notice or
stockholder approval, the effects of which may be adverse.
Our Board of Directors has the authority to modify or waive our current investment objective, operating policies and strategies without prior notice and without
stockholder approval. We cannot predict the effect any changes to our current investment objective, operating policies and strategies would have on our business, NAV, operating results and value of our stock. However, the effects might be
adverse, which could negatively impact our ability to pay you distributions and cause you to lose part or all of your investment.
Changes in laws or regulations governing our operations, including laws and regulations governing cannabis, may adversely
affect our business or cause us to alter our business strategy.
We and our anticipated portfolio companies will be subject to regulation at the local, state and federal level, including laws and regulations governing cannabis by state and federal governments. See “— Risks Related to the Cannabis and Hemp
Industries” below. New legislation may be enacted or new interpretations, rulings or regulations could be adopted, including those governing the types of investments we may be permitted to make or that impose limits on our ability to pledge a
significant amount of our assets to secure loans or that restrict the operations of a portfolio company, any of which could harm us and our stockholders and the value of our investments, potentially with retroactive effect. For example, certain
provisions of the Dodd-Frank Act, which influences many aspects of the financial services industry, have been amended or repealed and the Code has been substantially amended and reformed. Any amendment or repeal of legislation, or changes in
regulations or regulatory interpretations thereof, could create uncertainty in the near term, which could have a material adverse impact on our business, financial condition and results of operations.
Additionally, any changes to the laws and regulations governing our operations relating to permitted investments may cause us to alter our investment strategy in
order to avail ourselves of new or different opportunities. Such changes could result in material differences to the strategies and plans set forth herein and may result in our investment focus shifting from the areas of expertise of our Adviser
to other types of investments in which our Adviser may have less expertise or little or no experience. Thus, any such changes, if they occur, could have a material adverse effect on our results of operations and the value of your investment.
Provisions of the Maryland General Corporation Law and of our charter and bylaws could deter takeover attempts and have an
adverse impact on the price of our common stock.
The Maryland General Corporation Law (“MGCL”), our charter and our bylaws contain provisions that may discourage, delay or make more difficult a change in control or
the removal of our directors. Under our charter, certain charter amendments and certain transactions such as a merger, conversion of the Company to an open-end company, liquidation, or other transactions that may result in a change of control of
us, must be approved by stockholders entitled to cast at least 80% of the votes entitled to be cast on such matter, unless the matter has been approved by at least two-thirds of our “continuing directors,” as defined in our charter. Also, we are
subject to Subtitle 6 of Title 3 of the MGCL, the Maryland Business Combination Act, subject to any applicable requirements of the 1940 Act. Our Board of Directors has adopted a resolution exempting from the Maryland Business Combination Act any
business combination between us and any other person, subject to prior approval of such business combination by our Board of Directors, including approval by a majority of our directors who are not “interested persons,” as defined in the 1940
Act. If the resolution exempting business combinations is repealed or our Board of Directors does not approve a business combination, the Maryland Business Combination Act may discourage third parties from trying to acquire control of us and
increase the difficulty of consummating such a transaction. We are subject to Subtitle 7 of Title 3 of the MGCL, the Maryland Control Share Acquisition Act. The Maryland Control Share Acquisition Act also may make it more difficult for a third
party to obtain control of us and increase the difficulty of consummating such a transaction. Our bylaws provide that the Maryland Control Share Acquisition Act does not apply to shares acquired by our Adviser and/or our Adviser’s affiliates.
We have also adopted other measures that may make it difficult for a third party to obtain control of us, including provisions of our charter classifying our Board
of Directors in three classes serving staggered three-year terms; majority voting for directors in contested elections; and provisions of our charter authorizing our Board of Directors to classify or reclassify shares of our stock in one or more
classes or series, including preferred shares, to cause the issuance of additional shares of our stock of any class or series, and to amend our charter, without stockholder approval, to increase or decrease the number of shares of stock of any
class or series that we have authority to issue. These provisions, as well as other provisions of our charter and bylaws, may delay, defer or prevent a transaction or a change in control that could give the holders of our shares the opportunity
to realize a premium over the value of our shares or otherwise be in their best interest.
Our Board of Directors is authorized to reclassify any unissued shares of common stock into one or more classes or series of
stock, including preferred stock, which could convey special rights and privileges to its owners.
As noted above, under the MGCL and our charter, our Board of Directors is authorized to classify and reclassify any authorized but unissued shares of stock into one
or more classes or series of stock, including preferred stock. The cost of any such reclassification would be borne by our existing stockholders. Prior to issuance of shares of each class or series, our Board of Directors will be required by the
MGCL and our charter to set the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each class or series. Thus, our
Board of Directors could authorize the issuance of shares of preferred stock with terms and conditions that could have the effect of delaying, deferring or preventing a transaction or a change in control that might involve a premium price for
holders of our common stock or otherwise be in their best interest. Certain matters under the 1940 Act require the separate vote of the holders of any issued and outstanding preferred stock. For example, holders of preferred stock would vote as a
separate class from the holders of common stock on a proposal to cease operations as a BDC. In addition, the 1940 Act provides that holders of preferred stock are entitled to vote separately from holders of common stock to elect two preferred
stock directors. The issuance of preferred shares convertible into shares of common stock may also reduce the net income and net asset value per share of our common stock upon conversion; provided, that we will only be permitted to issue such
convertible preferred stock to the extent we comply with the requirements of Section 61 of the 1940 Act, including obtaining common stockholder approval. These effects, among others, could have an adverse effect on an investment in our common
stock.
Our bylaws include an exclusive forum selection provision, which could limit our stockholders’ ability to obtain a favorable
judicial forum for disputes with us or our directors, officers, employees or other agents.
Our bylaws require that, unless we consent in writing to the selection of an alternative forum, the Circuit Court for Baltimore City (or, if that court does not have
jurisdiction, the United States District Court for the District of Maryland, Northern Division) shall be the sole and exclusive forum for (a) any derivative action or proceeding brought on our behalf, (b) any Internal Corporate Claim, as such
term is defined in the MGCL, (c) any action asserting a claim of breach of any duty owed by any of our directors, officers, employees or other agents to us or to our stockholders, (d) any action asserting a claim against us or any of our
directors, officers, employees or other agents arising pursuant to any provision of the MGCL or our charter or bylaws, or (e) any other action asserting a claim against us or any of our directors, officers, employees or other agents that is
governed by the internal affairs doctrine. The exclusive forum selection provision will not apply to claims arising under the federal securities laws, or any other claim for which the federal courts have exclusive jurisdiction. The exclusive
forum selection provision may increase costs for a shareholder to bring a claim and may discourage claims or limit shareholders’ ability to bring a claim in a judicial forum that they find favorable. It is also possible that a court could rule
that the provision is inapplicable or unenforceable. If this occurred, we may incur additional costs associated with resolving such action in another forum, and/or the other forum may incorrectly apply or interpret the applicable Maryland law (in
a manner that is adverse to us), which could materially adversely affect our business, financial condition and results of operations.
We are subject to risks associated with communications and information systems.
We depend on the communications and information systems of our Adviser and its affiliates as well as certain third-party service providers. As these systems became
more important to our business, the risks posed to these communications and information systems have continued to increase. Any failure or interruption in these systems could cause disruptions in our activities, including because we do not
maintain any such systems of our own. In addition, these systems are subject to potential attacks, including through adverse events that threaten the confidentiality, integrity or availability of our information resources. These attacks, which
may include cyber incidents, may involve a third-party gaining unauthorized access to our communications or information systems for purposes of misappropriating assets, stealing confidential information related to our operations or portfolio
companies, corrupting data or causing operational disruption. Any such attack could result in disruption to our business, misstated or unreliable financial data, liability for stolen assets or information, increased cybersecurity protection and
insurance costs, litigation and damage to our business relationships, any of which could have a material adverse effect on our business, financial condition and results of operations.
We may be unable to invest a significant portion of the net proceeds from our IPO, or any follow-on offering of shares of our
common stock, on acceptable terms within an attractive time frame.
Delays in investing the net proceeds raised in our IPO or any follow-on offering of shares of our common stock may cause our performance to be worse than that of
other fully invested Business Development Companies or other lenders or investors pursuing comparable investment strategies. We cannot assure you that we will be able to identify any investments that meet our investment objective or that any
investment that we make will produce a positive return. We may be unable to invest the net proceeds of our IPO or any follow-on offering on acceptable terms within the time period that we anticipate or at all, which could harm our financial
condition and operating results.
We anticipate that, depending on market conditions, it may take us a substantial period of time to invest substantially all of the net proceeds of our IPO, or any
follow-on offering, in securities meeting our investment objective. During this period, we may invest the net proceeds from our IPO or any follow-on offering primarily in high-quality, short-term debt securities, consistent with our BDC election
and our election to be taxed as a RIC, at yields significantly below the returns which we expect to achieve when our portfolio is fully invested in securities meeting our investment objective. As a result, any distributions that we pay during
this period may be substantially lower than the distributions that we may be able to pay when our portfolio is fully invested in securities meeting our investment objective. In addition, until such time as the net proceeds of our IPO or any
follow-on offering are invested in securities meeting our investment objective, the market price for our common stock may decline. Thus, the return on your investment may be lower than when, if ever, our portfolio is fully invested in securities
meeting our investment objective.
We may experience fluctuations in our quarterly results.
We may experience fluctuations in our quarterly results due to a number of factors, including our ability or inability to make investments in companies that meet our
investment criteria, the interest rate payable on the debt securities we may acquire, changes in accrual status of our portfolio company investments, distributions, 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 market 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.
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.” As a result, we intend to take advantage of
the exemption for emerging growth companies allowing us to temporarily forgo the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act.”). We cannot predict if investors will find shares of
our common stock less attractive because we will rely on this exemption. 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. 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 our initial public offering, (ii) in which we have total annual gross revenue of
at least $1.235 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 end of our prior second fiscal quarter, and
(b) the date on which we have issued more than $1 billion in non-convertible debt during the prior three-year period.
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 of 1933, as amended (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 will 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.
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.
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. We may identify deficiencies in
our internal control over financial reporting in the future, including significant deficiencies and material weaknesses. A “significant deficiency” is a deficiency, or a combination of deficiencies, in internal control over financial reporting
that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of a company’s financial reporting. A “material weakness” is a deficiency, or a combination of deficiencies, in internal
control over financial reporting such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. A deficiency in internal
control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis.
In addition, any testing by us conducted in connection with Section 404 of the Sarbanes-Oxley Act, 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 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 detect. Undetected material weaknesses in our internal controls could lead to financial statement restatements and require us to incur the expense of remediation.
We will incur significant costs as a result of being a publicly traded company.
As a publicly traded company, we will incur legal, accounting and other expenses, including costs associated with the periodic reporting requirements applicable to a
company whose securities are registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as well as additional corporate governance requirements, including requirements under the Sarbanes-Oxley Act, and other rules
implemented by the SEC and the listing standards of the Nasdaq Stock Market. Upon ceasing to qualify as an emerging growth company under the JOBS Act, our independent registered public accounting firm will be required to attest to the
effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act, which will increase costs associated with our periodic reporting requirements.
Risks Relating to Conflicts of Interests
Our incentive fee may induce our Adviser to make speculative investments.
The incentive fee that will be payable by us to our Adviser may create an incentive for our Adviser to make investments on our behalf that are risky or more
speculative than would be the case in the absence of such compensation arrangement, which could result in higher investment losses, particularly during cyclical economic downturns. The Incentive Fee on Income is based on a percentage of our net
investment income (subject to a hurdle rate), which may encourage our Adviser to use leverage to increase the return on our investments or otherwise manipulate our income so as to recognize income in quarters where the hurdle rate is exceeded and
may result in an obligation for us to pay an Incentive Fee on Income to the Adviser even if we have incurred a loss for an applicable period.
The Incentive Fee on Income that will be payable by us to our Adviser also may create an incentive for our Adviser to invest on our behalf in instruments that have a
deferred interest feature. Under these investments, we would accrue the interest over the life of the investment but would not receive the cash income from the investment until the end of the investment’s term, if at all. Our net investment
income used to calculate the Incentive Fee on Income, however, will include accrued interest. Thus, a portion of the Incentive Fee on Income would be based on income that we will have not yet received in cash and may never receive in cash if the
portfolio company is unable to satisfy such interest payment obligation to us. The Adviser is not obligated to return the Incentive Fee on Income it receives on accrued interest that is later determined to be uncollectible in cash. While we may
make Incentive Fee on Income payments on income accruals that we may not collect in the future and with respect to which we do not have a “claw back” right against our Adviser, the amount of accrued income written off in any period will reduce
our income in the period in which such write-off was taken and thereby may reduce such period’s Incentive Fee on Income payment.
In addition, our Adviser may be entitled to receive an Incentive Fee on Capital Gains based upon net capital gains realized on our investments. Unlike the Incentive
Fee on Income, there will be no performance threshold applicable to the Incentive Fee on Capital Gains. As a result, our Adviser may have a tendency to invest more 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.
Given the subjective nature of the investment decisions made by our Adviser on our behalf, we will be unable to monitor these potential conflicts of interest between
us and our Adviser.
Our base management fee may induce our Adviser to incur leverage.
Our base management fee will be payable based upon our gross assets, which would include any borrowings for investment purposes, and which may encourage our Adviser
to use leverage to make additional investments. Given the subjective nature of the investment decisions that our Adviser may make on our behalf and the discretion related to incurring leverage in connection with any such investments, we will be
unable to monitor this potential conflict of interest between us and our Adviser.
There are significant potential conflicts of interest that could adversely impact our investment returns.
Our executive officers and directors, and certain members of our Adviser, serve or may serve as officers, directors or principals of entities that may operate in the
same or a related line of business as us or as investment funds managed by our affiliates. For example, SSC presently serves as a manager to several special purpose acquisition companies, or SPACs. These investment vehicles under management were
formed for the purpose of investing in specific private equity transactions, which differ from our mandate. SSC and its affiliates also manage private investment funds, and may manage other funds in the future, that have investment mandates that
are similar, in whole or in part, to ours. Therefore, there may be certain investment opportunities that satisfy the investment criteria for us as well as private investment funds advised by SSC or its affiliates. In addition, SSC and its
affiliates may have obligations to investors in other entities that they advise or sub-advise, the fulfillment of which might not be in the best interests of us or our stockholders. An investment in us is not an investment in any of these other
entities.
For example, the personnel of our Adviser may face conflicts of interest in the allocation of investment opportunities to us and such other funds and accounts.
Moreover, the Adviser and the investment professionals are engaged in other business activities which divert their time and attention. The investment professionals will devote as much time to us as such professionals deem appropriate to perform
their duties in accordance with the Investment Advisory Agreement. However, such persons may be committed to providing investment advisory and other services for other clients, and engage in other business ventures in which we have no interest.
As a result of these separate business activities, the Adviser may have conflicts of interest in allocating management time, services and functions among us, other advisory clients and other business ventures.
SSC has investment allocation guidelines that govern the allocation of investment opportunities among the investment funds and accounts managed or sub-advised by SSC
and its affiliates. To the extent an investment opportunity is appropriate for us or any other investment fund or account managed or sub-advised by SSC or its affiliates, SSC will adhere to its investment allocation guidelines in order to
determine a fair and equitable allocation.
Although SSC will endeavor to allocate investment opportunities in a fair and equitable manner, we and our common stockholders could be adversely affected to the
extent investment opportunities are allocated among us and other investment vehicles managed or sponsored by, or affiliated with, our executive officers, directors and members of our Adviser. We might not participate in each individual
opportunity, but will, on an overall basis, be entitled to participate equitably with other entities managed by SSC and its affiliates. SSC seeks to treat all clients fairly and equitably such that none receive preferential treatment vis-à-vis
the others over time, in a manner consistent with its fiduciary duty to each of them; however, in some instances, especially in instances of limited liquidity, the factors may not result in pro rata allocations or may result in situations where
certain funds or accounts receive allocations where others do not.
Pursuant to the Investment Advisory Agreement, our Adviser’s liability is limited and we are required to indemnify our Adviser against certain liabilities. This may
lead our Adviser to act in a riskier manner in performing its duties and obligations under the Investment Advisory Agreement than it would if it were acting for its own account, and creates a potential conflict of interest.
Pursuant to the Administration Agreement, SSC furnishes us with the facilities, including our principal executive office, and administrative
services necessary to conduct our day-to-day operations. We reimburse our administrator, SSC, for the costs and expenses incurred by SSC in performing its obligations and providing
personnel and facilities under the Administration Agreement (including costs and expenses incurred by SSC in connection with the delegation of its obligations under the Administration Agreement to a sub-administrator). We are generally not
responsible for the compensation of SSC’s employees or any overhead expenses of SSC (including rent, office equipment and utilities). However, we may reimburse SSC for an allocable portion of the compensation paid by SSC to our CCO and CFO
and their respective staffs (based on a percentage of time such individuals devote, on an estimated basis, to our business affairs)..
Risks Relating to Our Use of Leverage and Credit Facilities
If we borrow money, the potential for loss on amounts invested in us will be magnified and may increase the risk of investing
in us.
Borrowings, also known as leverage, magnify the potential for loss on invested equity capital. If we use leverage to partially finance our investments, through
borrowings from banks and other lenders, you will experience increased risks of investing in our common stock, including the likelihood of default. If the value of our assets decreases, leveraging would cause NAV to decline more sharply than it
otherwise would have had we not leveraged. Similarly, any decrease in our income would cause our net income to decline more sharply than it would have had we not borrowed. To the extent we incur additional leverage, these effects would be further
magnified, increasing the risk of investing in us. Such a decline could negatively affect our ability to make common stock distributions or scheduled debt payments. Leverage is generally considered a speculative investment technique and we only
intend to use leverage if expected returns will exceed the cost of borrowing.
As a BDC, under the 1940 Act we generally are not permitted to incur indebtedness unless immediately after such borrowing we have an asset coverage for total
borrowings of at least 150%. For example, under a 150% asset coverage ratio a BDC may borrow $2 for investment purposes of every $1 of investor equity. We are currently targeting a debt-to-equity ratio of 0.50x (i.e., we aim to have one dollar of
equity for each $0.50 of debt outstanding). If we were to incur such leverage, our NAV will decline more sharply if the value of our assets declines than if we had not incurred such leverage.
Any credit facility we may enter into in the future would likely subject all or significant amounts of our assets to security
interests and if we default on our obligations under such a credit facility, we may suffer adverse consequences, including foreclosure on our assets.
If we enter into a secured credit facility, all or significant amounts of our assets would likely be pledged as collateral to secure borrowings thereunder. If we
default on our obligations under such a facility, the lenders may have the right to foreclose upon and sell, or otherwise transfer, the collateral subject to their security interests or their superior claim. In such event, we may be forced to
sell our investments to raise funds to repay our outstanding borrowings in order to avoid foreclosure and these forced sales may be at times and at prices we would not consider advantageous. Moreover, such deleveraging of our company could
significantly impair our ability to effectively operate our business in the manner in which we intend to operate. As a result, we could be forced to curtail or cease new investment activities and lower or eliminate the dividends that we intend to
pay to our stockholders.
In addition, if the lenders exercise their right to sell the assets pledged under a secured credit facility, such sales may be completed at distressed sale prices,
thereby diminishing or potentially eliminating the amount of cash available to us after repayment of the amounts outstanding under such facility.
The current period of capital markets disruption and economic uncertainty may make it difficult to obtain indebtedness and any
failure to do so could have a material adverse effect on our business, financial condition or results of operations.
Current market conditions may make it difficult to obtain indebtedness and any failure to do so could have a material adverse effect on our business. The debt
capital that will be available to us in the future, if at all, may be at a higher cost and on less favorable terms and conditions than what we currently experience, including being at a higher cost in rising rate environments. If we are unable to
raise debt, then our equity investors may not benefit from the potential for increased returns on equity resulting from leverage and we may be limited in our ability to make new commitments or to fund existing commitments to our portfolio
companies. An inability to obtain indebtedness could have a material adverse effect on our business, financial condition or results of operations.
Our ability to obtain indebtedness may be limited because of the unwillingness or inability of certain financial institutions to transact with cannabis-related
companies such as ourselves, and we may be forced to liquidate our investments at inopportune times or prices to repay debt. See“— Risks Related to the Cannabis and Hemp Industries” below.
Risks Relating to Distributions
Because we intend to distribute at least 90% of our taxable income each taxable year to our stockholders in connection with
our election to be treated as a RIC, we will continue to need additional capital to finance our growth.
In order to qualify for the tax benefits available to RICs and to minimize corporate-level U.S. federal income taxes, we intend to distribute to our stockholders at
least 90% of our taxable income each taxable year, except that we may retain certain net capital gains for investment, and treat such amounts as deemed distributions to our stockholders. If we elect to treat any amounts as deemed distributions,
we would be subject to income taxes at the corporate rate applicable to net capital gains on such deemed distributions on behalf of our stockholders. As a result of these requirements, we will likely need to raise capital from other sources to
grow our business. Because we will continue to need capital to grow our investment portfolio, these limitations together with the asset coverage requirements applicable to us may prevent us from incurring debt and require us to raise additional
equity at a time when it may be disadvantageous to do so.
We may not be able to pay you distributions, our distributions may not grow over time and/or a portion of our distributions
may be a return of capital. A return of capital generally is a return of a stockholder’s investment rather than a return of earnings or gains derived from our investment activities. As a result, a return of capital will (i) lower your tax basis
in your shares and thereby increase the amount of capital gain (or decrease the amount of capital loss) realized upon a subsequent sale or redemption of such shares, and (ii) reduce the amount of funds we have for investment in portfolio
companies. We have not established any limit on the extent to which we may use offering proceeds to fund distributions.
We intend to pay distributions to our stockholders out of assets legally available for distribution. We cannot assure you that we will achieve investment results
that will allow us to sustain a specified level of cash distributions or periodic increases in cash distributions. In addition, the inability to satisfy the asset coverage test applicable to us as a BDC can limit our ability to pay distributions.
All distributions will be paid at the discretion of our Board of Directors and will depend on our earnings, our financial condition, maintenance of our ability to be subject to tax as a RIC, compliance with applicable BDC regulations and such
other factors as our Board of Directors may deem relevant from time to time. We cannot assure you that we will pay distributions to our stockholders in the future.
When we make distributions, our distributions generally will be treated as dividends for U.S. federal income tax purposes to the extent such distributions are paid
out of our current or accumulated earnings and profits. Distributions in excess of current and accumulated earnings and profits will be treated as a non-taxable return of capital to the extent of a stockholder’s basis in our stock and, assuming
that a stockholder holds our stock as a capital asset, thereafter as a capital gain. A return of capital generally is a return of a stockholder’s investment rather than a return of earnings or gains derived from our investment activities.
Moreover, we may pay all or a substantial portion of our distributions from the proceeds of the sale of shares of our common stock or from borrowings in anticipation of future cash flow, which could constitute a return of stockholders’ capital
and will lower such stockholders’ tax basis in our shares, which may result in increased tax liability to stockholders when they sell or otherwise dispose of such shares. Distributions from offering proceeds also could reduce the amount of
capital we ultimately have available to invest in portfolio companies.
We will be subject to corporate-level U.S federal income tax if we are unable to obtain and maintain our qualification as a
RIC under Subchapter M of the Code or do not satisfy the annual distribution requirement.
To obtain and maintain our status as a RIC and be relieved of U.S. federal taxes on income and gains distributed to our stockholders, we must meet the following
annual distribution, income source and asset diversification requirements:
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The annual distribution requirement will be satisfied if we distribute to our stockholders each taxable year an amount generally at least equal to 90% of the sum of our net taxable income plus realized
net short-term capital gains in excess of realized net long-term capital losses, if any. Because we may use debt financing, we are subject to an asset coverage ratio requirement under the 1940 Act and we may be subject to certain
financial covenants under our debt arrangements that could, under certain circumstances, restrict us from making distributions necessary to satisfy the annual distribution requirement. If we are unable to obtain cash from other sources,
we could fail to qualify for RIC tax treatment and thus could become subject to corporate-level income tax.
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The 90% gross income test will be satisfied if we earn at least 90% of our gross income for each taxable year from dividends, interest, gains from the sale of stock or securities or similar sources.
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The diversification test will be satisfied if, at the end of each quarter of our taxable year, at least 50% of the value of our assets consist of cash, cash equivalents, U.S. government securities,
securities of other RICs, and other acceptable securities; and no more than 25% of the value of our assets can be invested in the securities, other than U.S. government securities or securities of other RICs, of one issuer, of two or
more issuers that are controlled, as determined under applicable Code rules, by us and that are engaged in the same or similar or related trades or businesses or of certain “qualified publicly traded partnerships.” Failure to meet these
requirements may result in our having to dispose of certain investments quickly in order to prevent the loss of RIC status. Because most of our investments will be in private companies, and therefore will be relatively illiquid, any
such dispositions could be made at disadvantageous prices and could cause us to incur substantial losses.
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If we fail to be treated as a RIC and are subject to entity-level U.S. federal 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 may have difficulty paying our required distributions if we are required to recognize income for U.S. federal income tax
purposes before or without receiving cash representing such income.
For U.S. federal income tax purposes, we generally may be required to include in income certain amounts that we will have not yet received in cash, such as OID or
certain income accruals on contingent payment debt instruments, which may occur if we receive warrants in connection with the origination of a loan or possibly in other circumstances. Such OID is generally required to be included in income before
we receive any corresponding cash payments. In addition, our loans may contain PIK interest provisions. Any PIK interest, computed at the contractual rate specified in each loan agreement, is generally required to be added to the principal
balance of the loan and recorded as interest income. We also may be required to include in income certain other amounts that we do not receive, and may never receive, in cash. To avoid the imposition of corporate-level tax on us, this non-cash
source of income may need to be distributed to our stockholders in cash or, in the event we determine to do so, in shares of our common stock, even though we may have not yet collected and may never collect the cash relating to such income.
Because, in certain cases, we may recognize income before or without receiving cash representing such income, we may have difficulty meeting the annual distribution
requirement necessary to be relieved of entity-level U.S. federal taxes on income and gains distributed to our stockholders. Accordingly, we may have to sell or otherwise dispose of some of our investments at times and/or at prices we would not
consider advantageous, raise additional debt or equity capital or forgo new investment opportunities for this purpose. If we are not able to obtain cash from other sources, we may fail to satisfy the annual distribution requirement and thus
become subject to corporate-level U.S. federal income tax.
We may in the future choose to pay distributions partly in our own stock, in which case you may be subject to tax in excess of
the cash you receive.
We may distribute taxable distributions that are payable in part in our stock. In accordance with certain applicable U.S. Treasury regulations and other related
administrative pronouncements issued by the Internal Revenue Service, or the IRS, a RIC may be eligible to treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder is permitted to elect to receive
his or her entire distribution in either cash or stock of the RIC, subject to the satisfaction of certain guidelines. If too many stockholders elect to receive cash (which generally may not be less than 20% of the value of the overall
distribution), each stockholder electing to receive cash must receive a pro rata amount of cash (with the balance of the distribution paid in stock). If these and certain other requirements are met, for U.S. federal income tax purposes, the
amount of the distribution paid in stock generally will be equal to the amount of cash that could have been received instead of stock. Taxable stockholders receiving such distributions will be required to include the full amount of the
distribution as ordinary income (or as long-term capital gain to the extent such distribution is properly reported as a capital gain dividend) to the extent of their share of our current and accumulated earnings and profits for U.S. federal
income tax purposes. As a result, a U.S. stockholder may be subject to tax with respect to such distributions in excess of any cash received. If a U.S. stockholder sells the stock it receives as a distribution in order to pay this tax, the sales
proceeds may be less than the amount included in income with respect to the distribution, depending on the market price of our stock at the time of the sale. Furthermore, with respect to non-U.S. stockholders, we and other withholding agents may
be required to withhold U.S. tax with respect to such distributions, including in respect of all or a portion of such distribution that is payable in stock. In addition, if a significant number of our stockholders determine to sell shares of our
stock in order to pay taxes owed on distributions, such sales may put downward pressure on the trading price of our stock.
Risks Relating to Our Investments
Our investments in portfolio companies may be risky, and we could lose all or parts of our investments.
The companies in which we intend to invest will typically be highly leveraged, and, in most cases, our investments in such companies will not be rated by any rating
agency. If such investments were rated, we believe that they would likely receive a rating from a nationally recognized statistical rating organization of below investment grade (i.e., below BBB- or Baa), which is often referred to as
“high-yield” and “junk.” Exposure to below investment grade securities involves certain risks, and those securities are viewed as having predominately speculative characteristics with respect to the issuer’s capacity to pay interest and repay
principal. In addition, some of the loans in which we may invest may be “covenant-lite” loans. We use the term “covenant-lite” loans to refer generally to loans that do not have a complete set of financial maintenance covenants. Generally,
“covenant-lite” loans provide borrower companies more freedom to negatively impact lenders because their covenants are incurrence-based, which means they are only tested and can only be breached following an affirmative action of the borrower,
rather than by a deterioration in the borrower’s financial condition. Accordingly, to the extent we invest in “covenant-lite” loans, we may have fewer rights against a borrower and may have a greater risk of loss on such investments as compared
to investments in or exposure to loans with a complete set of financial maintenance covenants. Investing in middle-market companies involves a number of significant risks.
Certain of our debt investments may consist of debt securities for which issuers are not required to make principal payments until the maturity of such debt
securities, which could result in a substantial loss to us if such issuers are unable to refinance or repay their debt at maturity. Increases in interest rates may affect the ability of our portfolio companies to repay debt or pay interest, which
may in turn affect the value of our portfolio investments, and our business, financial condition and results of operations.
Among other things, portfolio companies:
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may have limited financial resources, may have limited or negative EBITDA and may be unable to meet their obligations under their debt instruments that we hold, which may be accompanied by a deterioration
in the value of any collateral and a reduction in the likelihood of us realizing any guarantees from subsidiaries or affiliates of our portfolio companies that we may have obtained in connection with our investments, as well as a
corresponding decrease in the value of the equity components of our investments;
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may have shorter operating histories, narrower product lines, smaller market shares and/or significant customer concentrations than larger businesses, which tend to render them more vulnerable to
competitors’ actions and market conditions, as well as general economic downturns;
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may operate in regulated industries and/or provide services to federal, state or local governments, or operate in industries that provide services to regulated industries or federal, state or local
governments, any of which could lead to delayed payments for services or subject the company to changing payment and reimbursement rates or other terms;
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may not have collateral sufficient to pay any outstanding interest or principal due to us in the event of a default by these companies;
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are more likely to depend on the management talents and efforts of a small group of people; therefore, the death, disability, resignation or termination of one or more of these persons could have a
material adverse impact on our portfolio company and, in turn, on us;
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may have difficulty borrowing or otherwise accessing the capital markets to fund capital needs, which may be more acute because such companies are operating in the cannabis industry, and which limit their
ability to grow or repay outstanding indebtedness at maturity (see “— Risks Related to the Cannabis and Hemp Industries” below);
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may not have audited financial statements or be subject to the Sarbanes-Oxley Act and other rules that govern public companies;
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generally have less predictable operating results, may from time to time be parties to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of
obsolescence, and may require substantial additional capital to support their operations, finance expansion or maintain their competitive position; and
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generally have less publicly available information about their businesses, operations and financial condition.
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These factors may make certain of our portfolio companies more susceptible to the adverse effects of the COVID-19 pandemic and resulting government regulations. As a
result of the limitations associated with certain portfolio companies, we must therefore rely on the ability of our Adviser to obtain adequate information through due diligence to evaluate the creditworthiness and potential returns from investing
in these companies. In addition, certain of our officers and directors may serve as directors on the boards of such companies. To the extent that litigation arises out of our investments in these companies, our officers and directors may be named
as defendants in such litigation, which could result in an expenditure of funds (through our indemnification of such officers and directors) and the diversion of management time and resources.
Finally, as noted above, little public information generally exists about privately owned companies, and these companies may not have third-party debt ratings or
audited financial statements. We must therefore rely on the ability of our Adviser to obtain adequate information through due diligence to evaluate the creditworthiness and potential returns from investing in these companies. Additionally, these
companies and their financial information will not generally be subject to the Sarbanes-Oxley Act and other rules that govern public companies.
To the extent OID and PIK interest constitute a portion of our income, we may be exposed to higher risks with respect to such
investments.
Our investments may include OID and contractual PIK interest, which typically represents contractual interest added to a loan balance and due at the end of such
loan’s term. To the extent OID or PIK interest constitute a portion of our income, we will be exposed to typical risks associated with such income being required to be included in taxable and accounting income prior to receipt of cash, including
the following:
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OID and PIK instruments may have higher yields, which reflect the payment deferral and credit risk associated with these instruments;
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OID and PIK accruals may create uncertainty about the source of our distributions to stockholders;
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OID and PIK instruments may have unreliable valuations because their continuing accruals require continuing judgments about the collectability of the deferred payments and the value of the collateral;
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OID and PIK instruments may represent a higher credit risk than coupon loans; and
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Our net investment income used to calculate the Incentive Fee on Income will include OID and PIK interest, and the Adviser is not obligated to return the Incentive Fee on Income it receives on OID and PIK
interest that is later determined to be uncollectible in cash.
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If we acquire the securities and obligations of distressed or bankrupt companies, such investments may be subject to
significant risks, including lack of income, extraordinary expenses, uncertainty with respect to satisfaction of debt, lower-than-expected investment values or income potentials and resale restrictions.
We may acquire the securities and other obligations of distressed or bankrupt companies. At times, distressed debt obligations may not produce income and may require
us to bear certain extraordinary expenses (including legal, accounting, valuation and transaction expenses) in order to protect and recover our investment. Therefore, to the extent we invest in distressed debt, our ability to achieve current
income for our stockholders may be diminished, particularly where the portfolio company has negative EBITDA.
We also will be subject to significant uncertainty as to when and in what manner and for what value the distressed debt we invest in will eventually be satisfied,
whether through liquidation, an exchange offer or a plan of reorganization involving the distressed debt securities or a payment of some amount in satisfaction of the obligation. In addition, even if an exchange offer is made or plan of
reorganization is adopted with respect to distressed debt held by us, there can be no assurance that the securities or other assets received by us in connection with such exchange offer or plan of reorganization will not have a lower value or
income potential than may have been anticipated when the investment was made.
Moreover, any securities received by us upon completion of an exchange offer or plan of reorganization may be restricted as to resale. As a result of our
participation in negotiations with respect to any exchange offer or plan of reorganization with respect to an issuer of distressed debt, we may be restricted from disposing of such securities.
Our portfolio companies may prepay loans, which may reduce our yields if capital returned cannot be invested in transactions
with equal or greater expected yields.
The loans we anticipate holding in our investment portfolio may be prepaid at any time, generally with little advance notice. Whether a loan is prepaid will depend
both on the continued positive performance of the portfolio company and the existence of favorable financing market conditions that allow such company the ability to replace existing financing with less expensive capital. As market conditions
change, we do not know when, and if, prepayment may be possible for each portfolio company. In some cases, the prepayment of a loan may reduce our achievable yield if the capital returned cannot be invested in transactions with equal or greater
expected yields, which could have a material adverse effect on our business, financial condition and results of operations.
We may be subject to risks arising from revolving credit facilities.
We may acquire or originate revolving credit facilities from time to time. A revolving credit facility is a line of credit in which the
borrower pays the lender a commitment fee during a commitment period and is then allowed to draw from the line of credit from time to time until the end of such commitment period. The borrower of a revolving credit facility is typically
permitted to draw thereunder for any reason, including to fund its operational requirements, to make acquisitions or to reserve cash, so long as certain customary conditions are met. Outstanding draw-downs under such revolving credit
facilities can therefore fluctuate on a day-to-day basis, which may generate operational and other costs for us. If the borrower of a revolving credit facility draws down on the facility, we would be obligated to fund the amounts due.
We can offer no assurance that a borrower of a revolving credit facility will fully draw down its available credit thereunder, and in many
cases a borrower with sufficient liquidity may forego drawing down its available credit thereunder in favor of obtaining other liquidity sources. As a result, we are likely to hold unemployed funds, and investments in revolving credit
facilities may therefore adversely affect our returns.
The lack of liquidity in our investments may adversely affect our business.
We intend to invest in companies whose securities are not publicly traded, and whose securities are subject to legal and other restrictions on resale or are
otherwise less liquid than publicly traded securities. In fact, all of our assets may be invested in illiquid securities. The illiquidity of these investments may make it difficult for us to sell these investments when desired. 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 had previously recorded these investments and suffer losses. Our investments are usually subject to contractual or
legal restrictions on resale or are otherwise illiquid because there is usually no established trading market for such investments. In addition, we may also face restrictions on our ability to liquidate our investments if our Adviser or any of
its affiliates have material nonpublic information regarding the portfolio company.
We may not have the funds or ability to make additional investments in our portfolio companies.
After our initial investment in a portfolio company, we may be called upon from time to time to provide additional funds to such company or have the opportunity to
increase our investment through a follow-on investment. There is no assurance that we will make, or will have sufficient funds to make, follow-on investments. Any decisions not to make a follow-on investment or any inability on our part to make
such an investment may have a negative impact on a portfolio company in need of such an investment, may result in a missed opportunity for us to increase our participation in a successful operation, may reduce the expected yield on the investment
or may impair the value of our investment in any such portfolio company.
Portfolio companies may be highly leveraged.
We invest primarily in first lien loans issued by middle-market companies. Our portfolio companies may have, or may be permitted to incur, other debt that ranks
equally with, or senior to, the debt in which we invest. By their terms, such debt instruments may entitle the holders to receive payments of interest or principal on or before the dates on which we are entitled to receive payments with respect
to the debt instruments in which we invest. 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. 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 instruments 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.
Our portfolio companies may incur debt that ranks equally with, or senior to, some of our investments in such companies.
We will invest primarily in senior secured loans, including unitranche and second lien debt instruments, as well as unsecured debt instruments, issued by our
portfolio companies. If we invest in unitranche, second lien, or unsecured debt instruments, our portfolio companies typically may be permitted to incur other debt that ranks equally with, or senior to, such debt instruments. 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 will be entitled to receive payments in respect of the debt securities in which we will invest. 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. In such cases, 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 will 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.
The disposition of our investments may result in contingent liabilities.
In connection with the disposition of an investment in private securities, we may be required to make representations about the business and financial affairs of the
portfolio company typical of those made in connection with the sale of a business. We may also be required to indemnify the purchasers of such investment to the extent that any such representations turn out to be inaccurate or with respect to
certain potential liabilities. These arrangements may result in contingent liabilities that ultimately yield funding obligations that must be satisfied through our return of certain distributions previously made to us.
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 structure some of our investments as senior loans, if one of our portfolio companies were to enter bankruptcy proceedings, a bankruptcy court
might re-characterize our debt investment and subordinate all or a portion of our claim to that of other creditors, depending on the facts and circumstances, including the extent to which we actually provide managerial assistance to that
portfolio company. 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.
Second priority liens on collateral securing loans that we may make to our portfolio companies may be subject to control by
senior creditors with first priority liens. If there is a default, the value of the collateral may not be sufficient to repay in full both the first priority creditors and us.
Certain loans that we make to portfolio companies may be secured on a second priority basis by the same collateral securing senior secured debt of such companies.
The first priority liens on the collateral secure the portfolio company’s obligations under any outstanding senior debt and may secure certain other future debt that may be permitted to be incurred by the company under the agreements governing
the loans. The holders of obligations secured by the first priority liens on the collateral will generally control the liquidation of and be entitled to receive proceeds from any realization of the collateral to repay their obligations in full
before us. In addition, the value of the collateral in the event of liquidation will depend on market and economic conditions, the availability of buyers and other factors. There can be no assurance that the proceeds, if any, from the sale or
sales of all of the collateral would be sufficient to satisfy the loan obligations secured by the second priority liens after payment in full of all obligations secured by the first priority liens on the collateral. If such proceeds are not
sufficient to repay amounts outstanding under the loan obligations secured by the second priority liens, then we, to the extent not repaid from the proceeds of the sale of the collateral, will only have an unsecured claim against the company’s
remaining assets, if any.
The rights we may have with respect to the collateral securing the loans we may make to portfolio companies with senior debt outstanding may also be limited pursuant
to the terms of one or more inter-creditor agreements that we enter into with the holders of senior debt. Under such an inter-creditor agreement, at any time that obligations that have the benefit of the first priority liens are outstanding, any
of the following actions may be taken with respect to the collateral and will be at the direction of the holders of the obligations secured by the first priority liens: the ability to cause the commencement of enforcement proceedings against the
collateral; the ability to control the conduct of such proceedings; the approval of amendments to collateral documents; releases of liens on the collateral; and waivers of past defaults under collateral documents. We may not have the ability to
control or direct such actions, even if our rights are adversely affected.
If we make unsecured debt investments, we may lack adequate protection in the event our portfolio companies become distressed
or insolvent and will likely experience a lower recovery than more senior debtholders in the event such portfolio companies default on their indebtedness.
We may make unsecured debt investments in portfolio companies. Unsecured debt investments are unsecured and junior to other indebtedness of the portfolio company. As
a consequence, the holder of an unsecured debt investment may lack adequate protection in the event the portfolio company becomes distressed or insolvent and will likely experience a lower recovery than more senior debtholders in the event the
portfolio company defaults on its indebtedness. In addition, unsecured debt investments of middle-market companies are often highly illiquid and in adverse market conditions may experience steep declines in valuation even if they are fully
performing.
We may need to foreclose on loans that are in default, which could result in losses.
We may find it necessary to foreclose on loans that are in default. Foreclosure processes are often lengthy and expensive, and state court foreclosure processes and
other creditors’ remedies with respect to cannabis companies are largely untested. Results of foreclosure processes or other exercises of creditors’ rights may be uncertain, as claims may be asserted by the relevant borrower or by other creditors
or investors in such borrower that interfere with enforcement of our rights, such as claims that challenge the validity or enforceability of our loan or the priority or perfection of our security interests. Our borrowers may resist foreclosure
actions or other remedies by asserting numerous claims, counterclaims and defenses against us, including, without limitation, lender liability claims and defenses, even when the assertions may have no merit, in an effort to prolong the
foreclosure action or other remedy and seek to force us into a modification or buy-out of our loan for less than we are owed. Additionally, the transfer of certain collateral to us may be limited or prohibited by applicable laws and regulations.
See “—The loans that we expect to make may be secured by collateral that is, and will be, subject to extensive regulations, such that if such collateral was foreclosed upon those regulations may result in significant costs and materially and
adversely affect our business, financial condition, liquidity and results of operations.” For transferable collateral, foreclosure or other remedies available may be subject to certain laws and regulations, including the need for regulatory
disclosure and/or approval of such transfer. If federal law were to change to permit cannabis companies to seek federal bankruptcy protection, the applicable borrower could file for bankruptcy, which would have the effect of staying the
foreclosure actions and delaying the foreclosure processes and potentially result in reductions or discharges of debt owed to us. Foreclosure may create a negative public perception of the collateral, resulting in a diminution of its value. Even
if we are successful in foreclosing on collateral securing our loan, the liquidation proceeds upon sale of the collateral may not be sufficient to recover our loan. Any costs or delays involved in the foreclosure or a liquidation of the
collateral will reduce the net proceeds realized and, thus, increase the potential for loss.
In the event a borrower defaults on any of its obligations to us and such debt obligations are equitized, we may not have the ability to hold such equity interests
legally under federal law, which may result in additional losses on our loans to such entity.
The loans that we expect to make may be secured by collateral that is, and will be, subject to extensive regulations, such
that if such collateral was foreclosed upon those regulations may result in significant costs and materially and adversely affect our business, financial condition, liquidity and results of operations.
The loans that we expect to make may be secured by collateral that is, and will be, subject to various legal and regulatory requirements, and we would be subject to
such requirements if such collateral was foreclosed upon. Due to current legal requirements, we will not own equity securities in companies that are not compliant with all applicable laws and regulations within the jurisdiction in which they are
located or operate, including federal laws, nor will we own any real estate used in cannabis-related operations in violation of state or federal law. While our loan agreements and related mortgages provide for foreclosure remedies, receivership
remedies and/or other remedies that would allow us to cause the sale or other realization of collateral, the regulatory requirements and statutory prohibitions related to equity investments in cannabis companies and real property used in
cannabis-related operations may cause significant delays or difficulties in realizing upon the expected value of such collateral. In addition, applicable legal requirements may prevent us from possessing or realizing the value of other collateral
securing our loans, such as cannabis licenses, cannabis inventory or cannabis merchandise. Our inability to realize the full value of such collateral could have a material adverse effect on our business, financial condition, liquidity and results
of operations. We may also be disadvantaged in a foreclosure process or other exercise of creditors’ rights relative to other creditors that are able to hold such collateral. We make no assurance that existing regulatory policies will not
materially and adversely affect the value or availability to us of all such collateral, or our standing relative to other creditors that are able to hold such collateral, or that additional regulations will not be adopted that would increase such
potential material adverse effect.
Certain assets of our borrowers may not be used as collateral or transferred to us due to applicable state laws and
regulations governing the cannabis industry, and such restrictions could negatively impact our profitability.
Each state that has legalized cannabis in some form has adopted its own set of laws and regulations that differ from one another. In particular, laws and regulations
differ among states regarding the collateralization or transferability of cannabis-related assets, such as cannabis licenses, cannabis inventory, and ownership interests in licensed cannabis companies. Some state laws and regulations where our
borrowers operate may prohibit the collateralization or transferability of certain cannabis-related assets. Other states may allow the collateralization or transferability of cannabis-related assets, but with restrictions, such as meeting certain
eligibility requirements, utilization of state receiverships, and/or upon approval by the applicable regulatory authority. Prohibitions or restrictions on our or others’ ability to acquire, own or hold certain cannabis-related assets securing the
loans of our borrowers could have a material adverse effect on our business, financial condition, liquidity and results of operations. In addition, because the sales of such assets may be forced upon the borrower when time may be of the essence
and available to a limited number of potential purchasers, the sales prices may be less than the prices that could be obtained with more time and/or in a larger market.
The market value of properties and equipment securing our loans may decrease upon foreclosure if they cannot be used for
cannabis related operations.
Properties and equipment used for cannabis operations, particularly cultivation and manufacturing facilities and equipment, are generally more valuable than if used
for other purposes. If we foreclose on any properties or equipment securing our loans, the inability to sell the property or equipment to a licensed cannabis company for a similar use may significantly decrease the market value of the foreclosed
property or equipment, thereby having a material adverse effect on our business, financial condition, liquidity and results of operations.
We may incur greater risk with respect to investments we acquire through assignments or participations of interests.
Although we intend to originate a substantial portion of our loans, we may acquire loans through assignments or participations of interests in such loans. The
purchaser of an assignment typically succeeds to all the rights and obligations of the assigning institution and becomes a lender under the credit agreement with respect to such debt obligation. However, the purchaser’s rights can be more
restricted than those of the assigning institution, and we may not be able to unilaterally enforce all rights and remedies under an assigned debt obligation and with regard to any associated collateral. A participation typically results in a
contractual relationship only with the institution participating out the interest and not directly with the borrower. Sellers of participations typically include banks, broker-dealers, other financial institutions and lending institutions. In
purchasing participations, we generally will have no right to enforce compliance by the borrower with the terms of the loan agreement against the borrower, and we may not directly benefit from the collateral supporting the debt obligation in
which we have purchased the participation. As a result, we will be exposed to the credit risk of both the borrower and the institution selling the participation. Further, in purchasing participations in lending syndicates, we will not be able to
conduct the same level of due diligence on a borrower or the quality of the loan with respect to which we are buying a participation as we would conduct if we were investing directly in the loan. This difference may result in us being exposed to
greater credit or fraud risk with respect to such loans than we expected when initially purchasing the participation.
We generally do not expect to control our portfolio companies.
We generally do not expect to control our portfolio companies. As a result, we may be subject to the risk that a portfolio company may make business decisions with
which we disagree and the management of such company, as representatives of the holders of their common equity, may take risks or otherwise act in ways that do not serve our interests as a debt investor, including actions that could decrease the
value of our investment. Due to the lack of liquidity for our anticipated investments, we may not be able to dispose of our interests in our portfolio companies as readily as we would like or at an appropriate valuation.
Defaults by our portfolio companies would harm our operating results.
A portfolio company’s failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially, termination of its
loans and foreclosure on its secured assets, which could trigger cross-defaults under other agreements and jeopardize a portfolio company’s ability to meet its obligations under the debt or equity securities that we hold. We may incur expenses to
the extent necessary to seek recovery upon default or to negotiate new terms, which may include the waiver of certain financial covenants, with a defaulting portfolio company. In addition, some of the loans in which we may invest may be
“covenant-lite” loans. We use the term “covenant-lite” loans to refer generally to loans that do not have a complete set of financial maintenance covenants. Generally, “covenant-lite” loans provide borrower companies more freedom to negatively
impact lenders because their covenants are incurrence-based, which means they are only tested and can only be breached following an affirmative action of the borrower, rather than by a deterioration in the borrower’s financial condition.
Accordingly, to the extent we invest in “covenant-lite” loans, we may have fewer rights against a borrower and may have a greater risk of loss on such investments as compared to investments in or exposure to loans with a complete set of financial
maintenance covenants.
We may write down the value of a portfolio company investment upon the worsening of the financial condition of the portfolio company or in anticipation of a default,
which could also have a material adverse effect on our business, financial condition and results of operations.
Our portfolio companies may experience financial distress and our investments in such companies may be restricted.
Our portfolio companies may experience financial distress from time to time. Debt investments in such companies may cease to be income-producing, may require us to
bear certain expenses to protect our investment and may subject us to uncertainty as to when, in what manner and for what value such distressed debt will eventually be satisfied, including through liquidation, reorganization or bankruptcy. Any
restructuring can fundamentally alter the nature of the related investment, and restructurings may not be subject to the same underwriting standards that our Adviser employs in connection with the origination of an investment. In addition, we may
write down the value of our investment in any such company to reflect the status of financial distress and future prospects of the business. Any restructuring could alter, reduce or delay the payment of interest or principal on any investment,
which could delay the timing and reduce the amount of payments made to us. For example, if an exchange offer is made or plan of reorganization is adopted with respect to the debt securities we currently hold, there can be no assurance that the
securities or other assets received by us in connection with such exchange offer or plan of reorganization will have a value or income potential similar to what we anticipated when our original investment was made or even at the time of
restructuring. Restructurings of investments might also result in extensions of the term thereof, which could delay the timing of payments made to us, or we may receive equity securities, which may require significantly more of our management’s
time and attention or carry restrictions on their disposition. We cannot assure you that any particular restructuring strategy pursued by our Adviser will maximize the value of or recovery on any investment.
We may not realize gains from our equity investments.
Certain investments we may make may include warrants or other equity securities. In addition, we may make direct equity investments in companies. Our goal is
ultimately to realize gains upon our disposition of such equity interests. However, the equity interests we may receive may not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from the
equity interests we may hold, and any gains that we do realize on the disposition of any such equity interests may not be sufficient to offset any other losses we may experience. We also may be unable to realize any value if a portfolio company
does not have a liquidity event, such as a sale of the business, recapitalization or public offering, which would allow us to sell the underlying equity interests. We may seek puts or similar rights to give us the right to sell our equity
securities back to the portfolio company issuer. We may be unable to exercise these put rights for the consideration provided in our investment documents if the issuer is in financial distress.
We are subject to certain risks associated with foreign investments.
We may make investments in foreign companies. Investing in foreign companies may expose us to additional risks not typically associated with investing in U.S.
companies. These risks include changes in foreign exchange rates, exchange control regulations, political and social instability, expropriation, imposition of foreign taxes, less liquid markets and less available information than is generally the
case in the U.S., higher transaction costs, less government supervision of exchanges, brokers and issuers, less developed bankruptcy laws, difficulty in enforcing contractual obligations, lack of uniform accounting and auditing standards and
greater price volatility.
Foreign investment risk may be particularly high to the extent that we invest in securities of issuers based in or securities denominated in the currencies of
emerging market countries. These securities may present market, credit, currency, liquidity, legal, political and other risks different from, and greater than, the risks of investing in developed foreign countries.
In addition, such foreign investments generally do not constitute “qualifying assets” under the 1940 Act.
Our success will depend, in part, on our ability to anticipate and effectively manage these and other risks. We cannot assure you that these and other factors will
not have a material adverse effect on our business as a whole.
We may expose ourselves to risks if we engage in hedging transactions.
Subject to applicable provisions of the 1940 Act and applicable regulations promulgated by the CFTC, we may enter into hedging transactions, which may expose us to
risks associated with such transactions. Such hedging 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 and amounts due under any credit facility from changes in currency and market interest rates. Use of these hedging instruments may include counterparty credit risk. Hedging against a decline in the values of our portfolio
positions does not eliminate the possibility of fluctuations in the values of such positions and amounts due under any credit facility 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 any hedging transactions, if any, 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 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 (or be able to) establish a perfect correlation between such hedging instruments and the portfolio holdings or credit facilities 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.
We are a non-diversified investment company within the meaning of the 1940 Act, and therefore have few restrictions with
respect to the proportion of our assets that may be invested in securities of a single industry or issuer.
We are classified as a non-diversified investment company within the meaning of the 1940 Act, which means that we are not limited by the 1940 Act with respect to the
proportion of our assets that we may invest in securities of a single industry or issuer, excluding limitations on investments in other investment companies. To the extent that we assume large positions in the securities of a small number of
industries or issuers, our NAV may fluctuate to a greater extent than that of a diversified investment company as a result of changes in the financial condition or the market’s assessment of the security, industry or issuer. We may also be more
susceptible to any single economic or regulatory occurrence than a diversified investment company. Beyond RIC diversification requirements, we will not have fixed guidelines for diversification, and our investments could be concentrated in
relatively few industries or issuers.
We have not yet identified most of the portfolio companies we will invest in using the proceeds of our initial public
offering.
We have not yet identified most of the portfolio investments that we will acquire with the proceeds of our initial public offering. We have significant flexibility
in investing the net proceeds of our initial public offering and any future offering, and may do so in a way with which you may not agree. Additionally, our Adviser will select our investments, and our stockholders will have no input with respect
to such investment decisions. Further, other than general limitations that may be included in a future credit facility, the holders of our debt securities will generally not have veto power or a vote in approving any changes to our investment or
operational policies. These factors increase the uncertainty, and thus the risk, of investing in our common stock. In addition, pending such investments, we may invest the net proceeds from this offering primarily in high-quality, short-term debt
securities, consistent with our BDC election and our election to be taxed as a RIC, at yields significantly below the returns which we expect to achieve when our portfolio is fully invested in securities meeting our investment objective. If we
are not able to identify or gain access to suitable investments, our income may be limited.
We may enter into total return swap agreements which expose us to certain risks, including market risk, liquidity risk and
other risks similar to those associated with the use of leverage.
We may enter into a total return swap (“TRS”) directly or through a wholly-owned financing subsidiary. A TRS is a contract in which one party agrees to make periodic
payments to another party based on the change in the market value of the assets underlying the TRS, which may include a specified security, basket of securities or securities indices during a specified period, in return for periodic payments
based on a fixed or variable interest rate. A TRS effectively adds leverage to a portfolio by providing investment exposure to a security or market without owning or taking physical custody of such security or investing directly in such market.
Because of the unique structure of a TRS, a TRS often offers lower financing costs than are offered through more traditional borrowing arrangements.
A TRS may enable us to obtain the economic benefit of owning assets subject to the TRS, without actually owning them, in return for an interest type payment to the
counterparty. As such, the TRS would be analogous to us borrowing funds to acquire assets and incurring interest expense to a lender.
A TRS is subject to market risk, liquidity risk and risk of imperfect correlation between the value of the TRS and the assets underlying the TRS. In addition, we may
incur certain costs in connection with a TRS that could in the aggregate be significant.
A TRS is also subject to the risk that a counterparty will default on its payment obligations thereunder or that we will not be able to meet our obligations to the
counterparty. We may be required to post cash collateral amounts to secure our obligations to the counterparty under a TRS. The counterparty, however, may not be required to collateralize any of its obligations to us under a TRS. We would bear
the risk of depreciation with respect to the value of the assets underlying a TRS and may be required under the terms of a TRS to post additional collateral on a dollar-for-dollar basis in the event of depreciation in the value of the underlying
assets after such value decreases below a specified amount. The amount of collateral required to be posted by us would be determined primarily on the basis of the aggregate value of the underlying assets.
If the counterparty chooses to exercise its termination rights under a TRS, it is possible that, because of adverse market conditions existing at the time of such
termination, we will owe more to the counterparty (or will be entitled to receive less from the counterparty) than we would otherwise have if we controlled the timing of such termination.
In addition, because a TRS is a form of synthetic leverage, such arrangements are subject to risks similar to those associated with the use of leverage. See “— Risks
Related to Our Use of Leverage and Credit Facilities” above.
The fair value of a TRS, which will not necessarily equal the notional value of such TRS, will be included in our calculation of gross assets for purposes of
computing the base management fee. For purposes of computing the Incentive Fee on Income and the Incentive Fee on Capital Gains, the calculation methodology will look through any TRS as if we owned the reference assets directly. See “Item 1.
Business — Investment Advisory Agreement — Overview of Our Investment Adviser — Management Fee.”
For purposes of Section 55(a) under the 1940 Act, the Company treats each loan underlying a TRS as a qualifying asset if the obligor on such loan is an eligible
portfolio company and as a non-qualifying asset if the obligor is not an eligible portfolio company. The Company may, however, accord different treatment to a TRS in the future in accordance with any applicable new rules or interpretations
adopted by the SEC or its staff.
Our ability to enter into transactions involving derivatives and financial commitment transactions may be limited, among other
reasons, because of the unwillingness or inability of certain financial institutions to transact with cannabis-related companies such as ourselves.
In November 2020, the SEC adopted Rule 18f-4 under the 1940 Act regarding the ability of a BDC (or a registered investment company) to use derivatives and other
transactions that create future payment or delivery obligations. Under Rule 18f-4, which BDCs were required to comply with no later than August 19, 2022, BDCs that use derivatives are subject to a value-at-risk leverage limit, a derivatives risk
management program and testing requirements and requirements related to board reporting. These new requirements apply unless the BDC qualifies as a “limited derivatives user,” as defined under Rule 18f-4. Under Rule 18f-4, a BDC may enter into an
unfunded commitment agreement that is not a derivatives transaction, such as an agreement to provide financing to a portfolio company, if the BDC has, among other things, a reasonable belief, at the time it enters into such an agreement, that it
will have sufficient cash and cash equivalents to meet its obligations with respect to all of its unfunded commitment agreements, in each case as it becomes due. Collectively, these requirements may limit our ability to use derivatives and/or
enter into certain other financial contracts. We have adopted updated policies and procedures in compliance with Rule 18f-4, and currently qualify as a “limited derivatives user.” Our ability to enter into derivatives transactions may be limited
because of the unwillingness or inability of certain financial institutions to transact with cannabis-related companies such as ourselves.
The health and wellness sector is highly regulated and competitive.
The health and wellness sector is highly regulated, and the production, packaging, labeling, advertising, distribution, licensing and/or sale of health and wellness
products and services may be subject to regulation by several U.S. federal agencies, including the U.S. Food and Drug Administration (the “FDA”), the Federal Trade Commission, the Consumer Product Safety Commission, and the Environmental
Protection Agency, as well as various state, local and international laws and agencies of the localities in which such products and services are offered or are sold. Government regulations may prevent or delay the introduction or require design
modifications of these products. Regulatory authorities may not accept the evidence of safety presented for existing or new products or services that a health and wellness company may wish to market, or they may determine that a particular
product or service presents an unacceptable health risk. If health and wellness companies are unable to obtain regulatory approval or fail to comply with these regulatory requirements, the financial condition of such companies could be adversely
affected.
There can be no assurance that future changes in government regulation will not adversely affect health and wellness companies. The health and wellness sector is
highly competitive and an emerging health and wellness company may be unable to compete effectively. Health and wellness companies are particularly susceptible to unfavorable publicity or client rejection of products, which could reduce sales of
products or services. Safety, quality and efficacy standards are extremely important for health and wellness companies. If a health and wellness company fails to meet these standards, its reputation could be damaged, it could lose customers, and
its revenue and results of operations could decline.
Risks Relating to the Cannabis and Hemp Industries
Risks related to the cannabis industry may directly or indirectly affect us or our portfolio companies engaged in the cannabis
industry.
Investing in portfolio companies involved in the cannabis industry subjects us to the following risks:
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The cannabis industry is extremely speculative and raises a host of legality issues, making it subject to inherent risk;
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The manufacture, distribution, sale, or possession of cannabis that is not in compliance with the U.S. Controlled Substances Act is illegal under U.S. federal law. Strict enforcement of U.S. federal laws
regarding cannabis would likely result in our portfolio companies’ inability to execute a business plan in the cannabis industry, and could result in the loss of all or part of any of our loans;
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The Biden Administration’s or specifically the U.S. Department of Justice’s change in policies or enforcement with respect to U.S. federal cannabis laws could negatively impact our portfolio companies’
ability to pursue their prospective business operations and/or generate revenues;
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U.S. federal courts may refuse to recognize the enforceability of contracts pertaining to any business operations that are deemed illegal under U.S. federal law, including cannabis companies operating
legally under state law;
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Consumer complaints and negative publicity regarding cannabis-related products and services could lead to political pressure on states to implement new laws and regulations that are adverse to the
cannabis industry, to not modify existing, restrictive laws and regulations, or to reverse current favorable laws and regulations relating to cannabis;
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Assets collateralizing loans to cannabis businesses may be forfeited to the U.S. federal government in connection with government enforcement actions under U.S. federal law;
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U.S. Food and Drug Administration regulation of cannabis and the possible registration of facilities where cannabis is grown could negatively affect the cannabis industry, which could directly affect our
financial condition and the financial condition of our portfolio companies;
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Due to our proposed strategy of investing in portfolio companies engaged in the regulated cannabis industry, our portfolio companies may have a difficult time obtaining the various insurance policies that
are needed to operate such businesses, which may expose us and our portfolio companies to additional risks and financial liabilities;
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The cannabis industry may face significant opposition from other industries that perceive cannabis products and services as competitive with their own, including but not limited to the pharmaceutical
industry, adult beverage industry and tobacco industry, all of which have powerful lobbying and financial resources;
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Many national and regional banks have been resistant to doing business with cannabis companies because of the uncertainties presented by federal law and, as a result, we or our portfolio companies may
have difficulty borrowing from or otherwise accessing the service of banks, which may inhibit our ability to open bank accounts or otherwise utilize traditional banking services;
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Due to our proposed strategy of investing in portfolio companies engaged in the regulated cannabis industry, we or our portfolio companies may have a difficult time obtaining financing in connection with
our investment strategy; and
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Laws and regulations affecting the regulated cannabis industry are varied, broad in scope and subject to evolving interpretations, and may restrict the use of the properties our portfolio companies
acquire or require certain additional regulatory approvals, which could materially adversely affect our investments in such portfolio companies.
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Any of the foregoing could have an adverse impact on our and our portfolio companies’ businesses, financial condition and results of operations.
Cannabis, except for hemp, is currently illegal under U.S. federal law and in other jurisdictions, and strict enforcement of
federal laws would likely result in our inability to execute our business plan.
The ability of our portfolio companies to achieve their business objectives will be contingent, in part, upon the legality of the cannabis industry, their compliance
with regulatory requirements enacted by various governmental authorities, and their obtaining all necessary regulatory approvals. The laws and regulations governing cannabis are still developing, including in ways that we or our portfolio
companies may not foresee. Any amendment to or replacement of existing laws to make them more onerous, or delays in amending or replacing existing laws to liberalize the legal possession and use of cannabis, or delays in obtaining, or the failure
to obtain, any necessary regulatory approvals may significantly delay or impact negatively the markets in which our portfolio companies operate, products and sales initiatives, and could have a material adverse effect on their and our business,
liquidity, financial condition and/or results of operations.
Legal status of cannabis, other than hemp
Thirty-seven states and several territories have legalized some form of whole-plant cannabis cultivation, sales and use for certain medical purposes (medical
states). Twenty-one of those states and several territories have also legalized cannabis for adults for non-medical purposes (sometimes referred to as recreational use).
Under U.S. federal law, however, those activities are illegal. The Controlled Substances Act (the “CSA”) continues to list cannabis (marijuana, but not including
hemp) as a Schedule I controlled substance (i.e., deemed to have no medical value), and accordingly, the manufacture (growth), sale or possession of cannabis is federally illegal, even for personal medical purposes. It also remains federally
illegal to advertise the sale of cannabis or to sell paraphernalia designed or intended primarily for use with cannabis, unless the paraphernalia is traditionally used with tobacco or authorized by federal, state or local law. Entities or persons
who knowingly lease or rent a property for the purposes of manufacturing, distributing or using any controlled substances, or merely know that any of those activities are occurring on land that they control, can also be found liable under the
CSA. Additionally, violating the CSA is a predicate specified unlawful activity under U.S. anti-money laundering laws.
Violations of any U.S. federal laws and regulations can result in arrests, criminal charges, forfeiture of property, significant fines and penalties, disgorgement of
profits, administrative sanctions, criminal convictions and cessation of business activities, as well as civil liabilities arising from proceedings initiated by either the U.S. government or private citizens. The U.S. government could enforce the
federal cannabis prohibition laws even against companies complying with state law.
The likelihood of adverse enforcement against companies complying with state cannabis laws remains uncertain. The U.S. government has not recently
prosecuted any state law compliant cannabis entity, although the risk of future enforcement cannot be dismissed entirely. In 2018, then-U.S. Attorney General Jefferson Sessions rescinded the DOJ’s previous guidance (the Cole Memo) that had
given federal prosecutors discretion not to enforce federal law in states that legalized cannabis, as long as the state’s legal regime adequately addressed specified federal priorities, and had authorized federal prosecutors to use their
prosecutorial discretion to decide whether to prosecute state-legal adult-use cannabis activities. Since that time, U.S. Attorneys have taken no legal action against state law compliant entities.
While President Biden’s election campaign promise to decriminalize may mean that the federal government would not criminally enforce the Schedule
II status against state legal entities, the implications are not entirely clear. Although the U.S. Attorney General could order federal prosecutors not to interfere with cannabis businesses operating in compliance with states’ laws, the
President alone cannot legalize medical cannabis, and as states have demonstrated, legalizing medical cannabis can take many different forms. While rescheduling cannabis to CSA schedule II would ease certain research restrictions, it would not
make the state medical or adult use programs federally legal. Furthermore, while industry observers are hopeful that changes in Congress, along with a Biden presidency, will increase the chances of banking reform, such as the SAFE Banking Act,
we cannot provide assurances that a bill legalizing cannabis would be approved by Congress.
If it became law, the SAFE Banking Act would, among other things, provide protection from federal prosecution to banks and other financial institutions that provide
financial services to state-licensed cannabis companies, which may include the provision of loans by financial institutions to such companies. If the SAFE Banking Act became law, or cannabis became legal under federal law, there would be
increased competition for lending to state-licensed cannabis companies, and such companies would have greater access to financing sources with lower costs of capital. These factors may result in us having to enter into loans at lower rates, which
may significantly adversely impact our profitability and our distributions to stockholders.
Since December 2014, companies strictly complying with state medical cannabis laws have also been protected against enforcement by an amendment (originally called
the Rohrabacher-Farr amendment, now called the Joyce amendment) to the Omnibus Spending Bill, which prevents federal prosecutors from using federal funds to impede the implementation of medical cannabis laws enacted at the state level. Courts
have interpreted the provision to bar the DOJ from prosecuting any person or entity in strict compliance with state medical cannabis laws. While the Joyce provision prevents prosecutions, it does not make cannabis legal. Accordingly, if the
protection expired, prosecutors could prosecute illegal activity that occurred within the statute of limitations even if the Joyce protection was in place when the federally illegal activity occurred. The Joyce protection depends on its continued
inclusion in the federal omnibus spending bill, or in some other legislation, and entities’ strict compliance with the state medical cannabis laws. Furthermore, how the DOJ would enforce against an entity complying with a state’s medical and
adult use laws has not been resolved and is open to debate.
Legal status of hemp and hemp derivatives
Until recently, hemp (defined by the U.S. government as Cannabis sativa L. with a THC concentration of not more than 0.3% on a dry weight basis) and hemp’s extracts
(except mature stalks, fiber produced from the stalks, oil or cake made from the seeds and any other compound, manufacture, salt derivative, mixture or preparation of such parts) were illegal Schedule I controlled substances under the CSA. The
Agricultural Act of 2014, Pub.L. 113-79 (the “2014 Farm Bill”) authorized states to establish industrial hemp research programs. The majority of states established programs purportedly in compliance with the 2014 Farm Bill. Many industry
participants and even states interpreted the law to include “research” into the commercialization of, and commercial markets for, CBD from hemp, including products containing CBD.
In December 2018, the U.S. government changed hemp’s legal status. The Agriculture Improvement Act of 2018, Pub.L. 115-334 (the “2018 Farm Bill”), removed hemp and
extracts of hemp, including CBD, from the CSA schedules. Accordingly, the production, sale and possession of hemp or extracts of hemp, including CBD, no longer violate the CSA. The 2018 Farm Bill did not create a system in which individuals or
businesses can grow hemp whenever and wherever they want. There are numerous restrictions. The 2018 Farm Bill allows hemp cultivation under state plans approved by the U.S. Department of Agriculture (“USDA”) or under USDA regulations in states
that have legalized hemp but not implemented their own regulations. It also allows the transfer of hemp and hemp-derived products across state lines for commercial or other purposes, even through states that have not legalized hemp or
hemp-derived products. Nonetheless, states can still prohibit hemp or limit hemp more stringently than the federal law.
Despite the passage of the 2018 Farm Bill, hemp products’ legal status is complicated further by state and other federal law. The states are a patchwork of different
laws on hemp and its extracts, including CBD. Additionally, the FDA claims that the Food, Drugs & Cosmetics Act (the “FDCA”) significantly limits the legality of hemp-derived CBD products.
The section of the 2018 Farm Bill establishing a framework for hemp production also states explicitly that it does not affect or modify the FDCA, Section 351 of the
Public Health Service Act, or the authority of the Commissioner of the FDA under those laws. Within hours of President Trump signing the 2018 Farm Bill, the FDA issued a statement reminding the public of the FDA’s continued authority “to regulate
products containing cannabis or cannabis-derived compounds under the [FDCA] and Section 351 of the Public Health Service Act.” First, the FDA noted that “it’s unlawful under the [FDCA] to introduce food containing added CBD or THC into interstate
commerce, or to market CBD or THC products, as, or in, dietary supplements, regardless of whether the substances are hemp-derived,” and regardless of whether health claims are made, because CBD (and THC) are active ingredients in FDA-approved
drugs and became the subject of public substantial clinical investigations when GW Pharmaceuticals submitted investigational new drug (“IND”) applications for Sativex and Epidiolex, both containing CBD as an active ingredient. The FDA then warned
against health claims: prior to introduction into interstate commerce, any cannabis product, whether derived from hemp or otherwise, marketed with a disease claim (e.g., therapeutic benefit, disease prevention) must first be approved by the FDA
for its intended use through one of the drug approval pathways. Notably, the FDA can look beyond the product’s express claims to find that a product is a “drug.” The definition of “drug” under the FDCA includes, in relevant part, “articles
intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease in man or other animals” as well as “articles intended for use as a component of [a drug as defined in the other sections of the definition].” In determining
“intended use,” the FDA has traditionally looked beyond a product’s label to statements made on websites, on social media or orally by the company’s representatives. The FDA did acknowledge that hemp foods not containing CBD or THC (e.g., hulled
hemp seeds, hemp seed protein, hemp seed oil) are legal.
Some CBD products are arguably federally legal today, notwithstanding the FDA’s position. To the extent that a CBD product is outside the FDA’s jurisdiction, the
product is likely federally legal because CBD, unlike many drugs that the FDA regulates, is no longer listed on the CSA’s schedules. CBD products other than food, beverages and supplements and not marketed as a drug, including making health
claims, may fall outside of the FDA’s authority. If so, some products that may be legal today include topical products such as cosmetics, massage oils, lotions and creams. Additionally, the FDA lacks authority, except in limited circumstances, to
enforce against companies selling CBD products that do not enter into “interstate commerce,” although the definition of interstate commerce is amorphous and may include sources of ingredients, components or even investments that in some way
impact more than one state.
Enforcement under the FDCA may be criminal or civil in nature and can include those who aid and abet a violation, or conspire to violate, the FDCA. Violations of the
FDCA are for first violations misdemeanors punishable by imprisonment up to one year or a fine, or both, and for second violations or violations committed with an “intent to defraud or mislead” felonies punishable by fines and imprisonment up to
three years. The fines provided for are low ($1,000 and $3,000), but under the Criminal Fine Improvements Act of 1987, the criminal fines can be increased significantly (approximately $100,000 to $500,000). Civil remedies under the FDCA include
civil money penalties, injunctions and seizures. The FDA also has a number of administrative remedies (e.g., warning letters, recalls, debarment). With respect to CBD products, the FDA so far has limited its enforcement to sending
cease-and-desist letters to companies selling CBD products and making “egregious, over-the-line” claims, such as “cures cancer,” “treats Alzheimer’s Disease” and “treats chronic pain.” Additionally, plaintiff lawyers have brought putative class
actions against several companies selling CBD product, claiming that the marketing of them as legal products violates California law, although most of the cases have been stayed pending the FDA issuing promised guidelines to the industry. Since
issuing the initial guidance following the 2018 Farm Bill, the FDA has sent cease-and-desist warning letters to more than twenty companies making health claims about CBD products. The Federal Trade Commission (“FTC”) has also sent warning letters
to companies making unsubstantiated health claims about CBD products and has even filed a lawsuit against one. The FDA’s additional guidance on CBD, titled, “Cannabidiol Enforcement Policy; Draft Guidance for Industry,” which the FDA has
described as a “risk-based enforcement policy” to prioritize enforcement decisions, was submitted to the White House on July 22, 2020, was not formally approved by the Trump administration, and has been pulled back by the Biden Administration.
Loans to relatively new and/or small companies and companies operating in the cannabis industry generally involve significant
risks.
We primarily provide loans to established companies operating in the cannabis industry, but because the cannabis industry is relatively new and rapidly evolving,
some of these companies may be relatively new and/or small companies. Loans to relatively new and/or small companies and companies operating in the cannabis industry generally involve a number of significant risks, including, but not limited to,
the following:
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these companies may have limited financial resources and may be unable to meet their obligations, which may be accompanied by a deterioration in the value of any collateral securing our loan and a
reduction in the likelihood of us realizing a return on our loan;
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they typically have shorter operating histories, narrower product lines and smaller market shares than larger and more established businesses, which tend to render them more vulnerable to competitors’
actions and market conditions (including conditions in the cannabis industry), as well as general economic downturns;
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they typically depend on the management talents and efforts of a small group of persons; therefore, the death, disability, resignation or termination of one or more of these persons could have a material
adverse effect on such borrower and, in turn, on us;
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there is generally less public information about these companies. Unless publicly traded, these companies and their financial information are generally not subject to the regulations that govern public
companies, and we may be unable to uncover all material information about these companies, which may prevent us from making a fully informed lending decision and cause us to lose money on our loans;
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they generally have less predictable operating results and may require substantial additional capital to support their operations, finance expansion or maintain their competitive position;
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we, our executive officers and directors and our Adviser may, in the ordinary course of business, be named as defendants in litigation arising from our loans to such borrowers and may, as a result, incur
significant costs and expenses in connection with such litigation;
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changes in laws and regulations, as well as their interpretations, may have a disproportionate adverse effect on their business, financial structure or prospects compared to those of larger and more
established companies; and
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they may have difficulty accessing capital from other providers on favorable terms or at all.
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Our investment opportunities are limited by the current illegality of cannabis under U.S. federal law; changes in the laws,
regulations and guidelines that impact the cannabis industry may cause adverse effects on our ability to make investments.
Currently, we intend to make equity investments only in portfolio companies that are compliant with all applicable laws and regulations within the jurisdictions in
which they are located or operate and, in particular, we will not make an equity investment in a portfolio company that we determine has been operating, or whose business plan is to operate, in violation of U.S. federal laws, including the U.S.
Controlled Substances Act. This limitation may adversely affect us by limiting the scope of our equity investment opportunities. Additionally, changes to such laws, regulations and guidelines may cause further adverse effects on our ability to
identify and make an equity investment in a portfolio company that meets these legal and regulatory requirements at the time of acquisition.
On the other hand, we may make a loan to a portfolio company regardless of its status under U.S. federal law, so long as we determine based on our due diligence that
the portfolio company is licensed in, and complying with, state-regulated cannabis programs. Any such loans will be designed to be compliant with all applicable laws and regulations to which we are subject, including U.S. federal law, although
the law in this area is not fully settled and there can be no assurances that federal authorities will consider such loans to be compliant with applicable law and regulations. In that regard, we have received an opinion of counsel (a copy of
which has been filed as an exhibit to our IPO registration statement) that the proposed investment activities as described in our IPO prospectus do not violate the U.S. Controlled Substances Act (21 U.S.C. § 801, et seq.)(the “CSA”), the U.S.
Money Laundering Control Act (18 U.S.C. § 1956), or the Drug Paraphernalia law contained in the CSA, 21 U.S.C. § 863, subject to certain assumptions, qualifications and exceptions stated in the opinion. However, there can be no assurances that a
court or federal authorities would agree with the conclusions reached in the opinion. Additionally, if federal legislation is enacted that provides protections from liability under U.S. federal law for other types of investments in portfolio
companies that are compliant with state, but not U.S. federal, laws and is determined to apply to us (or we otherwise determine that the investment is not prohibited), we may make other types of investments in portfolio companies that do not
comply with U.S. federal laws. There can be no assurance, however, that such type of legislation will be enacted or that we will otherwise be able to invest in portfolio companies that do not comply with U.S. federal law.
The nascent status of the medical and recreational cannabis industry involves unique circumstances and there can be no
assurance that the industry will continue to exist or grow as currently anticipated.
Cannabis industry businesses operate under a relatively new medical and adult-use recreational market. In addition to being subject to general business risks, a
business involving an agricultural product and a regulated consumer product needs to continue to build brand, product awareness and operations through significant investments in strategy, production capacity, quality assurance and compliance with
regulations.
Competitive conditions, consumer tastes, patient requirements and spending patterns in this new industry and market are not well understood and may have unique
circumstances that differ from existing industries and markets.
There can be no assurance that this industry and market will continue to exist or grow as currently estimated or anticipated, or function and evolve in a manner
consistent with our expectations and assumptions. Any event or circumstance that affects the medical or recreational cannabis industry and market could have a material adverse effect on our business, financial condition and results of operations,
as well as the business, financial condition and results of operations of portfolio companies.
Any potential growth in the cannabis industry continues to be subject to new and changing state and local laws and
regulations.
Continued development of the cannabis industry is dependent upon continued legislative legalization of cannabis at the state level, and a number of factors could
slow or halt progress in this area, even where there is public support for legislative action. Any delay or halt in the passing or implementation of legislation legalizing cannabis use, or its cultivation, manufacturing, processing,
transportation, distribution, storage and/or sale, or the re-criminalization or restriction of cannabis at the state level, could negatively impact our business and the business of our portfolio companies. Additionally, changes in applicable
state and local laws or regulations, including zoning restrictions, permitting requirements and fees, could restrict the products and services our portfolio companies may offer or impose additional compliance costs on such portfolio companies.
Violations of applicable laws, or allegations of such violations, could disrupt our portfolio companies’ businesses and result in a material adverse effect on their operations. We cannot predict the nature of any future laws, regulations,
interpretations or applications, and it is possible that regulations may be enacted in the future that will be materially adverse to the business of our portfolio companies, as well as our business.
Change in the laws, regulations and guidelines that impact our portfolio companies’ businesses may cause adverse effects on
operations.
A cannabis products business will be subject to a variety of laws, regulations and guidelines relating to the marketing, acquisition, manufacture, management,
transportation, storage, sale, labeling and disposal of cannabis as well as laws and regulations relating to health and safety, the conduct of operations and the protection of the environment. Changes to such laws, regulations and guidelines may
cause adverse effects on the operations of our portfolio companies, which could cause adverse effects on our business.
Portfolio companies operating in a highly regulated business will require significant resources.
In the event we invest in a portfolio company involved in the production, distribution or sale of cannabis products, such portfolio company will be operating in a
highly regulated business. In such a case, we would expect a significant amount of such portfolio company’s management’s time and external resources to be used to comply with the laws, regulations and guidelines that impact their business, and
changes thereto, and such compliance may place a significant burden on such management and other resources of a portfolio company.
Differing regulatory environments may cause adverse effects on our or our portfolio companies’ operations.
A cannabis products business will be subject to a variety of laws, regulations and guidelines in each of the jurisdictions in which it operates. Complying with
multiple regulatory regimes will require additional resources and may limit a portfolio company’s ability to expand into certain jurisdictions, even where cannabis may be legal. For example, even if cannabis were to become legal under U.S.
federal law, companies operating in the cannabis industry would have to comply with applicable state and local laws, which may vary greatly between jurisdictions, increasing costs for companies that operate in multiple jurisdictions.
We may invest in a portfolio company that is involved in a highly regulated business and any failure or significant delay in
obtaining regulatory approvals could adversely affect the ability of portfolio companies to conduct their businesses.
In the event we invest in a portfolio company involved in the production, distribution or sale of cannabis products, achievement of such portfolio company’s business
objectives will be contingent, in part, upon compliance with the regulatory requirements enacted by applicable government authorities and obtaining all regulatory approvals, where necessary, for the sale of their products. We cannot predict the
time required to secure all appropriate regulatory approvals for such products, additional restrictions that may be placed on our portfolio company’s business or the extent of testing and documentation that may be required by government
authorities. Any delays in obtaining, or failure to obtain, regulatory approvals would significantly delay the development of markets and products and could have a material adverse effect on the business, results of operation and financial
condition of any such portfolio company, or on our business, results of operations and financial condition.
The ability of our portfolio companies to access financing or engage in derivatives transactions may be limited because of the unwillingness or inability of certain
financial institutions to transact with companies that operate in the cannabis industry.
U.S. regulations and enforcement relating to hemp-derived CBD products are rapidly evolving.
We may invest in a business involved in the production, distribution or sale of hemp-derived CBD products. Although the passage of the 2018 Farm Bill legalized the
cultivation of hemp in the United States to produce products containing CBD and other non-THC cannabinoids, it is unclear how the FDA will respond to the approach taken by a portfolio company, or whether the FDA will propose or implement new or
additional regulations. In addition, such products may be subject to regulation at the state or local levels. Unforeseen regulatory obstacles may hinder such portfolio company’s ability to successfully compete in the market for such products.
Marketing constraints under regulatory frameworks may limit a portfolio company’s ability to compete for market share in a
manner similar to that of companies in other industries.
The development of a portfolio company’s business and operating results may be hindered by applicable restrictions on sales and marketing activities imposed by
regulations applicable to the cannabis industry. For example, the regulatory environment in Canada would limit a portfolio company’s ability to compete for market share in a manner similar to that of companies in other industries. Additionally,
Canadian regulations impose further packaging, labeling and advertising restrictions on producers in the adult-use recreational cannabis market. If a portfolio company is unable to effectively market its products and compete for market share, or
if the costs of compliance with government legislation and regulation cannot be absorbed through increased selling prices for its products, its sales and operating results could be adversely affected, which could impact our business, results of
operations and financial condition.
Portfolio companies may become involved in regulatory or agency proceedings, investigations and audits.
Businesses in the cannabis industry, and the business of the suppliers from which portfolio companies may acquire the products they may sell, require compliance with
many laws and regulations. Failure to comply with these laws and regulations could subject our portfolio companies or such suppliers to regulatory or agency proceedings or investigations and could also lead to damage awards, fines and penalties.
Our portfolio companies or such suppliers may become involved in a number of government or agency proceedings, investigations and audits. The outcome of any regulatory or agency proceedings, investigations, audits and other contingencies could
harm our reputation, the reputations of our portfolio companies or the reputations of the brands that they may sell, require the portfolio companies to take, or refrain from taking, actions that could harm their operations, or require them to pay
substantial amounts of money, harming their and our financial condition. There can be no assurance that any pending or future regulatory or agency proceedings, investigations and audits will not result in substantial costs or a diversion of
portfolio company management’s attention and resources or have a material adverse impact on their and our business, financial condition and results of operations.
Research in the United States, Canada and internationally regarding the medical benefits, viability, safety, efficacy and
dosing of cannabis or isolated cannabinoids remains in relatively early stages. There have been few clinical trials on the benefits of cannabis or isolated cannabinoids conducted.
Research in the United States, Canada and internationally regarding the medical benefits, viability, safety, efficacy and dosing of cannabis or isolated cannabinoids
(such as CBD and THC) remains in relatively early stages. Historically stringent regulations related to cannabis have made conducting medical and academic studies challenging, and there have been relatively few clinical trials on the benefits of
cannabis or isolated cannabinoids to date. Many statements concerning the potential medical benefits of cannabinoids are based on published articles and reports, and as a result, such statements are subject to the experimental parameters,
qualifications and limitations in the studies that have been completed. In the event we invest in a portfolio company involving medical cannabis, future research and clinical trials may draw different or negative conclusions regarding the medical
benefits, viability, safety, efficacy, dosing or other facts and perceptions related to medical cannabis, which could adversely affect social acceptance of cannabis and the demand for their products. Such portfolio companies may be subject to
liability for risks against which they cannot insure or against which they may elect not to insure due to the high cost of insurance premiums or other factors. Payment of liabilities for which such portfolio companies do not carry insurance may
have a material adverse effect on their financial position and operations. The payment of any such liabilities would reduce the funds available for their normal business activities, which could affect our business, financial condition and results
of operations.
With respect to portfolio companies operating in the medical and adult-use cannabis markets, the illicit supply of cannabis
and cannabis-based products may reduce such sales and impede such company’s ability to succeed in such markets.
In the event we invest in a portfolio company operating in the medical and adult-use cannabis markets, such portfolio company may face competition from unlicensed
and unregulated market participants, including illegal dispensaries and black market suppliers selling cannabis and cannabis-based products.
Even with the legalization of medical and adult-use cannabis in certain jurisdictions, black market operations remain abundant and are a substantial competitor to
cannabis-related businesses. In addition, illegal dispensaries and black market participants may be able to (i) offer products with higher concentrations of active ingredients that are either expressly prohibited or impracticable to produce under
applicable regulations, (ii) use delivery methods, including edibles, concentrates and extract vaporizers, that may be prohibited from being offered to individuals in such jurisdictions, (iii) brand products more explicitly, and (iv)
describe/discuss intended effects of products. As these illicit market participants do not comply with the regulations governing the medical and adult-use cannabis industry in such jurisdictions, their operations may also have significantly lower
costs.
As a result of the competition presented by the black market for cannabis, any unwillingness by consumers currently utilizing these unlicensed distribution channels
to begin purchasing from legal producers for any reason or any inability or unwillingness of law enforcement authorities to enforce laws prohibiting the unlicensed cultivation and sale of cannabis and cannabis-based products could (i) result in
the perpetuation of the black market for cannabis, (ii) adversely affect our portfolio companies’ market share and (iii) adversely impact the public perception of cannabis use and licensed cannabis producers and dealers, all of which would have a
materially adverse effect on our and our portfolio companies’ business, operations and financial condition.
If recreational or medical-use consumers elect to produce cannabis for their own purposes, it could reduce the addressable
market for a portfolio company’s products.
Cannabis regulations may permit the end user to produce cannabis for their own purposes. For example, under cannabis regulations in Canada, three options are
available for an individual to obtain cannabis for medical purposes: (i) registering with a holder of a license to sell for medical purposes and purchasing products from that entity; (ii) register with Health Canada to produce a limited amount of
cannabis for their own medical purposes; or (iii) designate someone else to produce cannabis for them. It is possible that the ability of an end user to produce cannabis for their own purposes, such as under (ii) and (iii) above, could
significantly reduce the addressable market for a portfolio company’s products and could materially and adversely affect the business, financial condition and results of operations of a portfolio company, which in turn, could adversely affect our
business, financial condition and results of operations.
The cannabis industry faces significant opposition, and any negative trends may adversely affect the business operations of
our portfolio companies.
If we invest in portfolio companies in the cannabis industry, we will be substantially dependent on the continued market acceptance, and the proliferation of
consumers, of cannabis. We believe that with further legalization, cannabis will become more accepted, resulting in growth in consumer demand. However, we cannot predict the future growth rate or future market potential, and any negative outlook
on the cannabis industry may adversely affect our business operations and the operations of our portfolio companies.
Large, well-funded industries that perceive cannabis products and services as competitive with their own, including but not limited to the pharmaceutical industry,
adult beverage industry and tobacco industry, all of which have powerful lobbying and financial resources, may have strong economic reasons to oppose the development of the cannabis industry. For example, should cannabis displace other drugs or
products, the medical cannabis industry could face a material threat from the pharmaceutical industry, which is well-funded and possesses a strong and experienced lobby. Any inroads the pharmaceutical, or any other potentially displaced, industry
or sector could make in halting or impeding the cannabis industry could have a detrimental impact on our business and the business of our portfolio companies.
Competition from synthetic products may adversely affect the business, financial condition or results of operations of a
portfolio company.
The pharmaceutical industry may attempt to dominate the cannabis industry, and in particular, legal cannabis, through the development and distribution of synthetic
products which emulate the effects of cannabis. If they are successful, the widespread popularity of such synthetic products could change the demand, volume and profitability of the cannabis industry. This could adversely affect the ability of a
portfolio company to secure long-term profitability and success through the sustainable and profitable operation of the anticipated businesses and investment targets, and could have a material adverse effect on a portfolio company’s business,
financial condition or results of operations, which in turn, could adversely affect our business, financial condition and results of operations.
An initial surge in demand for cannabis may result in supply shortages in the short term, while in the longer term, supply of
cannabis could exceed demand, which may cause a fluctuation in revenue.
Changes in the legal status of cannabis may result in an initial surge in demand. As a result of such initial surge, cannabis companies operating under such changed
legal regime may not be able to produce enough cannabis to meet demand of the adult-use recreational and medical markets, as applicable. This may result in lower than expected sales and revenues and increased competition for sales and sources of
supply.
However, in the future, cannabis producers may produce more cannabis than is needed to satisfy the collective demand of the adult-use recreational and medical
markets, as applicable, and they may be unable to export that oversupply into other markets where cannabis use is fully legal under all applicable jurisdictional laws. As a result, the available supply of cannabis could exceed demand, resulting
in a significant decline in the market price for cannabis. If such supply or price fluctuations were to occur, companies operating in the cannabis industry may see revenue and profitability fluctuate materially and their business, financial
condition, results of operations and prospects may be adversely affected, as could our business, financial condition and results of operations.
Consumer preferences may change, and the portfolio company may be unsuccessful in acquiring or retaining consumers and keeping
pace with changing market developments.
As a result of changing consumer preferences, many consumer products attain financial success for a limited period of time. Even if a portfolio company’s products
find success at retail, there can be no assurance that such products will continue to be profitable. A portfolio company’s success will be significantly dependent upon its ability to develop new and improved product lines and adapt to consumer
preferences. Even if a portfolio company is successful in introducing new products or developing its current products, a failure to gain consumer acceptance or to update products could cause a decline in the products’ popularity and impair the
brands. In addition, a portfolio company may be required to invest significant capital in the creation of new product lines, strains, brands, marketing campaigns, packaging and other product features, none of which are guaranteed to be
successful. Failure to introduce new features and product lines and to achieve and sustain market acceptance could result in the portfolio company being unable to satisfy consumer preferences and generate revenue.
A portfolio company’s success depends on its ability to attract and retain consumers. There are many factors which could impact its ability to attract and retain
consumers, including its ability to continually produce desirable and effective products, the successful implementation of its consumer acquisition plan and the continued growth in the aggregate number of potential consumers. A portfolio company
may not be successful in developing effective and safe new products, anticipating shifts in social trends and consumer demands, bringing such products to market in time to be effectively commercialized, or obtaining any required regulatory
approvals. A portfolio company’s failure to acquire and retain consumers could have a material adverse effect on the business of the portfolio company and us.
In addition, the patterns of cannabis consumption may shift over time due to a variety of factors, including changes in demographics, social trends, public health
policies and other leisure or consumption behaviors. If consumer preferences for a portfolio company’s products or cannabis products in general do not develop, or if once developed, they were to move away from its products or cannabis products in
general, or if a portfolio company is unable to anticipate and respond effectively to shifts in consumer behaviors, it may be adversely affected.
The cannabis industry is highly competitive and evolving.
The market for businesses in the cannabis industry is highly competitive and evolving. There may be no material aspect of our portfolio companies’ businesses that is
protected by patents, copyrights, trademarks or trade names, and they may face strong competition from larger companies, including those that may offer similar products and services to our portfolio companies. Potential competitors may have
longer operating histories, significantly greater financial, marketing or other resources, and larger client bases than our portfolio companies, and there can be no assurance that they will be able to successfully compete against these or other
competitors. Additionally, because the cannabis industry is at an early stage, a portfolio company may face additional competition from new entrants, including as a result of an increased number of licenses granted under any applicable regulatory
regime.
If the number of users of medical cannabis increases, and/or if the national demand for recreational cannabis increases, the demand for products will increase and we
expect that competition will become more intense, as current and future competitors begin to offer an increasing number of diversified products. To remain competitive, a portfolio company may require a continued high level of investment in
research and development, marketing, sales and client support. However, a portfolio company may not have sufficient resources to maintain research and development, marketing, sales and client support efforts on a competitive basis, which could
materially and adversely affect the business, financial condition and results of operations of such portfolio company, as well as our business, financial condition and results of operations. Additionally, as new technologies related to the
cultivation, processing, manufacturing, and research and development of cannabis are being explored, there is potential for third-party competitors to be in possession of superior technology that would reduce any relative competitiveness a
portfolio company may have.
As the legal landscape for cannabis continues to evolve, it is possible that the cannabis industry will undergo consolidation, creating larger companies with greater
financial resources, manufacturing and marketing capabilities, and product offerings. Given the rapid changes affecting the global, national and regional economies generally, and the cannabis industry in particular, our portfolio companies may
not be able to create and maintain a competitive advantage in the marketplace.
The success of any such portfolio company will depend on its ability to keep pace with any changes in such markets, particularly legal and regulatory changes. For
example, it is likely that a portfolio company, and its competitors, will seek to introduce new products in the future. The success of such portfolio companies will also depend on their ability to respond to, among other things, changes in the
economy, market conditions and competitive pressures. Any failure by them to anticipate or respond adequately to such changes could have a material adverse effect on the financial condition and results of operations of us and our portfolio
companies.
The technologies, process and formulations a portfolio company uses may face competition or become obsolete.
Many businesses in the cannabis industry face rapidly changing markets, technology, emerging industry standards and frequent introduction of new products. The
introduction of new products embodying new technologies, including new manufacturing processes or formulations, and the emergence of new industry standards may render a portfolio company’s products obsolete, less competitive or less marketable.
The process of developing their products is complex and requires significant continuing costs, development efforts and third-party commitments, including licensees, researchers, collaborators and lenders. A portfolio company’s failure to develop
new technologies and products and the obsolescence of existing technologies or processes could adversely affect its and our business, financial condition and results of operations. A portfolio company may be unable to anticipate changes in its
customer requirements that could make its existing technology, processes or formulations obsolete. Its success will depend in part on its ability to continue to enhance its existing technologies, develop new technology that addresses the
increasing sophistication and varied news of the market, and respond to technological advances and emerging industry standards and practices on a timely and cost-effective basis. The development of its proprietary technology, processes and
formulations may entail significant technical and business risks. A portfolio company may not be successful in using its new technologies or exploiting its niche markets effectively or adapting its business to evolving customer or medical
requirements or preferences or emerging industry standards.
There is uncertainty in pricing and demand for cannabis-based products.
The anticipated pricing of cannabis products may differ substantially from current levels given changes in the competitive and regulatory landscape. A portfolio
company’s business model may be susceptible to erosion of profitability should cannabis and cannabis-related products experience secular pricing changes. Potential sources of pricing changes include overproduction, regulatory action, increased
competition or the emergence of new competitors. Additionally, even if pricing of the broader cannabis and cannabis-related product market is sustained, there is no guarantee that a portfolio company will be successful in creating and maintaining
consumer demand and estimated pricing levels. To do this, the portfolio company may be dependent upon, among other things, continually producing desirable and effective cannabis and cannabis-related products and the continued growth in the
aggregate number of cannabis consumers. Campaigns designed to enhance a portfolio company’s brand and attract consumers, subject to restrictions imposed by law, can be expensive and may not result in increased sales. If the portfolio company is
unable to attract new consumers, it may not be able to increase its sales.
A portfolio company may have difficulty in forecasting sales and other business metrics.
A portfolio company may rely largely on its own market research to forecast sales as detailed forecasts are not generally obtainable from other sources at this early
stage of the cannabis industry. If the portfolio company underestimates the demand for its products, it may not be able to produce products that meet its stringent requirements, and this could result in delays in the shipment of products and
failure to satisfy demand, as well as damage to reputation and partner relationships. If the portfolio company overestimates the demand for its products, it could face inventory levels in excess of demand, which could result in inventory
write-downs or write-offs and the sale of excess inventory at discounted prices, which would harm the portfolio company’s gross margins and brand management efforts, which could impact our business, results of operations and financial condition.
Due to the nascent nature of the market, it could be difficult for the portfolio company to forecast demand. In particular, it could be difficult to forecast the
rate of the illicit cannabis market crossing over to the legal market. If the market does not develop as the portfolio company expects, it could have a material adverse effect on its business, results of operations and financial condition, which
could in turn have an adverse effect on our business, results of operations and financial condition. In addition to inherent risks and difficulties forecasting sales, anticipated costs and yields are also challenging to predict with certainty as
the cannabis industry is in its relative infancy and rapidly evolving. If portfolio companies make capital investments based on flawed sales, costs and yields forecasts, the portfolio company may not achieve its expected, or any, return on
invested capital. Failure to realize forecasted sales, costs and yields could have a material adverse effect on the portfolio company’s business, results of operations and financial condition, as well as our business, results of operations and
financial condition.
Portfolio companies may have difficulty borrowing from or otherwise accessing the service of banks, which may make it
difficult to sell products and services.
Financial transactions involving proceeds generated by cannabis-related conduct can form the basis for prosecution under the federal money laundering statutes, the
unlicensed money transmitter statute and the U.S. Bank Secrecy Act. Guidance issued by the Financial Crimes Enforcement Network (“FinCEN”), a division of the U.S. Department of the Treasury (the “FinCEN Memo”), clarifies how financial
institutions can provide services to cannabis-related businesses consistent with their obligations under the Bank Secrecy Act. Despite the rescission of memoranda that had de-prioritized the enforcement of federal law against marijuana users and
businesses that comply with state marijuana laws, FinCEN has not rescinded the FinCEN Memo. While this memo appears to be a standalone document and is presumptively still in effect, FinCEN could elect to rescind the FinCEN Memo at any time. Banks
remain hesitant to offer banking services to cannabis-related businesses. Consequently, those businesses involved in the cannabis industry continue to encounter difficulty in establishing banking relationships. The inability of portfolio
companies to maintain bank accounts would make it difficult for them to operate their business, would increase their operating costs and pose additional operational, logistical and security challenges, and could result in their inability to
implement their business plan.
The development and operation of businesses in the cannabis industry may require additional financing, which may not be
available on favorable terms, if at all.
Due to the growth in the cannabis industry, the continued development and operation of businesses in the cannabis industry may require additional financing. The
failure of portfolio companies to raise such capital could result in the delay or indefinite postponement of current business objectives or the cessation of business. There can be no assurance that additional capital or other types of financing
will be available if needed or that, if available, the terms of such financing will be favorable.
Portfolio companies may be subject to product liability claims.
If we invest in a portfolio company operating as a manufacturer and distributor of products utilizing cannabis for human consumption, such portfolio companies will
face an inherent risk of exposure to product liability claims, regulatory action and litigation if their products are alleged to have caused significant loss or injury. In addition, the manufacture and sale of cannabis products involve the risk
of injury to consumers due to tampering by unauthorized third-parties or product contamination. Previously unknown adverse reactions resulting from human consumption of cannabis products alone or in combination with other medications or
substances could occur. Our portfolio companies may be subject to various product liability claims, including, among others, that the products they produced caused injury or illness, include inadequate instructions for use or include inadequate
warnings concerning possible side effects or interactions with other substances.
A product liability claim or regulatory action against a portfolio company could result in increased costs, could adversely affect its reputation with its clients
and consumers generally, and could have a material adverse effect on its results of operations and financial condition, which in turn could adversely affect our results of operations and financial condition. There can be no assurances that a
portfolio company will be able to obtain or maintain product liability insurance on acceptable terms or with adequate coverage against potential liabilities. Such insurance is expensive and may not be available in the future on acceptable terms,
or at all. The inability to obtain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability claims could prevent or inhibit the commercialization of products.
Portfolio companies may not be able to obtain adequate insurance coverage in respect of the risks such business faces, the
premiums for such insurance may not continue to be commercially justifiable or there may be coverage limitations and other exclusions which may result in such insurance not being sufficient to cover potential liabilities that they face.
Although we expect our portfolio companies to have insurance coverage with respect to the assets and operations of their businesses, such insurance coverage will be
subject to coverage limits and exclusions and may not be available for the risks and hazards to which they are exposed. In addition, no assurance can be given that such insurance will be adequate to cover their liabilities, including potential
product liability claims, or will be generally available in the future or, if available, that premiums will be commercially justifiable. If a portfolio company were to incur substantial liability and such damages were not covered by insurance or
were in excess of policy limits, such portfolio company may be exposed to material uninsured liabilities that could impede such company’s liquidity, profitability or solvency, potentially impacting our results of operations and financial
condition.
Due to our involvement in the regulated cannabis industry, we and our borrowers may have a difficult time obtaining or
maintaining the various insurance policies that are desired to operate our business, which may expose us to additional risk and financial liabilities.
Insurance that is otherwise readily available, such as workers’ compensation, general liability, title insurance and directors’ and officers’ insurance, is more
difficult for us and our borrowers to find and more expensive, because of our borrowers’ involvement in the regulated cannabis industry. There are no guarantees that we or our borrowers will be able to find such insurance now or in the future, or
that such insurance will be available on economically viable terms. If we or our borrowers are forced to go without such insurance, it may prevent us from entering into certain business sectors, may inhibit our growth, may expose us to additional
risk and financial liabilities and, in the case of an uninsured loss, may result in the loss of anticipated cash flow or the value of our loan.
We, portfolio companies or the cannabis industry more generally may receive unfavorable publicity or become subject to
negative consumer or investor perception.
We believe that the cannabis industry is highly dependent upon positive consumer and investor perception regarding the benefits, safety, efficacy and quality of the
cannabis distributed to consumers. The perception of the cannabis industry and cannabis products, currently and in the future, may be significantly influenced by scientific research or findings, regulatory investigations, litigation, political
statements, media attention and other publicity (whether or not accurate or with merit) both in the United States and in other countries, including Canada, relating to the consumption of cannabis products, including unexpected safety or efficacy
concerns arising with respect to cannabis products or the activities of industry participants. There can be no assurance that future scientific research, findings, regulatory proceedings, litigation, media attention, or other research findings or
publicity will be favorable to the cannabis market or any particular cannabis product or will be consistent with earlier publicity. Adverse future scientific research reports, findings and regulatory proceedings that are, or litigation, media
attention or other publicity that is, perceived as less favorable than, or that questions, earlier research reports, findings or publicity (whether or not accurate or with merit) could result in a significant reduction in the demand for the
cannabis products of a portfolio company. Further, adverse publicity reports or other media attention regarding the safety, efficacy and quality of cannabis, or the products of a portfolio company specifically, or associating the consumption of
cannabis with illness or other negative effects or events, could adversely affect such portfolio company. This adverse publicity could arise even if the adverse effects associated with cannabis products resulted from consumers’ failure to use
such products legally, appropriately or as directed.
Third-parties with whom we do business may perceive themselves as being exposed to reputational risk by virtue of their
relationship with us and may ultimately elect not to do business with us.
If we invest in a portfolio company in the cannabis industry, the parties with which we do business may perceive that they are exposed to reputational risk as a
result of our investment in a cannabis business. Failure to establish or maintain business relationships could have a material adverse effect on us.
Our reputation and ability to do business, as well as the reputation of our portfolio companies and their ability to do
business, may be negatively impacted by the improper conduct of business partners, employees or agents.
We cannot provide assurance that the internal controls and compliance systems of our portfolio companies will always protect us from acts committed by such
companies’ employees, agents or business partners in violation of applicable laws and regulations in the jurisdictions in which they conduct operations, including those applicable to businesses in the cannabis industry. Any improper acts or
allegations could damage our reputation, the reputation of our portfolio companies and subject us and our portfolio companies to civil or criminal investigations and related shareholder lawsuits, could lead to substantial civil and criminal
monetary and non-monetary penalties, and could cause us or our portfolio companies to incur significant legal and investigatory fees.
Portfolio companies may be subject to regulatory, legal or reputational risk associated with potential misuse of their
products by their customers.
We cannot provide assurance that a portfolio company’s customers will always use its products in the manner in which they intend. Any misuse of their products by
their customers could lead to substantial civil and criminal monetary and non-monetary penalties, and could cause them to incur significant legal and investigatory fees.
A portfolio company may not succeed in promoting and sustaining its brands, which could have an adverse effect on its future
growth and business.
A critical component of a portfolio company’s future growth is its ability to promote and sustain its brands, often achieved by providing a high-quality user
experience. An important element of a portfolio company’s brand promotion strategy is establishing a relationship of trust with its consumers. In order to provide a high-quality user experience, a portfolio company may need to have invested and
continue to invest substantial resources in the development of products, infrastructure, fulfillment and customer service operations. Campaigns designed to enhance a portfolio company’s brand and attract consumers, subject to restrictions imposed
by law, can be expensive and may not result in increased sales. If a portfolio company is unable to attract new customers or its consumers are dissatisfied with the quality of the products sold to them or the customer service they receive and
their overall customer experience, it could see a decrease in sales, which could have a material adverse effect on the portfolio company’s business, financial condition and results of operations, which in turn, could have an adverse effect on our
business, financial condition and results of operations.
Certain events or developments in the cannabis industry more generally may impact our reputation or the reputation of our
portfolio companies.
Damage to our reputation or the reputation of our portfolio companies can result from the actual or perceived occurrence of any number of events, including any
negative publicity, whether true or not. If we invest in a portfolio company in the cannabis industry, because cannabis has been commonly associated with various other narcotics, violence and criminal activities, there is a risk that such
business might attract negative publicity. There is also a risk that the actions of other companies, service providers and customers in the cannabis industry may negatively affect the reputation of the industry as a whole and thereby negatively
impact our reputation or the reputation of our portfolio companies. The increased usage of social media and other web-based tools used to generate, publish and discuss user-generated content and to connect with other users has made it
increasingly easier for individuals and groups to communicate and share negative opinions and views in regards to our and our portfolio companies’ activities and the cannabis industry in general, whether true or not.
We do not ultimately have direct control over how we or the cannabis industry is perceived by others. Reputational issues may result in decreased investor
confidence, increased challenges in developing and maintaining community relations and present an impediment to our overall ability to advance our business strategy and realize our investments.
The cannabis industry is subject to the risks inherent in an agricultural business, including the risk of crop failure.
The growing of cannabis is an agricultural process. As such, a portfolio company with operations in the cannabis industry is subject to the risks inherent in the
agricultural business, including risks of crop failure presented by weather, insects, plant diseases and similar agricultural risks.
Although some cannabis production is conducted indoors under climate controlled conditions, cannabis continues to be grown outdoors and there can be no assurance
that artificial or natural elements, such as insects and plant diseases, will not entirely interrupt production activities or have an adverse effect on the production of cannabis and, accordingly, the operations of a portfolio company, which
could have an adverse effect on our business, financial condition and results of operations.
The cannabis industry is subject to transportation disruptions, including those related to an agricultural product.
As a business revolving mainly around the growth of an agricultural product, the ability to obtain speedy, cost-effective and efficient transport services will be
essential to the prolonged operations of a portfolio company’s business. Should such transportation become unavailable for prolonged periods of time, it could have a material adverse effect on the portfolio company’s business, financial condition
and results of operations, which could also have an adverse effect on our business, financial condition and results of operations.
Due to the nature of a portfolio company’s products, security of the product during transportation to and from its facilities may be important. A breach of security
during transport or delivery could have a material adverse effect on a portfolio company’s business, financial condition and results of operations, which could also have an adverse effect on our business, financial condition and results of
operations. Any breach of the security measures during transport or delivery, including any failure to comply with recommendations or requirements of regulatory authorities, could also have an impact on the portfolio company’s ability to continue
operating under its license or the prospect of renewing its licenses.
Many cannabis businesses are subject to significant environmental regulations and risks.
Participants in the cannabis industry are subject to various environmental regulations in the jurisdictions in which they operate. These regulations may mandate,
among other things, the maintenance of air and water quality standards and land reclamation. These regulations may also set forth limitations on the generation, transportation, storage and disposal of solid and hazardous waste. Environmental
legislation is evolving in a manner which will require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects and a heightened degree of responsibility
for companies and their officers, directors and employees. There is no assurance that future changes in environmental regulation, if any, will not adversely affect a portfolio company.
Many cannabis businesses are dependent on key personnel with sufficient experience in the cannabis industry.
The success of businesses in the cannabis industry is largely dependent on the performance of their respective management teams and key employees and their
continuing ability to attract, develop, motivate and retain highly qualified and skilled employees. Qualified individuals are in high demand, and significant costs may be incurred to attract and retain them. The loss of the services of any key
personnel, or an inability to attract other suitably qualified persons when needed, could prevent a business from executing on its business plan and strategy, and the business may be unable to find adequate replacements on a timely basis, or at
all.
There are a limited number of management teams in the cannabis industry that are familiar with U.S. securities laws.
There are a limited number of management teams in the cannabis industry that have U.S. public company experience. As a result, management of a portfolio company,
including any key personnel that it hires in the future, may not be familiar with U.S. securities laws. If such management team is unfamiliar with U.S. securities laws, they may have to expend time and resources becoming familiar with such laws.
This could be expensive and time-consuming and could lead to various regulatory issues which may adversely affect our operations.
It may be difficult to continuously maintain and retain a competitive talent pool with public company standards.
As we grow, our Adviser may need to hire additional human resources to continue to develop our business. However, experienced talent, including senior management,
with public company background in the areas of cannabis research and development, growing cannabis and extraction are difficult to source, and there can be no assurance that the appropriate individuals will be available or affordable.
Without adequate personnel and expertise, the growth of our business may suffer. There can be no assurance that our Adviser will be able to identify, attract, hire
and retain qualified personnel and expertise in the future, and any failure to do so could have a material adverse effect on our business, financial condition or results of operations.
A portfolio company may be dependent on skilled labor and suppliers.
The ability of a portfolio company to compete and grow will be dependent on it having access, at a reasonable cost and in a timely manner, to skilled labor,
equipment, parts and components. No assurances can be given that a portfolio company will be successful in maintaining its required supply of skilled labor, equipment, parts and components. Qualified individuals are in high demand, and the
portfolio company may incur significant costs to attract and retain them. It is also possible that the final costs of the major equipment and materials, including packaging materials, contemplated by the portfolio company’s capital expenditure
program may be significantly greater than anticipated by the portfolio company’s management, and may be greater than funds available to the portfolio company, in which circumstance the portfolio company may curtail, or extend the time frames for
completing, its capital expenditure plans. This could have a material adverse effect on the portfolio company’s business, financial condition and results of operations, which could also have an adverse effect on our business, financial condition
and results of operations.
Fraudulent or illegal activity by employees, contractors and consultants may adversely affect our portfolio companies’
business, financial condition or results of operations.
A portfolio company may be exposed to the risk that any of its employees, independent contractors or consultants may engage in fraudulent or other illegal activity.
Misconduct by these parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities that violate (i) government regulations, (ii) manufacturing standards, (iii) federal, state and provincial
healthcare fraud and abuse laws and regulations, or (iv) laws that require the true, complete and accurate reporting of financial information or data. It may not always be possible for the portfolio company to identify and deter misconduct by its
employees and other third-parties, and the precautions taken by the portfolio company to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting the portfolio company from
governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against the portfolio company, and it is not successful in defending itself or
asserting its rights, those actions could have a significant impact on the business of the portfolio company, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, contractual damages, reputational
harm, diminished profits and future earnings, and curtailment of the operations of the portfolio company, any of which could have a material adverse effect on the portfolio company’s business, financial condition and results of operations, as
well as our business, financial condition and results of operations.
A portfolio company may be reliant on key inputs and may not be able to realize its cannabis production or capacity targets.
The price of production of cannabis will also vary based on a number of factors outside of our portfolio companies’ control.
A portfolio company’s ability to produce and process cannabis, and the price of production, may be affected by a number of factors, including available space, raw
materials, plant design errors, non-performance by third-party contractors, increases in materials or labor costs, construction performance falling below expected levels of output or efficiency, environmental pollution, contractor or operator
errors, breakdowns, processing bottlenecks, aging or failure of equipment or processes, labor disputes, as well as factors specifically related to indoor agricultural practices, such as reliance on provision of energy and utilities to the
facility, and potential impacts of major incidents or catastrophic events on the facility, such as fires, explosions, earthquakes or storms. Any significant interruption or negative change in the availability or economics of the supply chain for
key inputs could materially impact the business, financial condition and operating results of a portfolio company. Some of these inputs may only be available from a single supplier or a limited group of suppliers, including access to the
electricity grid. If a sole source supplier was to go out of business, the portfolio company might be unable to find a replacement for such source in a timely manner or at all. If a sole source supplier were to be acquired by a competitor, that
competitor may elect not to sell to the portfolio company in the future. Any inability to secure required supplies and services or to do so on appropriate terms could have a materially adverse impact on the business, financial condition, results
of operations and prospects of such businesses, as well as an adverse impact on our business, financial condition and results of operations.
In addition, the price of production, sale and distribution of cannabis will fluctuate widely due to, among other factors, how young the cannabis industry is and the
impact of numerous factors beyond the control of such businesses, including international, economic and political trends, expectations of inflation, currency exchange fluctuations, interest rates, global or regional consumptive patterns,
speculative activities and increased production due to new production and distribution developments and improved production and distribution methods.
A portfolio company may be vulnerable to rising energy costs.
Cannabis growing operations consume considerable energy, which makes a portfolio company vulnerable to rising energy costs and/or the availability of stable energy
sources. Accordingly, rising or volatile energy costs or the inability to access stable energy sources may have a material adverse effect on the portfolio company’s business, financial condition and results of operations, which could also
adversely affect our business, financial condition and results of operations.
There may be a lack of access to U.S. bankruptcy protections for portfolio companies.
Because cannabis is illegal under U.S. federal law, many courts have denied cannabis businesses bankruptcy protections, thus making it very difficult for lenders to
recoup their investments in the cannabis industry in the event of a bankruptcy. If a portfolio company were to experience a bankruptcy, there is no guarantee that U.S. federal bankruptcy protections would be available, which could have a material
adverse effect on the financial condition and prospects of such business and on our rights as lenders and security holders.
Risks Relating to Our Common Stock
Shares of closed-end investment companies, including BDCs, may trade at a discount to their NAV.
Shares of closed-end investment companies, including BDCs, may trade at a discount to their NAV. This characteristic of closed-end investment companies and BDCs is
separate and distinct from the risk that our NAV per share may decline. We cannot predict whether our common stock will trade at, above or below NAV.
Investing in our common stock may involve an above-average degree of risk.
The investments we intend to make in accordance with our investment objective may result in a higher amount of risk than alternative investment options and a higher
risk of volatility or loss of principal. Our investments in portfolio companies involve higher levels of risk, and therefore, an investment in our shares may not be suitable for someone with lower risk tolerance.
The market price of our common stock may fluctuate significantly.
The market price and liquidity of the expected market for shares of our common stock may be significantly affected by numerous factors, some of which are beyond our
control and may not be directly related to our operating performance. These factors include:
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significant volatility in the market price and trading volume of securities of BDCs or other companies in our sector, which are not necessarily related to the operating performance of these companies;
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inability to obtain any exemptive relief that may be required by us from the SEC, if any;
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changes in regulatory policies, accounting pronouncements or tax guidelines, particularly with respect to RICs and BDCs;
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loss of our BDC or RIC status;
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changes in earnings or variations in operating results or distributions that exceed our net investment income;
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increases in expenses associated with defense of litigation and responding to SEC inquiries;
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changes in accounting guidelines governing valuation of our investments;
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changes in the value of our portfolio of investments and any derivative instruments, including as a result of general economic conditions, interest rate shifts and changes in the performance of our
portfolio companies;
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any shortfall in investment income or net investment income or any increase in losses from levels expected by investors or securities analysts;
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sales of our common stock by the Seed Investor (as defined below);
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departure of our Adviser’s key personnel; and
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general economic trends and other external factors, including those related to the COVID-19 pandemic.
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If our common stock trades below its NAV, we will generally not be able to sell additional shares of our common stock to the public at its market price without first
obtaining the approval of our stockholders (including our unaffiliated stockholders) and our independent directors for such issuance.
Sales of substantial amounts of our common stock in the public market, including by the Seed Investor, may have an adverse
effect on the market price of our common stock.
The Adviser was the seed investor of the Company (the “Seed Investor”) and provided initial funding to the Company by purchasing approximately $63 million of our
common stock in our initial public offering. The Seed Investor provided this “seed capital” to the Company for the purpose of facilitating the launch and initial operation of the Company, as opposed to for long term investment purposes. The Seed
Investor does not expect to hold our common stock indefinitely, and may sell our common stock at a future point in time. In order for the Seed Investor’s sales of the shares of the Company not to be deemed to have been made “on the basis of”
material nonpublic information, such sales may be made pursuant to a pre-approved trading plan that complies with Rule 10b5-1 under the Exchange Act and that may obligate the Seed Investor to make recurring sales of our common stock on a periodic
basis. Sales of substantial amounts of our common stock, including by the Seed Investor or other large stockholders, or the availability of such common stock for sale, could adversely affect the prevailing market prices for our common stock. If
this occurs and continues for a sustained period of time, it could impair our ability to raise additional capital through the sale of securities should we desire to do so.
The Seed Investor has significant influence over us, including having an approximately 72% vote for matters that require the
approval of stockholders, which could limit your ability to influence the outcome of matters submitted to stockholders for a vote.
The Seed Investor holds approximately 72% of our voting stock and has the ability to exercise substantial control over all corporate actions requiring stockholder
approval, including the election and removal of directors, certain amendments of our charter, our ability to issue our common stock at a price below NAV per share, and the approval of any merger or other extraordinary corporate action.
Certain provisions of our charter and bylaws and actions of our Board of Directors could deter takeover attempts and have an
adverse impact on the value of shares of our common stock.
Our charter, as well as certain statutory and regulatory requirements, contain certain provisions that may have the effect of discouraging a third-party from
attempting to acquire us. Our Board of Directors is divided into three classes of directors serving staggered three-year terms. Our Board of Directors may, without stockholder action, authorize the issuance of shares in one or more classes or
series, including shares of preferred stock; and our Board of Directors may, without stockholder action, amend our charter to increase the number of shares of our common stock, of any class or series, that we will have authority to issue. These
anti-takeover provisions may inhibit a change of control in circumstances that could give the holders of shares of our common stock the opportunity to realize a premium over the value of shares of our common stock.
Our common stockholders will bear the expenses associated with our borrowings, and the holders of our debt securities will
have certain rights senior to our common stockholders.
If in the future we issue debt securities, all of the costs of offering and servicing such debt, including interest thereon, will be borne by our common
stockholders. The interests of the holders of any debt we may issue will not necessarily be aligned with the interests of our common stockholders. In particular, the rights of holders of our debt to receive interest or principal repayment will be
senior to those of our common stockholders. In addition, we may grant a lender a security interest in a significant portion or all of our assets, even if the total amount we may borrow from such lender is less than the amount of such lender’s
security interest in our assets.
Stockholders may incur dilution if we issue securities to subscribe to, convert to or purchase shares of our common stock.
The 1940 Act prohibits us from selling shares of our common stock at a price below the current NAV per share of such stock with certain exceptions. One such
exception is prior stockholder approval of issuances of securities to subscribe to, convert to or purchase shares of our common stock even if the subscription, conversion or purchase price per share of our common stock is below the NAV per share
of our common stock at the time of any such subscription, conversion or purchase. Any decision to sell securities to subscribe to, convert to or purchase shares of our common stock will be subject to the determination by our Board of Directors
that such issuance is in our and our stockholders’ best interests. If we issue securities to subscribe to, convert to or purchase shares of common stock, the exercise or conversion of such securities would increase the number of outstanding
shares of our common stock. Any such exercise or conversion would be dilutive on the voting power of existing stockholders, and could be dilutive with regard to distributions and our NAV, and other economic aspects of the common stock.
Members of our management team and our board of directors and affiliated companies have been, and may from time to time be,
involved in legal proceedings or governmental investigations unrelated to our business.
Members of our management team and our board of directors have been involved in a wide variety of businesses. Such involvement has, and may lead to, media coverage
and public awareness. As a result of such involvement, members of our management team and our board of directors and affiliated companies have been, and may from time to time be, involved in legal proceedings or governmental investigations
unrelated to our business. Any such proceedings or investigations may be detrimental to our reputation and could negatively affect our ability to operate our business and may have an adverse effect on the price of our common stock.
| Item 1B. |
Unresolved Staff Comments
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None.
| Item 2. |
Properties
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We do not own any real estate or other physical properties materially important to our operations. We utilize office space that is leased by our affiliates for our
principal executive office at 600 Madison Avenue, Suite 1800, New York, NY 10022. We believe that our office facilities are suitable and adequate for our business as presently conducted.
| Item 3. |
Legal Proceedings
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We are not currently subject to any material legal proceedings, nor, to our knowledge, are any material legal proceedings threatened against us. From time to time,
we may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. Furthermore, third parties may seek to impose
liability on us in connection with the activities of our portfolio companies. Our business is also subject to extensive regulation, which may result in regulatory proceedings against us. While the outcome of any future legal or regulatory
proceedings cannot be predicted with certainty, we do not expect that any such future proceedings will have a material effect upon our financial condition or results of operations.
| Item 4. |
Mine Safety Disclosures
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Not Applicable.
| Item 5. |
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
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Common Stock
Our common stock began trading on the Nasdaq Global Market on February 4, 2022 under the symbol “SSIC” in connection with our IPO of shares of our common stock.
The following table lists the net asset value per share of our common stock, the range of high and low closing sales prices of our
common stock reported on the Nasdaq Global Market, the closing sale prices as a premium (or discount) to our net asset value per share and dividends per share for each fiscal quarter since our common stock began trading on the Nasdaq Global
Market. On March 24, 2023, the last reported closing sales price of our common stock on the Nasdaq Global Market was $9.08 per share, which represented a discount of approximately 34.7% to our net asset value per share of $13.91 as of December 31, 2022.
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Price Range
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Class and Period
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Net Asset
Value(1)
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High
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Low
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High Sales
Price
Premium (Discount) to
Net Asset
Value(2)
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Low Sales
Price
Premium (Discount) to
Net Asset
Value(2)
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Cash
Dividend Per Share(3)
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Year Ended December 31, 2023
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First Quarter (Through March 24, 2023)
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$
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*
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$
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9.98
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$
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9.08
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*
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*
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*
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Year Ended December 31, 2022(4)
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Fourth Quarter
|
$
|
13.91
|
$
|
10.55
|
$
|
9.57
|
-24.2
|
%
|
-31.2
|
%
|
-
|
|||||||||||||
|
Third Quarter
|
$
|
13.73
|
$
|
10.74
|
$
|
9.00
|
-21.8
|
%
|
-34.5
|
%
|
-
|
|||||||||||||
|
Second Quarter
|
$
|
13.64
|
$
|
13.50
|
$
|
7.80
|
-1.0
|
%
|
-42.8
|
%
|
-
|
|||||||||||||
|
First Quarter(5)
|
$
|
13.61
|
$
|
14.41
|
$
|
12.57
|
5.9
|
%
|
-7.6
|
%
|
-
|
|||||||||||||
|
(1)
|
Net asset value per share is determined as of the last day in the relevant quarter and therefore may not reflect the net asset value per share on the date of the high and low closing sales prices. The net asset values shown are based
on outstanding shares at the end of the relevant quarter.
|
|
(2)
|
Calculated as the respective high or low closing sales price less net asset value, divided by net asset value (in each case, as of the end of the applicable quarter).
|
|
(3)
|
Represents the dividend or distribution declared in the relevant quarter.
|
|
(4)
|
On November 8, 2022, our Board of Directors approved a change to our fiscal year end from March 31 to December 31.
|
| (5) |
Shares of our common stock began trading on the Nasdaq Global Market on February 4, 2022 under the trading symbol “SSIC.”
|
|
*
|
Not determined at time of filing.
|
Shares of BDCs may trade at a market price that is less than the value of the net assets attributable to those shares. At times, our shares of common stock have
traded at prices both above and below our net asset value per share. The possibility that our shares of common stock will trade at a discount from net asset value per share or at premiums that are unsustainable over the long term are separate and
distinct from the risk that our net asset value per share will decrease. It is not possible to predict whether our common stock will trade at, above, or below net asset value per share.
Holders
As of March 24, 2023, there were approximately 2 holders of record of our common stock, which does not include stockholders for whom shares are held in “nominee” or
“street name.”
Distributions
To the extent that we have income available, we intend to make quarterly distributions to our stockholders beginning after our first full year of operations. The
amount of our distributions, if any, will be determined by our Board of Directors.
We have elected to be treated, and intend to qualify annually to be treated, as a RIC under Subchapter M of the Code, for U.S. federal income tax
purposes, commencing with our taxable year ended March 31, 2022. As long as we qualify as a RIC, we will not be taxed on our investment company taxable income or realized net capital gains, to the extent that such taxable income or gains are
distributed, or deemed to be distributed, to stockholders on a timely basis.
To obtain and maintain RIC tax treatment, we must distribute (or be deemed to distribute) at least 90% of the sum of our: investment company taxable income (which is
generally our ordinary income plus the excess of realized short-term capital gains over realized net long-term capital losses), determined without regard to the deduction for dividends paid, for such taxable year; and net tax-exempt interest
income (which is the excess of our gross tax-exempt interest income over certain disallowed deductions) for such taxable year.
As a RIC, we (but not our stockholders) generally will not be subject to U.S. federal tax on investment company taxable income and net capital gains that we
distribute to our stockholders. The discussion below assumes that we will qualify to be treated as a RIC for U.S. federal tax purposes each year.
We intend to distribute annually all or substantially all of such income. To the extent that we retain our net capital gains or any investment company taxable
income, we generally will be subject to corporate-level U.S. federal income tax. We can be expected to carry forward our net capital gains or any investment company taxable income in excess of current-year dividend distributions, and pay the U.S.
federal excise tax as described below.
Depending on the level of taxable income earned in a tax year, we may choose to carry forward taxable income in excess of current-year distributions into the next
tax year. We will be subject to a 4% excise tax on a certain portion of these undistributed amounts. Please refer to “Item 1. Business — Material U.S. Federal Income Tax Considerations” for further information regarding the consequences of our
retention of net capital gains. We may, in the future, make actual distributions to our stockholders of our net capital gains. We can offer no assurance that we will achieve results that will permit the payment of any cash distributions and, if
we issue senior securities, we may be prohibited from making distributions if doing so causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if distributions are limited by the terms of any of our borrowings. See
“Item 1. Business — Business Development Company Regulations” and “Item 1. Business —Material U.S. Federal Income Tax Considerations.”
While we intend to distribute any income and capital gains in the manner necessary to minimize imposition of the 4% U.S. federal excise tax, sufficient amounts of
our taxable income and capital gains may not be distributed and as a result, in such cases, the excise tax will be imposed. In such an event, we will be liable for this tax only on the amount by which we do not meet the foregoing distribution
requirement.
We intend to pay quarterly distributions to our stockholders out of assets legally available for distribution. All distributions will be paid at the discretion of
our Board of Directors and will depend on our earnings, financial condition, maintenance of our tax treatment as a RIC, compliance with applicable BDC regulations and such other factors as our Board of Directors may deem relevant from time to
time.
To the extent our current taxable earnings for a year fall below the total amount of our distributions for that year, a portion of those distributions may be deemed
a return of capital to our stockholders for U.S. federal income tax purposes. Thus, the source of a distribution to our stockholders may be the original capital invested by the stockholder rather than our income or gains. Stockholders should read
written disclosure carefully and should not assume that the source of any distribution is our ordinary income or gains.
A return of capital is a return of a portion of your original investment in shares of our common stock. As a result, a return of capital will (i) lower your tax
basis in your shares and thereby increase the amount of capital gain (or decrease the amount of capital loss) realized upon a subsequent sale or redemption of such shares and (ii) reduce the amount of funds we have for investment in portfolio
companies. We have not established any limit on the extent to which we may use offering proceeds to fund distributions. However, our Board of Directors, including a majority of our independent directors, will be required to determine that making
return of capital distributions from our offering proceeds is in the best interests of our stockholders based upon our then-current financial condition and our expected future growth prospects.
We made no distributions during the fiscal year ended December 31, 2022.
Dividend Reinvestment Plan
We have adopted an “opt out” dividend reinvestment plan for our stockholders. As a result, if we declare a dividend, then stockholders’ cash distributions will be
automatically reinvested in additional shares of our common stock, unless they specifically “opt out” of the dividend reinvestment plan so as to receive cash distributions. Stockholders who receive distributions in the form of shares of our
common stock generally are subject to the same U.S. federal income tax consequences as are stockholders who elect to receive their distributions in cash.
Issuer Purchases of Equity Securities
We did not repurchase any of our equity securities during the fiscal year ended December 31, 2022.
Performance Graph
The following stock performance graph compares the cumulative stockholder return of an investment in our common stock, and the S&P BDC
Index, S&P 500 Index and NASDAQ Financial 100 Index. The graph measures total shareholder return, which takes into account both changes in stock price and distributions. It assumes that distributions paid are reinvested in like securities
prior to any tax effect.
* Assumes $100 invested on 2/4/2022 (first date our common stock began trading on the Nasdaq Global Market) in each of our common stock and the S&P BDC Index, S&P 500 Index and NASDAQ
Financial 100 Index, including reinvestment of dividends.
The stock price performance included in the above performance graph is based on historical data and is not necessarily indicative of future
stock performance. The performance graph and other information furnished under Part II. Item 5 of this Form 10-K shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C, or to the
liabilities of Section 18 of the Exchange Act.
| Item 6. |
[Reserved]
|
| Item 7. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
The following discussion and analysis or our financial condition and results of operations should be read together with the
consolidated financial statements and the related notes that are included in Item 8 of Part II of this transition report on Form 10-K. This discussion contains forward-looking statements based upon current expectations that involve risks and
uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under the section entitled “Item 1A. Risk Factors.” Please also see the
section entitled “Special Note Regarding Forward-Looking Statements.”
Overview
We were formed in January 2021 as a Maryland corporation and structured as an externally managed, closed-end, non-diversified management investment company. We have
elected to be treated as a BDC under the 1940 Act. In addition, for U.S. federal income tax purposes we have elected to be treated, and intend to qualify annually to be treated, as a RIC under Subchapter M of the Code, commencing with our taxable
year ended March 31, 2022. On November 8, 2022, our Board of Directors approved a change in our fiscal year end from March 31 to December 31.
We are a specialty finance company that may invest across the cannabis ecosystem through investments in the form of direct loans to, and equity ownership of,
privately held cannabis companies. All of our investments are designed to be compliant with all applicable laws and regulations within the jurisdictions in which they are made or to which we are otherwise subject, including U.S. federal laws. We
will make equity investments only in companies that are compliant with all applicable laws and regulations within the jurisdictions in which they are located or operate, including U.S. federal laws. We may make loans to companies that we
determine based on our due diligence are licensed in, and complying with, state-regulated cannabis programs, regardless of their status under U.S. federal law, so long as the investment itself is designed to be compliant with all applicable laws
and regulations in the jurisdiction in which the investment is made or to which we are otherwise subject, including U.S. federal law. We are externally managed by SSC and seek to expand the compliant cannabis investment activities of SSC’s
leading investment platform in the cannabis industry. We primarily seek to partner with private equity firms, entrepreneurs, business owners and management teams to provide credit and equity financing alternatives to support buyouts,
recapitalizations, growth initiatives, refinancings and acquisitions across cannabis companies, including cannabis-enabling technology companies, cannabis-related health and wellness companies, and hemp and CBD distribution companies. Under
normal circumstances, each such cannabis company derives at least 50% of its revenues or profits from, or commits at least 50% of its assets to, activities related to cannabis at the time of our investment in the cannabis company. We are not
required to invest a specific percentage of our assets in such cannabis companies, and we may make debt and equity investments in other companies in the health and wellness sector.
Our investment objective is to maximize risk-adjusted returns on equity for our shareholders. We seek to capitalize on what we believe to be
nascent cannabis industry growth and drive return on equity by generating current income from our debt investments and capital appreciation from our equity and equity-related investments. We intend to achieve our investment objective by
investing primarily in secured debt, unsecured debt, equity warrants and direct equity investments in privately held businesses. We intend that our debt investments will often be secured by either a first or second priority lien on the assets
of the portfolio company, can include either fixed or floating rate terms and will generally have a term of between three and six years from the original investment date. To date, we have invested in first lien secured, fixed and floating rate
debt with terms of two to four years. We expect our secured loans to be secured by various types of assets of our borrowers. While the types of collateral securing any given secured loan will depend on the nature of the borrower’s business,
common types of collateral we expect to secure our loans include real property and certain personal property, including equipment, inventory, receivables, cash, intellectual property rights and other assets to the extent permitted by applicable
laws and the regulations governing our borrowers. Certain attractive assets of our borrowers, such as cannabis licenses and cannabis inventory, may not be able to be used as collateral or transferred to us. See “Item 1A. Risk Factors—Risks
Relating to Our Investments—Certain assets of our borrowers may not be used as collateral or transferred to us due to applicable state laws and regulations governing the cannabis industry, and such restrictions could negatively impact our
profitability.” In some of our portfolio investments, we expect to receive nominally priced equity warrants and/or make direct equity investments in connection with a debt investment. In addition, a portion of our portfolio may be comprised of
derivatives, including total return swaps.
Generally, the loans we invest in have a complete set of financial maintenance covenants, which are used to proactively address materially adverse changes in a
portfolio company’s financial performance. However, we may invest in “covenant-lite” loans. We use the term “covenant-lite” to refer generally to loans that do not have a complete set of financial maintenance covenants. Generally, “covenant-lite”
loans provide borrower companies more freedom to negatively impact lenders because their covenants are incurrence-based, which means they are only tested and can only be breached following an affirmative action of the borrower, rather than by a
deterioration in the borrower’s financial condition. Accordingly, to the extent we invest in “covenant-lite” loans, we may have fewer rights against a borrower and may have a greater risk of loss on such investments as compared to investments in
or exposure to loans with a complete set of financial maintenance covenants.
The loans in which we tend to invest typically pay interest at rates which are determined periodically on the basis of PRIME plus a premium. The
loans in which we have invested and expect to invest are typically made to U.S. and, to a limited extent, non-U.S. (including emerging market) corporations, partnerships and other business entities which operate in various industries and
geographical regions. These loans typically are not rated or are rated below investment grade. Securities rated below investment grade are often referred to as “high-yield” or “junk” securities, and may be considered a higher risk than debt
instruments that are rated above investment grade.
We have typically invested in and expect to continue to invest in loans made primarily to private leveraged middle-market companies with up to
$100 million of earnings before interest, taxes, depreciation and amortization, or “EBITDA.” Our business model is focused primarily on the direct origination of investments through portfolio companies or their financial sponsors. We expect
that our investments will generally range between $4 million and $40 million each, although we expect that this investment size will vary proportionately with the size of our capital base. We have an active pipeline of investments and are
currently reviewing over $841 million of potential investments in varying stages of underwriting.
We are externally managed by SSC. SSC also provides the administrative services necessary for us to operate. We believe that our ability to leverage the existing
investment management platform of SSC enables us to operate more efficiently and with lower overhead costs than other newly formed funds of comparable size.
Revenues
We generate revenues primarily in the form of interest income from the investments we hold. In addition, we may generate income from dividends on either direct
equity investments or equity interests obtained in connection with originating loans, such as options, warrants or conversion rights. Our debt investments typically have a term of three to six years. Our loan portfolio will bear interest at a
fixed or floating rate, subject to interest rate floors in certain cases. Interest on our debt investments will generally be payable either monthly or quarterly, but may be semi-annually.
Our investment portfolio consists of fixed and floating rate loans, and our credit facilities, if any, will bear interest at floating rates. Macro trends in base
interest rates like PRIME may affect our net investment income over the long term.
Loan origination fees, OID, closing fees and market discount or premium are capitalized, and we accrete or amortize such amounts under accounting principles
generally accepted in the United States of America (“U.S. GAAP”) as interest income, using the effective yield method for term instruments and the straight-line method for revolving or delayed draw instruments. Repayments of our debt investments
will reduce interest income in future periods. The frequency or volume of these repayments may fluctuate significantly. We will record prepayment premiums on loans as interest income. We may also generate revenue in the form of commitment,
structuring, or due diligence fees, fees for providing managerial assistance to our portfolio companies, and consulting fees.
Dividend income on equity investments, if applicable, will be recorded on the record date for private portfolio companies or on the ex-dividend date for publicly
traded companies.
Our portfolio activity may also reflect the proceeds from sales of investments. We will recognize realized gains or losses on sales of investments based on the
difference between the net proceeds from the disposition and the amortized cost basis of the investment, without regard to unrealized gains or losses previously recognized. We will record current-period changes in fair value of investments that
are measured at fair value as a component of the net change in unrealized gains (losses) on investments on the Statements of Operations.
Expenses
Our primary operating expenses are a base management fee and any incentive fees under the Investment Advisory Agreement. Our investment management
fee compensates our Adviser for its work in identifying, evaluating, negotiating, executing, monitoring, servicing and realizing our investments. See “Item 1. Business—Investment Advisory Agreement.”
Except as specifically provided below, all investment professionals and staff of the Adviser, when and to the extent engaged in providing investment advisory and management services to us, the base compensation, bonus and benefits, and the routine
overhead expenses of such personnel allocable to such services, are provided and paid for by the Adviser. We may bear our allocable portion of the compensation paid by the Adviser (or its affiliates) to our CFO and CCO and their respective staffs
(based on a percentage of time such individuals devote, on an estimated basis, to our business affairs). We may bear any other expenses of our operations and transactions, including (without limitation) fees and expenses relating to:
|
•
|
the cost of our organization and offerings;
|
|
•
|
the cost of calculating our NAV, including the cost of any third-party valuation services;
|
|
•
|
the cost of effecting sales and repurchases of shares of our common stock and other securities;
|
|
•
|
fees and expenses payable under any underwriting agreements, if any;
|
|
•
|
debt service and other costs of borrowings or other financing arrangements;
|
|
•
|
costs of hedging;
|
|
•
|
expenses, including travel expenses, incurred by the Adviser, or members of the investment team, or payable to third-parties, performing due diligence on prospective portfolio companies and, if necessary,
enforcing our rights;
|
|
•
|
management and incentive fees payable pursuant to the Investment Advisory Agreement;
|
|
•
|
fees payable to third-parties relating to, or associated with, making investments and valuing investments (including third-party valuation firms);
|
|
•
|
costs, including legal fees, associated with compliance under cannabis laws;
|
|
•
|
transfer agent and custodial fees;
|
|
•
|
fees and expenses associated with marketing efforts (including attendance at industry and investor conferences and similar events);
|
|
•
|
federal and state registration fees;
|
|
•
|
any exchange listing fees and fees payable to rating agencies;
|
|
•
|
federal, state and local taxes;
|
|
•
|
independent directors’ fees and expenses, including travel expenses;
|
|
•
|
cost of preparing financial statements and maintaining books and records and filing reports or other documents with the SEC (or other regulatory bodies) and other reporting and compliance costs, and the
compensation of professionals responsible for the preparation of the foregoing;
|
|
•
|
the cost of any reports, proxy statements or other notices to our stockholders (including printing and mailing costs), the costs of any stockholder or director meetings and the compensation of investor
relations personnel responsible for the preparation of the foregoing and related matters;
|
|
•
|
brokerage commissions and other compensation payable to brokers or dealers;
|
|
•
|
research and market data;
|
|
•
|
fidelity bond, directors’ and officers’ errors and omissions liability insurance and other insurance premiums;
|
|
•
|
direct costs and expenses of administration, including printing, mailing and staff;
|
|
•
|
fees and expenses associated with independent audits, and outside legal and consulting costs;
|
|
•
|
costs of winding up;
|
|
•
|
costs incurred in connection with the formation or maintenance of entities or vehicles to hold our assets for tax or other purposes;
|
|
•
|
extraordinary expenses (such as litigation or indemnification); and
|
|
•
|
costs associated with reporting and compliance obligations under the 1940 Act and applicable federal and state securities laws.
|
We expect, but cannot assure, that our general and administrative expenses will increase in dollar terms during periods of asset growth, but will decline as a
percentage of total assets during such periods.
Hedging
To the extent that any of our investments are denominated in a currency other than U.S. dollars, we may enter into currency hedging contracts to reduce our exposure
to fluctuations in currency exchange rates. We may also enter into interest rate hedging agreements. Such hedging activities, which will be subject to compliance with applicable legal requirements, may include the use of futures, options, swaps
and forward contracts. Costs incurred in entering into such contracts or in connection with settling them will be borne by us.
Portfolio Composition and Investment Activity
Portfolio Composition
As of December 31, 2022, our investment portfolio had an aggregate fair value of approximately $50.3 million and was comprised of approximately
$40.7 million in first lien, senior secured loans, and approximately $9.6 million in senior secured notes across five portfolio companies. As of March 31, 2022, we had no investments.
A summary of the composition of our investment portfolio at cost and fair value as a percentage of total investments are shown in the following table as of December
31, 2022. As of March 31, 2022, we had no investments.
|
December 31, 2022
|
||||||||
|
Type
|
Amortized Cost
|
Fair Value
|
||||||
|
Senior Secured First Lien Term Loan
|
80.9
|
%
|
80.9
|
%
|
||||
|
Senior Secured Notes
|
19.1
|
19.1
|
||||||
|
Total
|
100.0
|
%
|
100.0
|
%
|
||||
The following table shows the composition of our investment portfolio by geographic region of the United States at cost and fair value as a percentage of total
investments as of December 31, 2022. The geographic composition is determined by the location of the headquarters of the portfolio company. As of March 31, 2022, we had no investments.
|
December 31, 2022
|
||||||||
|
Geographic Region
|
Amortized Cost
|
Fair Value
|
||||||
|
Midwest
|
48.4
|
%
|
48.5
|
%
|
||||
|
West
|
40.5
|
40.3
|
||||||
|
Northeast
|
7.6
|
7.7
|
||||||
|
Southeast
|
3.5
|
3.5
|
||||||
|
Total
|
100.0
|
%
|
100.0
|
%
|
||||
Set forth below is a table showing the industry composition of our investment portfolio at cost and fair value as a percentage of total investments as of December
31, 2022. As of March 31, 2022, we had no investments.
|
December 31, 2022
|
||||||||
|
Industry
|
Amortized Cost
|
Fair Value
|
||||||
|
Wholesale Trade
|
100.0
|
%
|
100.0
|
%
|
||||
|
Total
|
100.0
|
%
|
100.0
|
%
|
||||
Concentrations of Credit Risk
Credit risk is the risk of default or non-performance by portfolio companies, equivalent to the investment’s carrying amount. Industry and sector concentrations will
vary from period to period based on portfolio activity.
As of December 31, 2022, we had two portfolio companies that represented 80.9% of the fair value of our portfolio. As of December 31, 2022, our
largest portfolio company represents 40.64% of the total fair value of our investments in portfolio companies.
Investment Activity
During the nine months ended December 31, 2022, we made an aggregate of approximately $50.4 million of investments in five portfolio companies,
excluding fees and discounts. During the nine months ended December 31, 2022, there were no repayments received or sales of investments.
During the year ended March 31, 2022, we had made no investments.
The following table provides a summary of the changes in the investment portfolio for the nine months ended December 31, 2022. During the year ended March 31, 2022,
we had made no investments:
|
|
Nine Months Ended
December 31, 2022
|
|||
|
Beginning Portfolio, at fair value
|
$
|
-
|
||
|
Purchases
|
50,362,500
|
|||
|
Accretion of discount and fees (amortization of premium), net
|
165,398
|
|||
|
PIK interest
|
-
|
|||
|
Principal payments received on investments
|
-
|
|||
|
Proceeds from principal repayments
|
-
|
|||
|
Sale of investments
|
-
|
|||
|
Net realized gain (loss) on investments
|
-
|
|||
|
Net change in unrealized appreciation (depreciation) on investments
|
(273,348
|
)
|
||
|
Ending Portfolio, at fair value
|
$
|
50,254,550
|
||
Portfolio Asset Quality
Our portfolio management team uses an ongoing investment risk rating system to characterize and monitor our outstanding loans. Our portfolio management team monitors
and, when appropriate, recommends changes to the investment risk ratings. Our Adviser’s Valuation Committee reviews the recommendations and/or changes to the investment risk ratings, which are submitted on a quarterly basis to the Board of
Directors and its Audit Committee.
|
Investment
Performance
Risk Rating
|
Summary Description
|
|
|
Grade 1
|
Investments rated 1 involve the least amount of risk to our initial cost basis. The borrower is performing above expectations, and the trends and risk factors for this investment since origination or
acquisition are generally favorable. Full return of principal, interest and dividend income is expected.
|
|
|
Grade 2
|
Investment is performing in-line with expectations. Investments rated 2 involve an acceptable level of risk that is similar to the risk at the time of origination or acquisition. Risk factors remain neutral
or favorable compared with initial underwriting. All investments or acquired investments in new portfolio companies are initially assessed a rating of 2.
|
|
|
Grade 3
|
Investments rated 3 involve a borrower performing below expectations and indicates that the loan’s risk has increased somewhat since origination or acquisition. Capital impairment or payment delinquency is
not anticipated. The investment may also be out of compliance with certain financial covenants.
|
|
|
Grade 4
|
Investments rated 4 involve a borrower performing materially below expectations and indicates that the loan’s risk has increased materially since origination or acquisition. In addition to the borrower
being generally out of compliance with debt covenants, loan payments may be past due (but generally not more than 120 days past due). Delinquency of interest and / or dividend payments in anticipated. No loss of principal is anticipated.
|
|
|
Grade 5
|
Investments rated 5 involve a borrower performing substantially below expectations and indicates that the loan’s risk has increased substantially since origination or acquisition. It is anticipated that the
Company will not recoup its initial cost and may realize a loss upon exit. Most or all of the debt covenants are out of compliance and payments are substantially delinquent. Loans rated 5 are not anticipated to be repaid in full and we
will reduce the fair market value of the loan to the amount we anticipate will be recovered.
|
The following table shows the distribution of our loan investments on the 1 to 5 investment risk rating scale at fair value as of December 31, 2022:
|
December 31, 2022
|
|||||||||
|
Investment Performance Risk Rating
|
Investments at Fair
Value
|
Percentage of Total
Investments
|
|||||||
| 1 |
$
|
-
|
-
|
%
|
|||||
| 2 |
50,254,550
|
100.00
|
|||||||
| 3 |
-
|
-
|
|||||||
| 4 |
-
|
-
|
|||||||
| 5 |
-
|
-
|
|||||||
|
Total
|
$
|
50,254,550
|
100.00
|
%
|
|||||
Debt Investments on Non-Accrual Status
As of December 31, 2022, there were no loans in our portfolio placed on non-accrual status. As of March 31, 2022, there were no loans in our portfolio.
Results of Operations
The Company was formed January 25, 2021, the effective date of our registration statement was February 3, 2022, and our investment activity
commenced on May 26, 2022. During the year ended March 31, 2022 and the period of January 25, 2021 (Inception) to March 31, 2021, the primary activities of the Company were offering and organizational in nature. See the Company's annual report
on Form 10-K for the fiscal year ended March 31, 2022 for details. Therefore, the following discussion and analysis of our results of operations encompasses our results for the nine months ended December 31, 2022 and 2021.
Investment Income
The following table sets forth the components of investment income for the nine months ended December 31, 2022. As of December 31, 2021, there were no investments in
our portfolio:
|
Nine Months Ended
December 31, 2022
|
||||
|
Stated interest income
|
$
|
3,461,394
|
||
|
Accretion of discount and fees (amortization of premium), net
|
165,398
|
|||
|
Other fee income
|
410,000
|
|||
|
Total investment income
|
$
|
4,036,792
|
||
We generate revenues primarily in the form of investment income from the investments we hold, generally in the form of interest income from our debt securities.
Stated interest income represents interest income recognized as earned in accordance with the contractual terms of the loan agreement. Stated interest income from original issue discount (“OID”) and market discount represent the accretion into
interest income over the term of the loan as a yield enhancement. Interest income from payment-in-kind (“PIK”) represents contractually deferred interest added to the loan balance recorded on an accrual basis to the extent such amounts are
expected to be collected.
The Company also recognizes certain fees as one-time fee income, including, but not limited to, structuring fees.
For the nine months ended December 31, 2022, total investment income was approximately $4.0 million, which is attributable to $0.4 million of fee
income related to structuring fees and $3.6 million of interest income. For the nine months ended December 31, 2021 we had made no investments.
Operating Expenses
Our operating expenses for the nine months ended December 31, 2022 are comprised primarily of professional fees for legal, administration, audit and directors, and
our management fees. For the nine months ended December 31, 2021, our expenses are comprised primarily of organizational expenses. Our operating expenses totaled approximately $1.8 million and $0.3 million for the nine months ended December 31,
2022 and December 31, 2021, respectively.
Net Investment Income
As a result of approximately $4.0 million in total investment income as compared to $1.8 million in total expenses, net investment income for the nine months ended
December 31, 2022 was approximately $2.2 million. As a result of $0 in total investment income as compared to approximately $0.3 million in total expenses, net investment loss for the nine months ended December 31, 2021 was approximately $0.3
million. The fluctuation in net investment income between the nine months ended December 31, 2022 and the nine months ended December 31, 2021 is due to the initial public offering of the Company occurring on February 8, 2022. Prior to February 8,
2022, we had no operations, except for matters relating to the Company’s formation and organization as a BDC.
Net Realized Gains and Losses
Realized gains or losses are measured by the difference between the net proceeds from the sale or redemption of an investment or a financial
instrument and the cost basis of the investment or financial instrument, without regard to unrealized appreciation or depreciation previously recognized, and includes investments written-off during the period.
There were no net realized gains (losses) from the sales, repayments, or exits of investments during the nine months ended December 31, 2022
or December 31, 2021.
Net Change in Unrealized Appreciation / (Depreciation) from Investments
Net change in unrealized appreciation/(depreciation) from investments primarily reflects the net change in the fair value as of the last business day of the
reporting period, including the reversal of previously recorded unrealized gains or losses with respect to investments realized during the period. We record current-period changes in fair value of investments that are measured at fair value as a
component of the net change in unrealized gains (losses) on investments on the Statements of Operations.
Net unrealized appreciation and depreciation on investments for the nine months ended December 31, 2022 and 2021 is comprised of the following:
|
|
Nine Months Ended
December 31, 2022 |
Nine Months Ended
December 31, 2021 |
||||||
|
Gross unrealized appreciation
|
$
|
– |
$
|
-
|
||||
|
Gross unrealized depreciation
|
(273,348
|
) |
-
|
|||||
|
Total net unrealized appreciation (depreciation) on investments
|
$
|
(273,348
|
) |
$
|
-
|
|||
The following table details net change in unrealized appreciation (depreciation) for our portfolio for the nine months ended December 31, 2022 and
2021:
|
|
Nine Months Ended
December 31, 2022 |
Nine Months Ended
December 31, 2021 |
||||||
|
Shryne Group Inc.
|
$
|
(211,281
|
)
|
$
|
-
|
|||
|
PharmaCann Inc.
|
(62,067
|
)
|
-
|
|||||
|
Total net unrealized appreciation (depreciation) on investments
|
$
|
(273,348
|
)
|
$
|
-
|
|||
Financial Condition, Liquidity and Capital Resources
We generate cash primarily from the net proceeds of offerings of securities and cash flows from operations, including interest earned from the temporary investment
of cash in U.S. government securities.
In addition, we expect to enter into a credit facility in the future. The amount of leverage that we employ will depend on our assessment of market conditions and
other factors at the time of any proposed borrowing, such as the maturity, covenant package and rate structure of the proposed borrowings, our ability to raise funds through the issuance of shares of our common stock and the risks of such
borrowings within the context of our investment outlook. Ultimately, we only intend to use leverage if the expected returns from borrowing to make investments will exceed the cost of such borrowing. We are currently targeting a debt-to-equity
ratio of 0.50x (i.e., we aim to have one dollar of equity for each $0.50 of debt outstanding).
Our primary use of funds will be investments in portfolio companies, cash distributions to holders of our common stock, and the payment of operating expenses. As of
December 31, 2022, we had cash resources of approximately $35.1 million and no indebtedness.
Another use of funds will be dividend payments. To maintain its tax treatment as a RIC, the Company must meet specified source-of-income requirements
and timely distribute to its stockholders for each taxable year at least 90% of its investment company taxable income. Additionally, in order for the Company not to be subject to U.S. federal excise taxes, it must distribute annually an amount
at least equal to the sum of (i) 98% of its net ordinary income for the calendar year, (ii) 98.2% of its capital gains in excess of capital losses for the one-year period ending on October 31 of the calendar year and (iii) any net ordinary
income and capital gains in excess of capital losses for preceding years that were not distributed during such years.
Dividends may also be distributed in accordance with the Company’s distribution reinvestment plan (“DRIP”). which provides for the reinvestment of
distributions in the form of common stock on behalf of its stockholders, unless a stockholder has elected to receive distributions in cash. As a result, if the Company declares a cash distribution, its stockholders who have not “opted out” of
the DRIP by the opt out date will have their cash distribution automatically reinvested into additional shares of the Company’s common stock. The share requirements of the DRIP may be satisfied through the issuance of common shares or through
open market purchases of common shares by the DRIP plan administrator.
U.S. Federal Income Taxes
We elected to be treated, and intend to qualify annually to be treated, as a RIC under Subchapter M of the Code for federal income tax purposes. As a RIC, we
generally will not have to pay corporate-level federal income taxes on any ordinary income or capital gains that we distribute to our stockholders from our tax earnings and profits. To obtain and maintain our RIC tax treatment, we must, among
other things, meet specified source-of-income and asset diversification requirements and 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, if any.
Critical Accounting Estimates
Basis of Presentation
The Company’s financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and
pursuant to Regulation S-X under the Securities Act of 1933, as amended (the “Securities Act”). The Company follows accounting and reporting guidance as determined by the Financial Accounting Standards Board (“FASB”).
The preparation of financial statements in accordance with U.S. GAAP requires management to make certain estimates and assumptions affecting
amounts reported in our financial statements. We will continuously evaluate our estimates, including those related to the matters described below. These estimates will be based on the information that is currently available to us and on various
other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from those estimates under different assumptions or conditions. For additional information, please refer to “Note 2 – Significant
Accounting Policies” in the notes to the financial statements included with this transition report on Form 10-K. Valuation of investments and income recognition are considered to be our critical accounting policies and estimates. A discussion
of our critical accounting policies follows.
Investment Valuation
Investments for which market quotations are readily available will typically be valued at the bid price of those market quotations. To validate market quotations, we
utilize a number of factors to determine if the quotations are representative of fair value, including the source and number of the quotations. Debt and equity securities that are not publicly traded or whose market prices are not readily
available are valued at fair value as determined in good faith by the Adviser, as the Company’s valuation designee (the “Valuation Designee”), based on inputs that may include valuations, or ranges of
valuations, provided by independent third-party valuation firm(s) engaged by the Adviser. Effective September 8, 2022, pursuant to Rule 2a-5 under the 1940 Act, the Board designated the Adviser as the Valuation Designee to perform the fair
value determinations for the Company, subject to the oversight of the Board and certain Board reporting and other requirements.
As part of the valuation process, the Adviser takes into account relevant factors in determining the fair value of our investments, including: the
estimated enterprise value of a portfolio company (i.e., the total fair value of the portfolio company’s debt and equity), the nature and realizable value of any collateral, the portfolio company’s ability to make payments based on its earnings
and cash flow, the markets in which the portfolio company does business, a comparison of the portfolio company’s securities to any similar publicly traded securities, and overall changes in the interest rate environment and the credit markets
that may affect the price at which similar investments may be made in the future. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, the Adviser considers whether the pricing indicated by
the external event corroborates its valuation.
The Adviser undertakes a multi-step valuation process, which includes, among other procedures, the following:
|
•
|
With respect to investments for which market quotations are readily available, those investments will typically be valued at the bid price of those market quotations;
|
|
•
|
With respect to investments for which market quotations are not readily available, the valuation process begins with the Adviser’s valuation committee establishing a preliminary valuation of each
investment, which may be based on valuations, or ranges of valuations, provided by independent valuation firm(s);
|
|
•
|
Preliminary valuations are documented and discussed by the Adviser’s valuation committee and, where appropriate, the independent
valuation firm(s); and
|
|
•
|
The Adviser determines the fair value of each investment.
|
We conduct this valuation process on a quarterly basis.
We apply Financial Accounting Standards Board Accounting Standards Codification 820, Fair Value Measurement (“ASC 820”), which establishes a framework for measuring
fair value in accordance with U.S. GAAP and required disclosures of fair value measurements. ASC 820 determines fair value to be the price that would be received for an investment in a current sale, which assumes an orderly transaction between
market participants on the measurement date. Market participants are defined as buyers and sellers in the principal or most advantageous market (which may be a hypothetical market) that are independent, knowledgeable, and willing and able to
transact. In accordance with ASC 820, we consider the principal market to be the market that has the greatest volume and level of activity. ASC 820 specifies a fair value hierarchy that prioritizes and ranks the level of observability of inputs
used in determination of fair value. In accordance with ASC 820, these levels are summarized below:
|
•
|
Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date;
|
|
•
|
Level 2 – Valuations based on quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in
markets that are not active, or for which all significant inputs are observable, either directly or indirectly; and
|
|
•
|
Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
|
All of our investments as of December 31, 2022 are categorized at level 3, and therefore, 100% of our portfolio requires significant
estimates. Our investments may not have readily available market quotations (as such term is defined in Rule 2a-5 under the 1940 Act), and those investments which do not have readily available market quotations are valued at fair value as
determined in good faith in accordance with our valuation policy. There is no single standard for determining fair value in good faith. As a result, determining fair value requires that judgment be applied to the specific facts and
circumstances of each portfolio investment while employing a consistently applied valuation process for the types of investments we make. Significant unobservable inputs create uncertainty in the measurement of fair value as of the reporting
date. The significant unobservable inputs used in the fair value measurement of the Company’s investments are related to the debt investments’ yield and volatility fluctuations. Significant increases (decreases) in discount rate in isolation
would result in a significantly higher (lower) fair value assessment. Significant increases (decreases) in volatility in isolation would result in a significantly lower (higher) fair value assessment.
Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may
fluctuate from period to period. Additionally, the fair value of such investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values that
may ultimately be realized. Further, such investments are generally less liquid than publicly traded securities and may be subject to contractual and other restrictions on resale. If we were required to liquidate a portfolio investment in a
forced or liquidation sale, it could realize amounts that are different from the amounts presented and such differences could be material.
In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on
these investments to be different than the unrealized gains or losses reflected previously.
Other Contractual Obligations
We will have certain commitments pursuant to our Investment Advisory Agreement that we have entered into with SSC. We have agreed to pay a fee
for investment advisory services consisting of two components: a base management fee and an incentive fee. Payments under the Investment Advisory Agreement will be equal to (1) a percentage of the value of our average gross assets and (2) a
two-part incentive fee. See “Item 1. Business—Investment Advisory Agreement.” We have also entered into a contract with SSC to serve as our administrator. Payments under the Administration Agreement will be reimbursements to SSC for the costs
and expenses incurred by SSC in performing its obligations, including but not limited to maintaining and keeping all books and records and providing personnel and facilities. This includes costs and expenses incurred by SSC in connection with
the delegation of its obligations to a sub-administrator. The Company is not responsible for the compensation of SSC’s employees and overhead expenses. See “Item 1. Business—Administration Agreement.”
| Item 7A. |
Quantitative and Qualitative Disclosures About Market Risk
|
Uncertainty with respect to the economic effects of the COVID-19 pandemic and political tensions in the United States and around the world
(including the current conflict in Ukraine) have introduced significant volatility in the financial markets, and the effect of the volatility could materially impact our market risks, including those listed below. We are subject to financial
market risks, including valuation risk, interest rate risk and credit risk.
Valuation Risk
Our investments may not have readily available market quotations (as such term is defined in Rule 2a-5 under the 1940 Act), and those investments
which do not have readily available market quotations are valued at fair value as determined in good faith in accordance with our valuation policy. There is no single standard for determining fair value in good faith. As a result, determining
fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment while employing a consistently applied valuation process for the types of investments we make. Due to the inherent uncertainty of
determining the fair value of investments that do not have a readily available market value, the fair value of our investments may fluctuate from period to period, including as a result of the impact of the COVID‑19 pandemic on the economy and
financial and capital markets. Because of the inherent uncertainty of valuation, these estimated values may differ significantly from the values that would have been used had a ready market for the investments existed, and it is possible that
the difference could be material.
Interest Rate Risk
Interest rate sensitivity and risk refer to the change in earnings that may result from changes in the level of interest rates. To the extent that we borrow money to
make investments, including under any credit facility, our net investment income will be affected by the difference between the rate at which we borrow funds and the rate at which we invest these funds.
In periods of rising interest rates, our cost of borrowing funds would increase, which may reduce our net investment income. As a result, there can be no assurance that a significant change in market interest rates will not have a material
adverse effect on our net investment income.
As of December 31, 2022, 79.6% of our debt investments based on outstanding principal balance represented floating-rate investments based on
PRIME and approximately 20.4% of our debt investments based on outstanding principal balance represented fixed rate investments.
Based on our Statements of Operations as of December 31, 2022, the following table shows the annualized impact on net income of hypothetical
base rate changes in the PRIME rate on our debt investments (considering interest rate floors for floating rate instruments):
|
Change in Interest Rates
|
Interest Income
|
Interest expense
|
Net Income/(Loss)
|
|||||||||
|
Up 300 basis points
|
$
|
1,260
|
$
|
-
|
$
|
1,260
|
||||||
|
Up 200 basis points
|
840
|
-
|
840
|
|||||||||
|
Up 100 basis points
|
420
|
-
|
420
|
|||||||||
|
Down 100 basis points
|
(420
|
)
|
-
|
(420
|
)
|
|||||||
|
Down 200 basis points
|
(683
|
)
|
-
|
(683
|
)
|
|||||||
|
Down 300 basis points
|
(893
|
)
|
-
|
(893
|
)
|
|||||||
| Item 8. |
Financial Statements and Supplementary Data
|
INDEX TO FINANCIAL STATEMENTS
|
91
|
|
|
92
|
|
|
93
|
|
|
94
|
|
|
95
|
|
|
97
|
Silver Spike Investment Corp.
New York, NY
Opinion on the Financial Statements
We have audited the accompanying statements of assets and liabilities of Silver Spike Investment Corp. (the “Company”), as of December 31, 2022 and March 31, 2022,
including the schedule of investments as of December 31, 2022, the related statements of operations, changes in net assets, and cash flows for the period from April 1, 2022 through December 31, 2022, the year ended March 31, 2022 and for the
period from January 25, 2021 (Inception) through March 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial
position of the Company as of December 31, 2022 and March 31, 2022, and the results of its operations, changes in its net assets, and its cash flows for the period from April 1, 2022 through December 31, 2022, the year ended March 31, 2022 and
for the period from January 25, 2021 (Inception) through March 31, 2021, in conformity with accounting principles generally accepted in the United States of
America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements
based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of
our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we
express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31,
2022 by correspondence with the custodian and underlying investees. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ BDO USA, LLP
We have served as the Company’s auditor since 2021.
New York, NY
March 31, 2023
|
December 31, 2022*
|
March 31, 2022
|
|||||||
|
ASSETS
|
||||||||
|
Investments at fair value:
|
||||||||
|
Non-control/non-affiliate investments at fair value (amortized cost of $
|
$
|
|
$
|
|
||||
|
Cash and cash equivalents
|
|
|
||||||
|
Interest receivable
|
|
|
||||||
|
Prepaid expenses
|
|
|
||||||
|
Total assets
|
$
|
|
$
|
|
||||
|
LIABILITIES
|
||||||||
|
Management fee payable
|
$
|
|
$
|
|
||||
|
Excise tax payable
|
|
|
||||||
|
Administrator fees payable
|
|
|
||||||
|
Audit fees payable
|
|
|
||||||
|
Legal fees payable
|
|
|
||||||
|
Director’s fee payable
|
|
|
||||||
|
Professional fees payable
|
|
|
||||||
| Due to affiliate |
|
|||||||
|
Offering cost payable
|
|
|
||||||
|
Organizational costs payable
|
|
|
||||||
|
Other payables
|
|
|
||||||
|
Total liabilities
|
$
|
|
$
|
|
||||
|
Commitments and contingencies (Note 6)
|
||||||||
|
NET ASSETS
|
||||||||
|
Common Stock, $
|
$
|
|
$
|
|
||||
|
Additional paid-in-capital
|
|
|
||||||
|
Distributable earnings/(Accumulated losses)
|
|
(
|
)
|
|||||
|
Total net assets
|
$
|
|
$
|
|
||||
|
NET ASSET VALUE PER SHARE
|
$
|
|
$
|
|
||||
| * |
|
See notes to financial statements.
|
For the period from
April 1, 2022
through
December 31, 2022*
|
Year Ended
March 31, 2022
|
For the period
from January 25, 2021 (Inception) through March 31, 2021
|
||||||||||
|
INVESTMENT INCOME
|
||||||||||||
|
Non-control/non-affiliate investment income
|
||||||||||||
|
Interest income
|
$
|
|
$
|
|
$
|
|
||||||
|
Fee income
|
|
|
|
|||||||||
|
Total investment income
|
|
|
|
|||||||||
|
EXPENSES
|
||||||||||||
|
Legal expenses
|
|
|
|
|||||||||
|
Management fee
|
|
|
|
|||||||||
|
Insurance expense
|
|
|
|
|||||||||
|
Audit expense
|
|
|
|
|||||||||
|
Administrator fees
|
|
|
|
|||||||||
|
Director expenses
|
|
|
|
|||||||||
|
Excise tax expense
|
|
|
|
|||||||||
|
Professional fees
|
|
|
|
|||||||||
|
Custodian fees
|
|
|
|
|||||||||
|
Organizational expenses
|
|
|
|
|||||||||
|
Other expenses
|
|
|
|
|||||||||
|
Total expenses
|
|
|
|
|||||||||
|
NET INVESTMENT INCOME (LOSS)
|
|
(
|
)
|
(
|
)
|
|||||||
|
NET REALIZED GAIN (LOSS) FROM INVESTMENTS
|
|
|
|
|||||||||
|
NET CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS
|
||||||||||||
|
Non-controlled/non-affiliate investments
|
(
|
)
|
|
|
||||||||
|
Net change in unrealized appreciation/(depreciation) on investments
|
(
|
)
|
|
|
||||||||
|
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
||||
|
NET INVESTMENT INCOME (LOSS) PER SHARE – BASIC AND DILUTED
|
$
|
|
$
|
(
|
)
|
$
|
N/A
|
|||||
|
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS PER SHARE – BASIC AND DILUTED
|
$
|
|
$
|
(
|
)
|
$
|
N/A
|
|||||
|
WEIGHTED AVERAGE SHARES OUTSTANDING – BASIC AND DILUTED
|
|
|
N/A
|
|||||||||
| * |
|
See notes to financial statements.
|
Common Stock
|
||||||||||||||||||||
|
|
Shares
|
Par value
|
Additional
paid-in-capital |
Distributable Earnings/
(Accumulated Loss) |
Total net assets/
(net liabilities) |
|||||||||||||||
|
Balance, January 25, 2021 (Inception)
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|||||||||||
|
Net increase (decrease) in net assets resulting from operations
|
||||||||||||||||||||
|
Net investment income (loss)
|
-
|
|
|
(
|
)
|
(
|
)
|
|||||||||||||
|
Net realized gain (loss) from investments
|
-
|
|
|
|
|
|||||||||||||||
|
Net change in unrealized appreciation (depreciation) from investments
|
-
|
|
|
|
|
|||||||||||||||
|
Total net increase (decrease) in net assets resulting from operations
|
- |
- |
( |
) | ( |
) | ||||||||||||||
|
Capital transactions
|
||||||||||||||||||||
|
Issuance of common stock
|
|
|
|
|
|
|||||||||||||||
|
Total increase (decrease) in net assets
|
|
|
|
(
|
)
|
(
|
)
|
|||||||||||||
|
Effect of permanent adjustments
|
-
|
|
|
|
|
|||||||||||||||
|
Balance, March 31, 2021
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
|||||||||
|
Common Stock
|
||||||||||||||||||||
|
|
Shares
|
Par value
|
Additional
paid-in-capital |
Distributable Earnings/
(Accumulated Loss) |
Total net assets/
(net liabilities) |
|||||||||||||||
|
Balance, March 31, 2021
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
|||||||||
|
Net increase (decrease) in net assets resulting from operations
|
||||||||||||||||||||
|
Net investment income (loss)
|
-
|
|
|
(
|
)
|
(
|
)
|
|||||||||||||
|
Net realized gain (loss) from investments
|
-
|
|
|
|
|
|||||||||||||||
|
Net change in unrealized appreciation (depreciation) from investments
|
-
|
|
|
|
|
|||||||||||||||
|
Total net increase (decrease) in net assets resulting from operations
|
- |
- |
( |
) | ( |
) | ||||||||||||||
|
Capital transactions
|
||||||||||||||||||||
|
Issuance of common stock, net of offering costs of $
|
|
|
|
|
|
|||||||||||||||
|
Total increase (decrease) in net assets
|
|
|
|
(
|
)
|
|
||||||||||||||
|
Effect of permanent adjustments
|
-
|
|
(
|
)
|
|
|
||||||||||||||
|
Balance, March 31, 2022
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
||||||||||
|
Common Stock
|
||||||||||||||||||||
|
|
Shares
|
Par Value
|
Additional
paid-in-capital |
Distributable Earnings/
(Accumulated Loss) |
Total net assets/
(net liabilities) |
|||||||||||||||
|
Balance, March 31, 2022
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
||||||||||
|
Net increase (decrease) in net assets resulting from operations
|
||||||||||||||||||||
|
Net investment income (loss)
|
-
|
|
|
|
|
|||||||||||||||
|
Net realized gain (loss) from investments
|
-
|
|
|
|
|
|||||||||||||||
|
Net change in unrealized appreciation (depreciation) from investments
|
-
|
|
|
(
|
)
|
(
|
)
|
|||||||||||||
|
Total net increase (decrease) in net assets resulting from operations
|
- |
- |
||||||||||||||||||
|
Capital transactions
|
||||||||||||||||||||
|
Issuance of common stock
|
|
|
|
|
|
|||||||||||||||
|
Total increase (decrease) in net assets
|
|
|
|
|
|
|||||||||||||||
|
Effect of permanent adjustments
|
-
|
|
|
|
|
|||||||||||||||
|
Balance, December 31, 2022*
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|||||||||||
| * |
|
See notes to financial statements.
|
For the period from
April 1, 2022 through
December 31, 2022*
|
Year Ended
March 31, 2022
|
For the period
from January 25, 2021 (Inception) through March 31, 2021
|
||||||||||
|
Cash flows from operating activities
|
||||||||||||
|
Net increase (decrease) in net assets resulting from operations
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
||||
|
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used in) operating activities:
|
||||||||||||
|
Net change in unrealized (appreciation) depreciation from investments
|
|
|
|
|||||||||
|
Net (accretion of discounts) and amortization of premiums
|
(
|
)
|
|
|
||||||||
|
Purchase of investments
|
(
|
)
|
|
|
||||||||
|
(Increase)/Decrease in operating assets:
|
||||||||||||
|
Prepaid expenses
|
|
(
|
)
|
|
||||||||
|
Interest receivable
|
(
|
)
|
(
|
)
|
|
|||||||
|
Deferred offering costs
|
|
|
(
|
)
|
||||||||
|
Increase/(Decrease) in operating liabilities:
|
||||||||||||
|
Legal fees payable
|
|
|
|
|||||||||
|
Management fee payable
|
|
|
|
|||||||||
|
Other payables
|
|
|
|
|||||||||
|
Professional fees payable
|
|
|
|
|||||||||
|
Excise tax payable
|
|
|
|
|||||||||
|
Director’s fee payable
|
|
|
|
|||||||||
|
Due to affiliate
|
(
|
)
|
|
|
||||||||
|
Offering cost payable
|
(
|
)
|
(
|
)
|
|
|||||||
|
Audit fees payable
|
|
|
|
|||||||||
|
Administrator fees payable
|
|
|
|
|||||||||
|
Organizational costs payable
|
(
|
)
|
(
|
)
|
|
|||||||
|
Net cash provided by (used in) operating activities
|
(
|
)
|
(
|
)
|
|
|||||||
|
Cash flows from financing activities
|
||||||||||||
|
Issuance of common stock, net of offering cost
|
|
|
|
|||||||||
|
Net cash provided by (used in) financing activities
|
|
|
|
|||||||||
|
Net increase (decrease) in cash & cash equivalents
|
(
|
)
|
|
|
||||||||
|
Cash & cash equivalents, beginning of period/year
|
|
|
|
|||||||||
|
Cash & cash equivalents, end of period/year
|
$
|
|
$
|
|
$
|
|
||||||
| * |
|
See notes to financial statements.
|
Portfolio Company (1)
|
Type of
Investment (2)
|
Investment
Date (3)
|
Maturity Date
|
Interest Rate (4)
|
Fair Value
Hierarchy (5)
|
Geographic
Region (6) |
Non-Qualifying
Asset (7) |
Principal
Amount (8)
|
Amortized Cost
|
Fair Value (9)
|
% of Net
Assets
|
||||||||||||||||||||
|
Debt Securities – United States
|
|||||||||||||||||||||||||||||||
|
Wholesale Trade (10)
|
|||||||||||||||||||||||||||||||
|
|
|
|
|
Fixed interest rate
|
|
|
No
|
$
|
|
$
|
|
$
|
|
|
%
|
||||||||||||||||
|
|
|
|
|
Fixed interest rate
|
|
|
No
|
|
|
|
|
||||||||||||||||||||
|
|
|
|
|
Fixed interest rate
|
|
|
No
|
|
|
|
|
||||||||||||||||||||
|
|
|
|
|
Variable interest rate PRIME(11) +
( |
|
|
No
|
|
|
|
|
||||||||||||||||||||
|
|
|
|
|
Variable interest rate PRIME(11) +
( |
|
|
No
|
|
|
|
|
||||||||||||||||||||
|
$
|
|
|
|
|
|||||||||||||||||||||||||||
|
Total: Debt Securities – United States (
|
|
|
|
||||||||||||||||||||||||||||
|
Total: Debt Securities (
|
|
|
|
||||||||||||||||||||||||||||
|
Total Investment in Securities (
|
$
|
|
$
|
|
|
%
|
|||||||||||||||||||||||||
|
Cash equivalents
|
|||||||||||||||||||||||||||||||
|
State Street Institutional U.S. Government Money Market Fund (12)
|
|
$
|
|
$
|
|
|
%
|
||||||||||||||||||||||||
|
Cash equivalents (
|
|
|
|
||||||||||||||||||||||||||||
|
Total Portfolio Investments and Cash equivalents (
|
$
|
|
$
|
|
|
%
|
|||||||||||||||||||||||||
|
(1)
|
|
|
(2)
|
|
|
(3)
|
|
|
(4)
|
Interest rate is the fixed or variable rate of the debt
investments.
|
|
(5)
|
|
|
(6)
|
|
|
(7)
|
Under the Investment Company Act of 1940, as amended (the
“1940 Act”), a business development company (“BDC”) may not acquire any “non-qualifying asset” (i.e., an asset other than assets of the type listed in Section 55(a) of the 1940 Act, which are referred to as “qualifying assets”),
unless, at the time the acquisition is made, qualifying assets represent at least 70% of the BDC’s total assets.
|
|
(8)
|
|
|
(9)
|
|
|
(10)
|
|
|
(11)
|
|
|
(12)
|
|
See notes to financial statements.
NOTE 1 – ORGANIZATION
Silver Spike Investment Corp. (an emerging growth company) (the “Company”, “we” or “our”) was formed on January 25, 2021 as a Maryland corporation structured as an externally managed, closed-end, non-diversified management investment
company. The Company has elected to be treated as a business development company (“BDC”), under the Investment Company Act of 1940, as amended (“1940 Act”). In addition, for U.S. federal income tax purposes the Company adopted an initial tax year
end of December 31, 2021, and was taxed as a corporation for the tax period ended December 31, 2021. The Company adopted the tax year end of March 31, 2022 and elected to be treated for U.S. federal income tax purposes as a regulated investment
company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”) for the tax period January 1, 2022 through March 31, 2022, as well as maintain such election in future taxable years. However, there is no guarantee
that the Company will qualify to make such an election for any taxable year.
On February 4, 2022, the Company’s common stock began trading on the Nasdaq Global Market under the ticker symbol “SSIC,” and we completed our initial public
offering of 6,214,286 shares of our common stock, par value $0.01 , inclusive of an over-allotment option that was exercised in full on March 1, 2022 (“IPO”), for approximately $87 million.
The Company is managed by Silver Spike Capital, LLC (“SSC” or “Adviser”), a registered investment advisor under the Investment Advisers Act of 1940 with the
Securities and Exchange Commission. SSC has engaged SS&C Technologies, Inc. and ALPS Fund Services, Inc. (“SS&C”), as sub-administrator, to perform administrative services necessary for the Company to operate.
The Company’s investment objective is to maximize risk-adjusted returns on equity for its shareholders. The Company seeks to drive return on equity by generating
current income from debt investments and capital appreciation from equity and equity-related investments. The Company intends to achieve its investment objective by investing primarily in secured debt, unsecured debt, equity warrants and direct
equity investments in private leveraged middle-market cannabis companies and other companies in the health and wellness sector. The debt investments are often secured by either a first or second priority lien on the assets of the portfolio
company, can include either fixed or floating rate terms and will generally have a term of between and six years from the original investment date.
On November 8, 2022, the Board of Directors (“Board”) of the Company approved a change in its fiscal year end from March 31st to December 31st. As a result, the
Company’s results of operations, cash flows, and all transactions impacting shareholders equity presented in this Transition Report on Form 10-K are for the nine months ended December 31, 2022 whereas its prior fiscal year 2022 are for the twelve
months ended March 31, 2022. This Transition Report on Form 10-K also includes an unaudited consolidated statement of operations for the comparable stub period of April 1, 2021 to December 31, 2021; see Note 11 for additional information.
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”),
including the requirements under ASC 946, Financial Services—Investment Companies and Articles 6 and 12 of Regulation S-X.
Use of Estimates
The preparation of the financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions affecting reported amounts of assets and liabilities at the date of the financial statements (i.e. fair value of investments) and the reported amounts of income, expenses, and gains and losses during the reported period. These
estimates are based on the information that is currently available to the Company and on various other assumptions that the Company believes to be reasonable under the circumstances. Actual results could differ materially from those estimates
under different assumptions and conditions.
Investment Valuation
The Company’s investments are recorded at their estimated fair value on the Statement of Assets and Liabilities. Investments for which market
quotations are readily available will typically be valued at the bid price of those market quotations. To validate market quotations, we utilize a number of factors to determine if the quotations are representative of fair value, including the
source and number of the quotations. Debt and equity securities that are not publicly traded or whose market prices are not readily available are valued at fair value as determined in good faith by the Adviser, as the Company’s valuation designee
(the “Valuation Designee”), based on inputs that may include valuations, or ranges of valuations, provided by independent third-party valuation firm(s) engaged by the Adviser. Generally, the valuation approach used for debt investments is the
income approach. The approach derives a value based on either determining the present value of a projected level of cash flow, including a terminal value, or by the capitalization of a normalized measure of future cash flow. The discounted cash
flow (“DCF”) method, one of the methodologies under the income approach, involves estimating future cash
flows under various scenarios and discounting them to the measurement date. The discount rate represents a return required by a market participant in order to make an investment in the subject company. Generally, the valuation approach used for
debt investments is the income approach.
Alternatively, the market approach or asset approach may be used. The market approach is a way of determining a value indication by using one or
more methods that compare the portfolio company to similar businesses. Value indicators are applied to relevant financial information of the entity being valued to estimate its fair value. There are two methodologies to consider under the market
approach: the guideline company method (“GCM”) and the controlling transaction method (“CTM”). The GCM is based on the premise that the pricing multiples of comparable publicly traded companies can be used as a tool to value privately held
companies. The publicly traded companies’ ratios and business enterprise value provide guidance in the valuation process. Considerations of factors such as size, growth, profitability and return on investment are also analyzed and compared to the
subject business. The CTM is based on the same premise as the GCM. Guideline transactions include change-of-control transactions involving public or private businesses for companies engaged in similar lines of business or with similar economic
characteristics. The valuation considers the price at which the merger or acquisition took place to other factors in order to create a pricing multiple that can be used to determine an estimate of value for the subject company.
The asset approach provides an indication of the company’s value by developing a valuation-based balance sheet. This approach requires adjusting
the historical assets and liabilities listed on the U.S. GAAP-based balance sheet to market fair values. The excess of assets over liabilities represents the tangible value of the business enterprise. The asset approach does not consider the
relevant earnings capacity of a going concern business.
Effective September 8, 2022, pursuant to Rule 2a-5 under the 1940 Act, the Board designated the Adviser as the Valuation Designee to perform the fair value
determinations for the Company, subject to the oversight of the Board and certain Board reporting and other requirements.
As part of the valuation process, the Adviser takes into account relevant factors in determining the fair value of our investments, including: the estimated
enterprise value of a portfolio company (i.e., the total fair value of the portfolio company’s debt and equity), the nature and realizable value of any collateral, the portfolio company’s ability to make payments based on its earnings and cash
flow, the markets in which the portfolio company does business, a comparison of the portfolio company’s securities to any similar publicly traded securities, and overall changes in the interest rate environment and the credit markets. When an
external event such as a purchase transaction, public offering or subsequent equity sale occurs, the Adviser considers whether the pricing indicated by the external event corroborates its valuation.
The Adviser undertakes a multi-step valuation process, which includes, among other procedures, the following:
|
•
|
With respect to investments for which market quotations are readily available, those investments will typically be valued at the bid price of those market quotations;
|
|
•
|
With respect to investments for which market quotations are not readily available, the valuation process begins with the Adviser’s valuation committee establishing a preliminary valuation of each
investment, which may be based on valuations, or ranges of valuations, provided by independent valuation firm(s);
|
|
•
|
Preliminary valuations are documented and discussed by the Adviser’s valuation committee and, where appropriate, the independent
valuation firm(s); and
|
|
•
|
The Adviser determines the fair value of each investment.
|
We conduct this valuation process on a quarterly basis.
We apply Financial Accounting Standards Board Accounting Standards Codification 820, Fair Value Measurement (“ASC 820”),
which establishes a framework for measuring fair value in accordance with U.S. GAAP and required disclosures of fair value measurements. ASC 820 determines fair value to be the price that would be received for an investment in a current sale,
which assumes an orderly transaction between market participants on the measurement date. Market participants are defined as buyers and sellers in the principal or most advantageous market (which may be a hypothetical market) that are
independent, knowledgeable, and willing and able to transact. In accordance with ASC 820, we consider the principal market to be the market that has the greatest volume and level of activity. ASC 820 specifies a fair value hierarchy that
prioritizes and ranks the level of observability of inputs used in determination of fair value. In accordance with ASC 820, these levels are summarized below:
|
•
|
Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date;
|
|
•
|
Level 2 – Valuations based on quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in
markets that are not active, or for which all significant inputs are observable, either directly or indirectly; and
|
|
•
|
Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
|
Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may
fluctuate from period to period. Additionally, the fair value of such investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values that
may ultimately be realized. Further, such investments are generally less liquid than publicly traded securities and may be subject to contractual and other restrictions on resale. If we were required to liquidate a portfolio investment in a
forced or liquidation sale, it could realize amounts that are different from the amounts presented and such differences could be material.
In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on
these investments to be different than the unrealized gains or losses reflected previously.
Cash and Cash Equivalents
Cash and cash equivalents consists of funds deposited with financial institutions and short-term (maturity of 90 days or less) liquid investments and money market
funds. Funds held in money market funds are considered Level 1 in the fair value hierarchy in accordance with ASC 820. Cash held in demand deposit accounts may exceed the Federal Deposit Insurance Corporation (“FDIC”) insured limit. As of
December 31, 2022 and March 31, 2022, cash and cash equivalents consisted of $35.13 million and $84.77 million, respectively, of which $35.13
million and $84.77 million, respectively, was held in the State Street Institutional U.S. Government Money Market Fund.
Earnings per share
Basic earnings per share is computed by dividing net increase (decrease) in net assets resulting from operations by the
weighted-average number of common shares outstanding for the period. Other potentially dilutive common shares, and the related impact to earnings are considered when calculating earnings per share on a diluted basis.
Investment Transactions
Investment transactions are recorded on trade date. Realized gains or losses are recognized as the difference between the net proceeds received (excluding prepayment
fees, if any) and the amortized cost basis of the investment using the specific identification method without regard to unrealized gains or losses previously recognized, and include investments written off during the period, net of recoveries.
Current-period changes in fair value of investments are reflected as a component of the net change in unrealized appreciation/(depreciation) on investments on the Statements of Operations. The net change in unrealized appreciation/(depreciation)
primarily reflects the change in investment fair values as of the last business day of the reporting period, including the reversal of previously recorded unrealized gains or losses with respect to investments realized during the period.
Investments traded but not yet settled are reported in payable for investments purchased and receivable for investments sold on the Statement of Assets and
Liabilities.
Interest and Dividend Income
Interest income is recorded on the accrual basis and includes accretion and amortization of discounts or premiums, respectively. Discounts and premiums to par value
on securities purchased are accreted and amortized, respectively, into interest income over the contractual life of the respective security using the effective yield method. The amortized cost of investments represents the original cost adjusted
for the accretion and amortization of discounts and premiums, respectively. Upon prepayment of a loan or debt security, any prepayment premiums and unamortized discounts or premiums are recorded as interest income in the current period.
When a debt security becomes 90 days or more past due, or if management otherwise does not expect that principal, interest, and other obligations due will be
collected in full, the Company will generally place the debt security on non-accrual status and cease recognizing interest income on that debt security until all principal and interest due has been paid or the Company believes the borrower has
demonstrated the ability to repay its current and future contractual obligations. Any uncollected interest is reversed from income in the period that collection of the interest receivable is determined to be doubtful. However, the Company may
make exceptions to this policy if the investment has sufficient collateral value and is in the process of collection. As of December 31, 2022, there were no loan investments in the portfolio placed on non-accrual status. At March 31, 2022, there were no investments held by the Company.
We typically receive debt investment origination or closing fees in connection with investments. Such debt investment origination and closing fees are capitalized as
unearned income and offset against investment cost basis on our Statements of Assets and Liabilities and accreted into interest income using the effective yield method over the term of the investment. Upon the prepayment of a debt investment, any
unaccreted debt investment origination and closing fees are accelerated into interest income.
Interest income earned, excluding accretion of discounts and amortization of premiums, was $3,461,394 , $10,073 and $0 for the period from April 1, 2022 through December 31, 2022, the year ended March 31, 2022 and the period from January 25, 2021 (Inception) through March 31, 2021. As of
December 31, 2022 and March 31, 2022, $1,559,081 and $9,215 , respectively were recorded as interest receivable.
Dividend income on preferred equity securities is recorded on the accrual basis to the extent that such amounts are payable by the portfolio company and are expected
to be collected. Dividend income on common equity securities is recorded on the record date for private portfolio companies or on the ex-dividend date for publicly traded portfolio companies.
Certain investments may have contractual PIK interest or dividends. PIK interest or dividends represents accrued interest or dividends that is added to the principal
amount of the investment on the respective interest or dividend payment dates rather than being paid in cash and generally becomes due at maturity. If PIK interest or dividends are not expected to be realized by the Company, the investment
generating PIK interest or dividends will be placed on non-accrual status. When an investment with PIK is placed on non-accrual status, the accrued, uncapitalized interest or dividends are generally reversed through interest or dividend income,
respectively.
Fee Income
All transaction fees earned in connection with our investments are recognized as fee income and are generally non-recurring. Such fees typically include fees for
services, including structuring and advisory services, provided to portfolio companies. We recognize income from fees for providing such structuring and advisory services when the services are rendered or the transactions are completed.
For the period from April 1, 2022 through December 31, 2022, the year ended March 31, 2022 and the period from January 25, 2021 (Inception) through March 31, 2021, $410,000 , $0 and $0 , respectively were included in fee income.
Income Taxes
The Company adopted an initial tax year end of December 31, 2021 and was taxed as a corporation for U.S. federal income tax purposes for the tax period ended
December 31, 2021. The Company adopted the tax year end of March 31, 2022 and elected to be treated for U.S. federal income tax purposes as a RIC under Subchapter M of the Code for the tax period January 1, 2022 through March 31, 2022, and
intends to maintain such election in the current and future taxable years. To maintain its tax treatment as a RIC, the Company must meet specified source-of-income and asset diversification requirements and timely distribute to its stockholders
for each taxable year at least 90 % of its investment company taxable income. In order for the Company not to be subject to U.S.
federal excise taxes, it must distribute annually an amount at least equal to the sum of (i) 98 % of its net ordinary income for the
calendar year, (ii) 98.2 % of its capital gains in excess of capital losses for the one-year period ending on October 31 of the
calendar year and (iii) any net ordinary income and capital gains in excess of capital losses for preceding years that were not distributed during such years. The Company, at its discretion (subject to the requirement to distribute 90 % of its investment company taxable income as described above), may carry forward taxable income in excess of calendar year dividends and pay a 4 % nondeductible U.S. federal excise tax on this income. If the Company chooses to do so, this generally would increase expenses and reduce the amount
available to be distributed to stockholders. For the nine months ended December 31, 2022, the Company accrued excise taxes of $80,566 .
As of December 31, 2022, $80,566 of accrued excise taxes remained payable. For the year ended March 31, 2022, the Company had no excise taxes accrued.
The Company evaluates tax positions taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” to
be sustained by the applicable tax authority in accordance with ASC Topic 740, Income Taxes (“ASC 740”). Tax benefits of positions not deemed to meet the more-likely-than-not threshold, or uncertain tax
positions, would be recorded as tax expense in the current year. It is the Company’s policy to recognize accrued interest and penalties related to uncertain tax benefits in income tax expense.
Based on the analysis of the Company’s tax position, the Company has no
uncertain tax positions that met the recognition or measurement criteria as of December 31, 2022. The Company does not anticipate any significant increase or decrease in unrecognized tax benefits for the next twelve months. All of the Company’s
tax returns remain subject to examination by U.S. federal and state tax authorities.
Organization Expenses and Offering Costs
Organizational expenses
Costs associated with the organization of the Company are expensed as incurred. These expenses consist primarily of legal fees and other costs of organizing the
Company.
For the period from April 1, 2022 through December 31, 2022, the year ended March 31, 2022 and the period from January 25, 2021 (Inception) through March 31, 2021,
the Company incurred organizational expenses of $0 , $328,002 and $149,715 , respectively. As of
December 31, 2022 and March 31, 2022, $0 and $34,168 , respectively, was unpaid.
Offering costs
These costs consist primarily of legal fees and other costs incurred in connection with the Company’s share offerings, the preparation of the Company’s registration
statement, and registration fees.
Costs associated with the offering of common shares of the Company are capitalized as deferred offering and are included in deferred offering costs on the Statements
of Assets and Liabilities. Costs of approximately $1,690,184 were charged to capital upon the completion of the Company’s public
offering for the year ended March 31, 2022. For the period from April 1, 2022 through December 31, 2022 and the period from January 25, 2021 (Inception) through March 31, 2021, no 0
and $264,581 , respectively, of offering costs remained payable.
New Accounting Standards
Management does not believe any recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the accompanying
financial statements.
NOTE 3 – INVESTMENTS
The Company seeks to invest in portfolio companies primarily in the form of loans (secured and unsecured), but may include equity warrants and direct equity
investments. The loans typically pay interest with some amortization of principal. 80.9 % of the portfolio (based on amortized cost)
pays interest on a floating rate basis with a PRIME floor, and 19.1 % of the portfolio (based on amortized cost) pays fixed interest.
We will generally seek to obtain security interests in the assets of our portfolio companies that serve as collateral in support of the repayment of these loans. This collateral may take the form of first or second priority liens on the assets of
a portfolio company. In some of our portfolio investments, we expect to receive nominally priced equity warrants and/or make direct equity investments in connection with a debt investment. In addition, a portion of our portfolio may be comprised
of derivatives, including total return swaps.
We expect that our loans will typically have final maturities of
to six years . However, we expect that our portfolio companies often may repay these loans early, generally within three years from the date of initial investment.
Portfolio Composition
The Company’s portfolio investments are in companies conducting business in or supporting the cannabis industries. The following table summarizes the composition of
the Company’s portfolio investments by industry at cost and fair value and as a percentage of the total portfolio as of December 31, 2022. As of March 31, 2022, the Company had no portfolio investments.
|
December 31, 2022
|
||||||||||||||||
|
Amortized Cost
|
Fair Value
|
|||||||||||||||
|
Industry
|
Amount
|
%
|
Amount
|
%
|
||||||||||||
|
Wholesale Trade
|
$
|
|
|
%
|
$
|
|
|
%
|
||||||||
|
Total
|
$
|
|
|
%
|
$
|
|
|
%
|
||||||||
The geographic composition is determined by the location of headquarters of the portfolio company. The following table summarizes the composition of the Company’s
portfolio investments by geographic region of the United States at cost and fair value and as a percentage of the total portfolio as of December 31, 2022. As of March 31, 2022, the Company had no portfolio investments. Geographic regions are
defined as: West, for the states of WA, OR, ID, MT, WY, CO, AK, HI, UT, NV and CA; Midwest, for the states ND, SD, NE, KS, MO, IA, MN, WI, MI, IL, IN and OH; Northeast, for the states PA, NJ, NY, CT, RI, MA, VT, NH and ME; Southeast, for the
states of AR, LA, MS, TN, KY, AL, FL, GA, SC, NC, VA, DE, WV and MD; and Southwest, for the states of AZ, NM, TX and OK.
|
December 31, 2022
|
||||||||||||||||
|
Amortized Cost
|
Fair Value
|
|||||||||||||||
|
Geographic Location
|
Amount
|
%
|
Amount
|
%
|
||||||||||||
|
Midwest
|
$
|
|
|
%
|
$
|
|
|
%
|
||||||||
|
West
|
|
|
|
|
||||||||||||
|
Northeast
|
|
|
|
|
||||||||||||
|
Southeast
|
|
|
|
|
||||||||||||
|
Total
|
$
|
|
|
%
|
$
|
|
|
%
|
||||||||
The following table summarizes the composition of the Company’s portfolio investments by investment type at cost and fair value and as a percentage of the total
portfolio as of December 31, 2022. As of March 31, 2022, the Company had no portfolio investments.
|
December 31, 2022
|
||||||||||||||||
|
Amortized Cost
|
Fair Value
|
|||||||||||||||
|
Investment
|
Amount
|
%
|
Amount
|
%
|
||||||||||||
|
Senior Secured First Lien Term Loan
|
$
|
|
|
%
|
$
|
|
|
%
|
||||||||
|
Senior Secured Notes
|
|
|
|
|
||||||||||||
|
Total
|
$
|
|
|
%
|
$
|
|
|
%
|
||||||||
Certain Risk Factors
In the ordinary course of business, the Company manages a variety of risks including market risk, credit risk, liquidity risk, interest rate risk, prepayment risk,
risks associated with political tensions and risks associated with the COVID-19 pandemic. The Company identifies, measures and monitors risk through various control mechanisms, including trading limits and diversifying exposures and activities
across a variety of instruments, markets and counterparties.
Market
risk is the risk of potential adverse changes to the value of financial instruments because of changes in market conditions, including as a result of changes in the credit quality of a particular issuer, credit spreads, interest rates, and
other movements and volatility in security prices or commodities. In particular, the Company may invest in issuers that are experiencing or have experienced financial or business difficulties (including difficulties resulting from the
initiation or prospect of significant litigation or bankruptcy proceedings), which involves significant risks. The Company manages its exposure to market risk through the use of risk management strategies and various analytical monitoring
techniques.
Credit risk is the risk that a decline in the credit quality of an investment could cause the Company to lose money. The Company could lose money if the issuer or
guarantor of a portfolio security or a counterparty to a derivative contract fails to make timely payment or otherwise honor its obligations. Fixed income securities rated below investment grade (high-yield bonds) involve greater risks of default
or downgrade and are generally more volatile than investment grade securities. Below investment grade securities involve greater risk of price declines than investment grade securities due to actual or perceived changes in an issuer’s
creditworthiness. In addition, issuers of below investment grade securities may be more susceptible than other issuers to economic downturns. Such securities are subject to the risk that the issuer may not be able to pay interest or dividends and
ultimately to repay principal upon maturity. Discontinuation of these payments could substantially adversely affect the market value of the security.
The Company’s investments may, at any time, include securities and other financial instruments or obligations that are illiquid or thinly traded, making purchase or
sale of such securities and financial instruments at desired prices or in desired quantities difficult. Furthermore, the sale of any such investments may be possible only at substantial discounts, and it may be extremely difficult to value any
such investments accurately.
Interest rate risk refers to the change in earnings that may result from changes in the level of interest rates. To the extent that the Company borrows money to make
investments, including under any credit facility, net investment income will be affected by the difference between the rate at which the Company borrows funds and the rate at which the Company invests these funds. In periods of rising interest
rates, the Company’s cost of borrowing funds would increase, which may reduce net investment income. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on net
investment income.
Prepayment risk is the risk that a loan in the Company’s portfolio will prepay due to the existence of favorable financing market conditions that allow the portfolio
company the ability to replace existing financing with less expensive capital. As market conditions change, prepayment may be possible for each portfolio company. In some cases, the prepayment of a loan may reduce the Company’s achievable yield
if the capital returned cannot be invested in transactions with equal or greater expected yields, which could have a material adverse effect on our business, financial condition and results of operations.
Political tensions in the United States and around the world (including the current conflict in Ukraine), may contribute to increased market volatility, may have
long-term effects on the United States and worldwide financial markets and may cause economic uncertainties or deterioration in the U.S. and worldwide.
As jurisdictions around the United States and the world continue to experience surges in cases of COVID-19 and governments consider pausing the lifting of or
re-imposing restrictions, there is considerable uncertainty surrounding the full economic impact of the coronavirus pandemic and the long-term effects on the U.S. and global financial markets.
NOTE 4 – FAIR VALUE OF FINANCIAL INSTRUMENTS
ASC 820 defines fair value, establishes a framework for measuring fair value, and establishes a fair value hierarchy based on the quality of inputs used to measure
fair value and enhances disclosure requirements for fair value measurements. The Company accounts for its investments at fair value. As of December 31, 2022, the Company’s portfolio investments consisted of investments in secured loans and
secured notes. The fair value amounts have been measured as of the reporting date and have not been reevaluated or updated for purposes of these financial statements subsequent to that date. As such, the fair values of these financial instruments
subsequent to the reporting date may be different than amounts reported.
In accordance with ASC 820, the Company has categorized its investments based on the priority of the inputs to the valuation technique into a three-level fair value
hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical investments (Level 1) and the lowest priority to unobservable inputs (Level 3).
As required by ASC 820, when the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement
is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. For example, a Level 3 fair value measurement may include inputs that are observable (Levels 1 and 2) and unobservable (Level 3).
Therefore, the fair value related to such investments categorized within the Level 3 tables below may include components of the fair value that are attributable to both observable inputs (Levels 1 and 2) and unobservable inputs (Level 3). The
fair value determination of each portfolio investment categorized as Level 3 required one or more unobservable inputs.
The use of significant unobservable inputs creates uncertainty in the measurement of fair value as of the reporting date. The significant unobservable inputs used in
the fair value measurement of the Company’s investments may vary and may include debt investments’ yield (i.e. discount rate) and volatility assumptions.
The Company’s investments measured at fair value by investment type on a recurring basis as of December 31, 2022 were as follows:
|
Fair Value Measurements at Reporting Date Using
|
||||||||||||||||
|
Assets
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
Significant
Other
Observable
Inputs (Level 2)
|
Significant
Unobservable
Inputs (Level 3)
|
Total
|
||||||||||||
|
Senior Secured First Lien Term Loan
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Senior Secured Notes
|
|
|
|
|
||||||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
The following table provides a summary of the significant unobservable inputs used to fair value the Level 3 portfolio investments as of December 31, 2022. The
methodology for the determination of the fair value of the Company’s investments is discussed in “Note 2 – Significant Accounting Policies”.
|
Investment Type
|
Fair Value as of
December 31, 2022
|
Valuation Techniques/
Methodologies
|
Unobservable
Input
|
Range
|
Weighted Average (1)
|
||||||||||
|
|
|||||||||||||||
|
Senior Secured First Lien Term Loan
|
$
|
|
Discounted Cash Flow
|
Discount Rate
Volatility
|
|
%
%
|
|
%
%
|
|||||||
|
Senior Secured Notes
|
|
Discounted Cash Flow
|
Discount Rate
Volatility
|
|
%
%
|
|
%
%
|
||||||||
|
Total
|
$
|
|
|||||||||||||
|
(1)
|
|
Significant increases (decreases) in discount rate in isolation would result in a significantly higher (lower) fair value assessment. Significant increases
(decreases) in volatility in isolation would result in a significantly lower (higher) fair value assessment.
The following table provides a summary of changes in the fair value of the Company’s Level 3 portfolio investments for the period from April 1, 2022 through December
31, 2022:
|
Senior Secured
First Lien Term Loan |
Senior
Secured Notes |
Total
Investments |
||||||||||
|
Fair Value as of March 31, 2022
|
$
|
|
$
|
|
$
|
|
||||||
|
Purchases
|
|
|
|
|||||||||
|
Accretion of discount and fees (amortization of premium), net
|
|
|
|
|||||||||
|
PIK interest
|
|
|
|
|||||||||
|
Sales of investments
|
|
|
|
|||||||||
|
Proceeds from principal repayments
|
|
|
|
|||||||||
|
Net realized gain (loss) on investments
|
||||||||||||
|
Net change in unrealized appreciation (depreciation) on investments
|
( |
) | ( |
( |
) | |||||||
|
Fair Value as of December 31, 2022
|
$
|
|
$
|
|
$
|
|
||||||
|
Net change in unrealized appreciation/depreciation on Level 3 investments still held as of December 31, 2022
|
$
|
(
|
)
|
$
|
(
|
$
|
(
|
)
|
||||
As of March 31, 2022, and for the year then ended, the Company had no investments.
NOTE 5 – RELATED PARTY TRANSACTIONS
Pursuant to the investment advisory agreement between the Company and SSC (the “Investment Advisory Agreement”), fees payable to SSC are equal to (a) a base
management fee of 1.75 % of the average value of the Company’s gross assets at the end of the two most recent quarters (i.e., total assets held before deduction of any liabilities), which includes investments acquired with the use of leverage and excludes cash and
cash equivalents and (b) an incentive fee based on the Company’s performance. The incentive fee consists of two parts. The first part is calculated and payable quarterly in arrears and equals 20 % of the Company’s “Pre-Incentive Fee Net
Investment Income” for the quarter, subject to a preferred return, or “hurdle,” of 1.75 % per quarter (7 % annualized), and a “catch-up” feature. The second part is determined and payable in arrears as of the end of each fiscal year (or upon termination
of the Investment Advisory Agreement) and equals 20 % of the Company’s realized capital gains on a cumulative basis from inception
through the end of the fiscal year, if any, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fee.
The
management fee is payable quarterly in arrears. For the period from April 1, 2022 through December 31, 2022, the year ended March 31, 2022 and the period from January 25, 2021 (Inception) through March 31, 2021, the Company incurred management
fee expenses of $336,432 , $0
and $0 , respectively. As of December 31, 2022 and March 31, 2022, $170,965 and $0 , respectively, remained payable.
Pursuant to the administration agreement between the Company and SSC (the “Administration Agreement”), the Company is to reimburse the
administrator, SSC, for the costs and expenses incurred by SSC in performing its obligations, including but not limited to maintaining and keeping all books and records and providing personnel and facilities. This includes costs and expenses
incurred by SSC in connection with the delegation of its obligations to SS&C, the sub-administrator. The Company is generally not responsible for the compensation of SSC’s employees or any overhead expenses. However, we may reimburse SSC for an allocable portion of the compensation paid by SSC to our CCO and CFO and their respective staffs (based on a percentage of time such individuals devote, on an estimated
basis, to our business affairs). For the period from April 1, 2022 through December 31, 2022, the year ended March 31, 2022 and the period from January 25, 2021 (Inception) through March 31, 2021, the Adviser has waived any expense
reimbursement, other than those associated with the delegation of its obligations to the sub-administrator.
For the period from April 1, 2022 through December
31, 2022, the year ended March 31, 2022 and the period from January 25, 2021 (Inception) through March 31, 2021, the Company reimbursed SSC $12,145 ,
$387,373 and $0 , for
expenses it paid on behalf of the Company. Due to affiliate in the accompanying Statements of Assets and Liabilities in the amount of $37
and $85 as of December
31, 2022 and March 31, 2022, respectively, is due to SSC for expenses paid on the Company’s behalf. For the period from April 1, 2022 through December 31, 2022, the year ended March 31, 2022 and the period from January 25, 2021
(Inception) through March 31, 2021, the Company paid $2,086 , $0 and $0 , respectively, for expenses on SSC's behalf. Due to
affiliate in the accompanying Statement of Assets and Liabilities in the amount of $37 and $85 as of December 31, 2022 and March 31, 2022, respectively, is due to SSC for expenses SSC paid on the Company's behalf.
SSC was the seed investor of the Company and provided initial funding to the Company by purchasing approximately $63 million of the Company’s common stock in the Company’s initial public offering. SSC provided this “seed capital” to the Company for the purpose of facilitating the launch
and initial operation of the Company, as opposed to for long term investment purposes. SSC does not expect to hold the Company’s common stock indefinitely, and may sell the Company’s common stock at a future point in time. In order for SSC’s
sales of the shares of the Company not to be deemed to have been made “on the basis of” material nonpublic information, such sales may be made pursuant to a pre-approved trading plan that complies with Rule 10b5-1 under the Exchange Act and that
may obligate SSC to make recurring sales of the Company’s common stock on a periodic basis. Sales of substantial amounts of the Company’s common stock, including by SSC or other large stockholders, or the availability of such common stock for
sale, could adversely affect the prevailing market prices for the Company’s common stock. If this occurs and continues for a sustained period of time, it could impair the Company’s ability to raise additional capital through the sale of
securities, should the Company desire to do so.
SSC holds approximately 72 % of the Company’s voting
stock and has the ability to exercise substantial control over all corporate actions requiring stockholder approval, including the election and removal of directors, certain amendments of the Company’s charter, the Company’s ability to issue its
common stock at a price below NAV per share, and the approval of any merger or other extraordinary corporate action.
SSC has agreed to absorb $2.07 million, the cost of
the sales load (i.e., underwriting discounts and commissions) incurred by the Company in connection with the initial public offering of its common stock.
NOTE 6 – COMMITMENTS AND CONTINGENCIES
Commitments and contingencies have been reviewed and the Company has identified commitments or contingencies as of December 31, 2022.
NOTE 7 – COMMON STOCK
In connection with its formation, the Company authorized 100,000,000
shares of its common stock with a par value of $0.01 per share. The Company sold 6,214,672 common stock shares in exchange for approximately $85
million, net of offering costs of approximately $2 million, as of December 31, 2022.
Distribution Reinvestment Plan
The Company’s distribution reinvestment plan (“DRIP”) provides for the reinvestment of distributions in the form of common stock on behalf of its stockholders,
unless a stockholder has elected to receive distributions in cash. As a result, if the Company declares a cash distribution, its stockholders who have not “opted out” of the DRIP by the opt out date will have their cash distribution automatically
reinvested into additional shares of the Company’s common stock. The share requirements of the DRIP may be satisfied through the issuance of common shares or through open market purchases of common shares by the DRIP plan administrator.
The Company’s DRIP is administered by its transfer agent on behalf of the Company’s record holders and participating brokerage firms. Brokerage firms and other
financial intermediaries may decide not to participate in the Company’s DRIP but may provide a similar distribution reinvestment plan for their clients. During the period from April 1, 2022 through December 31, 2022, the year ended March 31, 2022 and the period from January 25, 2021 (Inception) through March 31,
2021, the Company issued no
NOTE 8 – INDEMNIFICATION
Under the Company’s organizational documents, the Company’s officers and directors are indemnified against certain liabilities arising out of the performance of
their duties to the Company. In addition, in the normal course of business the Company enters into contracts that contain a variety of representations which provide general indemnifications. The Company’s maximum exposure under these agreements
cannot be known; however, the Company expects any risk of loss to be remote.
NOTE 9 – EARNINGS PER SHARE
The following table sets forth the computation of the weighted average basic and diluted net increase (decrease) in net assets per share from operations for the
period from April 1, 2022 through December 31, 2022, the year ended March 31, 2022 and the period from January 25, 2021 (Inception) through March 31, 2021:
|
For the period from
April 1, 2022 through
December 31, 2022*
|
Year Ended
March 31, 2022
|
For the period
from January 25, 2021 (Inception) through March 31, 2021
|
||||||||||
|
Net increase (decrease) in net assets resulting from operations
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
||||
|
Weighted Average Shares Outstanding - basic and diluted
|
|
|
N/A
|
|||||||||
|
Net increase (decrease) in net assets resulting from operations per share - basic and diluted
|
$
|
|
$
|
(
|
)
|
$
|
N/A
|
|||||
| * |
|
NOTE 10 – INCOME TAXES
The Company adopted a tax year end of March 31 and elected to be treated as a regulated investment company (RIC) for U.S. federal income tax purposes under
Subchapter M of the Code for the tax period January 1, 2022 through March 31, 2022, and intends to maintain such election in the current and future taxable years. However, there is no guarantee that the Company will qualify to make such an
election for any taxable year. As a RIC, the Company generally will not pay corporate-level income tax if it distributes to stockholders at least 90% of its investment company taxable income (which is generally its net ordinary taxable income and
realized net short-term capital gains in excess of realized net long-term capital losses) and 90% of its tax-exempt income to maintain its RIC status. The amount to be paid out as a distribution is determined by the Company’s Board each quarter
and is based upon the annual earnings estimated by the management of the Company. To the extent the Company’s earnings fall below the amount of dividend distributions declared, however, a portion of the total amount of the Company’s distributions
for the fiscal year may be deemed a return of capital for tax purposes to the Company’s stockholders.
Because federal income tax regulations differ from GAAP, distributions in accordance with tax regulations may differ from net investment income and realized gains
recognized for financial reporting purposes. Differences may be permanent or temporary in nature. Permanent differences are reclassified among the capital accounts in the financial statements to reflect their appropriate tax character. Temporary
differences arise when certain items of income, expense, gain or loss are recognized in different periods for book and tax purposes.
While our new fiscal year end for financial reporting purposes is December 31, 2022, our tax year end is March 31 of each year. The information
presented in this footnote is based on our tax year end for each period presented, unless otherwise specified. During the period from April 1, 2022 through December 31, 2022, and the period ended March 31, 2022, the Company reclassified for
book purposes amounts arising from permanent book to tax differences primarily related to net operating loss forfeiture for income tax purposes. For the period April 1, 2022 through December 31, 2022, there are no amounts disclosed as the tax
year end is March 31, 2023.
|
March 31, 2022
|
||||
|
Increase (decrease) in capital in excess of par value
|
$
|
(
|
)
|
|
|
Increase (decrease) in accumulated undistributed (overdistributed) earnings
|
|
|||
As of March 31, 2022, the Company has no capital loss
carryforwards for federal income tax purposes, which can be used to offset future capital gains. Any such capital losses are permitted to be carried forward indefinitely.
For income tax purposes, distributions paid to shareholders are reported as ordinary income, return of capital, long-term capital gains, or a combination thereof.
There were no
As of March 31, 2022, the components of accumulated losses on a tax basis detailed below differ from the amounts reflected in the Company’s Statements of Assets and
Liabilities by temporary book or tax differences primarily arising from the tax treatment of organizational costs.
|
March 31, 2022
|
||||
|
Other temporary differences
|
$
|
(
|
)
|
|
|
Total
|
(
|
)
|
||
The following table sets forth the tax cost basis and the estimated aggregate gross unrealized appreciation and depreciation from investments and cash equivalents
for federal income tax purposes (in thousands):
|
December 31, 2022
|
March 31, 2022
|
|||||||
|
Tax Cost of Investments
|
$
|
|
$
|
|
||||
|
Gross unrealized appreciation
|
$
|
|
$
|
|
||||
|
Gross unrealized depreciation
|
(
|
)
|
|
|||||
|
Net unrealized appreciation (depreciation) from investments
|
$
|
(
|
)
|
$
|
|
|||
There were no differences between book-basis and tax-basis unrealized appreciation (depreciation) from investments.
NOTE 11 – FINANCIAL HIGHLIGHTS
The Company was formed on January 25, 2021 and the effective date of our registration statement was February 3, 2022. Prior to February 3, 2022, the Company had no
operations, except for matters relating to our formation and organization as a BDC. As a result, there are no significant financial results for comparative purposes. The following presents financial highlights for the period from April 1, 2022 through December 31, 2022 and
the period from February 3, 2022 to March 31, 2022:
|
For the period from
April 1, 2022 through
December 31, 2022*
|
For the period from
February 3, 2022 to March 31, 2022
|
|||||||
|
Per share data:
|
||||||||
|
Net asset value at beginning of period
|
$
|
|
$
|
|
||||
|
Net investment income (loss) (1)
|
|
(
|
)
|
|||||
|
Net realized and unrealized gains/(losses) on investments(1)
|
(
|
)
|
|
|||||
|
Net increase/(decrease) in net assets resulting from operations
|
|
(
|
)
|
|||||
|
Offering costs (2)
|
|
(
|
)
|
|||||
|
Permanent tax adjustments
|
|
(
|
)
|
|||||
|
Net asset value at end of period
|
$
|
|
$
|
|
||||
|
Net assets at end of period
|
$
|
|
$
|
|
||||
|
Shares outstanding at end of period
|
|
|
||||||
|
Weighted average net assets
|
$
|
|
$
|
|
||||
|
Per share market value at end of period
|
$
|
|
$
|
|
||||
|
Total return based on market value (3)
|
(
|
)%
|
(
|
)%
|
||||
|
Total return based on net asset value (3)
|
|
%
|
(
|
)%
|
||||
|
Ratio/Supplemental data:
|
||||||||
|
Ratio of expenses to average net assets(4)
|
|
%
|
|
%
|
||||
|
Ratio of net investment income (loss) to average net assets(4)
|
|
%
|
(
|
)%
|
||||
|
Portfolio turnover
|
N/A
|
N/A
|
||||||
| * |
|
(1) The per share data was derived by using the weighted average shares outstanding during the periods presented.
(2) SSC has absorbed the cost of the sales load (i.e, underwriting discounts and commissions) incurred by the Company in connection with the initial public offering of its common stock.
(3) Total return based on market value is based on the change in market price per share between the beginning and ending market prices per share in each period and assumes that common stock dividends
are reinvested in accordance with our common stock dividend reinvestment plan. Total return based on net asset value is based upon the change in net asset value per share between the beginning and ending net asset values per share in each period
and assumes that dividends are reinvested in accordance with our common stock dividend reinvestment plan. For periods less than a year, total return is not annualized.
(4) Ratio is not annualized.
NOTE 12 – TRANSITION PERIOD COMPARATIVE DATA
|
|
Nine Months Ended
December 31, 2022 |
Nine Months Ended
December 31, 2021 |
||||||
|
|
(unaudited)
|
|||||||
|
INVESTMENT INCOME
|
||||||||
|
Non-control/non-affiliate investment income
|
||||||||
|
Interest income
|
$
|
|
$
|
|
||||
|
Fee income
|
|
|
||||||
|
Total investment income
|
|
|
||||||
|
|
||||||||
|
EXPENSES
|
||||||||
|
Legal expenses
|
|
|
||||||
|
Management fee
|
|
|
||||||
|
Audit expense
|
|
|
||||||
|
Insurance expense
|
|
|
||||||
|
Administrator fees
|
|
|
||||||
|
Director expenses
|
|
|
||||||
|
Excise tax expense
|
|
|
||||||
|
Professional fees
|
|
|
||||||
|
Custodian fees
|
|
|
||||||
|
Organizational expenses
|
|
|
||||||
|
Other expenses
|
|
|
||||||
|
Total expenses
|
|
|
||||||
|
NET INVESTMENT INCOME (LOSS)
|
|
(
|
)
|
|||||
|
|
||||||||
|
NET REALIZED GAIN (LOSS) FROM INVESTMENTS
|
|
|
||||||
|
|
||||||||
|
NET CHANGE IN UNREALIZED APPRECIATION/(DEPRECIATION) ON INVESTMENTS
|
||||||||
|
Non-controlled/non-affiliate investments
|
(
|
)
|
|
|||||
|
Net change in unrealized appreciation/(depreciation) on investments
|
(
|
)
|
|
|||||
|
|
||||||||
|
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
|
$
|
|
$
|
(
|
)
|
|||
|
|
||||||||
|
NET INVESTMENT INCOME (LOSS) PER SHARE - BASIC AND DILUTED
|
$
|
|
$
|
(
|
)
|
|||
|
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS PER SHARE - BASIC AND DILUTED
|
$
|
|
$
|
(
|
)
|
|||
|
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED (1)
|
|
|
||||||
(1) 386 shares were issued on June 16, 2021. There were no shares prior to June 16, 2021.
|
|
Nine Months Ended
December 31, 2022 |
Nine Months Ended
December 31, 2021 |
||||||
|
|
(unaudited)
|
|||||||
|
Cash flows from operating activities
|
||||||||
|
Net increase (decrease) in net assets resulting from operations
|
$
|
|
$
|
(
|
)
|
|||
|
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used in) operating activities:
|
||||||||
|
Net change in unrealized (appreciation) depreciation from investments
|
|
|
||||||
|
Net (accretion of discounts) and amortization of premiums
|
(
|
)
|
|
|||||
|
Purchase of investments
|
(
|
)
|
|
|||||
|
(Increase)/Decrease in operating assets:
|
||||||||
|
Prepaid expenses
|
|
|
||||||
|
Interest receivable
|
(
|
)
|
|
|||||
|
Deferred offering costs
|
|
(
|
)
|
|||||
|
Increase/(Decrease) in operating liabilities:
|
||||||||
|
Legal fees payable
|
|
|
||||||
|
Management fee payable
|
|
|
||||||
|
Other payables
|
|
|
||||||
|
Professional fees payable
|
|
|
||||||
|
Excise tax payable
|
|
|
||||||
|
Director’s fee payable
|
|
|
||||||
|
Due to affiliate
|
(
|
)
|
|
|||||
|
Offering cost payable
|
(
|
)
|
|
|||||
|
Audit fees payable
|
|
|
||||||
|
Administrator fees payable
|
|
|
||||||
|
Organizational costs payable
|
(
|
)
|
|
|||||
|
Net cash provided by (used in) operating activities
|
(
|
)
|
|
|||||
|
|
||||||||
|
Cash flows from financing activities
|
||||||||
|
Issuance of common stock, net of offering cost
|
|
|
||||||
|
Net cash provided by (used in) financing activities
|
|
|
||||||
|
|
||||||||
|
Net increase (decrease) in cash & cash equivalents
|
(
|
)
|
|
|||||
|
Cash & cash equivalents, beginning of period
|
|
|
||||||
|
Cash & cash equivalents, end of period
|
$
|
|
$
|
|
||||
NOTE 13 – SUBSEQUENT EVENTS
The Company’s management evaluated subsequent events through the date on which the financial statements were issued. Other than the item listed below, there have
been no subsequent events that occurred during such period that have required adjustment or disclosure in the financial statements.
On January 24, 2023, the Company invested $4.5 million
in MariMed Inc.'s first lien senior secured term loan at PRIME + 5.75 % (PRIME floor of 6.25 %) cash + 1.4 % PIK maturing on January 24, 2026 for a net
consideration of $4.23 million.
| Item 9. |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
|
None.
| Item 9A. |
Controls and Procedures
|
Evaluation of Disclosure Controls and Procedures
In accordance with Rules 13a-15(b) and 15d-15(b) under the Exchange Act, we, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) as of the end of the period covered
by this transition report on Form 10-K and determined that our disclosure controls and procedures are effective as of the end of the period covered by this transition report on Form 10- K.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the
Exchange Act). Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting
based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 COSO Framework). Based on our evaluation under the framework in Internal
Control—Integrated Framework (2013), management concluded that our internal control over financial reporting was effective as of December 31, 2022.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Attestation Report of the Independent Registered Public Accounting Firm
This transition report on Form 10-K does not include an attestation report of the Company’s registered public accounting firm pursuant to the rules
of the Securities and Exchange Commission.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during
the quarter ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| Item 9B. |
Other Information
|
Not applicable.
| Item 9C. |
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
|
Not applicable.
| Item 10. |
Directors, Executive Officers and Corporate Governance
|
The information required by Item 10 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2023 Annual Meeting of Stockholders, to
be filed with the Securities and Exchange Commission within 120 days following the end of our fiscal year.
The Company has adopted a code of business conduct and ethics that applies to directors, officers and employees. The code of business conduct and ethics is available
on the Company’s website at ssic.silverspikecap.com/corporate-governance/documents-and-charters. The Company will report any amendments to or waivers of a required provision of the code of business conduct and ethics on the Company’s website or
in a Current Report on Form 8-K.
| Item 11. |
Executive Compensation
|
The information required by Item 11 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2023 Annual Meeting
of Stockholders, to be filed with the Securities and Exchange Commission within 120 days following the end of our fiscal year.
| Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|
The information required by Item 12 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2023 Annual Meeting
of Stockholders, to be filed with the Securities and Exchange Commission within 120 days following the end of our fiscal year.
| Item 13. |
Certain Relationships and Related Transactions, and Director Independence
|
The information required by Item 13 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2023 Annual Meeting
of Stockholders, to be filed with the Securities and Exchange Commission within 120 days following the end of our fiscal year.
| Item 14. |
Principal Accountant Fees and Services
|
The information required by Item 14 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2023 Annual Meeting of Stockholders, to
be filed with the Securities and Exchange Commission within 120 days following the end of our fiscal year.
| Item 15. |
Exhibits and Financial Statement Schedules
|
The following financial statements of the “Company” are filed herewith:
Report of Independent Registered Public Accounting Firm
Statements of Assets and Liabilities as of December 31, 2022 and March 31, 2022
Statements of Operations for the Period Ended December 31, 2022, the Year Ended March 31, 2022 and Period Ended March 31, 2021
Statements of Changes in Net Assets for the Period Ended December 31, 2022, the Year Ended March 31, 2022 and Period Ended March 31, 2021
Statements of Cash Flows for the Period Ended December 31, 2022, the Year Ended March 31, 2022 and Period Ended March 31, 2021
Notes to Financial Statements
The following exhibits are filed as part of this transition report on Form 10-K or hereby incorporated by reference to exhibits previously filed
with the SEC:
|
Exhibit Number
|
Description of Exhibit
|
|
Code of Ethics of the Company*
|
|
|
Code of Ethics of Silver Spike Capital, LLC*
|
|
|
Power of Attorney (included on signature page hereto)
|
|
|
Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
|
|
|
Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
|
|
|
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
|
|
|
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
|
| * |
Filed herewith.
|
| (1) |
Incorporated by reference to the Company’s annual report on Form 10-K/A, filed on June 30, 2022.
|
Not applicable.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
|
SILVER SPIKE INVESTMENT CORP.
|
||
|
Dated: March 31, 2023
|
By:
|
/s/ Scott Gordon
|
|
Scott Gordon
|
||
|
Chief Executive Officer
|
||
Each person whose signature appears below constitutes and appoints Scott Gordon and Umesh Mahajan, and each of them, such
person’s true and lawful attorney-in-fact and agent, with full power of substitution and revocation, for such person and in such person’s name, place and stead, in any and all capacities, to sign one or more Transition Reports on Form 10-K for
the transition period from April 1, 2022 to December 31, 2022, and any and all amendments thereto, and to file same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as such person
might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents and each of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the
following persons on behalf of the registrant in the capacities indicated on March 31, 2023.
|
Name
|
Title
|
||
|
/s/ Scott Gordon
|
Chief Executive Officer (Principal Executive Officer) and Chairman of the Board
|
||
|
Scott Gordon
|
|||
|
/s/ Umesh Mahajan
|
Chief Financial Officer (Principal Financial and Accounting Officer)
|
||
|
Umesh Mahajan
|
|||
|
/s/ Vivek Bunty Bohra
|
Director
|
||
|
Vivek Bunty Bohra
|
|||
|
/s/ Michael W. Chorske
|
Director
|
||
|
Michael W. Chorske
|
|||
|
/s/ Americo Da Corte
|
Director
|
||
|
Americo Da Corte
|
|||
|
/s/ Tracey Brophy Warson
|
Director
|
||
|
Tracey Brophy Warson
|
|||
112
Exhibit 14.1
Purpose of the Code of Ethics
Silver Spike Investment Corp. (the “Company”) has adopted this 1940 Act Code of Ethics to set forth guidelines and procedures that promote
ethical practices and conduct by all of the Company’s Access Persons, as defined below, and to ensure compliance with the federal securities laws. To the extent that any such individual is subject to compliance with the separately maintained Code
of Ethics of the Adviser, Sub-Administrator or underwriter, as applicable, whose Codes of Ethics complies with Rule 17j-1, compliance by such individuals with the provisions of the Code of Ethics of the applicable service provider (the Adviser,
Sub-Administrator or underwriter) shall constitute compliance with this 1940 Act Code of Ethics. The 1940 Act Code of Ethics is based on the principle that, each Access Person of the Company will conduct such activities in accordance with to the
following principles:
| • |
To be dutiful in placing the interests of the Company’s shareholders first and before their own;
|
| • |
all personal securities transactions must be conducted consistent with this 1940 Act Code of Ethics and in such a manner as to avoid any actual or potential conflict of interest or
any abuse of an individual's position of the Company and responsibility; and
|
| • |
adhere to the fundamental standard that Access Persons shall not take inappropriate advantage of their position.
|
Any violation of this 1940 Act Code of Ethics must be reported promptly to Roxanne Jenkins, the Company CCO. Failure to do so will be deemed a
violation of the 1940 Act Code of Ethics.
Legal Requirement
Pursuant to Rule 17j-1(b) of the Investment Company Act of 1940 (the “1940 Act”), it is unlawful for any Access Person to:
| • |
employ any device, scheme or artifice to defraud the Company;
|
| • |
make any untrue statement of a material fact to the Company or fail to state a material fact necessary in order to make the statements made to the Company, in light of the
circumstances under which they were made, not misleading;
|
| • |
engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon the Company; or
|
| • |
engage in any manipulative practice with respect to the Company, in connection with the purchase or sale (directly or indirectly) by such Access Person of a security "held or to be
acquired" by the Company.
|
Definitions - All definitions shall have the same
meaning as explained in Rule 17j-1 or Section 2(a) of the 1940 Act and are summarized below.
Access Person– Any officers, Directors, general partner
or employee of the Company or of Silver Spike Capital, LLC (the “Adviser”) (or of any entity in a control relationship to the Company or Adviser) who, in connection with his/her regular functions or duties, makes, participates in, or obtains
information regarding the purchase or sale of Covered Securities by the Company, or whose functions relate to the making of any recommendations with respect to such purchases or sales.
Automatic Investment Plan – A program in which regular
periodic purchases (or withdrawals) are made automatically in (or from) investment accounts in accordance with a predetermined schedule and allocation. An Automatic Investment Plan includes a dividend reinvestment plan.
Beneficial Ownership – in general and subject to the
specific provisions of Rule 16a- 1(a)(2) under the Exchange Act having or sharing, directly or indirectly, through any contract arrangement, understanding, relationship, or otherwise, a direct or indirect “pecuniary interest” in the security.
Connected Persons – Adult children or parents living at
home, and any relative, person or entity for whom the Access Person directs the investments or securities trading unless otherwise specified.
Control - shall have the same meaning as that set forth
in Section 2(a)(9) of the Exchange Act.
Covered Security – shall be any security except that it
does not include:
| • |
Direct obligations of the Government of the United States;
|
| • |
Bankers’ acceptances, bank certificates of deposit, commercial paper and high-quality short-term debt instruments, including repurchase agreements; and
|
| • |
Shares issued by open-end funds (excluding open-end exchange traded funds).
|
De Minimis Security - securities issued by any company included in the Standard
and Poor's 500 Stock Index and in an amount less than $10,000.
Exchange Traded Fund (“ETF”) - an open-end registered
investment company that is not a unit investment trust, and that operates pursuant to an order from the SEC exempting it from certain provisions of the 1940 Act permitting it to issue securities that trade on the secondary market. Examples of
open-end exchange-traded funds include, but are not limited to: Select Sector SPDRS; iShares; PowerShares; etc.
Fund - an investment company registered under the 1940 Act.
Independent Directors - those directors of the Company
that would not be deemed an “interested person” of the Company, as defined in Section 2(a)(19)(A) of the 1940 Act.
Initial Public Offering - an offering of securities
registered under the Securities Act, the issuer of which, immediately before the registration, was not subject to the reporting requirements of Sections 13 or 15(d) of the Securities Act.
Limited Offering - an offering that is exempt from
registration pursuant to Section 4(2) or Section 4(6) or pursuant to Rule 504, Rule 505, or Rule 506 under the Securities Act.
Purchase or Sale of a Covered Security - includes, among
other things, the writing of an option to purchase or sell a Covered Security.
Restricted Director - each director of the Company who
is not also a director, officer, partner, employee or controlling person of any one or more of the Company's investment advisers, administrator, custodian, transfer agent, or underwriter.
Security held or to be Acquired by the Company means:
| 1. |
Any Covered Security which, within the most recent fifteen (15) days:
|
| • |
Is or has been held by the Company; or
|
| • |
Is being or has been considered by the Company or its Adviser for purchase by the Company; and
|
| • |
Any option to purchase or sell, and any security convertible into or exchangeable for, a Covered Security.
|
Policies of the Company Regarding Personal Securities Transactions General
No Access Person of the Company shall engage in any act, practice or course of business that would violate the provisions of Rule 17j-1 as set
forth above, or in connection with any personal investment activity, engage in conduct inconsistent with this 1940 Act Code of Ethics.
Specific Policies
| 1. |
Restrictions on personal securities transactions by Access Persons, other than Restricted Directors.
|
| a. |
Except as provided below, no Access Person who is not a Restricted Director may buy or sell Covered Securities for his or her personal portfolio or the portfolio of a member of his
or her immediate family without obtaining authorization from the CCO of the Adviser prior to effecting such security transaction.
|
Note: If an Access Person has
questions as to whether purchasing or selling a security for his or her personal portfolio or the portfolio of a member of his or her immediate family requires prior authorization, the Access Person should consult the Adviser’s CCO for clearance or
denial of clearance to trade prior to effecting any securities transactions.
| b. |
Pre-clearance approval under paragraph (a) will expire at the close of business on the trading day after the date on which the authorization is received, and the Access Person is
required to renew clearance for the transaction if the trade is not completed before the authority expires.
|
| c. |
No clearance will be given to an Access Person other than a Restricted Director to purchase or sell any Covered Security (1) on a day when the Company has a pending "buy" or "sell"
order in that same Covered Security until that pending "buy" or "sell" order is executed or withdrawn or (2) when the Company CCO has been advised by the Adviser that the same Covered Security is being considered for purchase or sale for
any portfolio of the Company.
|
| d. |
The pre-clearance requirement contained above shall not apply to the following securities ("Exempt Securities"):
|
| • |
Securities that are not Covered Securities;
|
| • |
De Minimis Securities;
|
| • |
Securities purchased or sold in any account over which the Access Person has no direct or indirect influence or control;
|
| • |
Securities purchased or sold in a transaction which is non-volitional on the part of either the Access Person or the Company;
|
| • |
Securities acquired as a part of an Automatic Investment Plan;
|
| • |
Securities acquired upon the exercise of rights issued by an issuer pro rata to all holders of a class of its securities, to the extent such rights were acquired from such issuer,
and sales of such rights so acquired; and
|
| • |
Securities which the Company's funds are not permitted to purchase under the investment objectives and policies set forth in the Company's then current prospectus(es) under the
Securities Act or the Company's registration statement on Form N-2, provided that prior to a transaction by an Access Person such securities have been approved for inclusion in a list of securities which are not permissible for purchase by
the Company.
|
| e. |
The pre-clearance requirement contained shall apply to all purchases of a beneficial interest in any security through an Initial Public Offering or a Limited Offering by any Access
Person who is also classified as Investment Personnel. A record of any decision and the reason supporting such decision to approve the acquisition by investment personnel of Initial Public Offerings or Limited Offerings shall be made by the
CCO.
|
| 2. |
Restrictions on personal securities transactions by Restricted Directors.
|
The Company recognizes that a Restricted Director does not have on-going, day- to-day involvement with the operations of the Company. In addition,
it has been the practice of the Company to give information about securities purchased or sold by the Company or considered for purchase or sale by the Company to Restricted Directors in materials circulated more than 15 days after such securities
are purchased or sold by the Company or are considered for purchase or sale by the Company. Accordingly, the Company believes that less stringent controls are appropriate for Restricted Directors, as follows:
| a. |
The securities pre-clearance requirement detailed above shall only apply to a Restricted Director if he or she knew or, in the ordinary course of fulfilling his or her official
duties as a director, should have known, that during the 15-day period before the transaction in a Covered Security (other than an Exempt Security) or at the time of the transaction that the Covered Security purchased or sold by him or her
other than an Exempt Security was also purchased or sold by the Company or considered for the purchase or sale by the Company.
|
| b. |
If the pre-clearance provisions of the preceding paragraph apply, no clearance will be given to a Restricted Director to purchase or sell any Covered Security (1) on a day when any
portfolio of the Company has a pending "buy" or "sell" order in that same Covered Security until that order is executed or withdrawn or (2) when a CCO has been advised by the Adviser that the same Covered Security is being considered for
purchase or sale for any portfolio of the Company.
|
Reporting Requirements
The Company CCO or designee shall monitor all personal trading activity of all Access Persons as deemed appropriate and covered by this 1940 Act
Code of Ethics. An Access Person of a Company who is also an Access Person of the Company’s principal underwriter, affiliates or Adviser may submit such reporting requirements via the forms prescribed by any such separate code of ethics provided
that the associated forms comply with the requirements of Rule 17j-1(d)(1) of the 1940 Act.
Initial/Ongoing Disclosure of Personal Brokerage Accounts. Within ten
(10) days of the commencement of employment or at the commencement of a relationship with the Company, all Access Persons, except Independent Directors, are required to submit to the Company CCO a report stating the names and account numbers of all
of their personal brokerage accounts, brokerage accounts of any Connected Person, and any brokerage accounts which they control or in which they or a Connected Person has Beneficial Ownership. Such report must contain the date on which it is
submitted and the information in the report must be current as of a date no more than forty-five (45) days prior to that date. In addition, if a new brokerage account is opened during the course of the year, the Company CCO must be notified
immediately. The information required by the above paragraph must be provided to the Company CCO on an annual basis. Disclosure of an account shall cover, at a minimum, all accounts at a broker-dealer, bank or other institution opened during the
quarter and provide the following information:
| • |
the name of the broker, dealer or bank with whom the Access Person has established the account;
|
| • |
the date the account was established;
|
| • |
the date that the report is submitted by the Access Person.
|
| • |
Each of these accounts is required to furnish duplicate confirmations and statements to the Chief Compliance Officer. Such statements and confirms as an Access Person of the
Company may be sent to the Adviser.
|
Holdings Report. Within ten (10) days of
becoming an Access Person (and with information that is current as of a date no more than forty-five (45) days prior to the date that the person becomes an Access Person), each Access Person, except Independent Directors, must submit (i) a holdings
report that must contain, at a minimum, the title and type of security, and as applicable, the exchange ticker symbol or CUSIP number, number of shares, and principal amount of each Covered Security in which the Access Person has any direct or
indirect Beneficial Ownership and (ii) the name of any broker, dealer or bank with whom the Access Person maintained an account in which any securities were held for the Access Person’s direct or indirect benefit as of the date they became an
Access Person. This report must state the date on which it is submitted.
Quarterly Transaction Reports. All Access Persons,
except Independent Directors, shall report to the CCO or designee the following information with respect to transactions in a Covered Security in which such person has, or by reason of such transaction acquires, any direct or indirect Beneficial
Ownership in the Covered Security:
| • |
The date of the transaction, the title, and as applicable, the exchange ticker symbol or CUSIP number, interest rate and maturity date, number of shares, and the principal amount
of each Covered Security;
|
| • |
The nature of the transaction (i.e., purchase, sale or any other type of acquisition or disposition),
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| • |
The price of the Covered Security at which the transaction was effected
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| • |
The name of the broker, dealer, or bank with or through whom the transaction was effected; and
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| • |
The date the Access Person submits the report.
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Reports pursuant to this section of this 1940 Act Code of Ethics shall be made no later than thirty (30) days after the end of the calendar
quarter in which the transaction to which the report relates was effected and shall include a certification that the reporting person has reported all personal securities transactions required to be disclosed or reported pursuant to the
requirements of this 1940 Code of Ethics. Confirmations and brokerage statements sent directly to the appropriate address noted above is an acceptable form of a quarterly transaction report.
Review of Reports
The CCO of the Company, or designee, shall be responsible for reviewing the reports received, maintaining a record of the names of the persons
responsible for reviewing these reports, and as appropriate and reporting to the Board:
| • |
any transaction that appears to evidence a possible violation of this 1940 Act Code of Ethics; and
|
| • |
apparent violations of the reporting requirements stated herein.
|
The CCO of the Company shall review the reports referenced hereunder and shall determine whether the policies established in sections IV and V of
this 1940 Act Code of Ethics have been violated, and what sanctions, if any, should be imposed on the violator. Sanctions include but are not limited to a letter of censure, suspension or termination of the employment of the violator, or the
unwinding of the transaction and the disgorgement of any profits.
The Company CCO and the Board of the Company shall review the operation of this 1940 Act Code of Ethics at least annually. All material
violations of this 1940 Act Code of Ethics and any sanctions imposed with respect thereto shall periodically be reported to the Board of the Company.
Certification
Each Access Person will be required to certify annually that he/she has read and understood the provisions of this Code and will abide by them.
Each Access Person will further certify that he/she has disclosed or reported all personal securities transactions required to be reported under the Code. A form of such certification is attached below:
I certify that I have read and understand the Code of Ethics of and recognize that I am subject to it. [if an employee of the
Adviser] I further certify I will fulfill my personal securities holdings and transactions reporting obligates through the procedures of the Adviser with respect to covered securities.
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Printed Name:
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| Signature: |
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Date:
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Before the Board of Directors of the Company may approve the Code of Ethics, the Company must certify to the Board that the Company has adopted
procedures reasonably necessary to prevent Access Persons from violating this Code. Such certification shall be submitted to the Board of Directors at least annually.
Exhibit 14.2
Code of Ethics
600 Madison Avenue,
Suite 1800
New York, NY 10022
www.silverspikecap.com
Roxanne Jenkins, CCO: roxy@silverspikecap.com
March 2023
1
Table of Contents
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1) Introduction
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3 |
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2) Standards of Business Conduct
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3 |
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3) Policy Statement on Insider Trading
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3 |
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4) Procedures To Implement Policy Against Insider Trading
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4 |
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5) Personal Account Dealings
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5 |
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6) Gifts and Entertainment
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6 |
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7) Political Contributions
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8 |
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8) Outside Business Activities
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8 |
2
| 1) |
Introduction
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This Code of Ethics (the “Code”) has been developed by Silver Spike Capital, LLC (“Silver Spike,” or “Firm”) to provide a set of rules and principles to ensure the Firm
and its Supervised Persons meet the obligation to place Clients’ interests before those of the Firm and its Supervised Persons and to ensure all conflicts of interest are managed fairly.
Adherence to the Code of Ethics and related restrictions on personal investing is considered a basic condition of employment for Supervised Persons of Silver Spike.
All Supervised Persons are required to follow ethical principles of openness, integrity, honesty, and trust. All Supervised Persons are expected to follow this Code and
comply with all applicable laws. While not expected to know the details of each law governing Silver Spike's business, all Supervised Persons are expected to be familiar with the company-wide policies and procedures as they apply to their role at
Silver Spike and when in doubt, to seek advice from supervisors, or other appropriate personnel.
Should any questions about this Code, or any of Silver Spike's other policies, or how to comply with the law in a certain situation arise, it is required that Supervised
Persons immediately bring questions to the Chief Executive Officer (“CEO”) or Chief Compliance Officer (“CCO”).
Although Silver Spike will not retaliate against anyone for making a good faith report, failure to report violations may lead to appropriate disciplinary action.
Failure to adhere to these standards could expose a Supervised Person to sanctions imposed by Silver Spike, regulators, or law enforcement officials. Sanctions may
include disgorgement of profits, suspension or termination of employment, or criminal or civil penalties. If there is any doubt as to whether a Federal or State securities law applies, Supervised Persons should consult with the CCO.
Silver Spike will hold new employee training that will cover topics covered in this Code. Silver Spike will remind Supervised Persons on an ongoing basis of their
obligations under this Code and will require annual recertification that each Supervised Person has re-read, understands and has complied with the Code.
| 2) |
Standards of Business Conduct
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Supervised Persons must at all times comply with the following standards of business conduct to ensure Silver Spike meets its fiduciary obligations and those of its
Supervised Persons:
| • |
Clients Come First. Supervised Persons owe Clients a duty of loyalty and must avoid serving the Adviser’s or their own personal interests ahead of the Clients'. A Supervised Person may not induce or
cause a Client to take action, or not to take action, for the Firm’s or the Supervised Person’s own benefit rather than for the benefit of the Client. The Firm must make full and fair disclosure of all material facts related to the
investment, particularly where the interests of the Firm or a Supervised Person may conflict with those of a Client.
|
| • |
Avoid Taking Advantage. Supervised Persons may not trade on the basis of inside information, usurp investment opportunities that should properly be made available to the Firm's Clients, or otherwise
use their knowledge of the Firm’s investment activities to profit on such activities at the expense of the Firm’s Clients.
|
| • |
Avoid Inappropriate Relationships. In addition, Supervised Persons must avoid engaging in outside business activities and the receipt of investment opportunities, perquisites, or gifts from persons
seeking to do business with the Firm that could call into question a Supervised Person’s ability to exercise independent judgment in the best interests of the Firm’s Clients.
|
| • |
Compliance with Applicable Law. Supervised Persons must comply with all laws that apply to the business of the Firm.
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Doubtful situations should always be resolved in favor of the Client. Technical compliance with the Code’s procedures will not automatically insulate from scrutiny any
activities that indicate an abuse of these governing principles.
| 3) |
Policy Statement on Insider Trading
|
Section 204A of the Advisers Act requires that all investment advisers establish, maintain, and
enforce written policies and procedures reasonably designed, taking into consideration the nature of the business, to prevent the misuse of material, non- public information by the adviser or any person associated with the adviser.
Silver Spike forbids any Supervised Persons from trading, either personally or on behalf of others, including Funds, based upon Material Non-Public Information (“MNPI”)
about a publicly traded security, or communicating MNPI to others in violation of the law. This conduct is frequently referred to as “insider trading.” Silver Spike's policy applies to every Supervised Person and extends to activities within and
outside their duties at Silver Spike.
The term “insider trading” is not defined in the federal securities laws, but generally is used to refer to the use of MNPI to trade in securities (whether or not one is
an “insider”) or the communications of MNPI to others.
3
While the law concerning insider trading is not static, it is generally understood that the law prohibits:
| • |
trading by an insider, while in possession of MNPI;
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| • |
trading by a non-insider, while in possession of MNPI, where the information either was disclosed to the non-insider in violation of an insider’s duty to keep it confidential or was misappropriated;
or
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| • |
communicating MNPI to others (i.e. “tipping”).
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The elements of insider trading and the penalties for such unlawful conduct are discussed below. If, after reviewing this policy statement, any Supervised Person has any
questions they should consult the CCO.
Who is an Insider?
The concept of “insider” is broad. It includes officers, directors and employees of a company. In addition, a person can be a “temporary insider” if they enter into a
special confidential relationship in the conduct of a company’s affairs and as a result are given access to information solely for the company’s purposes. A temporary insider can include, among others, a company’s attorneys, accountants, consultants,
bank lending officers, and the employees of such organizations. In addition, Silver Spike may become a temporary insider of a company it advises or for which it performs other services. According to the Supreme Court, the company must expect the
outsider to keep the disclosed non-public information confidential and the relationship must at least imply such a duty before the outsider will be considered an insider.
What is Material Information?
“Material information” generally is defined as information for which there is a substantial likelihood that a reasonable investor would consider it important in making
their investment decisions, or information that is reasonably certain to have a substantial effect on the price of a company’s securities. Information that Supervised Persons should consider material includes, but is not limited to:
| • |
merger or acquisition proposals or agreements;
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| • |
news of a significant sale of assets or the disposition of a subsidiary;
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| • |
liquidation problems;
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| • |
major contract awards;
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| • |
the gain or loss of a substantial customer or supplier;
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| • |
pricing changes or discount policies;
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| • |
notice of issuance of patents;
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| • |
significant new products, processes or discoveries;
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| • |
major litigation or regulatory inquiries;
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| • |
extraordinary management developments;
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| • |
earnings estimates (or results);
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| • |
changes in previously released earnings estimates;
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| • |
current financial performance;
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| • |
changes in dividend amounts or policies or the declaration of a stock split or the offering of additional securities; and/or
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| • |
significant write-offs or restatements.
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What is Non-Public Information?
Information is non-public until it has been effectively communicated to the marketplace. One must be able to point to some fact to show that the information is generally
public. For example, information found in a report filed with the SEC, or appearing in Dow Jones, Reuters Economic Services, the Wall Street Journal or other publications of general circulation would be considered public. Common examples of
non-public information include information provided to a select group of analysts that is not made available to the investment community at large, information about a company that has not been disseminated by such company in a press release, or
information received as a “tip” from a person who owes a duty of trust or confidentiality with respect to such information.
Penalties for Insider Trading
Any violation of this policy statement can be expected to result in serious sanctions by Silver Spike, which may include dismissal of the persons involved.
Penalties for trading on or communicating MNPI are severe, both for individuals involved in such unlawful conduct and their employers. A person can be subject to some or
all of the penalties below even if they do not personally benefit from the violation. Penalties include:
| • |
civil injunctions;
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| • |
treble damages (triple the amount of compensatory/actual damages);
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| • |
disgorgement of profits;
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| • |
jail sentences;
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| • |
fines for the person who committed the violation of up to three times the profit gain or loss avoided, whether or not the person actually benefited; and
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| • |
fines for the employer or other controlling person of up to the greater of $100,000 or three times the amount of the profit gained or loss avoided.
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| 4) |
Procedures To Implement Policy Against Insider Trading
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The following procedures have been established to aid Supervised Persons in avoiding insider trading and to aid Silver Spike in preventing, detecting and imposing
sanctions against insider trading. Every Supervised Person must follow these procedures or risk serious sanctions, including dismissal, substantial personal liability and criminal penalties. If employees have any questions about these procedures,
they should consult the CCO.
4
Identifying Insider Information
| • |
Before engaging in personal trading or trading for Funds in the securities of a company which has publicly traded securities (even if the information relates to such company’s non-publicly traded
securities), Supervised Persons should ask the following questions about any information that may be MNPI prior to communicating such information to any person other than the CCO:
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| • |
Is the information material? Is this information that an investor would consider important in making his or her investment decisions? Is this information that would substantially affect the market
price of the securities if generally disclosed?
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| • |
Is the information non-public? To whom has this information been provided? Has the information been effectively communicated to the marketplace (e.g., by being published in Reuters, the Wall Street
Journal or other publications of general circulation or made available broadly to security holders)?
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| • |
Has this information been obtained from a company or from another source (including an immediate family member) as a result of a breach of a duty of trust or confidence by that source?
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| • |
If, after consideration of the above, there is a possibility that the information could be material and non-public, or if there are questions as to whether the information is material and non-public,
the following steps should be taken:
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| • |
The matter should be reported immediately to the CCO.
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| • |
The securities should not be purchased or sold personally or on behalf of a Fund or for any of the Supervised Person’s Personal Accounts;
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| • |
The information should not be communicated inside or outside Silver Spike, other than to the CCO.
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| • |
After the CCO has reviewed the issue or consulted with counsel (as the CCO deems appropriate), the CCO will determine whether to:
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| • |
continue the restriction on trading in such securities (by placing the security on the Restricted List (as defined below);
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| • |
permit trading in such securities and communication of the information (either in Personal Accounts or Fund accounts);
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| • |
create an “ethical wall” to limit the information to certain Supervised Persons and instruct the Supervised Person that they may communicate the information only to Supervised Persons that are
appropriately “walled off” by confidentiality agreement or otherwise; or
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| • |
take any other action the CCO deems appropriate.
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Restricting Access to MNPI
If a Supervised Person is in possession of information that they have identified as material and non-public, such information may not be communicated to anyone,
including persons within Silver Spike, except as permitted by the CCO (who may authorize other Supervised Persons to be put behind an “ethical wall”). In addition, care should be taken so that such information is secure. For example, files containing
MNPI should be sealed; access to computer files containing MNPI should be restricted.
Resolving Issues Concerning Insider Trading
If after consideration of the items set forth above doubt remains as to whether such information is material or non-public, or if there is any unresolved question as to
the applicability or interpretation of the foregoing procedures, or as to the propriety of any action, it must be discussed with the CCO before trading or communicating the information to anyone.
Officers, Directors and Employees of Public Companies
Certain Investors may serve as officers or on the Boards of publicly traded companies, which could potentially fall within Silver Spike's investment universe. As such,
Supervised Persons must be careful in speaking to such Investors to ensure that Silver Spike does not receive any material, non-public information. In the event any Supervised Person receives material, non- public information, such Supervised Person
is required to follow the guidelines and procedures relating to the handling and sharing of such information as contained in this manual.
| 5) |
Personal Account Dealings
|
Rule 204A-1 of the Investment Advisers Act of 1940 requires certain Supervised Persons of a Registered Investment Adviser, deemed “Access Persons” to report their
personal Securities Transactions and holdings. Rule 204A-1 defines an Access Person as any Supervised Person who has access to nonpublic information regarding clients' purchase or sale of securities, who is involved in making securities
recommendations to clients, or who has access to such recommendations that are nonpublic.
Silver Spike has deemed all Supervised Persons as Access Persons. Therefore, all Supervised Persons of Silver Spike are both Supervised Persons and Access Persons, and
all sections of this Code apply to all Supervised Persons. This Code covers the personal investments of all Supervised Persons and their Immediate Family Members (e.g., persons sharing the same household as the Supervised Person, see Appendix A for
further detail) as required by Rule 204A-1. Therefore, each Supervised Person and their Immediate Family Members must conduct all personal investments consistent with this Code.
Rule 204A-1 has certain requirements for all Registered Investment Advisers. Their Access Persons must
| • |
report securities holdings, at the time the person becomes an access person and at least once a year thereafter; and
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| • |
disclose each quarter their personal Securities Transactions no later than 30 days after the close of the calendar quarter.
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Initial Account and Holdings Disclosure Requirement:
Within 10 calendar days of a Supervised Person’s start date, the Supervised Person is required to disclose all brokerage accounts in which they have Beneficial
Ownership, including but not limited to accounts owned by Immediate Family Members. Supervised Persons must allow brokers or financial institutions to provide duplicate confirmations and statements directly to Silver Spike in accounts that can hold
Reportable Securities (see Exceptions below for Discretionary Management by Third Parties). If a Supervised Person’s broker is unwilling or unable to provide duplicate confirmations and statements, the Supervised Person is required to provide them to
Silver Spike's CCO.
Within 10 calendar days of a Supervised Person’s start date, all holdings in Reportable Securities that are beneficially owned by the Supervised Person must be
disclosed, excluding those managed by a Third Party. Holdings information must be current as of 45 days prior to the Supervised Person’s start date.
5
Ongoing Disclosure Requirements
Accounts: Supervised Persons must promptly
disclose any newly opened accounts under their Beneficial Ownership, including those owned by Immediate Family Members, that have the ability to hold Reportable Securities.
Transactions/Holdings: Supervised Persons must
ensure that the CCO receives duplicate statements and trade confirmations for all Reportable Securities (see Exceptions below for Discretionary Management by Third Parties) in one of the three ways listed below:
| 1. |
Electronic feeds – Supervised Persons are encouraged to deal through brokers that provide Compliance with trade confirmations and holdings via electronic feed. This provides Compliance with the most
timely and accurate account information.
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| 2. |
Broker delivery of duplicate confirmations and statements – In jurisdictions where applicable, Supervised Persons should allow for brokers to provide delivery of duplicate confirmations and
statements directly to Compliance. Compliance staff will enter trade details for Supervised Persons that utilize this option.
|
| 3. |
Supervised Person upload of confirmations and statements – If neither of the above options is possible, Supervised Persons are required to enter trade details into the Firm’s compliance management
system, MyComplianceOffice (“ACA Compliance Alpha”) and upload the trade confirmation (or quarterly statement).
|
Attestation Requirements:
Annually:
| • |
Account Attestation (For Accounts that have the ability to hold Reportable Securities)
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| • |
Holdings Attestation (For Reportable Securities)
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Quarterly:
| • |
Quarterly Trades Attestation (For Reportable Securities)
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Private Placements and Initial Public Offerings (IPOs)
Supervised Persons must request pre-approval prior to investing in a private placement or limited offering by submitting a request in ACA Compliance Alpha.
No Supervised Person shall acquire any security issued in any limited or private offering (please note that hedge funds are sold as limited or private offerings) unless
Silver Spike gives express prior written approval. In determining whether approval should be given, Silver Spike may take into account, among other factors, whether the investment opportunity should be reserved for a Client and whether the
opportunity is offered to the individual by virtue of his or her position with Silver Spike.
Rule 204A-1 requires Access Persons to request approval before investing in an Initial Public Offering ("IPO"). Supervised Persons must submit this request in ACA
Compliance Alpha.
Exceptions:
Rule 204A-1 permits two exceptions that are applicable to Silver Spike related to personal securities reporting in Reportable Securities. No disclosures are required:
| • |
with respect to transactions effected pursuant to an Automatic Investment Plan; or
|
| • |
with respect to securities held in accounts over which the access person had no direct or indirect influence or control
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In order to rely upon this provision, Supervised Persons are required to certify on a periodic basis that they do not have ability to influence or control investment
decisions made for the managed account.
Additional Restrictions for Personal Account Dealings Established by Silver Spike
Silver Spike maintains a Restricted List that is available to all Supervised Persons and is maintained electronically by the CCO or Designee. Silver Spike believes the
use of a Restricted List is appropriate due to the nature of its investments in order to prevent the use of nonpublic information by Silver Spike or its Supervised Persons. Silver Spike believes the use of a Restricted List will be infrequent.
Supervised Persons are responsible for ensuring they do not trade in a security on the Restricted List.
Once a company is on the Restricted List, any trading in a Client or Supervised Person account will be restricted until the security has been removed from the list.
Silver Spike utilizes its Restricted List to prohibit insider trading by Silver Spike and its Supervised Persons. Employee holdings are reviewed quarterly against the
Restricted List for non-compliance.
| 6) |
Gifts and Entertainment
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Gifts or Entertainment may create an actual or apparent conflict of interest, which could affect (or appear to affect) the recipient’s independent business judgment.
6
Supervised Persons are required to follow the standards below regarding the acceptance or giving of gifts and entertainment with respect to all Business Partners.
Supervised Persons are expected to avoid any gifts or entertainment that:
| • |
could create an apparent or actual conflict;
|
| • |
is excessive or would reflect unfavorably on Silver Spike or its Clients; or
|
| • |
would be inappropriate or disreputable in nature.
|
Supervised Persons may not take advantage of their position by requesting a gift or discount. They must not:
| • |
Receive cash, cash equivalents, loans or personal services on behalf of Silver Spike, even if these fall within the limits outlined above. This includes gift cards or certificates if they can be
redeemed for cash; or
|
| • |
Receive special discounts unless they are available to all other Supervised Persons (e.g., a discount coupon from a retail store).
|
Modest gifts and favors, which would not be regarded by others as improper, may be accepted or given on an occasional basis. Entertainment that satisfies these
requirements and conforms to generally accepted business practices is also permissible.
Where there is a law or rule that applies to the conduct of a particular business or the acceptance of gifts of even nominal value, the law or rule must be followed.
A “Gift” is anything of value that is given with the intent or perceived intent to foster a legitimate business relationship. Gifts can include merchandise such as wine,
gift baskets, or event tickets if the giver does not attend. No Supervised Person may receive any gift, service or other thing of excessive value from any person or entity that does business with or on behalf of Silver Spike. No Supervised Person may
give or offer any gift of excessive value, determined to be amounts in excess of $500, to existing Clients, prospective clients, or any entity that does business with or on behalf of Silver Spike without pre-approval by the CCO. Supervised Persons
may not accept a Gift of cash or a cash-equivalent in any amount.
“Entertainment” is a meeting, meal, or other activity where both the Supervised Person and the business partner are present and have the opportunity to discuss business
or any participant’s employer bears the cost. It does not include events that have been organized by Silver Spike directly, such as receptions following an industry gathering or multi-client entertainment. If the business partner will not be present
for the event, it will be considered a Gift.
No Supervised Person may provide or accept extravagant or excessive entertainment to or from a Client, prospective client, or any person or entity that does or seeks to
do business with or on behalf of Silver Spike. A Supervised Person may provide or accept a business entertainment event, such as dinner, a sporting event, golf outings, etc. provided that such activities involve no more than customary amenities and
the person or entity providing the entertainment is present.
While there is no maximum amount for how much may be spent or received by a Supervised Person for entertainment, Supervised Persons are expected to use good judgement
and refrain from giving or accepting any entertainment that is or may be perceived as lavish or extravagant. The CCO will review expenses for excessive or extravagant entertainment expenses.
A “Business Partner,” for the purpose of this Code, includes all current Clients, portfolio
companies, and vendors with which Silver Spike conducts business, any potential clients, portfolio companies, or vendors with whom Silver Spike could engage in business, any registered broker-dealers, and any firms under contract to do business with
Silver Spike.
Exempt from Disclosure of Gifts and Entertainment Requirement
For the purposes of disclosure of gifts and entertainment the following are exempt:
| • |
Usual and customary promotional items (e.g., t-shirts, caps, or pens marked with the vendor’s logo);
|
| • |
Gifts ($500 or less) or entertainment of nominal value;
|
| • |
Attendance and participation at industry sponsored events; or
|
| • |
Usual and customary gifts given to or by Supervised Persons based on a personal relationship (e.g., the vendor and Supervised Person have a family relationship that preceded interaction at the Firm).
|
Approval Process
Any Gift or Entertainment whose value exceeds the relevant stated limit listed above, or that is otherwise impermissible due to other listed restrictions, constitutes
violation of the Code. Any request for an exception must be entered into ACA Compliance Alpha and Silver Spike's CCO, or Designee, will review and approve or deny any exceptions to the Code.
Anti-Corruption and Anti-Bribery
Under the Foreign Corrupt Practices Act (“FCPA”) Silver Spike could face potentially serious civil and/or criminal penalties for offering, promising, paying, or
authorizing any bribe, kickback or similar improper payment to any foreign official, foreign political party or official or candidate for foreign political office in order to assist Silver Spike in obtaining, retaining, or directing business,
including investments in the Funds. As a matter of policy, Silver Spike strictly complies with the FCPA. All Supervised Persons are expected to carefully read this policy and to contact the CCO with any questions.
Under the FCPA, a "foreign official" includes any officer or employee of a foreign government or any department, agency or instrumentality thereof. Importantly, all
government employees are covered by this definition, as are employees of government- owned business entities and sovereign wealth funds. The FCPA does permit certain small "facilitating" or "expediting" payments to foreign officials to ensure that
they perform routine, nondiscretionary governmental duties (e.g. obtaining permits, licenses, or other official documents; processing governmental papers, such as visas and work orders; providing police protection, mail pick- up and delivery;
providing phone service, power and water supply, loading and unloading cargo, or protecting perishable products; and scheduling inspections associated with contract performance or transit of goods across country). The FCPA also permits payment or
reimbursement of reasonable and bona fide expenses of a foreign official (e.g., travel and lodging expenses) relating to the promotion, demonstration or explanation of a product or service or to the execution or performance of a contract with a
foreign government. However, it should be noted that these are narrowly defined exceptions and defenses. The FCPA also prohibits payments to third parties, such as a placement agent, with knowledge that all or a portion of the payment will be passed
on to a foreign official. Actual knowledge is not required; constructive knowledge, or the expectation that a person should reasonably know something, is sufficient.
7
In order to minimize the chance that Silver Spike could violate the FCPA or similar foreign laws, Supervised Persons must obtain the written approval of the CCO prior to
making any payment or giving certain gifts or other thing of value (including paying for entertainment or travel related expenses), or offering to do the same, to any:
| • |
official of a foreign government;
|
| • |
employee of any government-controlled foreign business;
|
| • |
sovereign wealth fund, employee or representatives of a sovereign wealth fund, or third party associated with a sovereign wealth fund’s investment process or investment due diligence; or
|
| • |
foreign political party or official or candidate for foreign political office.
|
This policy applies without regard to the purpose or motivation behind the giving of such payment, gift, or other thing of value. The CCO may consult with legal counsel
or outside compliance consultants to determine if such payments, gifts or entertainment would implicate FCPA concerns (or other legal concerns). As a general matter, the giving of any such payments, gifts, or other things of value will not be
permitted.
The CCO will document any exceptions to this general policy.
In addition, in the future, to the extent Silver Spike utilizes placement agents or other intermediaries to solicit Investors in foreign countries, the CCO will review
placement agent agreements for appropriate written representations, including, among other things, that the placement agent or other intermediary will act in accordance with U.S. and foreign laws, including the FCPA. Silver Spike also requires
placement agents or other intermediaries that solicit investors in foreign countries to disclose to Silver Spike any relationships with foreign government officials in the country in which it will operate. The CCO must expressly authorize the
placement agents or intermediaries to solicit investments in foreign countries. Further, Silver Spike requires that placement agents immediately notify the CCO if they have reason to believe an employee of the placement agent has engaged in
activities that violate the FCPA. The CCO may work with legal counsel or outside compliance consultants to determine the appropriate course of action if so notified. Finally, on a periodic basis, the CCO will require such placement agents or
intermediaries to renew appropriate representations relating to compliance with the FCPA.
Silver Spike reviews its policies and procedures with respect to the FCPA with Supervised Persons as part of Silver Spike's periodic compliance training.
| 7) |
Political Contributions
|
Silver Spike has implemented the following restrictions to adhere to the “Pay-to-Play” Rule (Rule 206(4)-5) and to mitigate any associated risks.
Supervised Persons and their Immediate Family are prohibited from making political contributions without preapproval by the CCO. Preapproval for contributions to
individual candidates, incumbents, political action committees, and similar vehicles must be requested in ACA Compliance Alpha.
Upon commencement of employment, the CCO, or an appropriate Designee, will request reporting of all recent political contributions. The disclosure should include
contributions made by Immediate Family as well. The report should include the individual or election committee receiving the contribution, the office for which the individual is running, the current elected office held (if any), the dollar amount of
the contribution or value of the donated item and whether or not the Supervised Person is eligible to vote for the candidate.
| 8) |
Outside Business Activities
|
Supervised Persons must not engage in activities that create, or appear to create, conflict of interest or otherwise might jeopardize the integrity or reputation of
Silver Spike. Supervised Persons are prohibited from receiving compensation from third parties for speaking engagements on investment-related topics. Additionally, certain outside business activities (“OBAs”) require pre- approval. Supervised Persons
should promptly notify the CCO of any other circumstances arising that may create, or appear to create, a conflict of interest or otherwise may jeopardize the integrity or reputation of the Firm or its clients.
Without receiving approval via ACA Compliance Alpha, no Supervised Person shall:
| • |
accept, directly or indirectly, compensation of any nature as a bonus, commission, fee, gratuity, or other consideration in connection with any transaction on behalf of the Firm or a Client from any
Person, firm, corporation or association, other than the Firm or an affiliate thereof; or
|
| • |
acquire, directly or indirectly, any equity or other ownership or financial interest in any other organization engaged in any securities, financial or related business, except for (i) a minority
equity or other ownership or other financial interest in any business that is publicly traded, or (ii) an equity or other ownership or financial interest through any account over which the Supervised Person has no direct or indirect influence
or control.
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Supervised Persons must receive approval via ACA Compliance Alpha prior to engaging in any outside business activity:
| • |
that involves a significant amount of time or provides a significant amount of income;
|
| • |
that is investment-related, including activities on behalf of a non-profit;
|
| • |
that involves service on the board of directors of a publicly traded company (will generally not be permitted);
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| • |
that involves serving as an employee, independent contractor, sole proprietor, officer, director or partner of a for-profit business;
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| • |
that involves serving as a director, officer or executive management of a non-profit entity or performing investment- related functions on its behalf; or
|
| • |
that involves engaging in any other outside employment or activity (paid or unpaid) that may give rise to a conflict with Silver Spike, one of its Funds, or Fund Investors or other risk (e.g.,
operating a blog that provides financial advice).
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8
At all times, the interests of the Firm and its Clients take priority over the outside business activities of Supervised Persons. An outside business activity may never:
| • |
present a substantial risk of confusing Clients or the public as to the capacity in which the Supervised Person is acting;
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| • |
pose a reputational risk for the Firm;
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| • |
inappropriately influence a Supervised Person’s business dealings or otherwise create a conflict of interest vis-à-vis the interests of Silver Spike or its Funds, or a Fund Investor; or
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| • |
involve use of information relating to Silver Spike, any Fund or other proprietary information.
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Immediate Family
While Silver Spike does not require pre-approval of the OBAs undertaken by a Supervised Person’s Immediate Family, the Supervised Person must contact the CCO if they
believe the outside activity by their Immediate Family could create or appear to create a conflict of interest or otherwise may jeopardize the integrity and reputation of Silver Spike.
9
Appendix A - Glossary
Access Person - Access Persons are Supervised Persons who:
| • |
have access to non-public information regarding Silver Spike's Funds, or non-public information regarding the portfolio holdings of any of Silver Spike's Funds, or any Silver Spike services;
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| • |
are involved in making investment recommendations to Clients, or have access to such recommendations that are non- public;
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| • |
in connection with their regular functions or duties, make, participate in or obtain information regarding transactions in Silver Spike's Funds or their functions relate to the making of any
recommendations with respect to Silver Spike's Funds;
|
| • |
are personnel, such as client service representatives, administrative and technical staff, who may qualify as Access Persons if their job functions give them access to material non-pubic information
or client or fund information;
|
| • |
are any other person designated by the CCO as necessary.
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Account – Any accounts in
which Securities (as defined below) transactions can be effected including:
| • |
any accounts held by any Supervised Person;
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| • |
accounts of the Supervised Person’s Immediate Family members (any relative by blood or marriage) living in the Supervised Person’s household or is financially dependent;
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| • |
accounts held by any other related individual over whose account the Supervised Person has discretionary control;
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| • |
any other account where the Supervised Person has discretionary control and materially contributes; and
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| • |
any account in which the Supervised Person has a direct or indirect beneficial interest, such as trusts and custodial accounts or other accounts in which the Supervised Person has a beneficial
interest or exercises investment discretion.
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Advisers Act – refers to the Investment Advisers Act of 1940, as amended
Automatic Investment Plan –
A program in which regular periodic purchases (or withdrawals) are made automatically in (or from) investment accounts in accordance with a predetermined schedule and allocation. An Automatic Investment Plan includes a dividend reinvestment plan.
Beneficial Ownership – The
Code applies to all accounts and securities beneficially owned by you as well as accounts under your direct or indirect influence or control. Essentially, this means that if you have the ability to profit, directly or indirectly, or share in any
profit from a transaction, you have Beneficial Ownership. If you are unsure if an account or investment falls under your beneficial ownership, contact the CCO for further guidance.
Practical Application of Beneficial Ownership:
| • |
You live with your parents: If you live in your parents’ house but do not financially support your parents, your parents’ accounts and securities are not beneficially owned by you and do not require
disclosure.
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| • |
Your parent lives with you: If you provide financial support to your parent, your parent’s accounts and securities are beneficially owned by you and require disclosure.
|
| • |
You have an adult child living in your home: If you provide financial support to your child, your child’s accounts and securities are beneficially owned by you and require disclosure.
|
| • |
You have a college-age child: If your child is in college and you still claim the child as a dependent for tax purposes, you are the beneficial owner of their accounts and securities.
|
| • |
Your child has an UGMA/UTMA account: If you (or your spouse) are the custodian for the minor child, the child’s accounts are beneficially owned by you. If someone other than you (or your spouse) is
the custodian for your minor child’s account, the account is not beneficially owned by you.
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| • |
You have a domestic partner or similar cohabitation arrangement: If you contribute to the maintenance of a household and the financial support of a partner, your partner’s accounts and securities are
beneficially owned by you and require disclosure.
|
| • |
You have a roommate: Generally, roommates are presumed to be temporary and therefore you have no beneficial ownership in one another’s accounts and securities.
|
| • |
You have power of attorney: If you have been granted power of attorney over an account, you are not the beneficial owner of the account until the time that the power of attorney has been activated.
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| • |
You are the trustee and/or the beneficiary of a trust: Due to the complexity and variety of trust agreements, these situations require case-by-case review by the CCO.
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Chief Compliance Officer (“CCO”) – The CCO as referenced is Roxanne Jenkins, so designated by Silver Spike. The CCO may designate additional individuals, where appropriate, to operate in the capacity of the CCO as outlined in this Code.
Client – Silver Spike funds
and investors within those funds
Code – refers to this Code of Ethics
Designee –a member assigned
by the CCO to assist with the monitoring and enforcement of Silver Spike's Compliance Program. The CCO may appoint employees of Silver Spike, a third-party consultant and/or any other individual or entity the CCO deems appropriate.
Firm – refers to Silver
Spike Management
10
Foreign Corrupt Practices Act (“FCPA”) – refers to the Foreign Corrupt Practices Act of 1977, as amended. The FCPA was enacted for the purpose of making it unlawful for
certain classes of persons and entities to make payments to foreign government officials to assist in obtaining or retaining business. Specifically, the anti-bribery provisions of the FCPA prohibit the willful use of the mails or any means of
instrumentality of interstate commerce corruptly in furtherance of any offer, payment, promise to pay, or authorization of the payment of money or anything of value to any person, while knowing that all or a portion of such money or thing of value
will be offered, given or promised, directly or indirectly, to a foreign official to influence the foreign official in his or her official capacity, induce the foreign official to do or omit to do an act in violation of his or her lawful duty, or
to secure any improper advantage in order to assist in obtaining or retaining business for or with, or directing business to, any person.
Fund - Any fund or business
development company managed by Silver Spike
Immediate Family Member of a Supervised Person – means:
| • |
any of the following persons sharing the same household with the Supervised Person (which does not include temporary house guests): a person’s child, stepchild, grandchild, parent, stepparent,
grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, sister-in-law, legal guardian, adoptive relative, or domestic partner;
|
| • |
any person sharing the same household with the Supervised Person (which does not include temporary house guests) that holds an account in which the Supervised Person is a joint owner or listed as a
beneficiary; or
|
| • |
any person sharing the same household with the Supervised Person in which the Supervised Person contributes to the maintenance of the household and material financial support of such person.
|
Initial Public Offering (“IPO”) - generally refers to when a company first sells its shares to the public
Investor - Investors in at
least one Silver Spike fund or fund-related investment vehicle
Material Non-Public Information (“MNPI”) – Any information that has not been publicly disseminated, or that was obtained legitimately while acting in a role of trust or confidence of an issuer or that was obtained wrongfully from an issuer or such person acting in a
role of trust or confidence that a reasonable investor would consider important in making a decision to buy, hold or sell a company’s securities. Regardless of whether it is positive or negative, historical or forward looking, any information that
a reasonable investor could expect to affect a company’s stock price. Material Nonpublic Information may include:
| • |
projections of future earnings or losses;
|
| • |
news of a possible merger, acquisition or tender offer;
|
| • |
significant new products or services or delays in new product or service introduction or development;
|
| • |
plans to raise additional capital through stock sales or otherwise;
|
| • |
the gain or loss of a significant customer, partner or supplier;
|
| • |
discoveries, or grants or allowances or disallowances of patents;
|
| • |
changes in management;
|
| • |
news of a significant sale of assets;
|
| • |
impending bankruptcy or financial liquidity problems; or
|
| • |
changes in dividend policies or the declaration of a stock split.
|
ACA Compliance Alpha – An
on-line compliance management application used for Supervised Persons to disclose all personal compliance disclosures including items found in Section 5 - Personal Account Dealing.
Reportable Securities – Rule
204A-1 treats all securities as reportable securities, with five exceptions designed to exclude securities that appear to present little opportunity for the type of improper trading on behalf of a Supervised Person which the restrictions are
designed to mitigate and /or uncover. These include:
| • |
transactions and holdings in direct obligations of the Government of the United States.
|
| • |
money market instruments — bankers' acceptances, bank certificates of deposit, commercial paper, repurchase agreements and other high quality short-term debt instruments.
|
| • |
shares of money market funds.
|
| • |
transactions and holdings in shares of other types of mutual funds, unless the adviser or a control affiliate acts as the investment adviser or principal underwriter for the fund.
|
| • |
transactions in units of a unit investment trust if the unit investment trust is invested exclusively in unaffiliated mutual funds.
|
Securities Transactions – The
term “Securities Transactions” as used within this Code typically refers to the purchase and/or sale of Securities, (as defined herein), by a Supervised Person. Securities Transactions shall include any gift of Reportable Securities that is given
or received by the Supervised Person, including any inheritance received that includes Reportable Securities.
Supervised Person – The
Advisers Act defines “Supervised Person” to mean any partner, officer, director (or other person occupying a similar status or performing similar functions), or employee of an investment adviser, or other person who provides investment advice on
behalf of the investment adviser and is subject to the supervision and control of the investment adviser. Also referred to as “Supervised Persons” or “Access Persons” in this Code. Supervised Persons of Silver Spike include all directors,
officers, and any other personnel as designated as a Supervised Person by the CCO.
11
Appendix B – Revision History
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Created Date:
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mm/dd/yyyy
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Revision Date:
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Revision Date:
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Revision Date:
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Revision Date:
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12
Exhibit 31.1
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Scott Gordon, Chief Executive Officer of Silver Spike Investment Corp., certify that:
1. I have reviewed this Transition Report on Form 10-K of Silver Spike Investment Corp. (the “registrant”) for the transition period from April 1, 2022 through December 31, 2022;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this Transition Report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for,
the periods presented in this Transition Report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant
is made known to us by others within those entities, particularly during the period in which this Transition Report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
|
Date: March 31, 2023
|
By:
|
/s/ Scott Gordon
|
|
Scott Gordon
|
||
| Chief Executive Officer | ||
|
(Principal Executive Officer)
|
Exhibit 31.2
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Umesh Mahajan, Chief Financial Officer of Silver Spike Investment Corp., certify that:
1. I have reviewed this Transition Report on Form 10-K of Silver Spike Investment Corp. (the “registrant”) for the transition period from April 1, 2022 through December 31, 2022;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this Transition Report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for,
the periods presented in this Transition Report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant
is made known to us by others within those entities, particularly during the period in which this Transition Report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
|
Date: March 31, 2023
|
By:
|
/s/ Umesh Mahajan
|
|
Umesh Mahajan
|
||
| Chief Financial Officer | ||
|
(Principal Financial Officer)
|
Exhibit 32.1
CERTIFICATION PURSUANT TO
SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, as Chief Executive Officer of Silver Spike Investment Corp. (the “Company”), does hereby
certify that to the undersigned’s knowledge:
1) the Company’s Form 10-K for the transition period from April 1, 2022 through December 31, 2022 fully complies with the requirements of Section 13(a) or 15(d) as applicable of the Securities Exchange Act of 1934, as amended; and
2) the information contained in the Company’s Form 10-K for the transition period from April 1, 2022 through December 31, 2022 fairly presents, in all material respects, the financial condition and results of operations of the Company.
|
Date: March 31, 2023
|
By:
|
/s/ Scott Gordon
|
|
Scott Gordon
|
||
| Chief Executive Officer | ||
|
(Principal Executive Officer)
|
Exhibit 32.2
CERTIFICATION PURSUANT TO
SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, as Chief Financial Officer of Silver Spike Investment Corp. (the “Company”), does hereby
certify that to the undersigned’s knowledge:
1) the Company’s Form 10-K for the transition period from April 1, 2022 through December 31, 2022 fully complies with the requirements of Section 13(a) or 15(d) as applicable of the Securities Exchange Act of 1934, as amended; and
2) the information contained in the Company’s Form 10-K for the transition period from April 1, 2022 through December 31, 2022 fairly presents, in all material respects, the financial condition and results of operations of the Company.
|
Date: March 31, 2023
|
By:
|
/s/ Umesh Mahajan
|
|
Umesh Mahajan
|
||
| Chief Financial Officer | ||
|
(Principal Financial Officer)
|