Item 1A. Risk Factors
Item 1A. RISK FACTORS
The Company’s business and operations are
subject to numerous risks. The material risks and uncertainties that management believes affect the Company are described below. The risks
and uncertainties described below are not the only ones facing the Company. Additional risks and uncertainties that are presently unknown,
management is not aware of or focused on or that management currently deems immaterial may also impair the Company’s business operations.
If any of the following risks actually occur, the Company’s financial condition and results of operations may be materially and
adversely affected. We may amend or supplement these risk factors from time to time in other reports we file with the SEC.
Business Risks
Our business is subject to significant
credit risk in connection with the execution, settlement and financing of various customer and principal securities and derivative transactions.
In the normal course of our businesses, we are
involved in the execution, settlement and financing of various customer and principal securities and derivative transactions. These activities
are transacted on a cash, margin or delivery-versus-payment basis and are subject to the risk of counterparty or customer nonperformance.
Even when transactions are collateralized by the underlying security or other securities, we still face the risks associated with changes
in the market value of the collateral through settlement date or during the time when margin is extended and collateral has not been secured
or the counterparty defaults before collateral or margin can be adjusted. We may also incur credit risk in our derivative transactions
to the extent such transactions result in uncollateralized credit exposure to our counterparties.
We seek to control the risk associated with these
transactions by establishing and monitoring credit limits and by monitoring collateral and transaction levels daily. We may require counterparties
to deposit additional collateral or return collateral pledged. In certain circumstances, we may, under industry regulations, purchase
the underlying securities in the market and seek reimbursement for any losses from the counterparty. However, there can be no assurances
that our risk controls will effectively mitigate or eliminate these risks.
We are exposed to significant market risk
and our principal transactions and investments expose us to risk of loss.
Market risk generally represents the risk that
values of assets and liabilities or revenues will be adversely affected by changes in market conditions. Market risk is inherent in the
financial instruments associated with our operations and activities, including trading account assets and liabilities, loans, securities,
short-term borrowings, corporate debt and derivatives. Market conditions that change from time to time, thereby exposing us to market
risk, include fluctuations in interest rates, equity prices, relative exchange rates, and price deterioration or changes in value due
to changes in market perception or actual credit quality of an issuer.
In addition, disruptions in the liquidity or transparency
of the financial markets may result in our inability to sell, syndicate or realize the value of security positions, thereby leading to
increased concentrations. The inability to reduce our positions in specific securities may not only increase the market and credit risks
associated with such positions, but also increase capital requirements, which could have an adverse effect on our business, results of
operations, financial condition and liquidity.
From time to time, we may engage in a large block
trade in a single security or maintain large position concentrations in a single security, securities of a single issuer, securities of
issuers engaged in a specific industry or securities from issuers located in a particular country or region. In general, because our inventory
is marked to market on a daily basis, any adverse price movement in these securities could result in a reduction of our revenues and profits.
In addition, we may engage in hedging transactions that if not successful, could result in losses. Increased market volatility may also
impact our revenues as transaction activity in our investment banking and capital markets sales and trading businesses can be negatively
impacted in a volatile market environment.
Refer to Management’s Discussion and Analysis
of Financial Condition and Results of Operations-Risk Management within Part II, Item 7. of this Annual Report on Form 10-K for additional
discussion.
Financing and advisory services engagements
are transactional in nature and do not generally provide for subsequent engagements.
Even though we work to represent our clients
at every stage of their lifecycle, we are typically retained on a short-term, engagement-by-engagement basis in connection with specific
advisory or capital markets transactions. As a consequence, the timing of when fees are earned varies, and, therefore, our financial
results from advisory and capital markets activities may experience volatility quarter to quarter based on equity market conditions as
well as the macroeconomic business cycle more broadly. In particular, our revenues related to advisory transactions tend to be more unpredictable
from quarter to quarter due to the one-time nature of the transaction and the size of the fee. As a result, high levels of revenue in
one quarter will not necessarily be predictive of continued high levels of revenue in any subsequent period. If we are unable to generate
a substantial number of new engagements and generate fees from the successful completion of those transactions, our business and results
of operations could be adversely affected.
7
Because we have a limited operating history
to evaluate our company, the likelihood of our success must be considered in light of the problems, expenses, difficulties, complications
and delays frequently encountered by an early-stage financial services company.
Since we have a limited operating history in our
current financial services business, it will make it difficult for investors and securities analysts to evaluate our business and prospects.
You must consider our prospects in light of the risks, expenses, and difficulties we face as an early-stage financial services company
with a limited operating history. Investors should evaluate an investment in our securities in light of the uncertainties encountered
by early-stage companies in an intensely competitive industry. There can be no assurance that our efforts will be successful or that we
will be able to become profitable.
Accordingly, you should consider the Company’s
prospects in light of the costs, uncertainties, delays and difficulties frequently encountered by companies in their start-up stages,
particularly those in the financial services industry. Stockholders should carefully consider the risks and uncertainties that a business
with no operating history will face. In particular, stockholders should consider that there is a significant risk that we will not be
able to:
● implement or execute our current business plan, or that our current business plan is sound;
● raise sufficient funds in the capital markets or otherwise to fully effectuate our business plan;
● maintain our management team; and/or
● attract clients.
Any of the foregoing risks may adversely affect
the Company and result in the failure of our business. In addition, we expect to encounter unforeseen expenses, difficulties, complications,
delays and other known and unknown factors.
We have incurred operating losses in the
past and may not consistently achieve profitability in the future.
Our net loss attributable to common stockholders
for the year ended December 31, 2025 was $22.4 million. Our accumulated deficit was $268.1 million as of December 31, 2025. Our ability
to operate profitably depends upon our ability to generate revenue from our financial products and services. We do not know if we will
continue to generate significant revenue from such financial services and products. Even though our revenue may continue to increase,
we expect to incur additional losses while we grow and expand our business. Our failure to sustain consistent profitability could negatively
impact the market price of our common stock.
If we cannot meet our future capital requirements,
we may be unable to develop and enhance our services, take advantage of business opportunities and respond to competitive pressures.
We may need to raise additional funds in the future
to grow our business internally, invest in new businesses, expand through acquisitions, enhance our current services or respond to changes
in our target markets. If we raise additional capital through the sale of equity or equity derivative securities, the issuance of these
securities could result in dilution to our existing stockholders. If additional funds are raised through the issuance of debt securities,
the terms of that debt could impose additional restrictions on our operations or harm our financial condition. Additional financing may
be unavailable on acceptable terms.
If we fail to maintain an effective system
of internal controls over financial reporting, we may not be able to accurately report our financial results or prevent fraud and our
business may be harmed and our stock price may be adversely impacted.
Effective internal controls over financial reporting
are necessary for us to provide reliable financial reports and to effectively prevent fraud. Any inability to provide reliable financial
reports or to prevent fraud could harm our business. The Sarbanes-Oxley Act of 2002 requires management to evaluate and assess the effectiveness
of our internal control over financial reporting. In order to continue to comply with the requirements of the Sarbanes-Oxley Act, we are
required to continuously evaluate and, where appropriate, enhance our policies, procedures and internal controls. If we fail to maintain
the adequacy of our internal controls over financial reporting, we could be subject to litigation or regulatory scrutiny and investors
could lose confidence in the accuracy and completeness of our financial reports. We cannot assure you that in the future we will be able
to fully comply with the requirements of the Sarbanes-Oxley Act or that management will conclude that our internal control over financial
reporting is effective. If we fail to fully comply with the requirements of the Sarbanes-Oxley Act, our business may be harmed and our
stock price may decline.
Our assessment, testing and evaluation of the
design and operating effectiveness of our internal control over financial reporting resulted in our conclusion that, as of December 31,
2025, our internal control over financial reporting was not effective, as described further in Item 9A of this Form 10-K for the fiscal
year ended December 31, 2025. We can provide no assurance as to conclusions of management with respect to the effectiveness of our internal
control over financial reporting in the future.
Developments in market and economic conditions
may adversely affect the Company’s business and profitability.
Performance in the financial services industry
is heavily influenced by the overall strength of economic conditions and financial market activity, which generally have a direct and
material impact on the Company’s results of operations and financial condition. These conditions are a product of many factors,
which are mostly unpredictable and beyond the Company’s control, and may affect the decisions made by financial market participants.
8
Changes in economic and political conditions,
including economic output levels, interest and inflation rates, employment levels, prices of commodities including oil and gas, exogenous
market events, consumer confidence levels, and fiscal and monetary policy can affect market conditions. For example, the Federal Reserve’s
policies determine, in large part, the cost of funds for lending and investing and the return earned on those loans and investments. Changes
in the Federal Reserve’s policies are beyond our control and, consequently, the impact of these changes on our activities and results
of our operations are difficult to predict. While global financial markets have shown signs of improvement in recent years, uncertainty
remains. A period of sustained downturns and/or volatility in the securities markets, and/or prolonged levels of increasing interest rates,
could lead to a return to increased credit market dislocations, reductions in the value of real estate, and other negative market factors
which could significantly impair our revenues and profitability.
U.S. markets may also be impacted by political
and civil unrest occurring in the Middle East, Eastern Europe, Russia, Venezuela and Asia. Continued uncertainties loom over the outcome
of the EU’s financial support programs. It is possible that other EU member states may choose to follow Britain’s lead and
leave the EU. Any negative impact on economic conditions and global markets from these developments could adversely affect our business,
financial condition and liquidity.
The U.S. has recently enacted and proposed to
enact significant new tariffs. Additionally, President Trump has directed various federal agencies to further evaluate key aspects of
U.S. trade policy and there has been ongoing discussion and commentary regarding potential significant changes to U.S. trade policies,
treaties and tariffs. There continues to exist significant uncertainty about the future relationship between the U.S. and other countries
with respect to such trade policies, treaties and tariffs. These developments, or the perception that any of them could occur, may have
a material adverse effect on global economic conditions and the stability of global financial markets.
Uncertain or unfavorable market or economic conditions
could result in reduced transaction volumes, reduced revenue and reduced profitability in any or all of the Company’s principal
businesses. For example:
● A portion of the Company’s revenues will be derived from fees generated from its asset management
business segment. Asset management fees often are primarily comprised of base management and performance (or incentive) fees. Management
fees are primarily based on assets under management. Assets under management balances are impacted by net inflow/outflow of client assets
and changes in market values. Poor investment performance by the Company’s portfolio managers could result in a loss of managed
accounts and could result in reputational damage that might make it more difficult to attract new investors, and, thus further impact
the Company’s business and financial condition. If the Company experiences losses of managed accounts, fee revenue will decline.
In addition, in periods of declining market values, the values of assets under management may ultimately decline, which would negatively
impact fee revenues.
● In the past decade, passively managed index funds have seen greater investor interest, and this trend
has become more prevalent in recent years. A continued lessening of investor interest in active investing and continued increase in passive
investing may lead to a continued decline in the revenue the Company generates from commissions on the execution of trading transactions
and, in respect of its market-making activities, a reduction in the value of its trading positions and commissions and spreads.
● The Company expects its investment banking revenue, in the form of underwriting, placement and financial
advisory fees, to be directly related to the volume and value of transactions as well as the Company’s role in these transactions
and will typically only be earned upon the successful completion of a transaction. In an environment of uncertain or unfavorable market
or economic conditions, the volume and size of capital-raising transactions and acquisitions and dispositions typically decreases, thereby
reducing the demand for the Company’s investment banking services and increasing price competition among financial services companies
seeking such engagements. Accordingly, the Company’s business will be highly dependent on market conditions, the decisions and actions
of its clients, and interested third parties. The number of engagements the Company has at any given time will be subject to change and
may not necessarily result in future revenues.
The Company may make strategic acquisitions
of businesses, engage in joint ventures or divest or exit existing businesses, which could result in unforeseen expenses or disruptive
effects on its business.
From time to time, the Company may consider acquisitions
of other businesses or joint ventures with other businesses. Any acquisition or joint venture that the Company determines to pursue will
be accompanied by a number of risks. After the announcement or completion of an acquisition or joint venture, the Company’s stock
price could decline if investors view the transaction as too costly or unlikely to improve the Company’s competitive position.
Costs or difficulties relating to such a transaction,
including integration of products, employees, offices, technology systems, accounting systems and management controls, may be difficult
to predict accurately and be greater than expected causing the Company’s estimates to differ from actual results. The Company may
be unable to retain key personnel after the transaction, and the transaction may impair relationships with customers and business partners.
In addition, the Company may be unable to achieve anticipated benefits and synergies from the transaction as fully as expected or within
the expected time frame. Divestitures or elimination of existing businesses or products could have similar effects, including the loss
of earnings of the divested business or operation. These difficulties could disrupt the Company’s ongoing business, increase its
expenses, and adversely affect its operating results and financial condition. As the costs of doing business increase, the Company may
not be able to continue to grow its revenues through “organic” growth (the growth attendant to hiring one employee at a time
or through expanding into a new business line through a limited investment in technology and employment). In lieu of organic growth, it
becomes increasingly necessary to grow through the acquisition of a business or businesses that fulfill the Company’s strategic
decisions for growth. However, due to competition or the cost of such acquisitions, such expansion may not be available on a profitable
basis and may threaten the Company’s ongoing ability to expand its business.
9
Our valuation methodologies for certain
assets can be subjective, and the fair value of assets established pursuant to such subjective methodologies is uncertain and may never
be realized.
There are no readily ascertainable market prices
for a substantial majority of illiquid investments held by us and our investment vehicles. When determining fair values of investments,
we use the last reported market price as of the applicable statement of financial condition date for investments that have readily observable
market prices. When an investment does not have a readily available market price, the fair value of the investment represents the value,
as determined by us in good faith, at which the investment could be sold in an orderly disposition over a reasonable period of time between
willing parties other than in a forced or liquidation sale. There is no single standard for determining fair value in good faith, and
in many cases fair value is best expressed as a range of fair values from which a single estimate may be derived. For our illiquid investments,
we use a variety of valuation methodologies, including a market multiples approach and discounted cash flow analysis, and we engage third
parties to assist us with certain aspects of our valuations. These methodologies typically require estimates of key inputs and significant
assumptions and judgments. For information about our valuation methodologies and processes, please see “Note 3—Summary of
Significant Accounting Policies—Fair Value Measurements.”
Because valuations, and in particular valuations
of investments for which market quotations are not readily available, are inherently uncertain, may fluctuate over short periods of time
and are typically based on estimates and significant assumptions and judgments, determinations of fair value may differ materially from
the values that would have resulted if a readily observable market price had existed. Even if market quotations are available for our
investments, such quotations may not reflect the value that we would actually be able to realize because of various factors, including
possible illiquidity associated with a large ownership position, subsequent illiquidity in the market for a company’s securities, future
market price volatility or the potential for a future loss in market value based on poor industry conditions or the market’s view of overall
company and management performance. Our financial results could be adversely affected if the values of investments that we record is materially
higher than the values that are ultimately realized upon the disposal of the investments, and changes in values attributed to investments
from quarter to quarter may result in volatility in our assets under management, which could materially affect our financial results that
we report from period to period. There can be no assurance that the investment values that we record from time to time will ultimately
be realized, including the investment values that are presented in this report.
Because there is significant uncertainty in the
valuation of, or in the stability of the value of, illiquid investments, the fair values of investments reflected in an investment vehicle’s
net asset value (“NAV”) do not necessarily reflect the prices that would actually be obtained by us on behalf of the investment
vehicle when such investments are realized. For example, there may be known or unknown liabilities such as tax exposures with respect
to investments, especially those outside the United States, which may not be fully reflected in valuations. Realizations at values significantly
lower than the values at which investments have been reflected in a prior investment vehicle’s NAVs would result in losses for the applicable
investment vehicle and the loss of any accrued carried interest and other fees. Also, if realizations of our investments produce values
materially different than the carrying values reflected in a prior investment vehicle’s NAVs, investors in such vehicles may lose confidence
in us, which could in turn result in difficulty in raising capital for future funds or other investment vehicles. In addition, because
we value our entire portfolio using the methodologies described in this report only on a periodic basis, subsequent events that may have
a material impact on those valuations may not be reflected until the next periodic valuation date.
In addition, the range of potential valuation
methodologies and the potential exercise of our subjective judgment in determining valuation might cause some of our investors or regulators
to question our valuations or methodologies. There can be no assurance that our policies will address all necessary valuation factors
or completely eliminate potential conflicts of interest in such determinations or that we will be able to achieve some valuations. The
SEC continues to focus on issues related to valuation of private investment vehicles, including consistent application of the methodology,
disclosure, and conflicts of interest, in its enforcement, examination, and rulemaking activities. Changes in these factors can have a
significant effect on the results of the valuation methodologies used to value our portfolio, and our reported fair values for these assets
could vary materially if these factors from prior quarters were to change significantly.
We may not be able to compete successfully
with other companies in the financial services industry that have significantly greater resources than we do.
The financial services industry remains highly
competitive, and our revenues and profitability may suffer if we are unable to compete effectively. We generally compete on the basis
of such factors as quality of advice and service, reputation, price, product selection, transaction execution and financial resources.
Pricing and other competitive pressures in investment banking, including the use of multiple book runners, co-managers, and multiple financial
advisors handling transactions, have affected and could continue to adversely affect our revenues. We remain at a competitive disadvantage
given our relatively small size compared to some of our competitors. Large financial services firms generally have a larger capital base,
greater access to capital, and greater technology resources, affording them greater capacity for risk and potential for innovation, an
extended geographic reach and flexibility to offer a broader set of products. For example, some of these firms are able to use their larger
capital base to offer additional products or services to their investment banking clients, which can be a competitive advantage. With
respect to our fixed income institutional brokerage and public finance investment banking businesses, it is more difficult for us to diversify
and differentiate our product set, and our fixed income business mix currently is concentrated in investment grade fixed income products,
potentially with less opportunity for growth than other firms which have grown their fixed income businesses by investing in, developing
and offering non-traditional products (e.g., credit default swaps, interest rate products and currencies and commodities).
Damage to our reputation could harm our
business.
Maintaining our reputation is critical to attracting
and maintaining clients, customers, investors, and employees. If we fail to deal with, or appear to fail to deal with, issues that may
give rise to reputational risk, such failure or appearance of failure could have a material adverse effect on our business and stock price.
These issues include appropriately dealing with potential conflicts of interest, legal and regulatory requirements, perceptions of our
environmental, social and governance practices or business selection, ethical issues, money laundering, cybersecurity, and the proper
identification of the strategic, market, human capital, liquidity, credit, operational, legal and regulatory risks inherent in our business
and products.
10
Future acquisitions and dispositions of
our businesses and investments are possible, changing the components of our assets and liabilities, and if unsuccessful or unfavorable,
could reduce the value of our securities.
Any future acquisitions or dispositions may result
in significant changes in the composition of our assets and liabilities, as well as our business mix and prospects. Consequently, our
financial condition, results of operations and the trading price of our securities may be affected by factors different from those affecting
our financial condition, results of operations and trading price at the present time.
The number of anticipated investment banking
transactions may differ from actual results.
The completion of anticipated investment banking
transactions in our pipeline is uncertain and partially beyond our control, and our investment banking revenue is typically earned only
upon the successful completion of a transaction. In most cases, we receive little or no payment for investment banking engagements that
do not result in the successful completion of a transaction. For example, a client’s acquisition transaction may be delayed or terminated
because of a failure to agree upon final terms with the counterparty, failure to obtain necessary regulatory consents or director or shareholder
approvals, failure to secure necessary financing, adverse market conditions or unexpected financial or other issues in the client’s or
counterparty’s business. More importantly, anticipated advisory or capital markets transactions may be delayed or terminated as a result
of a decline in or uncertainty surrounding market or economic conditions. If parties fail to complete a transaction on which we are advising
or an offering in which we are participating, we could earn little or no revenue from the transaction and may have incurred significant
expenses (e.g., travel and legal expenses) associated with the transaction. Accordingly, our business is highly dependent on market and
economic conditions as well as the decisions and actions of our clients and interested third parties, and the number of engagements we
have at any given time (and any characterization or description of our deal pipelines) is subject to change and may not necessarily result
in future revenues.
Artificial intelligence could increase competitive,
operational, legal and regulatory risks to our businesses in ways that we cannot predict.
The use of artificial intelligence by us and others,
and the overall adoption of artificial intelligence throughout society, may exacerbate or create new and unpredictable competitive, operational,
legal and regulatory risks to our businesses. There is substantial uncertainty about the extent to which artificial intelligence will
result in dramatic changes throughout the world, and we may not be able to anticipate, prevent, mitigate, or remediate all of the potential
risks, challenges, or impacts of such changes. These changes could potentially disrupt, among other things, our business models, investment
strategies, operational processes, and our ability to identify and hire employees. Some of our competitors may be more successful than
us in the development and implementation of new technologies, including services and platforms based on artificial intelligence, to address
investor demands or improve operations. If we are unable to adequately advance our capabilities in these areas, or do so at a slower pace
than others in our industry, we may be at a competitive disadvantage.
We may use artificial intelligence and other quantitative
analysis tools and models, developed by us or third-party service providers, to inform certain of our decisions. Such technology, analysis
and models are highly complex and subject to limitations and risks that have the potential to adversely impact us to the extent that we
rely on artificial intelligence. If the data we, or third parties whose services we rely on, use in connection with the development or
deployment of artificial intelligence is incomplete, inadequate or biased in some way, the performance of our products, services, and
businesses could suffer. In addition, we analyze data through different means, including manual reviews, automated rules as well as the
use of artificial intelligence and machine-learning technologies to better manage our business. Recent technological advances in artificial
intelligence and machine-learning technology both present opportunities and pose risks to us. Data in technology that uses artificial
intelligence may contain a degree of inaccuracy and error, which could result in flawed algorithms in various models used in our businesses.
Our personnel or the personnel of our service providers could, without being known to us, improperly utilize artificial intelligence and
machine-learning technology while carrying out their responsibilities. This could reduce the effectiveness of artificial intelligence
technologies and adversely impact us and our operations to the extent that we rely on the work product of such artificial intelligence
in such operations.
There is also a risk that artificial intelligence
may be misused or misappropriated by our employees or third parties engaged by us. For example, a user may input confidential information,
including material non-public information or personally identifiable information, into artificial intelligence applications, resulting
in such information becoming a part of a dataset that is accessible by third-party technology applications and users, including our competitors.
If we or third-party developers whose artificial intelligence we utilize do not have sufficient rights to use the data or other material
relied upon by such developers, we also may incur liability through the alleged violation of applicable laws and regulations, third-party
intellectual property, data privacy, or other rights, or contractual obligations. Further, we may not be able to control how third-party
artificial intelligence that we choose to use are developed or maintained, or how data we input is used or disclosed, even where we have
sought contractual protections with respect to these matters. The misuse or misappropriation of our data, unavoidable deficiencies in
the practices associated with data collection, training AI technology on large data sets, and big data analytics and difficulties validating
data, could have an adverse impact on our reputation and could subject us to legal and regulatory investigations or actions or create
competitive risk.
11
Regulators are also increasing scrutiny and considering,
and in some cases enacting, regulation of the use of artificial intelligence technologies, including regarding the use of “big
data,” diligence of data sets and oversight of data vendors. The use of artificial intelligence by us or others may require compliance
with legal or regulatory frameworks that are not fully developed or tested, and we may face litigation and regulatory actions related
to our use of artificial intelligence. In April 2023, the U.S. Federal Trade Commission (“FTC”), DOJ, CFPB, and EEOC released
a joint statement on artificial intelligence, demonstrating their interest in monitoring the development and use of automated systems
and enforcement of their respective laws and regulations. Such enforcement has included “sweeps” by the FTC focused on unfair
or deceptive practices by companies purporting to use artificial intelligence in their operations or selling artificial intelligence
products that may be used to mislead or deceive consumers. The NAIC has established a dedicated working group and adopted bulletins and
reports on the use of artificial intelligence by insurers. Existing laws and regulations may be interpreted in new ways, which would
affect the way in which we or our portfolio companies use artificial intelligence and machine-learning technology. In January 2025, the
U.S. Department of Commerce’s Bureau of Industry and Security issued a rule requiring licenses to export certain closed-weight
AI models and advanced computing integrated circuits beginning on May 15, 2025. In addition to the U.S. regulatory framework, in August
2024, the EU finalized a new regulation on artificial intelligence (the “EU AI Act”), parts of which are currently in effect
and others of which are slated to take effect from late 2026. The EU AI Act is a legal framework, which governs the development and deployment
of artificial intelligence placed on the EU market, used in the EU, or where the output is used or intended to be used within the EU.
The framework bans certain uses of artificial intelligence outright based on its risk and impose material obligations on both the providers
and deployers of certain other artificial intelligence activities. The fine threshold for non-compliance is expected to be 35 million
euros or 7% of total annual worldwide turnover, whichever is higher, and regulators are expected to have powers to remove non-compliant
products from the EU market. Other jurisdictions, such as Canada with its Artificial Intelligence and Data Act and Brazil with its AI
Legal Framework, have either implemented or are also considering similar legal frameworks.
Once effective, regulations relating to artificial
intelligence may expand our compliance obligations and impact our business or the business of our portfolio companies. In July 2023, the
SEC proposed new predictive data analytics rules, which would require registered investment advisers (and broker-dealers) to eliminate
or neutralize (rather than just disclosing and mitigating) certain conflicts of interest posed by covered technologies including artificial
intelligence and machine-learning, with respect to their interactions with clients and investors in pooled investment vehicles. In order
to limit their potential liability under this rule, our investment adviser entities could choose to change or discontinue some of their
activities related to such technologies. We cannot predict what, if any, actions may be taken, but such developments could have a materially
adverse impact to us.
Our ability to use data to gain insights into
and manage our business may be limited in the future by regulatory scrutiny and legal developments. See also “—Risks Related
to Our Business— Cybersecurity and security breaches of our technology systems, or those of our clients or other third-party vendors
we rely on, could subject us to significant liability and harm our reputation.”
We may expand into new investment strategies,
geographic markets and businesses and new types of investors or seek to expand our business or change our strategic focus with new strategic
initiatives, which may result in additional risks and uncertainties in our businesses .
Our organizational documents do not limit our
ability to enter into new lines of business, and we may expand into new investment strategies, geographic markets, businesses, types of
investors and investment products. We intend to seek to grow our businesses by increasing assets under management in existing businesses,
pursuing new investment strategies (including investment opportunities in new asset classes), developing new types of investment structures
and products (such as publicly listed vehicles, separately managed accounts and structured products), expanding into new geographic markets
and businesses and seeking investments from investor bases we have traditionally not pursued, such as individual investors, which subject
us to additional risk. See also “—Risks Related to Our Business—Certain types of investment vehicles, especially those
offered to individual investors, may subject us to a variety of risks, including new and greater levels of public and regulatory scrutiny,
regulation, risk of litigation and reputational risk, which could materially and adversely affect us.” We have also launched a number
of new investment initiatives in various asset classes or geographies, and increasingly manage investment vehicles owned by individual
investors, which subject us to additional risk. Introducing new types of investment structures and products could increase the complexities
involved in managing such investments, including ensuring compliance with applicable regulatory requirements and terms of the investment
vehicles.
Our organic growth strategy focuses on providing
resources to foster business expansion, such that we achieve a level of scale and profitability. Given our diverse platform, these initiatives
could create conflicts of interests with existing products, increase our costs and expose us to new market risks, and legal and regulatory
requirements. The success of our organic growth strategy will also depend on, among other things, our ability to correctly identify and
create products that appeal to the limited partners of our funds and vehicles. While we have made significant expenditures to develop
these new strategies and products, there is no assurance that they will achieve a satisfactory level of scale and profitability.
We have and may continue to pursue growth through
acquisitions of, or investments in, new businesses, other investment management companies, acquisitions of critical business partners,
strategic partnerships, other alternative or traditional investment managers, or other strategic initiatives which also may include entering
into new lines of business. In addition, we expect opportunities will arise to acquire other alternative or traditional investment managers.
12
To the extent we have made, or make, strategic
investments or acquisitions undertake other strategic initiatives, expand into new investment strategies or geographic markets, or enter
into a new line of business, we will face numerous risks and uncertainties, including risks associated with:
● the required investment of capital and other resources;
● delays or failure to complete an acquisition or other transaction in a timely manner or at all, which
may subject us to damages or require us to pay significant costs;
● lawsuits challenging an acquisition or unfavorable judgments in such lawsuits, which may prevent the closing
of the transaction, cause delays, or require us to incur substantial costs including in costs associated with the indemnification of directors;
● the failure to realize the anticipated benefits from an acquired business or strategic partnership in
a timely manner, if at all;
● combining, integrating or developing operational and management systems and controls, including an acquired
business’ internal controls and procedures;
● integration of the businesses, including the employees of an acquired business;
● disagreements with joint venture partners or other stakeholders in our hedge fund partnerships and our
strategic partnerships;
● the additional business risks of the acquired business and the broadening of our geographic footprint;
● properly managing conflicts of interests;
● our ability to obtain requisite regulatory approvals and licenses without undue cost or delay and without
being required to comply with material restrictions or material conditions that would be detrimental to us or to the combined organization;
● our ability to comply with new regulatory regimes; and
● becoming subject to new laws and regulations with which we are not familiar, or from which we are currently
exempt, that may lead to increased litigation and regulatory risk and costs.
The ability to attract, develop and retain
highly skilled and productive employees, particularly qualified financial advisors is critical to the success of the Company’s business.
The Company faces intense competition for qualified
employees from other businesses in the financial services industry, and the performance of its business may suffer to the extent it is
unable to attract and retain employees effectively, particularly given the relatively small size of the Company and its employee base
compared to some of its competitors. The primary sources of revenue in each of the Company’s business lines are commissions and
fees earned on advisory and underwriting transactions and customer accounts managed by its employees, who are regularly recruited by other
firms and in certain cases are able to take their client relationships with them when they change firms. Experienced employees are regularly
offered financial inducements by larger competitors to change employers, and thus competitors can de-stabilize the Company’s relationship
with valued employees. Some specialized areas of the Company’s business are operated by a relatively small number of employees,
the loss of any of whom could jeopardize the continuation of that business following the employee’s departure.
Turnover in the financial services industry is
high. The cost of retaining skilled professionals in the financial services industry has escalated considerably. Financial industry employers
are increasingly offering guaranteed contracts, upfront payments, and increased compensation. These can be important factors in a current
employee’s decision to leave us as well as in a prospective employee’s decision to join us. As competition for skilled professionals
in the industry remains intense, we may have to devote significant resources to attracting and retaining qualified personnel. To the extent
we have compensation targets, we may not be able to retain our employees, which could result in increased recruiting expenses or result
in our recruiting additional employees at compensation levels that are not within our target range. In particular, our financial results
may be adversely affected by the costs we incur in connection with any upfront loans or other incentives we may offer to newly recruited
financial advisors and other key personnel. If we were to lose the services of any of our investment bankers, sales and trading professionals,
asset managers, or executive officers to a competitor or otherwise, we may not be able to retain valuable relationships and some of our
clients could choose to use the services of a competitor instead of our services. If we are unable to retain our senior professionals
or recruit additional professionals, our reputation, business, results of operations and financial condition could be adversely affected.
Further, new business initiatives and efforts to expand existing businesses generally require that we incur compensation and benefits
expense before generating additional revenues.
Moreover, companies in our industry whose employees
accept positions with competitors frequently claim that those competitors have engaged in unfair hiring practices. We may be subject to
claims in the future as we seek to hire qualified personnel, some of whom may work for our competitors. Some of these claims may result
in material litigation.
We could incur substantial costs in defending
against these claims, regardless of their merits. Such claims could also discourage potential employees who work for our competitors from
joining us. Recent actions by some larger competitors to reject the “Recruiting Protocol”, an industry adopted set of practices
permitting financial advisors to port their client relationships to a new firm under strict rules, is likely to increase the likelihood
of litigation among competitors surrounding the employment of new advisors and their solicitation of their clients and may act as a new
barrier to recruitment of financial advisors.
13
If we fail to manage our anticipated growth
effectively, our business, financial condition and operating results could be harmed.
To manage our growth effectively, we must continue
to implement our operational plans and strategies, improve, and expand our infrastructure of people and information systems and expand,
train and manage our employee base. To support continued growth, we must effectively integrate, develop and motivate new employees. We
face significant competition for personnel. Failure to manage our hiring needs effectively or successfully integrate our new hires may
have a material adverse effect on our business, financial condition and operating results. Additionally, the growth of our business places
significant demands on our operations, as well as our management and other employees. The growth of our business may require significant
additional resources to meet these daily requirements, which may not scale in a cost-effective manner or may negatively affect the quality
of our services and client experience. We are also required to manage relationships with a growing number of partners, institutions, clients
and other third parties. Our information technology systems and our internal controls and procedures may not be adequate to support future
growth of our operations and employee base. If we are unable to manage the growth of our operations effectively, our business, financial
condition and operating results may be materially adversely affected.
The Company depends on its senior employees
and the loss of their services could harm its business.
The Company’s success is dependent in large
part upon the services of its senior executives and employees. Any loss of services of the chief executive officer and other senior executive
officers may adversely affect the business and operations of the Company. If the Company’s senior executives or employees terminate
their employment and the Company is unable to find suitable replacements in relatively short periods of time, its operations may be materially
and adversely affected.
The precautions the Company takes to prevent
and detect employee misconduct may not be effective and the Company could be exposed to unknown and unmanaged risks or losses.
The Company runs the risk that employee misconduct
could occur. Misconduct by employees could include, employees binding the Company to transactions that exceed authorized limits or present
unacceptable risks to the Company (rogue trading); employee theft and improper use of Company or client property; employees conspiring
with other employees or third parties to defraud the Company; employees hiding unauthorized or unsuccessful activities from the Company,
including outside business activities that are undisclosed and may result in liability to the Company; employees steering or soliciting
their clients into investments which have not been sponsored by the Company and without the proper diligence; the improper use of confidential
information; employee conduct outside of acceptable norms including harassment; or employees engaging in “hacking” or breaching
our cybersecurity safeguards.
These types of misconduct could result in unknown
and unmanaged risks or losses to the Company including regulatory sanctions and serious harm to its reputation. The precautions the Company
takes to prevent and detect these activities may not be effective. If employee misconduct does occur, the Company’s business operations
could be materially adversely affected.
There have been a number of highly-publicized
cases involving fraud or other misconduct by employees in the financial services industry and there is a risk that our employees could
engage in misconduct in the future that adversely affects our business. We are subject to a number of obligations and standards arising
from our asset management business and our authority over the assets managed by our asset management business. In addition, our financial
advisors may act in a fiduciary capacity, providing financial planning, investment advice and discretionary asset management. The violation
of these obligations and standards by any of our employees could adversely affect our clients and us. It is not always possible to deter
employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in all cases. If our employees
engage in misconduct, our business could be materially adversely affected, including our cash position.
Employee misconduct, including harassment in the
workplace, has come under increasing scrutiny in the national media. While the Company has adopted a Code of Conduct and instituted training
for its employees, it is difficult to predict when an employee may deviate from acceptable practices and open the Company to liability
either from actions taken by other employees or by authorities. The Company could also become liable for its actions in enforcing its
rules of conduct on former employees who disagree with the Company’s actions.
Our failure to deal appropriately with conflicts
of interest could damage our reputation and adversely affect our business.
Appropriately dealing with conflicts of interest
is complex and difficult and our reputation could be damaged if we fail, or appear to fail, to deal appropriately with one or more potential
or actual conflicts of interest. It is possible that potential or perceived conflicts could give rise to investor dissatisfaction or litigation
or regulatory enforcement actions. In addition, regulatory scrutiny of, or litigation in connection with, conflicts of interest would
have a material adverse effect on our reputation, which could materially and adversely affect our business in a number of ways, including
an inability to raise additional funds, a reluctance of counterparties to do business with us and the costs of defending litigation.
Our results of operations may be materially
affected by market fluctuations and by global and economic conditions and other factors, including changes in asset values.
Our results of operations may be materially affected
by market fluctuations due to global financial markets, economic conditions, changes to global trade policies and tariffs and other factors,
including the level and volatility of equity, fixed income and commodity prices, the level and term structure of interest rates, inflation
and currency values, and the level of other market indices. The results of our Capital Markets business segment, particularly results
relating to our involvement in primary and secondary markets for all types of financial products, are subject to substantial market fluctuations
due to a variety of factors that we cannot control or predict with great certainty. These fluctuations impact results by causing variations
in business flows and activity and in the fair value of securities and other financial products. Fluctuations also occur due to the level
of global market activity, which, among other things, affects the size, number and timing of investment banking client assignments and
transactions and the realization of returns from our principal investments.
14
During periods of unfavorable market or economic
conditions, the level of individual investor participation in the global markets, as well as the level of client assets, may also decrease,
which would negatively impact the results of our Private Client and Asset Management business segments. Substantial market fluctuations
could also cause variations in the value of our investments in our funds, the flow of investment capital into or from Assets Under Management,
and the way customers allocate capital among money market, equity, fixed income or other investment alternatives, which could negatively
impact our Private Client and Asset Management business segments.
The Company may incur losses and be subject to
reputational harm to the extent that, for any reason, it is unable to sell securities it purchased as an underwriter at anticipated price
levels. As an underwriter, the Company is subject to heightened standards regarding liability for material misstatements or omissions
in prospectuses and other offering documents relating to offerings it underwrites. Any such misstatement or omission could subject the
Company to enforcement action by the SEC and claims of investors, either of which could have a material adverse impact on the Company’s
results of operations, financial condition and reputation.
The value of our financial instruments may be
materially affected by market fluctuations. Market volatility, illiquid market conditions and disruptions in the credit markets may make
it extremely difficult to value and monetize certain of our financial instruments, particularly during periods of market displacement.
Subsequent valuations in future periods, in light of factors then prevailing, may result in significant changes in the values of these
instruments and may adversely impact historical or prospective fees and performance-based fees (also known as incentive fees, which include
carried interest) in respect of certain businesses. In addition, at the time of any sales and settlements of these financial instruments,
the price we ultimately realize will depend on the demand and liquidity in the market at that time and may be materially lower than their
current fair value. Any of these factors could cause a decline in the value of our financial instruments, which may have an adverse effect
on our results of operations in future periods. In addition, financial markets are susceptible to severe events evidenced by rapid depreciation
in asset values accompanied by a reduction in asset liquidity. Under these extreme conditions, hedging and other risk management strategies
may not be as effective at mitigating trading losses as they would be under more normal market conditions. Moreover, under these conditions,
market participants are particularly exposed to trading strategies employed by many market participants simultaneously and on a large
scale. Our risk management and monitoring processes seek to quantify and mitigate risk to more extreme market moves. However, severe market
events have historically been difficult to predict and we could realize significant losses if extreme market events were to occur.
Holding large and concentrated positions may expose
us to losses. Concentration of risk may reduce revenues or result in losses in our investing, and underwriting, including block trading,
in the event of unfavorable market movements, or when market conditions are more favorable for our competitors. Changes in interest rates
(especially if such changes are rapid), sustained low or high interest rates or uncertainty regarding the future direction of interest
rates, may create a less favorable environment for certain of the Company’s businesses, particularly its fixed income business,
resulting in reduced business volume and reduced revenue. If interest rates remain at low levels, the Company’s profitability will
be negatively impacted.
The Company is exposed to the risk that
third parties that owe it money, securities or other assets will not perform their obligations.
The Company is exposed to credit risk related
to third parties such as trading counterparties, customers, clearing agents, exchanges, clearing houses, and other financial intermediaries
as well as issuers whose securities we hold. These parties may default on their obligations owed to the Company due to bankruptcy, lack
of liquidity, operational failure or other reasons. This default risk may arise, for example, from holding securities of third parties,
executing securities trades that fail to settle at the required time due to non-delivery by the counterparty or systems failure by clearing
agents, exchanges, clearing houses or other financial intermediaries, and extending credit to clients through bridge or margin loans or
other arrangements. Significant failures by third parties to perform their obligations owed to the Company could adversely affect the
Company’s revenue and its ability to borrow in the credit markets.
As a holding company, we are dependent on
liquidity from payments from our subsidiaries, many of which are subject to restrictions.
As a holding company, we depend on dividends,
distributions and other payments from our subsidiaries to fund payments on our obligations. Some of our subsidiaries, particularly our
broker-dealer subsidiary, are subject to regulations that limit or restrict dividend payments or reduce the availability of the flow of
funds from those subsidiaries to us. In addition, our broker-dealer subsidiary is subject to restrictions on their ability to lend or
transact with affiliates and are required to maintain minimum regulatory capital requirements. These regulations may hinder our ability
to access funds that we may need to make payments to fulfill obligations.
Liquidity is essential to our businesses
and we rely on external sources to finance a significant portion of our operations.
Our liquidity could be negatively affected by
our inability to raise funding in the long-term or short-term debt capital markets, our inability to access the secured lending markets,
or unanticipated outflows of cash or collateral by customers or clients. Factors that we cannot control, such as disruption of the financial
markets or negative views about the financial services industry generally, including concerns regarding fiscal matters in the U.S. and
other geographic areas, could impair our ability to raise funding. In addition, our ability to raise funding could be impaired if investors
or lenders develop a negative perception of our long-term or short-term financial prospects due to factors such as an incurrence of large
trading losses, a downgrade by the rating agencies, a decline in the level of our business activity, if regulatory authorities take significant
action against us or our industry, or we discover significant employee misconduct or illegal activity. If we are unable to raise funding
using the methods described above, we would likely need to finance or liquidate unencumbered assets, such as our investment portfolios
or trading assets, to meet maturing liabilities or other obligations. We may be unable to sell some of our assets or we may have to sell
assets at a discount to market value, either of which could adversely affect our results of operations, cash flows and financial condition.
15
From time to time we may invest in securities
that are illiquid or subject to restrictions.
From time to time we may invest in securities
that are subject to restrictions which prohibit us from selling the securities for a period of time. Such agreements may limit our ability
to generate liquidity quickly through the disposition of the underlying investment while the agreement is effective.
We face increasing competition in the financial
services industry.
We operate in an intensely competitive industry
with other global bank holding companies that engage in investment banking and capital markets activities as one of their lines of business
and that have greater capital and resources than we do. We also compete against other broker-dealers, asset managers and boutique firms.
There is also growing pressure to provide services at lower fees to appeal to clients, which may impact our ability to effectively compete.
We are subject to operational risks, including
a failure, breach or other disruption of our operations or security systems or those of our third parties (or third parties thereof),
as well as human error or malfeasance, which could adversely affect our businesses or reputation.
Our businesses are highly dependent on our ability
to process and report, on a daily basis, a large number of transactions across numerous markets. We may introduce new products or services
or change processes or reporting, including in connection with new regulatory requirements, resulting in new operational risk that we
may not fully appreciate or identify. The trend toward direct access to automated, electronic markets and the move to more automated
trading platforms has resulted in the use of increasingly complex technology that relies on the continued effectiveness of the programming
code and integrity of the data to process the trades. We rely on the ability of our employees, consultants, and internal systems to operate
our different businesses and process a high volume of transactions. Additionally, we are subject to complex and evolving laws and regulations
governing cybersecurity, privacy and data protection, which may differ and potentially conflict, in various jurisdictions. As a participant
in the global capital markets, we face the risk of incorrect valuation or risk management of our trading positions due to flaws in data,
models, electronic trading systems or processes or due to fraud or cyber-attack.
We also face the risk of operational failure or
disruption of any of the clearing agents, exchanges, clearing houses or other financial intermediaries we use to facilitate our lending
and securities transactions. In the event of a breakdown or improper operation of our or a direct or indirect third party’s systems
(or third parties thereof) or processes or improper or unauthorized action by third parties, including consultants and subcontractors
or our employees, we could suffer financial loss, an impairment to our liquidity position, a disruption of our businesses, regulatory
sanctions or damage to our reputation. In addition, the interconnectivity of multiple financial institutions with central agents, exchanges
and clearing houses, and the increased importance of these entities, increases the risk that an operational failure at one institution
or entity may cause an industry-wide operational failure that could materially impact our ability to conduct business. Furthermore, the
concentration of Company and personal information held by a handful of third parties increases the risk that a breach at a key third party
may cause an industry-wide data breach that could significantly increase the cost and risk of conducting business. There can be no assurance
that our business contingency and security response plans fully mitigate all potential risks to us. Our ability to conduct business may
be adversely affected by a disruption in the infrastructure that supports our businesses and the communities where we are located. This
may include a disruption involving physical site access; cybersecurity incidents; terrorist activities; political unrest; disease pandemics;
catastrophic events; climate-related incidents and natural disasters (such as earthquakes, tornadoes, hurricanes and wildfires); electrical
outages; environmental hazards; computer servers; communications or other services we use; and our employees or third parties with whom
we conduct business. Although we employ backup systems for our data, those backup systems may be unavailable following a disruption, the
affected data may not have been backed up or may not be recoverable from the backup, or the backup data may be costly to recover, which
could adversely affect our business.
Notwithstanding evolving technology and technology-based
risk and control systems, our businesses ultimately rely on people, including our employees and those of third parties with which we conduct
business. As a result of human error or engagement in violations of applicable policies, laws, rules or procedures, certain errors or
violations are not always discovered immediately by our technological processes or by our controls and other procedures, which are intended
to prevent and detect such errors or violations. These can include calculation errors, mistakes in addressing emails or other communications,
errors in software or model development or implementation, or errors in judgment, as well as intentional efforts to disregard or circumvent
applicable policies, laws, rules or procedures. Human errors and malfeasance, even if promptly discovered and remediated, can result in
material losses and liabilities for us. Any theft of data, technology or intellectual property may negatively impact our operations and
reputation, including disrupting the business activities of our subsidiaries, affiliates, joint ventures or clients conducting business
in those jurisdictions.
The Company’s information systems
may experience an interruption or breach in security.
The Company relies heavily on communications and
information systems to conduct its business. Any failure, interruption or breach in security of these systems could result in failures
or disruptions in the Company’s customer relationship management, regulatory or other reporting, general ledger, and other systems.
While the Company has policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach
of its information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if
they do occur, that they will be adequately addressed. Recent disclosures of such incursions by foreign and domestic unauthorized agents
aimed at large financial institutions reflect higher risks for all such institutions. The occurrence of any failures, interruptions or
security breaches of the Company’s information systems could damage the Company’s reputation, result in a loss of customer
business, subject the Company to additional regulatory scrutiny, or expose the Company to civil litigation and possible financial liability,
any of which could have a material adverse effect on the Company’s financial condition and results of operations.
16
Our businesses rely extensively on data processing
and communications systems. In addition to better serving clients, the effective use of technology increases efficiency and enables us
to reduce costs. Adapting or developing our technology systems to meet new regulatory requirements, client needs, and competitive demands
is critical for our business. Introduction of new technology presents challenges on a regular basis. There are significant technical and
financial costs and risks in the development of new or enhanced applications, including the risk that we might be unable to effectively
use new technologies or adapt our applications to emerging industry standards. Our continued success depends, in part, upon our ability
to: (i) successfully maintain and upgrade the capability of our technology systems; (ii) address the needs of our clients by using technology
to provide products and services that satisfy their demands; and (iii) retain skilled information technology employees. Failure of our
technology systems, which could result from events beyond our control, or an inability to effectively upgrade those systems or implement
new technology-driven products or services, could result in financial losses, liability to clients, and violations of applicable privacy
and other applicable laws and regulatory sanctions.
Cybersecurity and security breaches of our
technology systems, or those of our clients or other third-party vendors we rely on, could subject us to significant liability and harm
our reputation.
Our operational systems and infrastructure must
continue to be safeguarded and monitored for potential failures, disruptions, cyber-attacks and breakdowns. Our operations rely on the
secure processing, storage and transmission of confidential and other information in our computer systems and networks. Although cybersecurity
incidents among financial services firms are on the rise, we have not experienced any material losses relating to cyber-attacks or other
information security breaches. However, there can be no assurance that we will not suffer such losses in the future.
Despite our implementation of protective measures
and endeavoring to modify them as circumstances warrant, our computer systems, software and networks may be vulnerable to human error,
natural disasters, power loss, spam attacks, unauthorized access, distributed denial of service attacks, computer viruses and other malicious
code and other events that could have an impact on the security and stability of our operations. Notwithstanding the precautions we take,
if one or more of these events were to occur, this could jeopardize the information we confidentially maintain, including that of our
clients and counterparties, which is processed, stored in and transmitted through our computer systems and networks, or otherwise cause
interruptions or malfunctions in our operations or the operations of our clients and counterparties. We may be required to expend significant
additional resources to modify our protective measures, to investigate and remediate vulnerabilities or other exposures or to make required
notifications or disclosures. We may also be subject to litigation and financial losses that are neither insured nor covered under any
of our current insurance policies.
A technological breakdown could also interfere
with our ability to comply with financial reporting and other regulatory requirements, exposing us to potential disciplinary action by
regulators. Our regulators have introduced programs to review our protections against such incidents which, if they determined that our
systems do not reasonably protect our clients’ assets and their data, could result in enforcement activity and sanctions.
In providing services to clients, we may manage,
utilize and store sensitive or confidential client or employee data, including personal data. As a result, we may be subject to numerous
laws and regulations designed to protect this information, such as U.S. federal and state and international laws governing the protection
of personally identifiable information. These laws and regulations are increasing in complexity and number. If any person, including any
of our associates, negligently disregards or intentionally breaches our established controls with respect to client or employee data,
or otherwise mismanages or misappropriates such data, we could be subject to significant monetary damages, regulatory enforcement actions,
fines and/or criminal prosecution. In addition, unauthorized disclosure of sensitive or confidential client or employee data, whether
through system failure, employee negligence, fraud or misappropriation, could damage our reputation and cause us to lose clients and related
revenue.
Potential liability in the event of a security
breach of client data could be significant. Depending on the circumstances giving rise to the breach, this liability may not be subject
to a contractual limit or an exclusion of consequential or indirect damages. The federally mandated Consolidated Audit Trail (“CAT”)
program which requires that client personally identifiable information be submitted to a database not controlled by us may expose us to
liability for breaches of that database not under our control.
As a result of the foregoing, the Company has
and is likely to incur significant costs in preparing its infrastructure and maintaining it to resist any such attacks. In addition to
personnel dedicated to overseeing the infrastructure and systems to defend against cybersecurity incidents, senior management and our
designated member of the Board of Directors are regularly briefed on issues, preparedness and any incidents requiring response.
The Company continually encounters technological
change.
The financial services industry is continually
undergoing rapid technological change with frequent introductions of new technology-driven products and services, driven by the emergence
of the Fintech industry. The effective use of technology increases efficiency and enables financial institutions to better serve customers
and reduce costs. The Company’s future success depends, in part, upon its ability to address the needs of its customers by using
technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in the Company’s
operations. Many of the Company’s competitors have substantially greater resources to invest in technological improvements. Failure
to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on
the Company’s business and, in turn, the Company’s financial condition and results of operations.
There is risk associated with the sufficiency
of coverage under the Company’s insurance policies.
The Company’s operations and financial results
are subject to risks and uncertainties related to the use of a combination of insurance, self-insured retention and self-insurance for
a number of risks, including most significantly property and casualty, general liability, cyber-crime, workers’ compensation, and
the portion of employee-related health care benefits plans funded by the Company, and certain errors and omissions liability, among others.
17
While the Company endeavors to purchase insurance
coverage that is appropriate to its assessment of risk, it is unable to predict with certainty the frequency, nature or magnitude of claims
for direct or consequential damages. The Company’s business may be negatively affected if in the future its insurance proves to
be inadequate or unavailable. In addition, insurance claims may divert management resources away from operating the business.
Climate change concerns could disrupt our
businesses, adversely affect client activity levels, adversely affect the creditworthiness of our counterparties and damage our reputation.
Climate change may cause extreme weather events
that, among other things, could damage our facilities and equipment, injure our employees, disrupt operations at one or more of our primary
locations, negatively affect our ability to service and interact with our clients, and adversely affect the value of our investments.
Any of these events may increase our costs including our costs to insure against these events.
Climate change may also have a negative impact
on the financial condition of our clients, which may decrease revenues from those clients and increase the credit exposures to those clients.
Additionally, our reputation and client relationships may be damaged as a result of our involvement, or our clients’ involvement,
in certain industries associated with causing or exacerbating, or alleged to cause or exacerbate, climate change. We also may be negatively
impacted by any decisions we make to continue to conduct or change our activities in response to considerations relating to climate change.
New regulations or guidance relating to climate change, as well as the perspectives of stockholders, employees and other stakeholders
regarding climate change, may affect whether and on what terms and conditions we engage in certain activities or offer certain products.
The Company is subject to extensive securities
regulation and the failure to comply with these regulations could subject it to monetary penalties or sanctions.
The securities industry and the Company’s
businesses are subject to extensive regulation by the SEC, state securities regulators, other governmental regulatory authorities and
industry self-regulatory organizations. The Company may be adversely affected by new or revised legislation or regulations or changes
in the interpretation or enforcement of existing laws and rules by these governmental authorities and self-regulatory organizations.
Dominari Securities is a broker-dealer and investment
adviser registered with the SEC and is primarily regulated by FINRA. Broker-dealers are subject to regulations which cover all aspects
of the securities business, including, without limitation sales methods and supervision, underwriting, trading practices among broker-dealers,
emerging standards concerning fees and charges imposed on clients for fee-based programs, use and safekeeping of customers’ funds
and securities, anti-money laundering and the USA Patriot Act (the “Patriot Act”) compliance, capital structure of securities
firms, trade and regulatory reporting, cybersecurity, pricing of services, compliance with Department of Labor rules and regulations
for retirement accounts, compliance with lending practices (Regulation T), record keeping, and the conduct of directors, officers and
employees.
Compliance with many of the regulations applicable to the Company involves
a number of risks, particularly in areas where applicable regulations may be subject to varying interpretation. The requirements imposed
by these regulations are designed to ensure the integrity of the financial markets and to protect customers and other third parties who
deal with the Company. New regulations may result in enhanced standards of duty on broker-dealers in their dealings with their clients
(fiduciary standards). Consequently, these regulations often serve to limit the Company’s activities, including through net capital,
customer protection and market conduct requirements, including those relating to principal transactions. Much of the regulation of broker-dealers
has been delegated to self-regulatory organizations, principally FINRA. FINRA adopts rules, subject to approval by the SEC, which govern
its members and conducts periodic examinations of member firms’ operations.
If the Company is found to have violated any applicable
laws, rules or regulations, formal administrative or judicial proceedings may be initiated against it that may result in censure, fine,
civil or criminal penalties, including treble damages in the case of insider trading violations, the issuance of cease-and-desist orders,
the suspension or termination of our broker-dealer or investment advisory activities, the suspension or disqualification of our officers
or employees; or other adverse consequences.
The imposition of any of the above or other penalties
could have a material adverse effect on our operating results and financial condition.
Financial services firms have been subject
to increased regulatory scrutiny increasing the risk of financial liability and reputational harm resulting from adverse regulatory actions.
Firms in the financial services industry have
been operating in an onerous regulatory environment. The industry has experienced increased scrutiny from a variety of regulators, including
the SEC, FINRA, and state regulators. Penalties and fines sought by regulatory authorities have increased substantially. We may be adversely
affected by changes in the interpretation or enforcement of existing laws and rules by these governmental authorities and SROs. Each of
the regulatory bodies with jurisdiction over us has regulatory powers dealing with many different aspects of financial services, including,
but not limited to, the authority to fine us and to grant, cancel, restrict or otherwise impose conditions on the right to continue operating
particular businesses. For example, the failure to comply with the obligations imposed by the Exchange Act on broker-dealers and the Advisers
Act on investment advisers, including recordkeeping, registration, advertising and operating requirements, disclosure obligations and
prohibitions on fraudulent activities, or by the Investment Company Act of 1940, as amended (the “1940 Act”), could result
in investigations, sanctions and reputational damage. Increasingly, regulators have instituted a practice of “regulation by enforcement”
where new interpretations of existing regulations are introduced by bringing enforcement actions against securities firms for activities
that occurred in the past but were not then thought to be problematic. We also may be adversely affected as a result of new or revised
legislation or regulations imposed by the SEC, other U.S. or foreign governmental regulatory authorities or SROs (e.g., FINRA) that supervise
the financial markets. Substantial legal liability or significant regulatory action taken against us could have a material adverse effect
on our business prospects including our cash position.
18
Numerous regulatory changes and enhanced
regulatory and enforcement activity relating to the asset management business may increase our compliance and legal costs and otherwise
adversely affect our business.
U.S. and foreign governments have taken regulatory
actions impacting the investment management industry, and may continue to take further actions, including expanding current (or enacting
new) standards, requirements and rules that may be applicable to us and our subsidiaries, particularly those subsidiaries that are SEC
registered investment advisers. For example, the SEC and several states and municipalities in the United States have adopted “pay-to-play”
rules, which could limit our ability to charge advisory fees. Such “pay-to-play” rules could affect the profitability of that
portion of our business. Additionally, the use of “soft dollars,” where a portion of commissions paid to broker-dealers in
connection with the execution of trades also pays for research and other services provided to advisors has been mostly prohibited in Europe
and, is periodically reexamined in the U.S. and may be limited or modified in the future. Furthermore, new regulations regarding the management
of hedge funds and the use of certain investment products may impact our investment management business and result in increased costs.
For example, many regulators around the world adopted disclosure and reporting requirements relating to the hedge fund business.
On June 5, 2019, the SEC adopted Regulation Best
Interest (“Reg BI”) as Rule 15l-1 under the Exchange Act. Reg BI imposes a new federal standard of conduct on registered broker-dealers
and their associated persons when dealing with retail clients and requires that a broker-dealer and its representatives act in the best
interest of such client and not place its own interests ahead of the customer’s interests. Reg BI requires enhanced documentation
for recommendations of securities transactions to broker-dealer retail clients. The new rules and processes related thereto will likely
limit revenue and most likely involve increased costs, including, but not limited to, compliance costs associated with new or enhanced
technology as well as increased litigation costs.
It is not possible to determine the extent of
the impact of any new laws, regulations or initiatives that may be imposed, or whether any existing proposals will become law. Conformance
with any new laws or regulations could make compliance more difficult and expensive and affect the manner in which we conduct business.
If the Company violates the securities laws
or is involved in litigation in connection with a violation, the Company’s reputation and results of operations may be adversely
affected .
Many aspects of the Company’s business
involve substantial risks of liability. An underwriter is exposed to substantial liability under federal and state securities laws, other
federal and state laws, and court decisions, including decisions with respect to underwriters’ liability and limitations on indemnification
of underwriters by issuers. For example, a firm that acts as an underwriter may be held liable for material misstatements or omissions
of fact in a prospectus used in connection with the securities being offered or for statements made by its securities analysts or other
personnel. The Company’s underwriting activities will usually involve offerings of the securities of smaller companies, which often
involve a higher degree of risk and are more volatile than the securities of more established companies. In comparison with more established
companies, smaller companies are also more likely to be the subject of securities class actions, to carry directors and officers liability
insurance policies with lower limits or not at all, and to become insolvent. In addition, in market downturns, claims tend to increase.
Each of these factors increases the likelihood that an underwriter may be required to contribute to an adverse judgment or settlement
of a securities lawsuit.
The Company’s risk management policies
and procedures may leave it exposed to unidentified risks or an unanticipated level of risk.
The policies and procedures the Company employs
to identify, monitor and manage risks may not be fully effective. Some methods of risk management are based on the use of observed historical
market behavior. As a result, these methods may not predict future risk exposures, which could be significantly greater than historical
measures indicate. Other risk management methods depend on evaluation of information regarding markets, clients or other matters that
are publicly available or otherwise accessible. This information may not be accurate, complete, up-to-date or properly evaluated. Management
of operational, legal and regulatory risk requires, among other things, policies and procedures to properly record and verify a large
number of transactions and events. The Company cannot give assurances that its policies and procedures will effectively and accurately
record and verify this information.
The Company seeks to monitor and control its risk
exposure through a variety of separate but complementary financial, credit, operational, compliance and legal reporting systems. The Company
believes that it effectively evaluates and manages the market, credit and other risks to which it is exposed. Nonetheless, the effectiveness
of the Company’s ability to manage risk exposure can never be completely or accurately predicted or fully assured, and there can
be no guarantee that the Company’s risk management will be successful. For example, unexpectedly large or rapid movements or disruptions
in one or more markets or other unforeseen developments can have a material adverse effect on the Company’s financial condition
and results of operations. The consequences of these developments can include losses due to adverse changes in securities values, decreases
in the liquidity of trading positions, higher volatility in earnings, and increases in general systemic risk. Certain of the Company’s
risk management systems are subject to regulatory review and may be found to be insufficient by the Company’s regulators potentially
leading to regulatory sanctions. There can be no guarantee that the operation of these systems will allow the Company to prevent or mitigate
the various risks faced by its businesses. Various regulators periodically review companies’ risk control practices, and, if found
inadequate, bring enforcement actions and sanctions against such firms.
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Failure to maintain effective internal controls
in accordance with Section 404 of the Sarbanes-Oxley Act could materially affect our business.
We have documented and tested our internal control
procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”),
which requires annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our
independent auditors regarding our internal control over financial reporting. We are not in compliance with Section 404 of the Sarbanes-Oxley
Act as of December 31, 2025. If we fail to remediate and maintain the adequacy of our internal controls, as such standards are modified, supplemented
or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls
over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Failure to maintain an effective internal control environment
could materially adversely affect our business.
A change in tax laws in key jurisdictions
could materially increase our tax expense.
We are subject to tax in the U.S. and numerous
international jurisdictions. Changes to income tax laws and regulations in any of the jurisdictions in which we operate, or in the interpretation
of such laws, or the introduction of new taxes, could significantly increase our effective tax rate and ultimately reduce our cash flow
from operating activities and otherwise have an adverse effect on our financial condition or results of operations.
If our tax filing positions were to be challenged
by federal, state and local, or foreign tax jurisdictions, we may not be wholly successful in defending our tax filing positions.
We record reserves for unrecognized tax benefits
based on our assessment of the probability of successfully sustaining tax filing positions. Management exercises significant judgment
when assessing the probability of successfully sustaining tax filing positions, and in determining whether a contingent tax liability
should be recorded and, if so, estimating the amount. If our tax filing positions are successfully challenged, payments could be required
that are in excess of reserved amounts or we may be required to reduce the carrying amount of our net deferred tax asset, either of which
result could be significant to our financial condition or results of operations.
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Risks Associated with the Company’s Common
Stock
Our common stock may be delisted from The
Nasdaq Capital Market if we fail to comply with continued listing standards.
● Our common stock is currently traded on The Nasdaq Capital Market (“Nasdaq”), under the symbol
“DOMH.” If we fail to meet any of the continued listing standards of Nasdaq, our common stock could be delisted from Nasdaq.
These continued listing standards include specifically enumerated criteria, such as:
● a $1.00 minimum closing bid price;
● stockholders’ equity of $2.5 million;
● 500,000 shares of publicly held common stock with a market value of at least $1 million;
● 300 public stockholders; and
● compliance with Nasdaq’s corporate governance requirements, as well as additional or more stringent
criteria that may be applied in the exercise of Nasdaq’s discretionary authority.
If we fail to comply with Nasdaq’s continued
listing standards, we may be delisted and our common stock will trade, if at all, only on the over-the-counter market, such as the OTC
Bulletin Board or OTCQX market, and then only if one or more registered broker-dealer market makers comply with quotation requirements.
In addition, the delisting of our common stock could depress our stock price, substantially limit liquidity of our common stock and materially
adversely affect our ability to raise capital on terms acceptable to us, or at all. Further, delisting of our common stock would likely
result in our common stock becoming a “penny stock” under the Exchange Act.
Our share price may be volatile and there
may not be an active trading market for our common stock.
There can be no assurance that the market price
of our common stock will not decline below its present market price or that there will be an active trading market for our common stock.
The market prices of upstart financial services companies have been and are likely to continue to be highly volatile. Fluctuations in
our operating results and general market conditions for upstart financial services stocks could have a significant impact on the volatility
of our common stock price. We have experienced significant volatility in the price of our common stock. From January 1, 2025 through December
31, 2025, the closing share price of our common stock (on a split-adjusted basis) ranged from a high of $13.00 to a low of $1.03. The
reason for the volatility in our common stock is not well understood and may continue. Factors that may have contributed to such volatility
include, but are not limited to:
● developments regarding regulatory filings;
● our funding requirements and the terms of our financing arrangements;
● introduction of new technologies by us or our competitors;
● government regulations and laws;
● public sentiment relating to our industry;
● the number of shares issued and outstanding;
● the number of shares trading on an average trading day;
● block sales of our shares by stockholders to whom we have sold stock
in private placements, or the cessation of transfer restrictions with respect to those shares; and
● market speculation regarding any of the foregoing.
Our shares of common stock are thinly traded
and, as a result, stockholders may be unable to sell at or near ask prices, or at all, if they need to sell shares to raise money or otherwise
desire to liquidate their shares.
Our common stock has been “thinly-traded”
meaning that the number of persons interested in purchasing our common stock at or near ask prices at any given time may be relatively
small or non-existent. This situation is attributable to a number of factors, including the fact that we are a small company that is
relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or
influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant
to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we become more seasoned
and viable. In addition, we believe that due to the limited number of shares of our common stock outstanding, an options market has not
been established for our common stock, limiting the ability of market participants to hedge or otherwise undertake trading strategies
available for larger companies with broader stockholder bases which prevents institutions and others from acquiring or trading in our
securities. Consequently, there may be periods of several days or more when trading activity in our shares is minimal or non-existent,
as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales
without an adverse effect on share price. We cannot give stockholders any assurance that a broader or more active public trading market
for our common shares will develop or be sustained, or that current trading levels will be sustained.
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Our stock price and trading volume could
decline as a result of inaccurate or unfavorable research, or the cessation of research cover, about our business published by securities
or industry analysts.
The trading market for our common stock may be
affected by the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts
who covers us downgrades our common stock or publishes inaccurate or unfavorable research about our business, our stock price could decline.
In addition, the analysts’ projections may have little or no relationship to the results we actually achieve and could cause our
stock price to decline if we fail to meet their projections. If one or more of these analysts ceases coverage of us or fails to publish
reports on us regularly, our stock price or trading volume could decline.
Because of the “anti-takeover”
provisions in our Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws and Delaware General Corporation Law,
a third party may be discouraged from making a takeover offer that could be beneficial to our stockholders.
The effect of certain provisions of our Amended
and Restated Certificate of Incorporation, Amended and Restated Bylaws and the anti-takeover provisions of the Delaware General Corporation
Law (the “DGCL”), could delay or prevent a third party from acquiring us or replacing members of our Board of Directors, or
make more costly any attempt to acquire control of the Company, even if the acquisition or the Board of Directors designees would be beneficial
to our stockholders. These factors could also reduce the price that certain investors might be willing to pay for shares of the common
stock and result in the market price being lower than it would be without these provisions.
We incur increased costs as a result of
being a public company.
As a public company, we incur significant levels
of legal, accounting, regulatory and other expenses. Sarbanes-Oxley and related rules of the SEC, together with the listing requirements
of Nasdaq, impose significant requirements relating to disclosure controls and procedures and internal control over financial reporting.
We have incurred costs as a result of compliance with these public company requirements, and we may need to hire additional qualified
personnel in order to continue to satisfy these public company requirements. We are required to expend considerable time and resources
complying with public company regulations. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject
to delisting of our common stock, fines, sanctions and other regulatory action.
Because of their significant stock ownership,
some of our executive officers, directors and members of our advisory board will be able to exert control over us and our significant
corporate decisions.
Our executive officers, directors and their affiliates,
and members of our advisory board beneficially own or control, in the aggregate, approximately 68.5% of our outstanding common stock as
of December 31, 2025. These stockholders may be able to exercise influence over matters requiring stockholder approval, such as the election
of directors and the approval of significant corporate transactions, including transactions involving an actual or potential change of
control of the company or other transactions that non-controlling stockholders may not deem to be in their best interests. This concentration
of ownership may harm the market price of our common stock by, among other things: delaying, deferring, or preventing a change in control
of our company; impeding a merger, consolidation, takeover, or other business combination involving our company; causing us to enter into
transactions or agreements that are not in the best interests of all stockholders; or discouraging a potential acquirer from making a
tender offer or otherwise attempting to obtain control of our company.
There is no assurance that we will continue
to declare or pay dividends on our common stock in the future.
On February 11, 2025, we declared a special cash
dividend on our common stock and pursuant to the terms of certain common stock purchase warrants issued) of $0.32 per share, which was
paid on March 3, 2025, to shareholders and certain warrant holders of record as of the close of business on February 24, 2025. On August
22, 2025, we declared a special cash dividend on our common stock and pursuant to the terms of certain common stock purchase warrants
(on an as-exercised basis) of $0.22 per share, which was paid on September 26, 2025, to shareholders and certain warrant holders of record
as of the close of business on September 3, 2025. On December 11, 2025, we declared a special cash dividend on our common stock and pursuant
to the terms of certain common stock purchase warrants (on an as-exercised basis) of $0.432 per share, which was paid on January 26, 2026,
to shareholders and certain warrant holders of record as of the close of business on January 5, 2026. However, there is no assurance that
we will continue to declare or pay cash dividends in the future. Any future dividend payments are within the discretion of our Board of
Directors and will depend upon, among other things, our results of operations, financial condition, level of indebtedness, working capital
requirements, capital expenditure requirements, any contractual restrictions with respect to payment of dividends, business opportunities,
anticipated cash needs, provisions of applicable law, and other factors that our Board of Directors may deem relevant.
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