Item 1. Business
Item
1. Business
SuRo
Capital
SuRo
Capital Corp. (“we”, “us”, “our”, the “Company” or “SuRo Capital”),
formerly known as Sutter Rock Capital Corp. and as GSV Capital Corp. and formed in September 2010 as a Maryland corporation, is an
internally managed, non-diversified closed-end management investment company. We have elected to be regulated as a business
development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”), and have
elected to be treated, and intend to qualify annually, as a regulated investment company (“RIC”) under Subchapter M of
the Internal Revenue Code of 1986, as amended (the “Code”).
Our
date of inception was January 6, 2011, which is the date we commenced development stage activities. We commenced operations as a BDC
upon completion of our initial public offering (“IPO”) in May 2011 and began our investment operations during the second
quarter of 2011. See “Management’s Dicussion and Analysis of Financial Condition and Results of Operations” in Part
II, Item 7 of this Form 10-K.
On
and effective June 22, 2020, we changed our name to “SuRo Capital Corp.” from “Sutter Rock Capital Corp.” On
and effective March 12, 2019, our board of directors (“Board of Directors”) approved internalizing our operating
structure (“Internalization”) and we began operating as an internally managed non-diversified closed-end management
investment company that has elected to be regulated as a BDC under the 1940 Act. Our Board of Directors approved the Internalization
in order to better align the interests of our stockholders with our management. As an internally managed BDC, we are managed by our employees, rather than the employees of an external investment adviser, thereby allowing for greater
transparency to stockholders through robust disclosure regarding our compensation structure.
Our
investment objective is to maximize our portfolio’s total return, principally by seeking capital gains on our equity and
equity-related investments, and to a lesser extent, income from debt investments. We invest principally in the equity securities of
what we believe to be rapidly growing venture capital-backed emerging companies. We acquire our investments through direct
investments in prospective portfolio companies, secondary marketplaces for private companies, and negotiations with selling
stockholders. In addition, we may invest in private credit and in the founders equity, founders warrants, forward purchase
agreements, and private investment in public equity (“PIPE”) transactions of special purpose acquisition companies
(“SPACs”). We may also invest on an opportunistic basis in select publicly traded equity securities or certain non-U.S.
companies that otherwise meet our investment criteria, subject to applicable requirements of the 1940 Act. To the extent we make
investments in private equity funds and hedge funds that are excluded from the definition of “investment company” under
the 1940 Act by Section 3(c)(1) or 3(c)(7) of the 1940 Act, we will limit such investments to no more than 15% of our net
assets.
Our
investment philosophy is based on a disciplined approach of identifying promising investments in high-growth, venture-backed companies
across several key industry themes, which may include, among others, social mobile, cloud computing and big data, internet commerce, financial
technology, mobility, and enterprise software. Our investment decisions are based on a disciplined analysis of available information
regarding each potential portfolio company’s business operations, focusing on the portfolio company’s growth potential, the
quality of recurring revenues, and path to profitability, as well as an understanding of key market fundamentals. Venture capital funds
or other institutional investors have invested in the vast majority of companies that we evaluate.
We
seek to deploy capital primarily in the form of non-controlling equity and equity-related investments, including common stock, warrants,
preferred stock and similar forms of senior equity, which may or may not be convertible into a portfolio company’s common equity,
and convertible debt securities with a significant equity component. Typically, our preferred stock investments are non-income producing,
have different voting rights than our common stock investments and are generally convertible into common stock at our discretion. As
our investment strategy is primarily focused on equity positions, our investments generally do not produce current income, and therefore,
we may be dependent on future capital raising to meet our operating needs if no other source of liquidity is available.
We
seek to create a low-turnover portfolio that includes investments in companies representing a broad range of investment themes.
Our
common stock is traded on the Nasdaq Global Select Market under the symbol “SSSS”. The net asset value per share of our common
stock on December 31, 2023 was $7.99. On March 13, 2024, the last reported sale price of a share of our common stock on the Nasdaq Global
Select Market was $4.36.
1
TABLE OF CONTENTS
Operating
and Regulatory Structure
We
formed in 2010 as a Maryland corporation and operate as an internally managed, non-diversified closed-end management investment company.
Our investment activities are supervised by our Board of Directors and managed by our executive officers and investments professionals,
all of which are our employees.
As
a BDC, we are subject to certain regulatory requirements. See “—Regulation as a BDC.” Also,
while we are permitted to finance investments using debt, our ability to use debt is limited in certain significant aspects.
With
certain limited exceptions, we may issue “senior securities,” including borrowing money from banks or other financial
institutions only in amounts such that the ratio of our total assets (less total liabilities other than indebtedness represented by
senior securities) to our total indebtedness represented by senior securities plus preferred stock, if any, is at least 200% (or
150% if certain conditions are met) after such incurrence or issuance. This means that generally, we can borrow up to $1 for every
$1 of investor equity (or, if certain conditions are met, we can borrow up to $2 for every $1 of investor equity). In March 2018,
the Small Business Credit Availability Act (the “SBCAA”) modified the 1940 Act by allowing a BDC to increase the maximum
amount of leverage it may incur by decreasing the asset coverage percentage from 200% to 150%, if certain requirements under the
1940 Act are met. Under the 1940 Act, we are allowed to increase our leverage capacity if stockholders representing at least a
majority of the votes cast, when a quorum is present, approve a proposal to do so. If we receive stockholder approval, we would be
allowed to increase our leverage capacity on the first day after such approval. Alternatively, the 1940 Act allows the majority of
our independent directors to approve an increase in our leverage capacity, and such approval would become effective after the
one-year anniversary of such approval. In either case, we would be required to make certain disclosures on our website and in SEC
filings regarding, among other things, the receipt of approval to increase our leverage, our leverage capacity and usage, and risks
related to leverage. We currently do not intend to seek stockholder approval or approval from our Board of Directors to
increase our leverage capacity as set forth above. See “Risk Factors” in Part I, Item 1A of this Form 10-K for more
information.
We
have elected to be treated as a RIC under Subchapter M of the Code and expect to continue to operate in a manner so as to qualify for
the tax treatment applicable to RICs. See “—Material U.S. Federal Income Tax Considerations” and “Note 2—Significant
Accounting Policies—U.S. Federal and State Income Taxes” and “Note 9—Income Taxes” to our Consolidated Financial Statements for the year ended December 31, 2023 for more information.
Human
Capital Resources
As
of December 31, 2023, we had eleven employees, each of whom was directly employed by us. These employees include our executive officers,
investment and finance professionals, and administrative staff. All of our employees are located in the United States at our principal
executive office and headquarters located at 640 Fifth Avenue, 12th Floor, New York, NY 10019 and our additional office located at One
Sansome Street, Suite 730, San Francisco, CA 94104. Our telephone number is (212) 931-6331.
As
an internally managed BDC, the success of our business and investment strategy, including achieving our investment objective, depends
in material part on our employees. We depend upon the members of our management team and our investment professionals for the identification,
final selection, structuring, closing and monitoring of our investments. These employees have critical industry experience and relationships
on which we rely to implement our business plan. We expect that the members of our management team and our investment professionals will
maintain key informal relationships, which we will use to help identify and gain access to investment opportunities. If we do not attract,
develop and retain highly skilled employees, we may not be able to operate our business as we expect and our operating results could
be adversely affected. See “Risk Factors” in Part I, Item 1A of this Form 10-K.
We
strive to attract, develop and retain our employees by offering unique employment opportunities, advancement and promotion opportunities,
training programs and opportunities, and competitive compensation and benefit structures, as well as a safe, harassment-free work environment.
2
TABLE OF CONTENTS
Investment
Opportunity
We
believe that society is experiencing a convergence of numerous disruptive trends, producing new high-growth markets.
At
the same time, we believe that the IPO markets have experienced substantial structural changes which have made it significantly more
challenging for private companies to go public. Volatile equity markets, a lack of investment research coverage for private and smaller
companies and investor demand for a longer history of revenue and earnings growth have resulted in companies staying private significantly
longer than in the past. In addition, increased public company compliance obligations such as those imposed by the Sarbanes-Oxley Act
of 2002 (the “Sarbanes-Oxley Act”) and the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank
Act”) have made it more costly and less attractive to become a public company. As a result, there are significantly fewer IPOs
today than there were during the 1990s, with prospective public companies taking longer to come to market.
Investment
Strategy
We
seek to maintain our portfolio of potentially high-growth emerging private companies via a repeatable and disciplined investment approach,
as well as to provide investors with access to such companies through our publicly traded common stock.
Our
investment objective is to maximize our portfolio’s total return, principally by seeking capital gains on our equity and equity-related
investments, and to a lesser extent, income from debt investments. We have adopted the following business strategies to achieve our investment
objective:
●
Identify
high quality growth companies. Based on our extensive experience in analyzing technology trends and markets, we have identified
several technology sub-sectors, including social mobile, big data and cloud, marketplaces, and education technology, as opportunities
where we believe companies are capable of producing substantial growth. We rely on our collective industry knowledge as well as an
understanding of where leading venture capitalists and other institutional investors are investing.
We
leverage a combination of our relationships throughout Silicon Valley and our independent research to identify leaders in our targeted
sub-sectors that we believe are differentiated and best positioned for sustained growth. Our team continues to expand our sourcing network
in order to evaluate a wide range of investment opportunities in companies that demonstrate strong operating fundamentals. We target
businesses that have been shown to provide scaled valuation growth before a potential IPO or strategic exit.
●
Acquire
positions in targeted investments. We seek to selectively add to our portfolio by sourcing investments at an acceptable price
through our disciplined investing strategy. To this end, we utilize multiple methods to acquire equity stakes in private companies
that are not available to many individual investors.
Direct
equity investments. We seek direct investments in private companies. There is a large market among emerging private companies for
equity capital investments. Many of these companies, particularly within the technology sector, lack the necessary cash flows to sustain
substantial amounts of debt, and therefore have viewed equity capital as a more attractive long-term financing tool. We seek to be a
source of such equity capital as a means of investing in these companies and look for opportunities to invest alongside other venture
capital and private equity investors with whom we have established relationships.
3
TABLE OF CONTENTS
Private
secondary marketplaces and direct share purchases. We also utilize private secondary marketplaces as a means to acquire equity and
equity-related interests in privately held companies that meet our investment criteria and that we believe are attractive candidates
for investment. We believe that such markets offer new channels for access to equity investments in private companies and provide a potential
source of liquidity should we decide to exit an investment. In addition, we also purchase shares directly from stockholders, including
current or former employees. As certain companies grow and experience significant increased value while remaining private, employees
and other stockholders may seek liquidity by selling shares directly to a third party or to a third party via a secondary marketplace.
Sales of shares in private companies are typically restricted by contractual transfer restrictions and may be further restricted by provisions
in company charter documents, investor rights of first refusal and co-sale and company employment and trading policies, which may impose
strict limits on transfer. We believe that the reputation of our investment professionals within the industry and established history
of investing affords us a favorable position when seeking approval for a purchase of shares subject to such limitations.
●
Create
access to a varied investment portfolio. We seek to hold a varied portfolio of non-controlling equity investments, which
we believe will minimize the impact on our portfolio of a negative downturn at any one specific company. We believe that our relatively
varied portfolio will provide a convenient means for accredited and non-accredited individual investors to obtain access to an asset
class that has generally been limited to venture capital, private equity and similar large institutional investors.
Starting
in 2017, we began to focus our investment strategy to increase the size of our investments in individual portfolio companies. While this
will likely have the effect of reducing the number of companies in which we hold investments, we believe that the shift towards larger
positions will better allow our investment professionals to focus our investments in companies and industries that are more likely to
result in beneficial returns to our stockholders.
Competitive
Advantages
We
believe that we benefit from the following competitive advantages in executing our investment strategy:
●
Capable
team of investment professionals. Our executive officers, investment professionals, and Board of Directors have significant
experience researching and investing in the types of high-growth venture capital-backed companies we are targeting for investment.
Through our proprietary company evaluation process, including our identification of technology trends and themes and company
research, we believe we have developed important insight into identifying and valuing emerging private companies.
●
Disciplined
and repeatable investment process. We have established a disciplined and repeatable process to locate and acquire available
shares at attractive valuations by utilizing multiple sources. In contrast to industry “aggregators” that accumulate
stock at market prices, we conduct valuation analysis and make acquisitions only when we can invest at valuations that we believe
are attractive to our investors.
●
Deep
relationships with significant credibility to source and complete transactions. Our executive officers and investment professionals
are strategically located in New York, New York and at our additional office in San Francisco, California, allowing us to fully engage
in the technology and innovation ecosystem. Our wide network of venture capital and technology professionals supports our sourcing
efforts and helps provide access to promising investment opportunities. Our executive officers and investment professionals have
also developed strong relationships in the financial, investing and technology-related sectors.
●
Source
of permanent investing capital. As a publicly traded corporation, we have access to a source of permanent equity capital
that we can use to invest in portfolio companies. This permanent equity capital is a significant differentiator from other potential
investors that may be required to return capital to stockholders on a defined schedule. We believe that our ability to invest on
a long-term time horizon makes us attractive to companies looking for strong, stable owners of their equity.
●
Early
mover advantage. We believe we are one of the few publicly traded BDCs with a specific focus on investing in high-growth
venture-backed companies. The transactions that we have executed to date since our IPO have helped to establish our reputation with
the types of secondary sellers and emerging companies that we target for investment. We have leveraged a number of relationships
and channels to acquire the equity of private companies. As we continue to grow our portfolio with attractive investments, we believe
that our reputation as a committed partner will be further enhanced, allowing us to source and close investments that would otherwise
be unavailable. We believe that these factors collectively differentiate us from other potential investors in private company securities
and will serve our goal to complete equity transactions in compelling private companies at attractive valuations.
Our
primary competitors include specialty finance companies including late-stage venture capital funds, private equity funds, other crossover
funds, public funds investing in private companies and public and private BDCs. Many of these entities have greater financial and managerial
resources than we will have. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which
could allow them to consider more investments and establish more relationships than we do. Furthermore, many of our competitors are not
subject to the regulatory restrictions the 1940 Act imposes on us as a BDC. For additional information concerning the competitive risks
we face, see “Risk Factors—Risks Related to Our Business and Structure” in Part I, Item 1A of this Form 10-K.
4
TABLE OF CONTENTS
Investment
Process
Concentrated
Technology-Related Focus
Our
executive officers and investment professionals have identified five key investment themes from which we have seen significant numbers
of high-growth companies emerge: social and mobile, financial technology and services, big data and cloud, marketplaces, and education.
However, the opportunity set of high-growth venture-backed technology companies extends beyond these key investment themes into much
broader markets. These broad markets have the potential to produce disruptive technologies, reach a large addressable market, and provide
significant commercial opportunities. Within these areas, we have identified trends that could create significant positive effects on
growth such as globalization, consolidation, branding, convergence and network effects. Thus, while we remain focused on selecting market
leaders within the key investment themes identified, our executive officers and investment professionals actively seek out promising
investments across a diverse selection of new technology subsectors.
Investment
Targeting and Screening
We
identify prospective portfolio companies through an extensive network of relationships developed by our executive officers and investment
professionals, supplemented by the knowledge and relationships of our Board of Directors. Investment opportunities that fall within our
identified themes are validated against the observed behavior of leading venture capitalists and institutional investors, as well as
through our own internal and external research. We evaluate potential portfolio companies across a spectrum of criteria, including industry
positioning and leadership, stage of growth, path to profitability, the uniqueness and defensibility of the portfolio company’s
strategy, investor sponsorship, and the portfolio company’s potential access to capital to continue to fund its growth that collectively
characterize our proprietary investment process. We typically seek to invest our assets under management in the equity of well-established
and growth stage companies, and debt investments of emerging companies that fit within our targeted areas. Based on our initial screening,
we identify a select set of companies that we evaluate in greater depth.
Research
and Due Diligence Process
Once
we identify those companies that we believe warrant more in-depth analysis, we focus on their total addressable market, revenue growth
and sustainability, and earnings growth, as well as other metrics that may be strongly correlated with higher valuations. We also focus
on the company’s management team and any significant financial sponsor, their current business model, competitive positioning,
regulatory and legal issues, the quality of any intellectual property and other investment-specific due diligence. Each prospective portfolio
company that passes our initial due diligence review is given a qualitative ranking to allow us to evaluate it against others in our
pipeline, and we review and update these companies on a regular basis.
Our
due diligence process will vary depending on whether we are investing through a private secondary transaction with
a selling stockholder or by direct equity investment. We access information on our potential investments through a variety of sources,
including information made available on secondary marketplaces, publications by private company research firms, industry publications,
commissioned analysis by third-party research firms, and, to a limited extent, directly from the company or financial sponsor. We utilize
a combination of each of these sources to help us set a target value for the companies we ultimately select for investment.
Portfolio
Construction and Sourcing
Upon
completion of our research and due diligence process, we select investments for inclusion in our portfolio based on their value proposition,
addressable market, fundamentals and valuation. We seek to create a relatively varied portfolio that we expect will include investments
in companies representing a broad range of investment themes. We generally choose to pursue specific investments based on the availability
of shares and valuation expectations. We utilize a combination of secondary marketplaces, direct purchases from stockholders and direct
equity investments in order to make investments in our portfolio companies. Once we have established an initial position in a portfolio
company, we may choose to increase our stake through subsequent purchases. Maintaining a balanced portfolio is a key to our success,
and as a result we constantly evaluate the composition of our investments and our pipeline to ensure we are exposed to a diverse set
of companies within our target segments.
5
TABLE OF CONTENTS
Transaction
Execution
We
enter into purchase agreements for all of our private company portfolio investments. Private company securities are typically
subject to contractual transfer limitations, which may, among other things, give the issuer, its assignees and/or its stockholders a
particular period of time, often 30 days or more, in which to exercise a veto right, or a right of first refusal over, the sale of such
securities. Accordingly, the purchase agreements we enter into for secondary transactions typically require the lapse or satisfaction
of these rights as a condition to closing. Under these circumstances, we may be required to deposit the purchase price into escrow upon
signing, with the funds released to the seller at closing or returned to us if the closing conditions are not met.
Risk
Management and Monitoring
We
monitor the financial trends of each portfolio company to assess our exposure to individual companies as well as to evaluate overall
portfolio quality. We establish valuation targets at the portfolio level and for gross and net exposures with respect to specific companies
and industries within our overall portfolio. In cases where we make a direct investment in a portfolio company, we may also obtain board
positions, board observation rights and/or information rights from that portfolio company in connection with our equity investment. We
regularly monitor our portfolio for compliance with the diversification requirements for purposes of maintaining our status as a BDC
and a RIC for tax purposes.
Managerial
Assistance
As
a BDC, we are required to offer, and in some cases may provide and be paid for, significant managerial assistance to portfolio companies.
This assistance typically involves monitoring the operations of portfolio companies, participating in their board and management meetings,
consulting with and advising their officers and providing other organizational and financial guidance. We will provide such managerial
assistance on our behalf to portfolio companies that request assistance. We may receive fees for these services, subject to review by
our Board of Directors, including our independent directors.
Portfolio
Overview
The
following table shows the fair value of our portfolio of investments by asset class as of December 31, 2023 and 2022:
December
31, 2023
December
31, 2022
Fair
Value
Percentage
of
Portfolio
Fair
Value
Percentage
of Portfolio
Private
Portfolio Companies:
Preferred
Stock
$ 122,744,564
49.5 %
$ 117,214,465
48.4 %
Common
Stock
39,086,792
15.8 %
18,692,931
7.7 %
Debt
Investments
3,098,734
1.3 %
4,488,200
1.9 %
Options
3,638,161
1.5 %
3,469,497
1.4 %
Private
Portfolio Companies
168,568,251
68.0 %
143,865,093
59.4 %
Publicly
Traded Portfolio Companies:
Common
Stock
13,548,248
5.5 %
13,323,485
5.5 %
Options
1,964,750
0.8 %
—
— %
Publicly
Traded Portfolio Companies
15,512,998
6.3 %
13,323,485
5.5 %
Total
Portfolio Investments
184,081,249
74.3 %
157,188,578
64.9 %
Non-Portfolio
Investments
U.S.
Treasury Bills
63,810,855
25.7 %
85,056,817
35.1 %
Total
Investments
$ 247,892,104
100.0 %
$ 242,245,395
100.0 %
Determination
of Net Asset Value
We
determine the net asset value (“NAV”) of our investment portfolio after the conclusion of each fiscal quarter in
connection with the preparation of our annual and quarterly reports filed under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), or more frequently if required under the 1940 Act.
6
TABLE OF CONTENTS
Securities
that are publicly traded are generally valued at the close price on the valuation date; however, if they remain subject to lock-up restrictions,
they are discounted accordingly. Securities that are not publicly traded or for which there are no readily available market quotations,
including securities that trade on secondary markets for private securities, are valued at fair value as determined in good faith by
our Board of Directors and in accordance with Rule 2a-5 as promulgated under the 1940 Act. In connection with that determination, our
executive officers and investment professionals will prepare portfolio company valuations using, when available, the most recent portfolio
company financial statements and forecasts. We also engage an independent valuation firm to perform independent valuations of our investments
that are not publicly traded or for which there are no readily available market quotations. We may also engage an independent valuation
firm to perform independent valuations of any securities that trade on private secondary markets, but are not otherwise publicly traded,
where there is a lack of appreciable trading or a wide disparity in recently reported trades.
For
those securities that are not publicly traded or for which there are no readily available market quotations, our Board of Directors,
with the assistance of its valuation committee (the “Valuation Committee”), will use the recommended valuations as prepared
by our executive officers and investment professionals and the independent valuation firm, respectively, as a component of the foundation
for its final fair value determination. Due to the uncertainty inherent in the valuation process, such estimates of fair value may differ
significantly from the values that would have resulted had others made the determination using the same or different procedures or had
a readily available market for the securities existed, and the differences could be material. Additionally, changes in the market environment
and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments
to be different than the gains or losses implied by the valuation currently assigned to such investments. For those investments that
are publicly traded, we generally record unrealized appreciation or depreciation based on changes in the market value of the securities
as of the valuation date. Publicly traded securities that remain subject to lock-up restrictions are discounted accordingly. For those
investments that are not publicly traded and for which there are no readily available market quotations, we record unrealized depreciation
on such investments when we believe that an investment has become impaired and record unrealized appreciation if we believe that the
underlying portfolio company has appreciated in value and our equity security has also appreciated in value. Changes in fair value are
recorded in the Consolidated Statement of Operations as the net change in unrealized appreciation or depreciation.
Our Board of Directors
generally determines the fair value of our investments by considering a number of factors. The following represent factors that, among
others, could impact our fair value determinations:
1.
Public
trading of our portfolio securities, taking into consideration lock-up requirements and liquidity;
2.
Active
trading of our portfolio securities on a private secondary market, where we have determined that there is meaningful volume and the
transactions are considered arm’s length by sophisticated investors;
3.
Qualified
funding rounds in the companies in which we invested, where there is meaningful and reputable information available on size, valuation
and investors; and
4.
Additional
investments by us in current portfolio companies, where the price of the new investment differs materially from prior investments.
There
is inherent subjectivity in determining the fair value of our investments. We expect that most of our portfolio investments, other than
those for which market quotations are readily available and that may be sold without restriction, will be valued at fair value as determined
in good faith by our Board of Directors, with the assistance of our Valuation Committee. Furthermore, when calculating NAV,
we also consider our recognition of a deferred tax liability for unrealized gains on investments for those investments held in our taxable
subsidiaries. See “Note 1—Nature of Operations” to our Consolidated Financial Statements for the year ended December
31, 2023 for a list of our taxable subsidiaries.
Regulation
as a BDC
General
A
BDC is regulated by the 1940 Act. A BDC must be organized in the United States for the purpose of investing in, or lending to,
primarily private companies and making significant managerial assistance available to them. A BDC may use capital provided by public
stockholders and from other sources to make long-term, private investments in businesses. A BDC provides stockholders the ability to
retain the liquidity of a publicly traded stock while sharing in the possible benefits, if any, of investing primarily in privately
owned companies.
7
TABLE OF CONTENTS
We
may not change the nature of our business so as to cease to be, or withdraw our election as, a BDC unless authorized by vote of a majority
of the outstanding voting securities, as required by the 1940 Act. A majority of the outstanding voting securities of a company is defined
under the 1940 Act as the lesser of: (a) 67% or more of such company’s voting securities present at a meeting if more than 50%
of the outstanding voting securities of such company are present or represented by proxy, or (b) more than 50% of the outstanding voting
securities of such company. We do not anticipate any substantial change in the nature of our business.
As
with other companies regulated by the 1940 Act, a BDC must adhere to certain substantive regulatory requirements. A majority of our directors
must be persons who are not “interested persons” as defined in the 1940 Act. Additionally, we are required to provide and
maintain a bond issued by a reputable fidelity insurance company to protect the BDC. Furthermore, as a BDC, we are prohibited from protecting
any director or officer against any liability to us or our stockholders arising from willful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in the conduct of such person’s office.
As
a BDC, we are generally required to meet an asset coverage ratio, defined under the 1940 Act as the ratio of our gross assets (less all
liabilities and indebtedness not represented by senior securities) to our outstanding senior securities, of at least 200% after each
issuance of senior securities. We may also be prohibited under the 1940 Act from knowingly participating in certain transactions with
our affiliates without the prior approval of our directors who are not interested persons and, in some cases, prior approval by the SEC.
The
SBCAA modified the asset coverage percentage for BDCs, reducing the required coverage percentage for senior securities from 200% to 150%,
subject to certain conditions. Under the SBCAA, we are allowed to increase our leverage capacity if stockholders representing at least
a majority of the votes cast, when a quorum is present, approve a proposal to do so. If we receive stockholder approval, we would be
allowed to increase our leverage capacity on the first day after such approval. Alternatively, the SBCAA allows the majority of our independent
directors to approve an increase in our leverage capacity, and such approval would become effective on the one-year anniversary of such
approval. In either case, we would be required to make certain disclosures on our website and in SEC filings regarding, among other things,
the receipt of approval to increase our leverage, our leverage capacity and usage, and risks related to leverage.
Pursuant
to the SBCAA, the SEC issued rules or amendments to rules allowing BDCs to use the same securities offering and proxy rules that are
available to operating companies, including, among other things, allowing BDCs to incorporate by reference in registration statements
filed with the SEC and allowing certain BDCs to file shelf registration statements that are automatically effective and take advantage
of other benefits available to Well-Known Seasoned Issuers.
We
do not intend to acquire securities issued by any investment company that exceed the limits imposed by the 1940 Act. Under these limits,
except for registered money market funds, we generally cannot acquire more than 3% of the voting stock of any investment company, invest
more than 5% of the value of our total assets in the securities of one investment company or invest more than 10% of the value of our
total assets in the securities of investment companies in the aggregate. The portion of our portfolio invested in securities issued by
investment companies ordinarily will subject our stockholders to additional indirect expenses. Our investment portfolio is also subject
to diversification requirements by virtue of our election to be treated as a RIC for U.S. federal income tax purposes and our intention
to continue to operate in a manner so as to qualify for the tax treatment applicable to RICs. See “Risk Factors—Risks Related
to Our Business and Structure” in Part I, Item 1A of this Form 10-K for more information.
In
addition, investment companies registered under the 1940 Act and private funds that are excluded from the definition of “investment
company” pursuant to either Section 3(c)(1) or 3(c)(7) of the 1940 Act may not acquire directly or through a controlled entity
more than 3% of our total outstanding voting stock (measured at the time of the acquisition), unless the funds comply with an exemption
under the 1940 Act. As a result, certain of our investors may hold a smaller position in our shares than if they were not subject to
these restrictions.
We
are generally not able to issue and sell our common stock at a price below NAV per share. See “Risk Factors—Risks
Related to Our Business and Structure— Regulations governing our operation as a BDC affect our ability to, and the way in which
we, raise additional capital, which may expose us to risks, including the typical risks associated with leverage .” in Part I,
Item 1A of this Form 10-K. We may, however, sell our common stock, or warrants, options or rights to acquire our common stock, at a price
below the then-current NAV of our common stock if our Board of Directors determines that such sale is in our best interests
and the best interests of our stockholders, and our stockholders approve such sale. In addition, we may generally issue new shares of
our common stock at a price below NAV in rights offerings to existing stockholders, in payment of dividends and in certain
other limited circumstances.
8
TABLE OF CONTENTS
As
a BDC, we are also prohibited under the 1940 Act from knowingly participating in certain transactions with our affiliates without the
prior approval of our Board of Directors who are not interested persons and, in some cases, prior approval by the SEC. The affiliates
with which we may be prohibited from transacting include our directors, officers and employees and any person controlling or under common
control with us, subject to certain exceptions. For example, under the 1940 Act, absent receipt of exemptive relief from the SEC, we
and certain of our affiliates are generally precluded from co-investing in negotiated private placements of securities.
We
are subject to periodic examination by the SEC for compliance with the 1940 Act.
As
a BDC, we are subject to certain risks and uncertainties. See “Risk Factors—Risks Related to Our Business and Structure”
in Part I, Item 1A of this Form 10-K.
Qualifying
Assets
Under
the 1940 Act, a BDC may not acquire any asset other than assets of the type listed in Section 55(a) of the 1940 Act, which are referred
to as “qualifying assets”, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the BDC’s
gross assets. The principal categories of qualifying assets relevant to our business are the following:
1.
Securities
purchased in transactions not involving any public offering from the issuer of such securities, which issuer (subject to certain
limited exceptions) is an eligible portfolio company, or from any person who is, or has been during the preceding 13 months, an affiliated
person of an eligible portfolio company, or from any other person, subject to such rules as may be prescribed by the SEC. An eligible
portfolio company is defined in the 1940 Act as any issuer which:
a.
is
organized under the laws of, and has its principal place of business in, the United States;
b.
is
not an investment company (other than a small business investment company wholly owned by the BDC) or a company that would be an
investment company but for certain exclusions under the 1940 Act; and
c.
satisfies
any of the following:
i.
does
not have any class of securities that is traded on a national securities exchange;
ii.
has
a class of securities listed on a national securities exchange, but has an aggregate market value of outstanding voting and non-voting
common equity of less than $250.0 million;
iii.
is
controlled by a BDC or a group of companies including a BDC and the BDC has an affiliated person who is a director of the eligible
portfolio company;
iv.
is
a small and solvent company having gross assets of not more than $4.0 million and capital and surplus of not less than $2.0 million;
or
v.
meets
such other criteria as may be established by the SEC.
2.
Securities
of any eligible portfolio company which we control.
3.
Securities
purchased in a private transaction from a U.S. issuer that is not an investment company or from an affiliated person of the issuer,
or in transactions incident thereto, if the issuer is in bankruptcy and subject to reorganization or if the issuer, immediately prior
to the purchase of its securities, was unable to meet its obligations as they came due without material assistance other than conventional
lending or financing arrangements.
4.
Securities
of an eligible portfolio company purchased from any person in a private transaction if there is no ready market for such securities
and we already own 60% of the outstanding equity of the eligible portfolio company.
5.
Securities
received in exchange for or distributed on or with respect to securities described in (1) through (4) above, or pursuant to the exercise
of options, warrants or rights relating to such securities.
6.
Cash,
cash equivalents, U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment.
9
TABLE OF CONTENTS
In
addition, a BDC must have been organized and have its principal place of business in the United States and must be operated for the purpose
of making investments in the types of securities described in (1), (2) or (3) above.
If
at any time less than 70% of our gross assets are comprised of qualifying assets, including as a result of an increase in the value of
any non-qualifying assets or decrease in the value of any qualifying assets, we would generally not be permitted to acquire any additional
non-qualifying assets, other than office furniture and equipment, interests in real estate and leasehold improvements and facilities
maintained to conduct our business operations, deferred organization and operating expenses, and other non-investment assets
necessary and appropriate to our operations as a BDC, until such time as 70% of our then-current gross assets were comprised of qualifying
assets. We would not be required, however, to dispose of any non-qualifying assets in such circumstances.
Managerial
Assistance to Portfolio Companies
A
BDC generally must offer to make available to the issuer of the securities it holds significant managerial assistance, except in circumstances
where either (i) the BDC controls such issuer of securities or (ii) the BDC purchases such securities in conjunction with one or more
other persons acting together and one of the other persons in the group makes available such managerial assistance. Making available
significant managerial assistance means, among other things, any arrangement whereby the BDC, through its directors, officers or employees,
offers to provide, and, if accepted, does so provide, significant guidance and counsel concerning the management, operations or business
objectives and policies of a portfolio company. See “Business — Managerial Assistance” in Part I, Item 1 of this Form 10-K for more information.
Temporary
Investments
Pending
investment in other types of “qualifying assets,” as described above, our investments may consist of cash, cash equivalents,
U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment, which we refer to,
collectively, as temporary investments, so that 70% of our assets are qualifying assets. Typically, we will invest in U.S. Treasury bills
or in repurchase agreements, provided that such agreements are fully collateralized by cash or securities issued by the U.S. government
or its agencies. A repurchase agreement involves the purchase by an investor, such as us, of a specified security and the simultaneous
agreement by the seller to repurchase it at an agreed-upon future date and at a price which is greater than the purchase price by an
amount that reflects an agreed-upon interest rate. There is no percentage restriction on the proportion of our assets that may be invested
in such repurchase agreements. However, if more than 25% of our gross assets constitute repurchase agreements from a single counterparty,
we would not meet the diversification tests in order to qualify as a RIC for U.S. federal income tax purposes. Thus, we do not intend
to enter into repurchase agreements with a single counterparty in excess of this limit. We will monitor the creditworthiness of the counterparties
with which we enter into repurchase agreement transactions.
Warrants
and Options
Under
the 1940 Act, a BDC is subject to restrictions on the amount of warrants, options, restricted stock or rights to purchase shares of capital
stock that it may have outstanding at any time. Under the 1940 Act, we may generally only offer warrants provided that (i) the warrants
expire by their terms within ten years, (ii) the exercise or conversion price is not less than the current market value at the date of
issuance, (iii) our stockholders authorize the proposal to issue such warrants, and our Board of Directors approves such issuance on
the basis that the issuance is in the best interests of us and our stockholders and (iv) if the warrants are accompanied by other securities,
the warrants are not separately transferable unless no class of such warrants and the securities accompanying them has been publicly
distributed. The 1940 Act also provides that the amount of our voting securities that would result from the exercise of all outstanding
warrants, as well as options and rights, at the time of issuance may not exceed 25% of our outstanding voting securities. In particular,
the amount of capital stock that would result from the conversion or exercise of all outstanding warrants, options or rights to purchase
capital stock cannot exceed 25% of the BDC’s total outstanding shares of capital stock. This amount is reduced to 20% of the BDC’s
total outstanding shares of capital stock if the amount of warrants, options or rights issued pursuant to an executive compensation plan
would exceed 15% of the BDC’s total outstanding shares of capital stock.
10
TABLE OF CONTENTS
Senior
Securities
We
are permitted, under specified conditions, to issue multiple classes of indebtedness and one class of stock senior to our common stock
if our asset coverage, as defined in the 1940 Act, is at least equal to 200% (or 150% if certain requirements are met) immediately after
each such issuance. In addition, while any senior securities remain outstanding, we must make provisions to prohibit any distribution
to our stockholders or the repurchase of such securities or shares unless we meet the applicable asset coverage ratios at the time of
the distribution or repurchase. We may also borrow amounts up to 5% of the value of our gross assets for temporary or emergency purposes
without regard to asset coverage. For a discussion of the risks associated with leverage, see “Risk Factors — Risks Related
to Our Business and Structure — Borrowings, such as the 6.00% Notes due 2026, can magnify
the potential for gain or loss on amounts invested and may increase the risk of investing in us. ” in Part I, Item 1A of this
Form 10-K.
Code
of Ethics
We
have adopted a code of ethics pursuant to Rule 17j-1 under the 1940 Act. This code establishes procedures for personal investments and
restricts certain transactions by our personnel. Our code of ethics and our code of business conduct and ethics are available on the
EDGAR database on the SEC’s Internet site at http://www.sec.gov , and are available on our website. You may also obtain copies
of our code of ethics and our code of business conduct and ethics, after paying a duplicating fee, by electronic request at the following
email address: publicinfo@sec.gov.
Compliance
Policies and Procedures
We
have adopted and implemented written policies and procedures reasonably designed to detect and prevent violation of the federal securities
laws and review these compliance policies and procedures annually for their adequacy and the effectiveness of their implementation. Our
Chief Compliance Officer is responsible for administering these policies and procedures.
Compliance
with Corporate Governance Regulations
The
Sarbanes-Oxley Act imposes a wide variety of regulatory requirements on publicly held companies and their insiders. Many of these requirements
affect us. For example:
●
pursuant
to Rule 13a-14 of the Exchange Act, our Chief Executive Officer and Chief Financial Officer must certify the accuracy of the financial
statements contained in our periodic reports;
●
pursuant
to Item 307 of Regulation S-K, our periodic reports must disclose our conclusions about the effectiveness of our disclosure controls
and procedures;
●
pursuant
to Rule 13a-15 of the Exchange Act, our management must prepare an annual report regarding its assessment of our internal control
over financial reporting, and we must obtain an audit of the effectiveness of internal control over financial reporting performed
by our independent registered public accounting firm if we are no longer a non-accelerated filer (as defined in Rule 12b-2 under
the Exchange Act); and
●
pursuant
to Item 308 of Regulation S-K and Rule 13a-15 of the Exchange Act, our periodic reports must disclose whether there were significant
changes in our internal control over financial reporting or in other factors that could significantly affect these controls subsequent
to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
The
Sarbanes-Oxley Act requires us to review our current policies and procedures to determine whether we comply with the Sarbanes-Oxley Act
and the regulations promulgated thereunder. We will continue to monitor our compliance with all regulations that are adopted under the
Sarbanes-Oxley Act and will take actions necessary to ensure that we are in compliance therewith.
In
addition, Nasdaq has adopted various corporate governance requirements as part of its listing standards. We
believe we are in compliance with such corporate governance listing standards. We will continue to monitor our compliance with all future
listing standards and will take actions necessary to ensure that we are in compliance therewith.
11
TABLE OF CONTENTS
Proxy
Voting Policies and Procedures
Proxy
Policies
We
will vote proxies relating to our portfolio securities in what we perceive to be the best interests of our stockholders. We will review
on a case-by-case basis each proposal submitted for a vote to determine its impact on the portfolio securities held by us. Although we
will generally vote against proposals that may have a negative impact on our portfolio securities, we may vote for such a proposal if
there are compelling long-term reasons to do so.
Our
proxy voting decisions are made by our executive officers and investment professionals who are responsible for monitoring the relevant
investments. To ensure that our vote is not the product of a conflict of interest, we require that: (1) anyone involved in the decision-making
process disclose to our Chief Compliance Officer any potential conflict that he or she is aware of and any contact that he or she has
had with any interested party regarding a proxy vote; and (2) employees involved in the decision-making process or vote administration
are prohibited from revealing how we intend to vote on a proposal without the prior approval of the Chief Compliance Officer and our
senior management in order to reduce any attempted influence from interested parties.
Proxy
Voting Records
You
may obtain information about how we voted proxies with respect to our portfolio securities by making a written request for proxy voting
information to: Chief Compliance Officer, SuRo Capital Corp., 640 Fifth Avenue, 12th Floor, New York, NY 10019 or compliance@surocap.com.
Privacy
Principles
We
are committed to maintaining the privacy of our stockholders and to safeguarding their non-public personal information. The following
information is provided to help you understand what personal information we collect, how we protect that information, and why, in certain
cases, we may share information with select other parties.
Generally,
we do not receive any non-public personal information relating to our stockholders, although certain non-public personal information
of our stockholders may become available to us. We do not disclose any non-public personal information about our stockholders or former
stockholders to anyone, except as permitted by law or as is necessary in order to service stockholder accounts (for example, to a transfer
agent or third-party administrator).
We
restrict access to non-public personal information about our stockholders to our employees and affiliates with a legitimate business
need for the information. We maintain physical, electronic and procedural safeguards designed to protect the non-public personal information
of our stockholders.
Available
Information
The
SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that
file electronically with the SEC. The address of that site is http://www.sec.gov .
Our
internet address is www.surocap.com. We make available free of charge on our website our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, proxy statements and amendments to those reports as soon as reasonably practicable
after we electronically file such material with, or furnish it to, the SEC. The information on our website is not incorporated by reference
into and should not be considered to be part of this annual report on Form 10-K.
Material
U.S. Federal Income Tax Considerations
Included
in our consolidated financial statements are GSV Capital Lending, LLC, SuRo Capital Sports, LLC, and the following wholly owned
subsidiaries, which are taxable subsidiaries (collectively, the “Taxable Subsidiaries”) regardless of whether we qualify
for tax treatment as a RIC: GSVC AE Holdings, Inc., GSVC AV Holdings, Inc., GSVC SW Holdings, Inc., and GSVC SVDS Holdings, Inc. The
Taxable Subsidiaries are C corporations for U.S. federal and state income tax purposes. These taxable subsidiaries are not
consolidated for income tax purposes and may generate income tax expenses as a result of their ownership of the portfolio companies.
Such income tax expenses and deferred taxes, if any, will be reflected in our consolidated financial statements.
12
TABLE OF CONTENTS
We
evaluate tax positions taken, or expected to be taken, in the course of preparing our consolidated financial statements to determine
whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority. We recognize the tax
benefits of uncertain tax positions only when the position has met the “more-likely-than-not” threshold. We classify penalties
and interest associated with income taxes, if any, as income tax expense. Conclusions regarding tax positions are subject to review and
may be adjusted at a later date based on factors including, but not limited to, ongoing analyses of tax laws, regulations and interpretations
thereof. We have identified our major tax jurisdictions as U.S. federal and New York.
Election
to be Taxed as a RIC
We
elected to be taxed as a RIC under the Code beginning with our taxable year ended December 31, 2014, and qualified for taxation as a
RIC for such taxable year and each of the subsequent taxable years, including the fiscal year ended December 31, 2023. We intend to
operate in a manner so as to continue to qualify for taxation as a RIC. So long as we maintain our qualification for taxation a RIC,
we generally will not be required to pay U.S. federal income tax at corporate rates on any ordinary income or capital gains that we
timely distribute to our stockholders as dividends. To qualify for taxation as a RIC, we must, among other things, meet certain
source-of-income and asset diversification requirements (as described below). In addition, in order to qualify for the special
treatment accorded to RICs, we are required to distribute to our stockholders on a timely basis each year at least 90% of our
“investment company taxable income,” which is generally our net ordinary income plus the excess of realized net
short-term capital gains over realized net long-term capital losses (the “Annual Distribution Requirement”).
Taxation
as a Regulated Investment Company
If
we:
●
qualify
as a RIC; and
●
satisfy
the Annual Distribution Requirement,
then
we will not be subject to U.S. federal income tax on the portion of our income and capital gains that we timely distribute (or are deemed
to distribute) to stockholders. We will be subject to U.S. federal income tax at the regular corporate rates on any income, including
capital gains not distributed (or deemed distributed) to our stockholders.
We
will be subject to a 4% nondeductible U.S. federal excise tax on certain undistributed income unless we distribute in a timely manner
each calendar year an amount equal to at least the sum of (1) 98% of our net ordinary income for each calendar year, (2) 98.2% of our
capital gains in excess of capital losses for the one-year period ending October 31 in that calendar year and (3) any ordinary income
and net capital gains that we recognized for preceding years but were not distributed during such years and on which we paid no U.S.
federal income tax (the “Excise Tax Avoidance Requirement”). While we intend to timely distribute our income and capital
gains in order to avoid imposition of this 4% U.S. federal excise tax, we may not be successful in avoiding entirely the imposition of
this tax. In that case, we will be liable for the tax only on the amount by which we do not meet the foregoing distribution requirement.
In
order to qualify as a RIC for U.S. federal income tax purposes, we must, among other things:
●
continue
to qualify as a BDC under the 1940 Act at all times during each taxable year;
●
derive
in each taxable year at least 90% of our gross income from dividends, interest, payments with respect to loans of certain securities,
gains from the sale of stock or other securities or foreign currencies, other income derived with respect to our business of investing
in such stock or securities and net income from “qualified publicly traded partnerships” (the “90% Income Test”);
and
●
diversify
our holdings so that at the end of each quarter of the taxable year:
●
at
least 50% of the value of our assets consists of cash, cash equivalents, U.S. government securities, securities of other RICs, and
other securities if such other securities of any one issuer do not represent more than 5% of the value of our assets or more than
10% of the outstanding voting securities of the issuer (the “50% Diversification Test”); and
●
no
more than 25% of the value of our assets is invested in the securities of one issuer, other than U.S. government securities or securities
of other RICs, the securities (other than securities of other RICs) of two or more issuers that are controlled, as determined under
applicable Code rules, by us and that are engaged in the same or similar or related trades or the securities of businesses, or of
certain “qualified publicly traded partnerships” (the “25% Diversification Test,” and together with the 50%
Diversification Test, the “Diversification Tests”).
13
TABLE OF CONTENTS
If
we satisfy the Diversification Tests as of the close of any quarter, we will not fail the Diversification Tests as of the close of a
subsequent quarter as a consequence of a discrepancy between the value of our assets and the requirements of the Diversification Tests
that is attributable solely to fluctuations in the value of our assets. Rather, we will fail the Diversification Tests as of the end
of a subsequent quarter only if such a discrepancy existed immediately after our acquisition of any asset and such discrepancy is wholly
or partly the result of that acquisition. In addition, if we fail the Diversification Tests as of the end of any quarter, we will not
lose our status as a RIC if we eliminate the discrepancy within thirty days of the end of such quarter and, if we eliminate the discrepancy
within that thirty-day period, we will be treated as having satisfied the Diversification Tests as of the end of such quarter for purposes
of applying the rule described in the preceding sentence.
We
may be required to recognize taxable income in circumstances in which we do not receive cash. For example, if we hold debt obligations
that are treated under applicable tax rules as having original issue discount (which may arise if we receive warrants in connection with
the origination of a loan or possibly in other circumstances), we must include in income each year a portion of the original issue discount
that accrues over the life of the obligation, regardless of whether cash representing such income is received by us in the same taxable
year. We may also have to include in income other amounts that we have not yet received in cash, such as contractual payment-in-kind,
or PIK, interest (which represents contractual interest added to the loan balance and due at the end of the loan term) or dividends and
deferred loan origination fees that are paid after origination of the loan or are paid in non-cash compensation such as warrants or stock.
Because any original issue discount or other amounts accrued will be included in our investment company taxable income for the year of
accrual, we may be required to make a distribution to our stockholders in order to satisfy the Annual Distribution Requirement and the
Excise Tax Avoidance Requirement, even though we will not have received any corresponding cash amount.
We
will be subject to certain asset coverage ratio requirements under the 1940 Act and financial covenants under loan and credit agreements
that could, under certain circumstances, restrict us from making distributions necessary to satisfy the Annual Distribution Requirement.
See “—Regulation as a BDC—Senior Securities.” Moreover, our ability to dispose of assets
to meet our distribution requirements may be limited by (1) the illiquid nature of our portfolio and/or (2) other requirements relating
to our status as a RIC, including the Diversification Tests. If we dispose of assets in order to meet the Annual Distribution Requirement
or the Excise Tax Avoidance Requirement, we may make such dispositions at times that, from an investment standpoint, are not advantageous.
We
may be required to sell assets in order to satisfy the Diversification Tests. However, our ability to dispose of assets to meet the Diversification
Tests may be limited by the illiquid nature of our portfolio. If we dispose of assets in order to meet the Diversification Tests, we
may make such dispositions at times that, from an investment standpoint, are not advantageous and may result in substantial losses.
We
may invest in partnerships, including qualified publicly traded partnerships, which may result in our being subject to state, local
or foreign income taxes, franchise taxes, or withholding liabilities. To the extent that we invest in entities treated as
partnerships for U.S. federal income tax purposes (other than a “qualified publicly traded partnership”, as defined in the Code), we generally
must include the items of gross income derived by the partnerships for purposes of the 90% Income Test, and the income that is
derived from a partnership (other than a “qualified publicly traded partnership”) will be treated as qualifying income
for purposes of the 90% Income Test only to the extent that such income is attributable to items of income of the partnership which
would be qualifying income if realized by us directly.
In
order to meet the 90% Income Test, we may establish one or more special purpose corporations to hold assets from which we do not anticipate
earning dividend, interest or other qualifying income under the 90% Income Test. Any investments held through a special purpose corporation
would generally be subject to U.S. federal income and other taxes, and therefore we can expect to achieve a reduced after-tax yield on
such investments.
Certain
of our investment practices may be subject to special and complex U.S. federal income tax provisions that may, among other things: (i)
disallow, suspend or otherwise limit the allowance of certain losses or deductions; (ii) convert lower taxed long-term capital gain into
higher taxed short-term capital gain or ordinary income; (iii) convert an ordinary loss or a deduction into a capital loss (the deductibility
of which is more limited); (iv) cause us to recognize income or gain without a corresponding receipt of cash; (v) adversely affect the
time as to when a purchase or sale of securities is deemed to occur; (vi) adversely alter the characterization of certain complex financial
transactions; and (vii) produce income that will not be qualifying income for purposes of the 90% Income Test described above. We will
monitor our transactions and may make certain tax elections in order to mitigate the potential adverse effect of these provisions.
14
TABLE OF CONTENTS
A
portfolio company may face financial difficulty that requires us to work-out, modify or otherwise restructure our investment in the portfolio
company. Any such restructuring may result in unusable capital losses and future non-cash income. Any restructuring may also result in
our recognition of a substantial amount of non-qualifying income for purposes of the 90% Income Test.
Gain
or loss realized by us from the sale or exchange of warrants acquired by us as well as any loss attributable to the lapse of such warrants
generally will be treated as capital gain or loss. The treatment of such gain or loss as long-term or short-term will depend on how long
we held a particular warrant. Upon the exercise of a warrant acquired by us, our adjusted tax basis in the stock purchased under the
warrant will equal the sum of the amount paid for the warrant plus the strike price paid on the exercise of the warrant.
As
a RIC, we are generally limited in our ability to deduct expenses in excess of our “investment company taxable income” (which
is, generally, ordinary income plus the excess of net short-term capital gains over net long-term capital losses). If our expenses in
a given year exceed investment company taxable income, we would experience a net operating loss for that year. However, a RIC is not
permitted to carry forward net operating losses to subsequent years. In addition, expenses can be used only to offset investment company
taxable income, not net capital gain. Due to these limits on the deductibility of expenses, we may, for tax purposes, have aggregate
taxable income or net capital gains for several years that we are required to distribute and that is taxable to our stockholders even
if such income or net capital gains is greater than the aggregate net income we actually earned during those years. Such required distributions
may be made from the Company’s cash assets or by liquidation of investments, if necessary. We may realize gains or losses from
such liquidations. In the event we realize net capital gains from such transactions, a stockholder may receive a larger capital gain
distribution than it would have received in the absence of such transactions.
Our
investment in non-U.S. securities may be subject to non-U.S. income, withholding and other taxes. In that case, our yield on those securities
would be decreased. Stockholders will generally not be entitled to claim a credit or deduction with respect to non-U.S. taxes paid by
us.
If
we purchase shares in a “passive foreign investment company” (a “PFIC”), we may be subject to U.S. federal income
tax on our allocable share of a portion of any “excess distribution” received on, or any gain from the disposition of, such
shares. Additional charges in the nature of interest generally will be imposed on us in respect of deferred taxes arising from any such
excess distribution or gain. This additional tax and interest may apply even if we make a distribution in an amount equal to any “excess
distribution” or gain from the disposition of such shares as a taxable dividend by us to our shareholders. If we invest in a PFIC
and elect to treat the PFIC as a “qualified electing fund” under the Code (a “QEF”), in lieu of the foregoing
requirements, we will be required to include in income each year our proportionate share of the ordinary earnings and net capital gain
of the QEF, even if such income is not distributed by the QEF. Alternatively, we may be able to elect to mark-to-market at the end of
each taxable year its shares in a PFIC; in this case, we will recognize as ordinary income our allocable share of any increase in the
value of such shares, and as ordinary loss our allocable share of any decrease in such value to the extent that any such decrease does
not exceed prior increases included in our income. Under either election, we may be required to recognize in a year income in excess
of distributions from PFICs and proceeds from dispositions of PFIC stock during that year, and such income will nevertheless be subject
to the Annual Distribution Requirement and will be taken into account for purposes of the 4% U.S. federal excise tax.
Failure
to Maintain our Qualification as a RIC
If
we fail to satisfy the 90% Income Test or the Diversification Tests for any taxable year, we may nevertheless continue to qualify as
a RIC for such year if certain relief provisions are applicable (which may, among other things, require us to pay certain U.S. federal
income taxes at corporate rates or to dispose of certain assets).
If
we were unable to qualify for treatment as a RIC and the foregoing relief provisions are not applicable, we would be subject to tax on
all of our taxable income at regular corporate rates, regardless of whether we make any distributions to our stockholders. Distributions
would not be required, and any distributions would be taxable to our stockholders as ordinary dividend income that, subject to certain
limitations, may be eligible for the 20% maximum rate to the extent of our current and accumulated earnings and profits provided certain
holding period and other requirements were met. Subject to certain limitations under the Code, corporate distributees would be eligible
for the dividends-received deduction. Distributions in excess of our current and accumulated earnings and profits would be treated first
as a return of capital that would reduce the stockholder’s adjusted tax basis in its common stock (and correspondingly increase
such stockholder’s gain, or reduce such stockholder’s loss, on disposition of such common stock), and any remaining distributions
would be treated as a capital gain. To requalify as a RIC in a subsequent taxable year, we would be required to satisfy the RIC qualification
requirements for that year and dispose of any earnings and profits from any year in which we failed to qualify as a RIC. Subject to a
limited exception applicable to RICs that qualified as such under Subchapter M of the Code for at least one year prior to disqualification
and that requalify as a RIC no later than the second year following the nonqualifying year, we could be subject to tax on any unrealized
net built-in gains in the assets held by us during the period in which we failed to qualify as a RIC that are recognized within the subsequent
five years, unless we made a special election to pay U.S. federal income tax at corporate rates on such built-in gain at the time of
our requalification as a RIC.
15
TABLE OF CONTENTS
Tax
matters are complicated and the tax consequences to an investor of an investment in our common stock will depend on the facts of his,
her or its particular situation. We encourage investors to consult their own tax advisers regarding the specific consequences of such
an investment, including tax reporting requirements, the applicability of U.S. federal, state, local and foreign tax laws, eligibility
for the benefits of any applicable tax treaty and the effect of any possible changes in the tax laws.
See
“Risk Factors—Risks Related to Our Business and Structure” in Part I, Item 1A of this Form 10-K and “Note 2—Significant
Accounting Policies— U.S. Federal and State Income Taxes ” and “Note 9—Income Taxes” to our Consolidated Financial Statements for the year ended December 31, 2023 for further detail.