Chicago Atlantic BDC (LIEN) risk factors, FY2024 10-K

Other

1. 01The following is a summary of the principal risks that you should carefully consider before investing in our common stock and is followed by a more detailed discussion of the material risks related to us and an investment in our common stock
2. 02Our ability to achieve our investment objective depends on our Adviser’s ability to support our investment process; if our Adviser were to lose key personnel or they were to resign, our ability to achieve our investment objective could be significantly harmed
3. 03A failure on our part to maintain qualification as a BDC would significantly reduce our operating flexibility
4. 04We may be unable to invest a significant portion of the net proceeds from our initial public offering, or any follow-on offering of shares of our common stock, on acceptable terms within an attractive time frame
5. 05We may not be able to pay you distributions, and if we are able to pay you distributions, our distributions may not grow over time and/or a portion of our distributions may be a return of capital. We have not established any limit on the extent to which we may use offering proceeds to fund distributions
6. 06Our investments in portfolio companies may be risky, and we could lose all or part of our investments
7. 07The market price of our common stock may fluctuate significantly
8. 08Strict enforcement of U.S. federal laws regarding cannabis would likely result in our portfolio companies’ inability to execute a business plan in the cannabis industry, and could result in the loss of all or part of any of our loans

Risks Relating to Economic Conditions

1. 09Economic recessions or downturns may have a material adverse effect on our business, financial condition and results of operations, and could impair the ability of our portfolio companies to repay debt or pay interest
2. 10Global economic, political and market conditions, including downgrades of the U.S. credit rating, may adversely affect our business, results of operations and financial condition
3. 11The ongoing armed conflicts as a result of the Russian invasion of Ukraine and the conflict in the Middle East may have a material adverse impact on us and our portfolio companies
4. 12Capital markets may experience periods of disruption and instability. Such market conditions may materially and adversely affect debt and equity capital markets in the United States and abroad, which may have a negative impact on our business and operations
5. 13We may be affected by force majeure events (e.g., acts of God, fire, flood, earthquakes, outbreaks of an infectious disease, pandemic or any other serious public health concern, war, terrorism, nationalization of industry and labor strikes)
6. 14General economic and market conditions, including those caused by inflation and a rising interest rate environment, could materially affect the success of our activities and investments
7. 15Any public health emergency, or the threat thereof, and the resulting financial and economic market uncertainty could have a significant adverse impact on us and the fair value of our investments and our portfolio companies

Risks Relating to Our Business and Structure

1. 16We have limited operating history and our Adviser is a recently registered investment adviser under the Advisers Act, with limited history of managing BDCs and limited history of making credit investments in the nascent cannabis industry
2. 17A general increase in interest rates will likely have the effect of increasing our net investment income, which would make it easier for our Adviser to receive Incentive Fees on Income
3. 18Our ability to achieve our investment objective will depend on our Adviser’s ability to support our investment process; if our Adviser were to lose key personnel or they were to resign, our ability to achieve our investment objective could be significantly harmed
4. 19Our business model depends to a significant extent upon strong referral relationships, and the inability of the personnel associated with our Adviser to maintain or develop these relationships, or the failure of these relationships to generate investment opportunities, could adversely affect our business
5. 20We may face increasing competition for investment opportunities, which could reduce returns and result in losses
6. 21Our ability to enter into transactions with our affiliates is restricted
7. 22Regulations governing our operation as a BDC and RIC may affect our ability to raise, and the way in which we raise, additional capital or borrow for investment purposes, which may have a negative effect on our growth
8. 23The Incentive Fee on Capital Gains may be effectively greater than 20%
9. 24Our Board of Directors may change our investment objective, operating policies and strategies without prior notice or stockholder approval, the effects of which may be adverse
10. 25Changes in laws or regulations governing our operations, including laws and regulations governing cannabis, may adversely affect our business or cause us to alter our business strategy
11. 26Our Board of Directors is authorized to reclassify any unissued shares of common stock into one or more classes or series of stock, including preferred stock, which could convey special rights and privileges to its owners
12. 27We are dependent on information systems and systems failures could significantly disrupt our business, which may, in turn, negatively affect our liquidity, financial condition or results of operations
13. 28These events, in turn, could have a material adverse effect on our business, financial condition and operating results and negatively affect the market price of our common stock and our ability to pay dividends to our stockholders
14. 29We may be unable to invest a significant portion of the net proceeds from our IPO, or any follow-on offering of shares of our common stock, on acceptable terms within an attractive time frame
15. 30We may experience fluctuations in our quarterly results
16. 31We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our shares of common stock less attractive to investors
17. 32Our status as an “emerging growth company” under the JOBS Act may make it more difficult to raise capital as and when we need it
18. 33We incur significant costs as a result of being a publicly traded company

Risks Relating to Conflicts of Interests

1. 34Our incentive fee may induce our Adviser to make speculative investments
2. 35Our base management fee may induce our Adviser to incur leverage
3. 36There are significant potential conflicts of interest that could adversely impact our investment returns
4. 37We have adopted a formal code of ethics that governs the conduct of our officers and directors. Our officers and directors also remain subject to the duties imposed by both the 1940 Act and the Maryland General Corporation Law
5. 38Our Adviser and its affiliates may face conflicts of interest with respect to services performed for issuers in which we may invest

Risks Relating to Our Use of Leverage and Credit Facilities

1. 39If we borrow money, the potential for loss on amounts invested in us will be magnified and may increase the risk of investing in us
2. 40Any credit facility we may enter into in the future would likely subject all or significant amounts of our assets to security interests and if we default on our obligations under such a credit facility, we may suffer adverse consequences, including foreclosure on our assets
3. 41The current period of capital markets disruption and economic uncertainty may make it difficult to obtain indebtedness and any failure to do so could have a material adverse effect on our business, financial condition or results of operations

Risks Relating to Distributions

1. 42Because we intend to distribute at least 90% of our taxable income each taxable year to our stockholders in connection with our election to be treated as a RIC, we will continue to need additional capital to finance our growth
2. 43We will be subject to corporate-level U.S federal income tax if we are unable to obtain and maintain our qualification as a RIC under Subchapter M of the Code or do not satisfy the annual distribution requirement
3. 44The 90% gross income test will be satisfied if we earn at least 90% of our gross income for each taxable year from dividends, interest, gains from the sale of stock or securities or similar sources
4. 45We may have difficulty paying our required distributions if we are required to recognize income for U.S. federal income tax purposes before or without receiving cash representing such income
5. 46We may in the future choose to pay distributions partly in our own stock, in which case you may be subject to tax in excess of the cash you receive

Risks Relating to Our Investments

1. 47Our investments in portfolio companies may be risky, and we could lose all or parts of our investments
2. 48generally have less publicly available information about their businesses, operations and financial condition
3. 49To the extent OID and PIK interest constitute a portion of our income, we may be exposed to higher risks with respect to such investments
4. 50If we acquire the securities and obligations of distressed or bankrupt companies, such investments may be subject to significant risks, including lack of income, extraordinary expenses, uncertainty with respect to satisfaction of debt, lower-than-expected investment values or income potentials and resale restrictions
5. 51Our portfolio companies may prepay loans, which may reduce our yields if capital returned cannot be invested in transactions with equal or greater expected yields
6. 52We may be subject to risks arising from revolving credit facilities
7. 53The lack of liquidity in our investments may adversely affect our business
8. 54We may not have the funds or ability to make additional investments in our portfolio companies
9. 55Portfolio companies may be highly leveraged
10. 56Our portfolio companies may incur debt that ranks equally with, or senior to, some of our investments in such companies
11. 57The disposition of our investments may result in contingent liabilities
12. 58Second priority liens on collateral securing loans that we may make to our portfolio companies may be subject to control by senior creditors with first priority liens. If there is a default, the value of the collateral may not be sufficient to repay in full both the first priority creditors and us
13. 59If we make unsecured debt investments, we may lack adequate protection in the event our portfolio companies become distressed or insolvent and will likely experience a lower recovery than more senior debtholders in the event such portfolio companies default on their indebtedness
14. 60We may need to foreclose on loans that are in default, which could result in losses
15. 61In the event a borrower defaults on any of its obligations to us and such debt obligations are equitized, we may not have the ability to hold such equity interests legally under federal law, which may result in additional losses on our loans to such entity
16. 62Certain assets of our borrowers may not be used as collateral or transferred to us due to applicable state laws and regulations governing the cannabis industry, and such restrictions could negatively impact our profitability
17. 63The market value of properties and equipment securing our loans may decrease upon foreclosure if they cannot be used for cannabis related operations
18. 64We generally do not expect to control our portfolio companies
19. 65Defaults by our portfolio companies would harm our operating results
20. 66Our portfolio companies may experience financial distress and our investments in such companies may be restricted
21. 67We are subject to certain risks associated with foreign investments
22. 68In addition, such foreign investments generally do not constitute “qualifying assets” under the 1940 Act
23. 69We may expose ourselves to risks if we engage in hedging transactions
24. 70We may enter into total return swap agreements which expose us to certain risks, including market risk, liquidity risk and other risks similar to those associated with the use of leverage
25. 71A TRS is subject to market risk, liquidity risk and risk of imperfect correlation between the value of the TRS and the assets underlying the TRS. In addition, we may incur certain costs in connection with a TRS that could in the aggregate be significant
26. 72In addition, because a TRS is a form of synthetic leverage, such arrangements are subject to risks similar to those associated with the use of leverage. See “— Risks Related to Our Use of Leverage and Credit Facilities” above
27. 73The health and wellness sector is highly regulated and competitive

Risks Relating to the Cannabis and Hemp Industries

1. 74Risks related to the cannabis industry may directly or indirectly affect us or our portfolio companies engaged in the cannabis industry
2. 75Cannabis, except for hemp, is currently illegal under U.S. federal law and in other jurisdictions, and strict enforcement of federal laws would likely result in our inability to execute our business plan
3. 76Legal status of cannabis, other than hemp
4. 77Legal status of hemp and hemp derivatives
5. 78Our investment opportunities are limited by the current illegality of cannabis under U.S. federal law; changes in the laws, regulations and guidelines that impact the cannabis industry may cause adverse effects on our ability to make investments
6. 79Competitive conditions, consumer tastes, patient requirements and spending patterns in this new industry and market are not well understood and may have unique circumstances that differ from existing industries and markets
7. 80Any potential growth in the cannabis industry continues to be subject to new and changing state and local laws and regulations
8. 81Change in the laws, regulations and guidelines that impact our portfolio companies’ businesses may cause adverse effects on operations
9. 82Portfolio companies operating in a highly regulated business will require significant resources
10. 83Differing regulatory environments may cause adverse effects on our or our portfolio companies’ operations
11. 84U.S. regulations and enforcement relating to hemp-derived CBD products are rapidly evolving
12. 85Marketing constraints under regulatory frameworks may limit a portfolio company’s ability to compete for market share in a manner similar to that of companies in other industries
13. 86Portfolio companies may become involved in regulatory or agency proceedings, investigations and audits
14. 87Research in the United States, Canada and internationally regarding the medical benefits, viability, safety, efficacy and dosing of cannabis or isolated cannabinoids remains in relatively early stages. There have been few clinical trials on the benefits of cannabis or isolated cannabinoids conducted
15. 88In the event we invest in a portfolio company operating in the medical and adult-use cannabis markets, such portfolio company may face competition from unlicensed and unregulated market participants, including illegal dispensaries and black market suppliers selling cannabis and cannabis-based products
16. 89If recreational or medical-use consumers elect to produce cannabis for their own purposes, it could reduce the addressable market for a portfolio company’s products
17. 90The cannabis industry faces significant opposition, and any negative trends may adversely affect the business operations of our portfolio companies
18. 91An initial surge in demand for cannabis may result in supply shortages in the short term, while in the longer term, supply of cannabis could exceed demand, which may cause a fluctuation in revenue
19. 92Consumer preferences may change, and the portfolio company may be unsuccessful in acquiring or retaining consumers and keeping pace with changing market developments
20. 93The cannabis industry is highly competitive and evolving
21. 94The technologies, process and formulations a portfolio company uses may face competition or become obsolete
22. 95There is uncertainty in pricing and demand for cannabis-based products
23. 96A portfolio company may have difficulty in forecasting sales and other business metrics
24. 97Portfolio companies may have difficulty borrowing from or otherwise accessing the service of banks, which may make it difficult to sell products and services
25. 98The development and operation of businesses in the cannabis industry may require additional financing, which may not be available on favorable terms, if at all
26. 99Portfolio companies may be subject to product liability claims
27. 100Due to our involvement in the regulated cannabis industry, we and our borrowers may have a difficult time obtaining or maintaining the various insurance policies that are desired to operate our business, which may expose us to additional risk and financial liabilities
28. 101We, portfolio companies or the cannabis industry more generally may receive unfavorable publicity or become subject to negative consumer or investor perception
29. 102If we invest in a portfolio company in the cannabis industry, the parties with which we do business may perceive that they are exposed to reputational risk as a result of our investment in a cannabis business. Failure to establish or maintain business relationships could have a material adverse effect on us
30. 103Portfolio companies may be subject to regulatory, legal or reputational risk associated with potential misuse of their products by their customers
31. 104A portfolio company may not succeed in promoting and sustaining its brands, which could have an adverse effect on its future growth and business
32. 105Certain events or developments in the cannabis industry more generally may impact our reputation or the reputation of our portfolio companies
33. 106The growing of cannabis is an agricultural process. As such, a portfolio company with operations in the cannabis industry is subject to the risks inherent in the agricultural business, including risks of crop failure presented by weather, insects, plant diseases and similar agricultural risks
34. 107The cannabis industry is subject to transportation disruptions, including those related to an agricultural product
35. 108Many cannabis businesses are subject to significant environmental regulations and risks
36. 109Many cannabis businesses are dependent on key personnel with sufficient experience in the cannabis industry
37. 110There are a limited number of management teams in the cannabis industry that are familiar with U.S. securities laws
38. 111It may be difficult to continuously maintain and retain a competitive talent pool with public company standards
39. 112Fraudulent or illegal activity by employees, contractors and consultants may adversely affect our portfolio companies’ business, financial condition or results of operations
40. 113A portfolio company may be reliant on key inputs and may not be able to realize its cannabis production or capacity targets. The price of production of cannabis will also vary based on a number of factors outside of our portfolio companies’ control
41. 114A portfolio company may be vulnerable to rising energy costs

Risks Relating to Our Common Stock

1. 115Shares of closed-end investment companies, including BDCs, may trade at a discount to their NAV
2. 116Investing in our common stock may involve an above-average degree of risk
3. 117general economic trends and other external factors
4. 118Sales of substantial amounts of our common stock in the public market, including by the Adviser or CALP, may have an adverse effect on the market price of our common stock
5. 119The Adviser and CALP have significant influence over us, including having an approximately 80% vote for matters that require the approval of stockholders, which could limit your ability to influence the outcome of matters submitted to stockholders for a vote
6. 120Certain provisions of our charter and bylaws and actions of our Board of Directors could deter takeover attempts and have an adverse impact on the value of shares of our common stock
7. 121Our common stockholders will bear the expenses associated with our borrowings, and the holders of our debt securities will have certain rights senior to our common stockholders
8. 122Stockholders may incur dilution if we issue securities to subscribe to, convert to or purchase shares of our common stock
9. 123Members of our management team and our board of directors and affiliated companies have been, and may from time to time be, involved in legal proceedings or governmental investigations unrelated to our business

Risks Relating to the Loan Portfolio Acquisition

1. 124Sales of shares of our common stock after the completion of the Loan Portfolio Acquisition may cause the market price of our common stock to decline
2. 125We may be unable to realize the benefits anticipated by the Loan Portfolio Acquisition, including estimated cost savings, or it may take longer than anticipated to achieve such benefits