RAND Capital (RAND) risk factors, FY2024 10-K

Risks related to our Business and Structure

1. 01We are dependent upon RCM for our future success
2. 02Our financial results will depend on RCM’s skill to manage and deploy capital effectively
3. 03We are subject to risks created by our highly regulated environment
4. 04We are subject to risks created by the valuation of our portfolio investments
5. 05RCM, acting as our investment adviser, operates in a competitive market for investment opportunities
6. 06There are potential conflicts of interest, including the management of other investment funds and accounts by the principals and certain members of the Investment Committee of RCM, which could impact our investment returns
7. 07RCM and its affiliates, including some of our officers and directors, face conflicts of interest caused by compensation arrangements with us, which could result in actions that are not in the best interests of our shareholders
8. 08Our ability to enter into transactions with our affiliates is restricted
9. 09RCM may be paid incentive compensation even if we incur a net loss, and we cannot recover any portion of the incentive fee previously paid
10. 10RCM’s liability is limited under the Investment Management Agreement and the Administration Agreement, and we are required to indemnify RCM against certain liabilities, which may lead RCM to act in a riskier manner on our behalf than it would when acting for its own account
11. 11RCM has the right to resign on 60 days’ written notice, and we may not be able to find a suitable replacement within that time, resulting in a disruption in our operations that could adversely affect our financial condition, business and results of operations
12. 12As a BDC, we may not acquire any assets other than “qualifying assets” unless, at the time of and after giving effect to such acquisition, at least 70% of our total assets are qualifying assets
13. 13The fee structure under the Investment Management Agreement may induce RCM to pursue investments and incur leverage, which may not be in the best interests of the shareholders
14. 14We may need to raise additional capital to grow
15. 15If we are unable to access the capital markets or if we are unable to borrow from financial institutions, we may be unable to grow our business and execute our business strategy fully, and our earnings, if any, could decrease, which could have an adverse effect on the value of our common stock
16. 16We may experience fluctuations in our annual and quarterly results
17. 17We are subject to risks related to corporate social responsibility

Risks related to our Investments

1. 18We have a limited number of companies in our portfolio of investments and may be subjected to greater risk if any of these companies default
2. 19The lack of liquidity in our investments may adversely affect our business
3. 20Economic downturns or recessions may adversely affect our portfolio companies’ financial performance and therefore harm our operating results
4. 21Investing in private companies involves a high degree of risk
5. 22Any unrealized losses we experience in our portfolio may be an indication of future realized losses, which could reduce our income available for distribution
6. 23We may be subject to risks associated with our origination of, or investment in, covenant-lite loans to our portfolio companies
7. 24We provide debt and equity capital primarily to small companies that are not publicly traded, which may present a greater risk of loss than providing debt and equity capital to larger companies
8. 25may be particularly vulnerable to changes in customer preferences and market conditions, depend on a limited number of customers, and face intense competition, including from companies with greater financial, technical, managerial and marketing resources
9. 26We may have limited access to information about privately held companies in which we invest
10. 27Prepayments of our debt investments by our portfolio companies could adversely impact our results of operations and reduce our returns on equity
11. 28Our portfolio companies may incur debt that ranks equal with, or senior to, our investments in such companies
12. 29There may be circumstances where our debt investments could be subordinated to claims of other creditors or we could be subject to lender liability claims
13. 30We generally do not control our portfolio companies
14. 31We typically are a minority shareholder in our portfolio companies in which we have made equity investments
15. 32We may not have the funds or ability to make follow-on investments in our portfolio companies

Risks related to our Indebtedness

1. 33We borrow money, which magnifies the potential for loss on amounts invested and increases the risk of investing with us
2. 34Corresponding return to a shareholder assuming 150% asset coverage as of December 31, 2024 (4)
3. 35Because we often borrow money to make our investments, if there is an increase in market interest rates, our cost of capital under our Credit Facility is likely to also increase, which could reduce our net investment income
4. 36Legislation allows us to incur additional leverage
5. 37Provisions in our Credit Facility or any other future borrowing facility limit our discretion in operating our business

Risks related to our Common Stock

1. 38East exercises significant influence over us in connection with its ownership of our common stock
2. 39Our shares often trade at a discount to our net asset value
3. 40Investing in our shares may be inappropriate for an investor's risk tolerance

Risks related to U.S. Federal Income Tax

1. 41In connection with our RIC election, we may not be able to pay distributions to our shareholders, our distributions may not grow over time and a portion of our distributions may be a return of capital
2. 42In connection with our RIC Election, we will be subject to corporate-level income tax if we are unable to satisfy certain RIC qualification requirements under Subchapter M of the Code or do not satisfy the annual distribution requirement
3. 43The income source requirement will only be satisfied if we obtain at least 90% of our income for each year from dividends, interest, gains from the sale of stock or securities or similar sources
4. 44In connection with our RIC Election, we may have difficulty paying required distributions to shareholders if we recognize income before or without receiving cash representing such income