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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
VENTURE LENDING & LEASING III, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
MARYLAND 77-0534084
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2010 NORTH FIRST STREET, SUITE 310
SAN JOSE, CA 95131
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (408) 436-8577
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SECURITIES TO BE REGISTERED PURSUANT TO 12(b) OF THE ACT: NONE
SECURITIES TO BE REGISTERED PURSUANT TO 12(g) OF THE ACT: COMMON STOCK, $.001 PAR VALUE
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(TITLE OF CLASS)
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INFORMATION REQUIRED IN REGISTRATION STATEMENT
ITEM 1. BUSINESS
(a) General Development of Business
GENERAL. Venture Lending & Leasing III, Inc. ("Fund"), a Maryland
corporation, is a newly organized, non-diversified, closed-end management
investment company electing status as a business development company (a "BDC")
under the Investment Company Act of 1940 (the "1940 Act"). The Fund's investment
objective is to achieve a high total return. The Fund will provide asset-based
financing to, and make equity investments in, carefully selected venture
capital-backed companies; the asset-based financing will be in the form of
secured loans, installment sales contracts or equipment leases. The Fund
generally will receive warrants to acquire equity securities of the companies in
which the Fund invests in connection with the Fund's loans or equipment leases.
Westech Investment Advisors, Inc. ("Westech Advisors" or the "Manager") will
serve as the Fund's Investment Manager. Siguler Guff Advisers, LLC ("Adviser to
the Manager") will serve as adviser to Westech Advisors with respect to Westech
Advisors' administrative duties to the Fund. See Items 5 and 7 for the
information about the Manager and the Adviser to the Manager. The Fund was
incorporated on February 1, 2000. The Fund has not yet commenced operations and
is registering its shares of Common Stock, $.001 par value (the "Shares"),
pursuant to Section 12(g) of the Securities Exchange Act of 1934 (the "Act"), in
compliance with the requirement of Section 54(a)(2) of the 1940 Act. Its
principal office is located at 2010 North First Street, Suite 310, San Jose,
California 95131 and its telephone number is (408) 436-8577.
OWNERSHIP OF THE FUND. Initially, the Fund will be owned entirely by
Venture Lending & Leasing III, LLC, a Maryland limited liability company (the
"Limited Liability Company" or "Company"), to whom the Fund will sell 1,000,000
Shares ("Initial Shares"), at a price of $0.01 per Share in an offering exempt
from the registration requirements of the Securities Act of 1933 ("1933 Act")
pursuant to Section 4(2) and Regulation D ("Regulation D") thereof. The Limited
Liability Company will offer and sell membership interests (the "Interests") to
investors (the "Members") in an offering exempt from the registration
requirements of the 1933 Act pursuant to Regulation D, and will sell its
Interests in that offering solely to "accredited investors", as that term is
defined in Regulation D. To the extent called for by the Fund, the Limited
Liability Company will be obligated to make further contributions to the capital
("LLC Contributions") of the Fund to the extent of the Members' capital
commitment to the Limited Liability Company ("Committed Equity Capital"). The
Limited Liability Company intends to seek up to $250 million in such capital
commitments.
USE OF PROCEEDS. The Fund intends to apply the net proceeds of the sale of
the Initial Shares and of the LLC Contributions to enter into venture lending
and leasing transactions, to a greater extent, and equity investments, to a
lesser extent, with Eligible Portfolio Companies (as defined below) and with
other companies in furtherance of its investment objective and policies.
(b) Financial Information About Industry Segments.
Not applicable; the Fund has not commenced business and has no reserves.
(c) Narrative Description of Business.
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Investment Program.
GENERAL. The Fund's investment objective is to achieve a high total return.
The Fund will provide financing to, and make equity investments in, carefully
selected venture capital-backed companies; such financing generally will be in
the form of secured loans or, to a lesser extent, installment sales contracts or
equipment leases. The Fund generally will receive warrants to acquire equity
securities in connection with its loans or equipment leases. The Fund also may
directly purchase equity securities of venture-backed companies (including
equity securities of companies whose loans are held by the Fund). Such purchases
will not exceed 20% of the capital commitments of the Limited Liability Company.
The Fund will make available significant managerial assistance through its
officers to certain companies whose securities are held in the Fund's portfolio,
as described under "Regulation". There can be no assurance that the Fund will
attain its investment objective.
As a BDC, the Fund must invest at least 70% of its total assets in
qualifying assets ("Qualifying Assets") consisting of (a) interests in "eligible
portfolio companies" as defined in the 1940 Act ("Eligible Portfolio Companies")
and (b) certain other assets including cash and cash equivalents. An Eligible
Portfolio Company generally is a United States company that is not an investment
company and that (i) does not have a class of securities registered on an
exchange or included in the Federal Reserve Board's over-the-counter margin
list; (ii) is actively controlled by a BDC and has an affiliate of a BDC on its
board of directors; or (iii) meets such other criteria as may be established by
the SEC. The Fund may invest up to 30% of its total assets in non-Qualifying
Assets, including interests in companies that are not Eligible Portfolio
Companies (for example, because the company's securities are quoted on the
National Association of Securities Dealers' Automated Quotation System
("NASDAQ")) and Eligible Portfolio Companies as to which the Fund does not offer
to make available significant managerial assistance. The foregoing percentages
will be determined, in the case of financings in which the Fund commits to
provide financing prior to funding the commitment, by the amount of the Fund's
total assets represented by the value of the maximum amount of securities to be
issued by the borrower or lessee to the Fund pursuant to such commitment.
VENTURE LOANS AND LEASES. Venture loans generally will be made pursuant to
a negotiated written loan agreement, and be evidenced by promissory notes
secured by the equipment or other assets of the borrower financed with the
proceeds of such loans, and in some cases secured by a broader lien on
substantially all of the borrower's assets (especially where loan proceeds are
permitted to be used for purposes other than financing equipment). The Fund will
receive periodic payments (usually monthly) of interest and principal, and will
generally receive a final payment in the nature of additional interest in an
amount equal to a percentage of the original loan amount, payable at maturity of
the loan (whether as stated or accelerated). Venture leases will consist of a
lease from the Fund to the lessee of the assets to be financed, with periodic
payments of rent and, in most cases, with a put option to sell the assets to the
lessee at the end of the lease term for a predetermined or formula price. The
interest rate and amortization terms of venture loans, the rental rate and put
provisions of leases, and all other transaction terms will be individually
negotiated between the Fund and each borrower or lessee. If the Fund qualifies
as a regulated investment company ("RIC"), provisions of the Internal Revenue
Code may limit the extent to which the Fund may enter into venture leases,
which, in substance, do not constitute loans for this purpose.
The documentation for loans or leases will include negotiated
representations, warranties, covenants and events of default intended to protect
the Fund customary for commercial transactions of this type and size. Typical
material terms include covenants to maintain the equipment or other assets
underlying the loan or lease and keep it adequately insured, prohibitions
against sale or other disposition of the assets or assignment of the loan or
lease except under specified conditions, and acceleration
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provisions making the remaining outstanding amounts under the loan or lease
immediately due and payable and giving rise to a right to take possession of the
underlying assets upon certain events of default, including failure to make
required payments and failure to comply with specified covenants. There can be
no assurance that the value of the underlying assets at the time of default will
be at least equal to the outstanding amount due under the loan or lease.
Typically, loans or leases will be structured as commitments by the Fund to
provide financing in one or more advances during a specified period of time. The
commitment of the Fund to finance future asset acquisitions or working capital
needs is typically subject to the absence of any default under the loan or lease
and compliance by the borrower or lessee with requirements relating to, among
other things, the type of assets to be acquired. Although the Fund's commitment
generally will provide that the Fund is not required to continue to fund
additional asset purchases or working capital needs if there is a material
adverse change in the borrower's or lessee's financial condition, it is possible
that a borrower's or lessee's financial condition will not be as strong at the
time the Fund funds a commitment.
WARRANTS. The Fund generally will acquire warrants to purchase equity
securities of the borrower or lessee in connection with asset financings. It is
anticipated that such warrants, generally, will be distributed by the Fund to
the Limited Liability Company shortly following their acquisition. The terms of
the warrants, including the expiration date, exercise price and terms of the
equity security for which the warrant may be exercised, will be negotiated
individually with each borrower or lessee, and will likely be affected by the
price and terms of securities issued by the company to its venture capitalists
and other holders. Based upon the Manager's past experience, it is anticipated
that most warrants will be for a term of five to ten years, and will have an
exercise price based upon the price at which the borrower or lessee most
recently issued equity securities or, if a new equity offering is imminent, will
next issue equity securities. The equity securities for which the warrant will
be exercised generally will be common stock (of which there may be one or more
classes) or convertible preferred stock. Substantially all the warrants and
underlying equity securities will be restricted securities under the 1933 Act at
the time of issuance; the Fund generally negotiates registration rights with the
borrower or lessee that may provide (i) "piggyback" registration rights, which
permit the owner of the warrant under certain circumstances to include some or
all of the securities owned by it in a registration statement filed by the
borrower or lessee, or (ii) in very rare circumstances, "demand" registration
rights permitting the owners of the warrant under certain circumstances to
require the borrower or lessee to register the securities under the 1933 Act (in
some cases at the owner's expense). The Fund will generally negotiate "net
issuance" provisions in the warrants, which allow the owner of the warrant to
exercise the warrant without payment of any cash, and thereby receive a net
amount of shares determined by the increase in the value of the issuer's stock
above the exercise price stated in the warrant.
EQUITY SECURITIES. The Fund also may make direct investments in equity
securities having an aggregate cost of up to 10% of the aggregate cost of all
investments of the Fund determined over the life of the Fund. The Manager will
seek to make at least 80% of these investments in companies in which a
professionally managed venture capital fund is the lead investor, with up to 20%
in seed-stage companies or other early stage transactions where the Manager may
take a more active role, including a board of director's position. Such direct
investments generally will be in equity securities of borrowers in the Fund's
portfolio, although equity securities of other companies could also be
purchased. It is anticipated that the Fund would not make loans to companies in
which the Fund has made a direct equity investment until such time as a
professionally managed venture capital firm has made an investment as a lead and
the Manager is no longer in an active role. The Manager expects that the equity
securities generally will be convertible preferred stock, though it is possible
the Fund would invest directly in common stock of venture backed companies. The
Manager also expects the transfer restrictions and registration and other rights
with respect to direct equity investments will be substantially the same as
those applicable to the equity securities underlying the warrants which the Fund
will receive in connection with its loans and
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leases. It is likely that, as in the case of warrants, equity investments
generally will be distributed by the Fund to the Limited Liability Company
shortly following their acquisition, although, in this case, as a result of
certain regulatory requirements of the 1940 Act, the equity investments may be
held by the Fund for a longer period of time prior to their distribution to the
Limited Liability Company.
Investment Policies
For purposes of these investment policies and unless otherwise specified,
references to the percentage of the Fund's total assets "invested" in securities
of a company will be deemed to refer, in the case of financings in which the
Fund commits to provide financing prior to funding the commitment, to the amount
of the Fund's total assets represented by the value of the maximum amount of
securities to be issued by the borrower or lessee to the Fund pursuant to such
commitment; the Fund will not be required to divest securities in its portfolio
or decline to fund an existing commitment because of a subsequent change in the
value of securities the Fund has previously acquired or committed to purchase.
DIVERSIFICATION STANDARDS. The Fund will be classified as a
"non-diversified" closed-end investment company under the 1940 Act. Until the
Fund qualifies as a RIC, it will not be subject to the diversification
requirements applicable to RICs under the Internal Revenue Code. Commencing with
the first capital call, the Manager will seek to increase the diversification of
the Fund's portfolio so as to make it possible to meet the RIC diversification
requirements, as described below. There can be no assurance, however, that the
Fund will be able to meet those requirements.
To qualify as a RIC, the Fund must meet the issuer diversification
standards under the Internal Revenue Code that require that, at the close of
each quarter of the Fund's taxable year, (i) not more than 25% of the market
value of its total assets is invested in the securities of a single issuer, and
(ii) at least 50% of the market value of its total assets is represented by
cash, cash items, government securities, securities of other RICs and other
securities (with each investment in such other securities limited so that not
more than 5% of the market value of the Fund's total assets is invested in the
securities of a single issuer and the Fund does not own more than 10% of the
outstanding voting securities of a single issuer).
The Fund will invest no more than 25% of its total assets in securities of
companies in any single industry. The broad industry categories in which the
Fund anticipates that most of its investments will fall (and within each of
which there may be several "industries" for purposes of the industry
diversification policy) include computer and semiconductor-related,
medical/biotechnology, Internet and communications.
INVESTMENT GUIDELINES. In selecting investments for the Fund's portfolio,
the Manager will endeavor to meet the following investment guidelines, as
established by the Fund's board of directors. The Fund may, however, make
investments that do not conform to one or more of these guidelines when deemed
appropriate by the Manager. Such investments might be made if the Manager
believes that a failure to conform in one area is offset by exceptional strength
in another or is compensated for by a higher yield, favorable warrant issuance
or other attractive transaction terms or features.
STAGE OF DEVELOPMENT GUIDELINES. The Manager will seek to diversify the
Fund's portfolio based on the development stage of the companies in which it
invests (either in the form of loans, leases or equity investments) by limiting
the Fund's aggregate investment in securities of companies that, in its opinion,
are in the start-up stage, to 50% of the Fund's total assets. The Manager will
seek to invest the remainder of the Fund's assets in securities of companies
that, in its opinion, are in the emerging growth stage or mezzanine stage,
except that the Manager may invest up to 5% of the Fund's total assets in
securities of companies that, in its opinion, are in the seed capital stage. The
Fund would invest in seed capital stage companies for strategic purposes, with
the goal of making additional, larger investments if
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the company succeeds. For purposes of these investment guidelines, the stages of
development are defined as follows:
- Seed capital companies represent the earliest stage of
development. These companies have raised relatively modest equity
capital to prove a concept and qualify for start-up capital. Their
activities generally are limited to product development,
scientific and market research, recruiting a management team and
developing a business plan. These companies likely do not have
financial support from either venture capitalists or larger
companies making strategic investments.
- Start-up stage companies are completing or have recently
completed product development and initial marketing, but have not
sold their products commercially. Generally such firms have made
market studies, assembled key management, developed a business
plan and are ready to commence operations.
- Emerging growth stage companies have initiated or are about to
initiate full-scale operations and sales, but may not be showing a
profit.
- Mezzanine stage companies are approaching or have attained break
even or profitability and are continuing to expand. An acquisition
or initial public offering may be imminent.
Classification of a company by stage of development necessarily involves a
subjective judgment by the Manager, and it is possible that other investors or
market analysts would classify a company differently than the classification
used by the Fund.
QUALITY GUIDELINES. The Manager will seek to invest at least 65% of the
Fund's aggregate investments (determined over the life of the Fund) that meet
the following criteria:
Company Criteria
- The company has a minimum capitalization of at least $1 million.
- The company has at least nine months' available cash to fund its
operations (excluding the cost of the financing to be provided by
the Fund) and/or indications from its equity investors that they
will make investments necessary to provide such cash.
- At least two venture capital investors have indicated a current
intention to make additional equity financing available to the
company, or the company has a forecasted positive cash flow.
- The company's business plan contemplates sales of at least $25
million within five years.
- The company has or will consummate equity venture capital
financing prior to funding the assets to be acquired.
Transaction Criteria for Loans and Leases
- The term of the loan or lease does not exceed 60 months, and does
not extend beyond December 31, 2008.
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- At least 75% of the assets to be financed are, in the opinion of
the Manager, critical to the company's day-to-day operations.
- At least 75% of the assets to be financed are moveable and, in the
opinion of the Manager, readily remarketable.
Equity Venture Capital Support Criteria
- At least two of the company's equity venture capital investors
(including the lead investor) have (i) in the opinion of the
Manager, significant venture capital industry experience and (ii)
at least $50 million under management.
SPECIAL SITUATIONS. The Manager may invest up to 10% of the Fund's
aggregate investments determined over the life of the Fund in special situation
investments. Such special situations would include providing bridge financing to
a company which is in the process of raising additional private equity, planning
an initial public offering or is seeking to enter into a business combination
through which it would be acquired. In addition, special situations would
include investments in a "troubled" company undergoing a restructuring or
recapitalization of its existing debt or equity, and making investments in
subordinated debt.
INTERNATIONAL INVESTMENTS. The Manager may invest up to 10% of its
aggregate investments determined over the life of the Fund in United States
based companies that have international operations with assets located in
foreign divisions, subsidiaries or affiliated entities. If reasonably
practicable, such investment would be secured by the assets located in such
foreign divisions in addition to being secured by any assets located in the
United States.
LEVERAGE. The Fund intends to borrow money from and issue debt securities
to banks, insurance companies and other lenders to obtain additional funds to
originate venture loans and leases. Under the 1940 Act, the Fund may not incur
borrowings unless, immediately after the borrowing is incurred, such borrowings
would have "Asset Coverage" of at least 200%. "Asset Coverage" means the ratio
which the value of the Fund's total assets, less all liabilities not represented
by (i) the borrowings and (ii) any other liabilities constituting "senior
securities" under the 1940 Act, bears to the aggregate amount of such borrowings
and senior securities. The practical effect of this limitation is to limit the
Fund's borrowings and other senior securities to 50% of its total assets less
its liabilities other than the borrowings and other senior securities. The 1940
Act also requires that, if the Fund borrows money, provision be made to prohibit
the declaration of any dividend or other distribution on the Shares (other than
a dividend payable in Shares), or the repurchase by the Fund of Shares, if,
after payment of such dividend or repurchase of Shares, the Asset Coverage of
such borrowings would be below 200%. If the Fund is unable to pay dividends or
distributions in the amounts required under the Internal Revenue Code, it might
not be able to qualify as a RIC or, if qualified, to continue to so qualify.
The use of leverage increases investment risk. Lenders are expected to
require that the Fund pledge portfolio assets as collateral for loans, and may
require that the Limited Liability Company provide guarantees or other credit
enhancement. If the Fund is unable to service the borrowings, the Fund may risk
the loss of such pledged assets. Lenders are also expected to require that the
Fund agree to loan covenants limiting the Fund's ability to incur additional
debt or otherwise limiting the Fund's flexibility, and loan agreements may
provide for acceleration of the maturity of the indebtedness if certain
financial tests are not met. To minimize risks associated with lending money at
fixed rates, the Fund may enter into interest rate hedging transactions with
respect to all or any portion of the Fund's investments. There can be no
assurance that such interest rate hedging transactions will be available in
forms acceptable to the Fund. In addition, entering into interest rate hedging
transactions raises costs to the Fund.
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TEMPORARY INVESTMENTS. Pending investment in asset financing transactions
and equity investments, and until distributions to the shareholders are made,
the Fund will invest excess cash in (i) securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities; (ii) repurchase agreements
fully collateralized by U.S. government securities; (iii) short-term
high-quality debt instruments of U.S. corporations; and (iv) pooled investment
funds whose investments are restricted to those described above. All such
investments will mature in one year or less. The U.S. government securities in
which the Fund may invest include U.S. government securities backed by the full
faith and credit of the U.S. government (such as Treasury bills, notes and
bonds) as well as securities backed only by the credit of the issuing agency.
Corporate securities in which the Fund may invest include commercial paper,
bankers' acceptances and certificates of deposit of domestic or foreign issuers.
The Fund also may enter into repurchase agreements that are fully
collateralized by U.S. government securities with banks or recognized securities
dealers in which the Fund purchases a U.S. government security from the
institution and simultaneously agrees to resell it to the seller at an
agreed-upon date and price. The repurchase price is related to an agreed-upon
market rate of interest rather than the coupon of the debt security and, in that
sense, these agreements are analogous to secured loans from the Fund to the
seller. Repurchase agreements carry certain risks not associated with direct
investments in securities, including possible declines in the market value of
the underlying securities and delays and costs to the Fund if the other party to
the transaction defaults.
OTHER INVESTMENT POLICIES. The Fund will not sell securities short,
purchase securities on margin (except to the extent the Fund's permitted
borrowings are deemed to constitute margin purchases), write puts or calls,
purchase or sell commodities or commodity contracts (except interest rate
hedging transactions in connection with the Fund's permitted borrowings) or
purchase or sell real estate. The Fund will not underwrite the securities of
other companies, except to the extent the Fund may be deemed an underwriter upon
the disposition of restricted securities acquired in the ordinary course of the
Fund's business.
The Fund's investment objective, investment policies and investment
guidelines (other than its status as a BDC) are not fundamental policies and may
be changed by the Fund's board of directors at any time without shareholder
approval.
Regulation
The Small Business Incentive Act of 1980 ("1980 Provisions") modified the
provisions of the 1940 Act that are applicable to a closed-end investment
company. After filing its election to be treated as a BDC, a company may not
withdraw its election without first obtaining the approval of holders of a
majority of its outstanding voting securities (as defined under the 1940 Act).
The following is a brief description of the 1940 Act, as modified by the 1980
Provisions, and is qualified in its entirety by reference to the full text of
the 1940 Act and the rules thereunder.
Generally, to be eligible to elect BDC status, a company must engage in the
business of furnishing capital and offering significant managerial assistance to
Eligible Portfolio Companies. More specifically, in order to qualify as a BDC, a
company must (i) be a domestic company; (ii) have registered a class of its
securities, or have filed a registration statement, with the SEC pursuant to
Section 12 of the 1934 Act; (iii) operate for the purpose of investing in the
securities of certain types of Eligible Portfolio Companies; (iv) offer to
extend significant managerial assistance to such Eligible Portfolio Companies;
(v) have a majority of disinterested directors; and (vi) file (or under certain
circumstances, intend to file) a proper notice of election with the SEC. The
National Securities Markets Improvement Act of 1996 relaxed the requirement set
forth in clause (iv), above, in certain respects; in this regard, a BDC is not
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required to offer significant managerial assistance to an issuer (x) which has
total assets of not more than $4,000,000 and capital and surplus of not less
than $2,000,000 or (y) with respect to any other issuer that meets such criteria
as the SEC otherwise may provide.
"Making available significant managerial assistance" is defined under the
1940 Act, in relevant part, as (i) an arrangement whereby the BDC, through its
officers, directors, employees or general partners, offers to provide and, if
accepted, does provide, significant guidance and counsel concerning the
management, operations or business objectives of a portfolio company; or (ii)
the exercise by a BDC of a controlling influence over the management or polices
of the portfolio company by the BDC acting individually or as part of a group
acting together which controls the portfolio company. The officers of the Fund,
on behalf of the Fund, and the officers of the Manager, on behalf of the Limited
Liability Company, intend to offer to provide managerial assistance, including
advice on equipment acquisition and financing, cash flow and expense management,
general financing opportunities, acquisition opportunities and opportunities to
access the public securities markets, to the great majority of companies to whom
the Fund provides venture loans or leases. In some instances, officers of the
Fund or the Manager might serve on the board of directors of borrowers or
lessees or of companies in which it makes an equity investment. As noted above,
the officers of the Manager, on behalf of the Limited Liability Company, will be
providing such managerial assistance in order to satisfy certain requirements of
the Employee Retirement Income Security Act of 1974.
An "eligible portfolio company" generally is a United States company that
is not an investment company and that either (i) does not have a class of
securities registered on an exchange or included in the Federal Reserve Board's
over-the-counter margin list; (ii) is actively controlled by a BDC and has an
affiliate of a BDC on its board of directors; or (iii) meets such other criteria
as may be established by the SEC. Control under the 1940 Act is presumed to
exist where a BDC owns more than 25% of the outstanding voting securities of the
eligible portfolio company.
The 1940 Act prohibits or restricts BDCs from investing in certain types of
companies, such as brokerage firms, insurance companies, investment banking
firms, and investment companies. Moreover, the 1940 Act limits the type of
assets that BDCs may acquire to certain prescribed Qualifying Assets and certain
assets necessary for its operations (such as office furniture, equipment, and
facilities) if, at the time of acquisition, less than 70% of the value of BDC's
assets consist of Qualifying Assets. Qualifying Assets include: (i) privately
acquired securities of companies that were Eligible Portfolio Companies at the
time such BDC acquired their securities; (ii) securities of bankrupt or
insolvent companies; (iii) securities of Eligible Portfolio Companies controlled
by a BDC; (iv) securities received in exchange for or distributed with respect
to any of the foregoing; and (v) cash items, government securities and
high-quality short-term debt. The 1940 Act also places restrictions on the
nature of transactions in which, and the persons from whom, securities can be
purchased in order for the securities to be considered Qualifying Assets. Such
restrictions include limiting purchases to transactions not involving a public
offering and the requirement that securities be acquired directly from either
the portfolio company or its officers, directors or affiliates.
The Fund, as a BDC, may sell its securities at a price that is below its
net asset value per share provided a majority of the Fund's disinterested
directors has determined that such sale would be in the best interests of the
Fund and its shareholders and upon the approval by the holders of a majority of
its outstanding voting securities, including a majority of the voting securities
held by non-affiliated persons, of such policy or practice within one year of
such sale. A majority of the disinterested directors also must determine in good
faith, in consultation with the underwriters of the offering if the offering is
underwritten, that the price of the securities being sold is not less than a
price which closely approximates market value of the securities, less any
distribution discounts or commissions. As defined in the 1940 Act, the term
"majority of the outstanding voting securities" of the Fund means the vote of
(i) 67% or
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more of the Fund's Shares present at a meeting, if the holders of more than 50%
of the outstanding Shares are present or represented by proxy, or (ii) more than
50% of the Fund's outstanding Shares, whichever is less.
Many of the transactions involving a company and its affiliates (as well as
affiliates of those affiliates) which were prohibited without the prior approval
of the Securities and Exchange Commission ("SEC") under the 1940 Act prior to
its amendment by the 1980 Provisions are permissible for BDCs, including the
Fund, upon the prior approval of a majority of the Fund's disinterested
directors and a majority of the directors having no financial interest in the
transactions. Certain transactions, however, involving certain persons related
to the Fund, including its directors, officers, the Manager and the Adviser to
the Manager and the Limited Liability Company, may still require the prior
approval of the SEC. In general, (i) any person who owns, controls, or holds
power to vote, more than 5% of the Fund's outstanding Shares (ii) any director,
executive officer, or general partner of that person; and (iii) any person who
directly or indirectly controls, is controlled by, or is under common control
with, that person, must obtain the prior approval of a majority of the Fund's
disinterested directors, and, in some situations, the prior approval of the SEC,
before engaging in certain transactions with the Fund or any company controlled
by the Fund. The 1940 Act generally does not restrict transactions between the
Fund and its Eligible Portfolio Companies. While a BDC may change the nature of
its business so as to cease being a BDC (and in connection therewith withdraw
its election to be treated as a BDC) only if authorized to do so by a majority
vote (as defined by the 1940 Act) of its outstanding voting securities,
shareholder approval of changes in other fundamental investment policies of a
BDC is not required (in contrast to the general 1940 Act requirement, which
requires shareholder approval for a change in any fundamental investment
policy).
Taxation
The following is a general summary of certain of the United States federal
income tax laws relating to the Fund. This discussion is based on the Internal
Revenue Code, regulations thereunder, published rulings, procedures and
announcements and court decisions as of the date hereof. The tax law, as well as
the implementation thereof, is subject to change, and any such change might
interfere with the Fund's ability to qualify as a RIC or, if the Fund so
qualifies, to maintain such qualification. This discussion does not purport to
deal with all of the United States federal income tax consequences applicable to
the Fund or to all categories of investors, some of whom may be subject to
special rules. In addition, it does not address state, local, foreign or other
taxes to which the Fund or its investors may be subject, or any proposed changes
in applicable tax laws. Investors should consult their tax advisers with respect
to an investment in Fund Shares.
TAXATION OF THE FUND AS AN ORDINARY CORPORATION.
It is anticipated that, commencing with the second year of its investment
operations, the Fund will seek to meet the requirements, including
diversification requirements, to qualify for the special pass-through status
available to RICs under the Internal Revenue Code, and thus to be relieved of
federal income tax on that part of its net investment income and realized
capital gains that it distributes to shareholders. Unless and until the Fund
meets these requirements, it will be taxed as an ordinary corporation on its
taxable income for that year (even if that income is distributed to
shareholders) and all distributions out of its earnings and profits will be
taxable to shareholders as dividends; thus, such income will be subject to a
double layer of tax (although corporate shareholders may be entitled to a
dividends-received deduction). There is no assurance that the Fund will meet the
requirements to qualify as a RIC.
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TAXATION OF THE FUND AS A RIC
Consequences of Converting From an Ordinary Corporation to a RIC. In order
to qualify as a RIC, the Fund must, at the end of the first year in which it so
qualifies, have no accumulated earnings and profits from years in which it was
not taxed as a RIC. To meet this requirement, the Fund must, before the end of
the first year in which it qualifies as a RIC, distribute as dividends all of
its accumulated earnings and profits. In addition to the foregoing, pursuant to
temporary Treasury Regulations, the Fund must either (i) elect to recognize gain
on the disposition of any asset during the ten year period (the "Recognition
Period") beginning on the first day of the first taxable year for which the Fund
qualifies as a RIC that is held by the Fund as of the beginning of such
Recognition Period, to the extent of the excess of (a) the fair market value of
such asset as of the beginning of such Recognition Period over (b) the Fund's
adjusted tax basis in such asset as of the beginning of such Recognition Period
(such excess, hereinafter, "built-in gain"), taxable at the highest regular
corporate rates or (ii) immediately recognize and pay tax on any such built-in
gain with respect to any of its portfolio holdings and, as described above,
distribute the earnings and profits from such deemed sales. As a RIC, the Fund
would not be able to use any net operating loss carryforwards relating to
periods prior to the first year in which the Fund qualifies as a RIC.
RIC Qualification Requirements. To qualify as a RIC, the Fund must
distribute to its shareholders for each taxable year at least 90% of its
investment company taxable income (consisting generally of net investment income
and net short-term capital gain) ("Distribution Requirement") and must meet
several additional requirements. It should be noted that a distribution of
warrants or equity investments to the Limited Liability Company will be treated
as a sale by the Fund of such assets with the excess of the fair market value of
those assets over their tax basis being the amount of the income or gain to the
Fund. Among the requirements are the following: (a) the Fund must derive at
least 90% of its gross income each taxable year from dividends, interest,
payments with respect to loans of securities and gains from the sale or other
disposition of securities or other income derived with respect to its business
of investing in securities ("Income Requirement"); (b) the Fund must diversify
its assets so that, at the close of each quarter of the Fund's taxable year, (i)
not more than 25% of the market value of its total assets is invested in the
securities of a single issuer, or in the securities of two or more issuers that
the Fund controls and that are engaged in the same or similar trades or
businesses or related trades or businesses, and (ii) at least 50% of the market
value of its total assets is represented by cash, cash items, government
securities, securities of other RICs and other securities (with each investment
in such other securities limited so that not more than 5% of the market value of
the Fund's total assets is invested in the securities of a single issuer and the
Fund does not own more than 10% of the outstanding voting securities of a single
issuer) ("Diversification Requirement"); and (c) the Fund must file an election
to be treated as a RIC. If, after initially qualifying as a RIC, the Fund fails
to qualify for treatment as a RIC for a taxable year, it would be taxed as an
ordinary corporation on its taxable income for that year and all distributions
out of its earnings and profits would be taxable to shareholders as dividends
(that is, ordinary income). In such a case, there could be substantial tax and
other costs associated with re-qualifying as a RIC. In this regard, except as
otherwise noted in this paragraph, the tax consequences described above under
the caption "Consequences of Converting from an Ordinary Corporation to a RIC"
would apply. Under the final Treasury regulations expected to be adopted,
however, the foregoing should not apply upon requalification so long as the Fund
had qualified as a RIC for at least one taxable year period prior to such
disqualification, and had remained disqualified for only one taxable year.
The Fund will be subject to a nondeductible 4% excise tax ("Excise Tax") to
the extent it fails to distribute by the end of any calendar year at least 98%
of its ordinary income for such calendar year and 98% of its capital gain net
income for the one-year period ending on October 31 of such calendar year, plus
certain other amounts. For these purposes, any taxable income retained by the
Fund, and on which it pays federal income tax, will be treated as having been
distributed.
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<PAGE> 12
The Fund currently intends to distribute in each year for which it
qualifies as a RIC substantially all of its net investment income and capital
gain net income so as to not be subject to federal income or excise taxes.
Effect of Certain Investments and Investment Practices. The Fund's
activities generally will be unlike the typical activities engaged in by most
investment companies that seek to qualify as RICs for federal income tax
purposes. Certain aspects of these activities may at times make it more
difficult for the Fund to satisfy the requirements for qualifying as a RIC than
is true for other investment companies. For example, because the timing of
borrowings under the Fund's loan or lease commitments will be primarily
controlled by the borrower or lessee, it is possible that, due to borrowings
being made under some commitments at a faster pace than others, the Fund might
experience difficulty in meeting the Diversification Requirement as of the close
of a fiscal quarter. This difficulty might be exacerbated during the early
period of the Fund's existence, when the Fund will own venture loans or leases
to, and have outstanding financing commitments with respect to, fewer borrowers
or lessees than will be the case for later periods. If the Fund does not meet
the Diversification Requirement as of the close of any fiscal quarter by reason
of a discrepancy existing immediately after the acquisition of any security or
other property which is wholly or partly the result of such acquisition during
such quarter, it generally will not lose its status as a RIC for such quarter if
such discrepancy is eliminated within 30 days after the close of such quarter
and in such cases it shall be considered to have met such requirements at the
close of such quarter. There can be no assurance, however, that the Fund will be
able to eliminate a discrepancy within the 30 day period.
The Fund's ability to enter into venture leasing transactions will be
limited by the Fund's intention to qualify as a RIC because, depending on the
terms of the leases, they may fail to qualify as assets either satisfying the
Diversification Requirement or producing income that would satisfy the Income
Requirement. Given the complexity of this area and the factual nature of the
determination, the Fund can offer no assurance or guarantee as to how each
venture lease will be characterized.
To the extent that the terms of venture loans provide for the receipt by
the Fund of additional interest at the end of the loan term or the terms of
venture leases provide that the lessee must purchase the asset at the end of the
lease term ("residual income"), the Fund would be required to accrue such
residual income over the life of the loan or lease, and to include such accrued
income in its gross income for each taxable year even if it receives no portion
of such residual income in that year. Thus, in order to meet the Distribution
Requirement and avoid payment of income taxes or the Excise Tax on undistributed
income, the Fund may be required in a particular year to distribute as a
dividend an amount in excess of the total amount of income it actually receives.
Those distributions will be made from the Fund's cash assets, from amounts
received through amortization of loans or leases or from borrowed funds.
TAXATION OF THE FUND'S SHAREHOLDERS IF THE FUND QUALIFIES AS A RIC
General. Dividends paid to shareholders that are attributable to the Fund's
net investment income will be taxable to shareholders (and, therefore, the
Members of the Limited Liability Company) as ordinary income. Capital gain
distributions are taxable as long-term capital gains regardless of how long the
shareholder has held the Shares or the Member has held its Interest in the
Limited Liability Company. It is not anticipated that a significant portion of
the Fund's dividends will qualify for the dividends-received deduction for
corporate Members of the Limited Liability Company in respect of their
distributive share of Fund dividends.
Distributions are generally taxable to shareholders at the time the
distribution is received. Any distribution, however, declared by the Fund in
October, November or December, made payable to
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<PAGE> 13
shareholders of record in such a month and paid the following January, is deemed
to have been paid by the Fund and received by shareholders (and, therefore, the
Limited Liability Company) on December 31 of the year declared. This will
prevent the application of the Excise Tax, discussed above, to the Fund as a
result of the delay in the payment of the dividends.
If, for any calendar year, the Fund's total distributions exceed its net
investment income and net capital gains, the excess will generally be considered
a tax-free return of capital to a shareholder (and, therefore, the Limited
Liability Company) to the extent of the shareholder's adjusted tax basis in its
shares and then as capital gain. The amount treated as tax-free return of
capital will reduce the adjusted tax basis of a shareholder's Shares, thereby
increasing the potential gain or reducing the potential loss on the sale of the
Shares.
In general, upon the sale or other disposition of Shares of the Fund by the
Limited Liability Company or a Member of its Interest in the Limited Liability
Company, the Limited Liability Company or Member will recognize a gain or loss
equal to the difference between the amount realized on the sale and the seller's
adjusted tax basis in the Shares or Interest. Any loss realized will be
disallowed to the extent the seller has acquired (or entered into a contract to
acquire) substantially identical Shares within a period beginning 30 days before
the disposition of Shares and ending 30 days after the disposition. In such
case, the basis of the Shares acquired will be adjusted to reflect the
disallowed loss. Gain or loss realized upon a sale of Shares or Interest
generally will be treated as a capital gain or loss. The gain or loss will be a
long-term capital gain or loss if the Shares or Interest were held for more than
one year. In addition, if the Shares sold by a shareholder (and, therefore, the
Limited Liability Company) were not held for more than six months, any loss on
the sale will be treated as long-term capital loss to the extent of any capital
gain dividend received by the shareholder with respect to such Shares; this rule
will not apply to a sale by a Member of its Interest.
The Fund (as well as the Limited Liability Company) is required to withhold
31% of reportable payments (which may include dividends and capital gain
distributions) to individuals and certain other noncorporate shareholders who do
not provide the Fund (or the Limited Liability Company, as the case may be )
with a correct taxpayer identification number or who otherwise are subject to
backup withholding. The certification of a Member's taxpayer identification
number will be included in the Subscription Agreement to be provided with the
Private Offering Memorandum for the Limited Liability Company.
Federal withholding taxes at a rate of 30% (or a lesser treaty rate) may
apply to distributions to shareholders of the Fund and Members of the Limited
Liability Company who are nonresident aliens or foreign partnerships, trusts or
corporations. The rules governing United States federal income taxation of
foreign shareholders and members of a limited liability company or partners of a
partnership are complex, and prospective non-U.S. owners should consult with
their own tax advisors to determine the impact of federal, state and local
income tax laws with regard to an investment in Shares and Interests, including
any reporting requirements.
Individuals and certain other persons who are Members of the Limited
Liability Company will be required to include in their gross income an amount of
certain Fund expenses relating to the production of gross income that are
allocable to the Limited Liability Company. These Members, therefore, will be
deemed to receive gross income from the Fund in excess of the distributions they
actually receive. Such allocated expenses may be deductible by an individual
Member as a miscellaneous itemized deduction, subject to the limitation on
miscellaneous itemized deductions not exceeding 2% of adjusted gross income.
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<PAGE> 14
The Fund will notify its shareholders (and, therefore, the Limited
Liability Company) following the end of each calendar year of the amounts of
dividends and capital gain distributions paid or deemed paid during the year.
Transactions Involving "Qualified Small Business Stock". Section 1202 of
the Code permits a non-corporate taxpayer to exclude, for federal income tax
purposes, 50% of any gain (subject to certain limitations) realized upon the
sale or exchange of "qualified small business stock" held for more than five
years. Generally, qualified small business stock is stock of a small business
corporation acquired directly from the issuing corporation, which must (a) at
the time of issuance and immediately thereafter have assets of not more than $50
million and (b) throughout substantially all of the holder's holding period for
the stock be actively engaged in the conduct of a trade or business not excluded
by the Code. If either the Fund or the Company acquires qualified small business
stock, holds such stock for five years and disposes of such stock at a profit,
then a non-corporate Member who held his or her interest in the Limited
Liability Company at the time the qualified small business stock was acquired
and at all times thereafter until such stock is disposed of would be entitled to
exclude from his or her taxable income 50% of his or her share of such gain.
Note, however, that 42% (28% for stock, the holding period for which begins
after December 31, 2000) of any amount so excluded would be treated as a
preference item for alternative minimum tax purposes. Comparable rules apply
under the qualified small business stock "rollover" provisions of Section 1045
of the Code, under which gain otherwise reportable by individual Members with
respect to sales by either the Fund or the Company of qualified small business
stock held for more than six months can be deferred if the sales proceeds are
reinvested by the Fund or the Company (or if a Member reinvests an amount equal
to his or her share of such sales proceeds) within 60 days in other qualified
small business stock.
Tax-Exempt Investors. Qualified plans, Individual Retirement Accounts and
investors exempt from taxation under Section 501(c)(3) of the Internal Revenue
Code (collectively, "Tax-Exempt Entities") are generally exempt from taxation
except to the extent that they have unrelated business taxable income ("UBTI")
(determined in accordance with Internal Revenue Code Sections 511-514). If the
Fund qualifies as a RIC, it is likely that a Tax-Exempt Entity's distributive
share from the Limited Liability Company of dividends from the Fund will not be
considered UBTI and, therefore, will be exempt from federal income tax even if
the Fund borrows to acquire its investment assets. Under Section 512(b) of the
Internal Revenue Code, UBTI does not include dividends received by a Tax-Exempt
Entity. As a general rule, the income tax provisions relating to corporations
apply to RICs, unless Subchapter M of the Internal Revenue Code provides
otherwise, and thus Section 512(b) should apply to exclude from UBTI dividends
paid by a RIC to a Tax-Exempt Entity. This conclusion is also supported by
Revenue Ruling 66-106, which applies Section 512(b) to exclude from UBTI
dividends paid to the tax-exempt shareholders of a real estate investment trust
("REIT"), a conduit entity that invests in real estate and is substantially
similar to a RIC for tax purposes. If a Tax-Exempt Entity, however, borrows
money to purchase its Interest in the Limited Liability Company, a portion of
its income from the Fund will constitute UBTI pursuant to the "debt-financed
property" rules.
Social clubs, voluntary employee benefit associates, supplemental
unemployment benefit trusts, and qualified group legal service organizations
that are exempt from taxation under Sections 501(c)(7), (9), (17) and (20),
respectively, of the Internal Revenue Code, are subject to different UBTI rules,
which generally will require them to characterize distributions as UBTI.
Distributions to a charitable organization that is a private foundation should
constitute investment income for purposes of the excise tax on net investment
income of private foundations imposed by Section 4940 of the Internal Revenue
Code.
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<PAGE> 15
Risk Factors
GENERAL
No Operating History; Reliance on Management. The Fund is newly organized
and has not yet entered into any financing transactions or identified any
specific transactions it will finance. The Fund could require substantial time
to become fully invested. Pending investment, all cash that the Fund has
received pursuant to capital calls will be committed to short-term, high grade
investments that present relatively low investment risk but provide a
correspondingly lower return.
The Fund will be wholly dependent for the selection, structuring, closing
and monitoring of its investments on the diligence and skill of its Manager,
acting under the supervision of the Fund's board of directors. Although the
principals of Westech Advisors have over 30 years' of combined experience in
investing in venture lending and leasing transactions, there can be no assurance
that the Fund will attain its investment objective. Ronald W. Swenson and
Salvador O. Gutierrez, the senior officers of Westech Advisors, will have
primary responsibility for the selection of the companies in which the Fund will
invest, the negotiation of the terms of such investments and the monitoring of
such investments after they are made. Although Messrs. Swenson and Gutierrez
intend to devote such time as is necessary to the affairs of the Fund, they are
not required to devote full time to the management of the Fund. Furthermore,
there can be no assurance that either officer will remain associated with
Westech Advisors or that, if either officer ceased to be associated with Westech
Advisors, Westech Advisors would be able to find a qualified person or persons
to fill their positions.
Illiquid Investment. The Shares will not be registered under the Securities
Laws and are subject to substantial restrictions on transfer. There will be no
trading market for the Shares, and shareholders are likely to be required to
hold their Shares until the final liquidation of the Fund. An investment in the
Fund is, therefore, illiquid and should be considered only by investors
financially able to maintain this investment for the long term.
Long-Term Investment. After the fourth anniversary following the first
closing of this offering, the Fund will cease to make new equity investments as
well as investments in venture loans or leases (except pursuant to commitments
made before such fourth anniversary) and will distribute the proceeds of
repayment, prepayment or sale of its investments, net of any principal
repayments on borrowings, expenses or other obligations of the Fund, amounts
paid on exercise of warrants and certain other amounts. The Fund's Articles of
Incorporation provide that, on December 31, 2008, the Fund automatically will be
dissolved without any action by its shareholders. From and after such
dissolution, the Fund's activities will be limited to the winding-up of its
affairs, the liquidation of its remaining assets and the distribution of the net
proceeds thereof to its shareholders. Although the Fund generally would not
invest in any loan or lease with a maturity date later than December 31, 2008,
it is possible that, due to a default by a borrower or lessee or a transaction
restructuring due to a borrower's or lessee's financial difficulties, the Fund
will not fully realize on a loan or lease by the original maturity date.
Furthermore, the Fund may not be able to sell warrants it receives from
borrowers or lessees, or the equity securities it receives upon exercise of such
warrants, to the extent those investments were retained by the Fund (and not
distributed earlier to its shareholders) for a significant period of time due to
legal or contractual restrictions on resale or the absence of a liquid secondary
market. As a result, the liquidation process might not be completed for a
significant period after the Fund's dissolution. In addition, it is possible
that, if certain of the Fund's assets are not liquidated within a reasonable
time after the Fund's dissolution, the Fund may elect to make a distribution in
kind of all or part of such assets to its shareholders. In such case, the
shareholders would bear any expenses attendant to the liquidation of such
assets.
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<PAGE> 16
Competition. Other entities and individuals compete for investments similar
to those proposed to be made by the Fund, some of whom, with respect to
investments in the form of loans and leases, and many of whom, with respect to
the equity investments, may have greater resources than the Fund and, in either
case, could obtain investments on better terms than are offered to the Fund.
Furthermore, the Fund's need to comply with provisions of the 1940 Act
pertaining to BDCs and, if the Fund qualifies as a RIC, provisions of the
Internal Revenue Code pertaining to RICs might restrict the Fund's flexibility
as compared with its competitors. The need to compete for investment
opportunities may make it necessary for the Fund to offer borrowers or lessees
or companies in which it makes equity investments more attractive terms than
otherwise might be the case.
Leverage. The Fund's ability to borrow money to make additional loans or
leases creates leverage. Although the Fund intends to leverage its loans and
leases, it does not intend to do so with respect to its equity investments.
While leverage can enhance the return on invested capital, if the return on the
investments purchased with borrowed funds fails to cover the fixed cost of the
borrowings, or if the return is negative, the value of the Fund's net assets
will decline more rapidly than would be the case in the absence of leverage. For
this reason, leverage is considered a speculative investment technique. The Fund
will pledge portfolio assets as collateral for borrowings, although such pledge
likely would not include equity investments, if the Fund is unable to service
its borrowings, because of the failure of the obligors on the Fund's loans or
leases to make debt service or lease payments, or due to other factors, the Fund
may risk the loss of the pledged assets. In addition, if the interest rates on
floating or variable rate borrowings increase at a time that the Fund holds
fixed rate loans or leases, or holds variable rate loans or leases whose
interest rates do not increase as much as the rate on Fund's borrowings, the
Fund's income and yield will be adversely affected. If the income from assets
purchased with borrowed funds fails to cover the cost of the borrowing, the Fund
would be in a better position had it not borrowed at all. To minimize risks
associated with lending money at fixed rates, the Fund may enter into interest
rate hedging transactions with respect to all or any portion of the Fund's
investments. There can be no assurance that such interest rate hedging
transactions will be available on terms acceptable to the Fund. In addition,
entering into interest rate hedging transactions raises costs to the Fund.
Conversely, the ability of the Fund to attain its investment objective
depends in part on its ability to borrow money on favorable terms, and there can
be no assurance that the Fund will be able to do so. Lenders may require that
the Fund agree to loan covenants that could restrict its flexibility in the
future. In order to repay its indebtedness in a timely fashion, the Fund may be
required to dispose or seek prepayment of assets at a time it would otherwise
not do so. Under the 1940 Act, if the Fund borrows money, provision must be made
to prohibit the declaration of any dividend or other distribution on the Shares
(other than a dividend payable in Shares), or the repurchase by the Fund of
Shares if, after payment of such dividend or repurchase of Shares, the value of
the Fund's total assets, less all liabilities not represented by (i) the
borrowings and (ii) any other liabilities constituting "senior securities" under
the 1940 Act, is less than 200% of the aggregate amount of such borrowings and
senior securities. If the Fund is unable to pay dividends or distributions in
the amounts required under the Internal Revenue Code, it might not be able to
qualify for treatment as a RIC or, if qualified, to continue to so qualify.
Regulation. The Fund has elected to be treated as a BDC under the Small
Business Incentive Act of 1980, which modified the 1940 Act. Although the 1980
Provisions exempt BDCs from registration under the 1940 Act and relieve such
companies from compliance with many provisions of the 1940 Act, the 1980
Provisions impose on BDCs greater restrictions in some respects on permitted
types of investments. Moreover, the applicable provisions of the 1940 Act
continue to impose numerous restrictions on the activities of the Fund,
including restrictions on leverage and on the nature of its investments. While
the Fund is not aware of any judicial rulings under, and is aware of only a few
administrative interpretations of, the 1980 Provisions, there can be no
assurance that the 1980 Provisions
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<PAGE> 17
will be interpreted or administratively implemented in a manner consistent with
the Fund's objectives or manner of operation.
Litigation. The Fund could be subject to litigation by borrowers or
lessees, based on theories of "lender liability" or otherwise, in connection
with the exercise of its rights as secured lender or lessor. The defense of such
a lawsuit, even if ultimately determined to be without merit, could be costly
and time-consuming.
Tax Status. The Fund must meet a number of requirements, described under
"Federal Income Taxation", to qualify as a RIC and, if qualified, to continue to
so qualify. For example, the Fund must meet specified asset diversification
standards under the Internal Revenue Code which might be difficult to meet if
the borrowers or lessees under some loans or leases drew down their committed
financing at a faster rate than other borrowers or lessees, particularly during
the early periods of the Fund's operations. If the Fund experiences difficulty
in meeting the diversification requirement for any fiscal quarter, it might
accelerate capital calls or borrowings in order to increase the portion of the
Fund's total assets represented by cash, cash items and U.S. government
securities as of the close of the following fiscal quarter and thus attempt to
meet the diversification requirement. However, the Fund would incur additional
interest and other expenses in connection with any such accelerated borrowings,
and increased investments by the Fund in cash, cash items and U.S. government
securities (whether the funds to make such investments are derived from called
equity capital or from accelerated borrowings) are likely to reduce the Fund's
return. Furthermore, there can be no assurance that the Fund would be able to
meet the diversification requirements through such actions. Failure to qualify
as a RIC would deny the Fund pass-through status and, in a year in which the
Fund has taxable income, would have a significant adverse effect on the return
of the Fund.
When the Fund elects to convert its status from that of an ordinary, or C,
corporation to that of a RIC, it must choose either to (i) pay tax whenever an
asset is sold during the ten years following the conversion on, at most, the
amount of gain which would have been realized had the property been sold on the
conversion date, or (ii) treat the entire amount of "built-in gain" as income at
the time of conversion.
Allocation of Expenses. If the Fund qualifies as a RIC, individuals and
certain other persons who are Members of the Limited Liability Company will be
required to include in their gross income an amount of certain Fund expenses
relating to the production of gross income that are allocable to the Limited
Liability Company. These Members, therefore, will be deemed to receive gross
income from the Fund in excess of the distributions they actually receive. Such
allocated expenses may be deductible by an individual Member as a miscellaneous
itemized deduction, subject to the limitation on miscellaneous itemized
deductions not exceeding 2% of adjusted gross income.
INVESTMENT RISKS
Credit Risks. The companies with which the Fund will enter into financing
transactions in most cases will not at that time have achieved profitability,
may experience substantial fluctuations in their operating results or, in some
cases, will not have significant operating revenues. The ability of these
companies to meet their obligations to the Fund, therefore, will depend to a
significant extent on the willingness of equity venture capital investors to
provide additional equity financing to the borrower or lessee, which in turn
will depend on the borrower's or lessee's success in meeting its business plan,
the market climate for venture capital investments generally and many other
factors. The companies for which the Fund will provide financing will frequently
be engaged in the development of new products or technologies, and the success
of these efforts, or the ability of the companies to successfully manufacture or
market products or technologies developed, cannot be assured. These companies
frequently face intense competition, including competition from companies with
greater resources, and may face risks of
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<PAGE> 18
product or technological obsolescence or rapidly changing regulatory
environments which could adversely affect their prospects. The success of such
companies often depend on the management talents and efforts of one person or
small group of persons whose death, disability or resignation would adversely
affect their businesses.
Remedies Upon Default. In the event of a default on a loan or lease, the
Fund's available remedies would include legal action against the borrower or
lessee and foreclosure or repossession of collateral given by the borrower or
lessee, including the equipment or other assets being financed. The Fund could
experience significant delays in exercising its rights as a secured lender or
lessor and might incur substantial costs in taking possession of the underlying
assets and taking other steps to protect its investment. Furthermore, the
requirements under the laws of the various states for creating and perfecting a
security interest in the assets underlying a loan or lease are technical and
complex, and even minor deviations from the required procedures could impair the
Fund's security interest in the underlying assets. Venture Lending & Leasing,
Inc. II ("VLLI II") is a BDC organized by Westech Advisors and Siguler Guff
Advisers, LLC, and engaged in the same business as the Fund. The Fund and VLLI
II will enter into intercreditor agreements which could limit the Fund's
flexibility in pursuing its remedies as a secured creditor, and reduce the
proceeds realized from foreclosing or taking possession of the collateral. Under
the intercreditor agreements, the Fund would agree that its security interest
would be treated in parity with the security interest of VLLI II, regardless of
which security interest would have priority under applicable law.
The Fund will utilize certain of its funds in investments that involve the
financing of equipment assets. Equipment assets are often subject to rapid
depreciation or obsolescence such that there can be no assurance that the value
of the assets underlying a loan or lease to finance such assets will not
depreciate during the term of the transaction below the amount of the borrower's
or lessee's obligations. In addition, although borrowers or lessees will be
required under the transaction documents to provide customary insurance for the
assets underlying a loan or lease, and will be prohibited from disposing of the
assets without the Fund's consent, compliance with these covenants cannot be
assured and, in the event of non-compliance, the assets could become unavailable
to the Fund due to destruction, theft, sale or other circumstances. The Fund's
ability to obtain payment beyond the assets underlying the loan or lease from
the borrower or lessee might be limited by bankruptcy or similar laws affecting
creditors' rights. Therefore, there can be no assurance that the Fund would
ultimately collect the full amount owed on a defaulted loan or lease.
Emerging Company Risks. The possibility that Eligible Portfolio Companies
will not be able to commercialize their technology or product concept presents
significant risk to the Fund. Additionally, although some of the Eligible
Portfolio Companies to whom the Fund lends or invests in may already have a
commercially successful product or product line at the time of investment,
technology products and services often have a more limited market or life span
than products in other industries. Thus, the ultimate success of these Eligible
Portfolio Companies may depend on their ability to continually innovate in
increasingly competitive markets.
Privately-held Company Risks. The Fund intends to invest primarily in
privately-held companies. Generally, very little public information exists about
these companies and the Fund will be required to rely on the ability of the
Manager to obtain adequate information to evaluate the potential returns from
investing in these companies. Moreover, these companies typically depend upon
the management talents and efforts of a small group of individuals and the loss
of one or more of these individuals could have a significant impact on the
investment returns from a particular company. Also, these companies frequently
have less diverse product lines and smaller market presence than larger
companies. They are thus generally more vulnerable to economic downturns and may
experience substantial variations in operating results.
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<PAGE> 19
Eligible Portfolio Companies Will Need Additional Financing. Most of the
Eligible Portfolio Companies will require substantial additional equity
financing to satisfy their continuing working capital requirements. Each round
of venture financing is typically intended to provide a company with enough
capital to reach the next stage of development. The circumstances or market
conditions under which Eligible Portfolio Companies will seek additional capital
is unpredictable. It is possible that one or more of Eligible Portfolio
Companies will not be able to raise additional financing or may be able to do so
only at a price or on terms which are unfavorable.
Speculative Nature of Warrants and Equity Investments. The value of the
warrants that the Fund generally will receive in connection with its portfolio
investments is dependent on the value of the equity securities for which the
warrants can be exercised. The value of such securities and direct equity
investments is dependent primarily on the success of the company's business
strategy and the growth of its earnings, but also depends on general economic
and equity market conditions. The prospects for achieving consistent
profitability in the case of many companies in which the Fund will invest are
speculative. The warrants and equity securities for which the warrants can be
exercised and direct equity investments generally will be restricted securities
that cannot readily be sold for some period of time. If the value of the equity
securities underlying a warrant does not increase above the exercise price
during the life of the warrant, the Fund would permit the warrant to expire
unexercised and the warrant would then have no value.
Illiquidity of Investments. The Fund anticipates that substantially all of
its portfolio investments (other than short-term investments) will consist of
securities that at the time of acquisition are subject to restrictions on sale
and for which no ready market will exist. Restricted securities cannot be sold
publicly without prior agreement with the issuer to register the securities
under the 1933 Act, or by selling such securities under Rule 144 or other
provisions of the 1933 Act which permit only limited sales under specified
conditions. Venture loans and leases and equity investments are privately
negotiated transactions, and there is no established trading market in which
such loans, leases and equity investments can be sold. In the case of warrants
or equity securities, the Fund generally will realize the value of such
securities only if the issuer is able to make an initial public offering of its
shares, or enters into a business combination with another company which
purchases the Fund's warrants or equity securities or exchanges them for
publicly-traded securities of the acquiror. The feasibility of such transactions
depends upon the entity's financial results as well as general economic and
equity market conditions. Furthermore, even if the restricted warrants or equity
securities owned become publicly-traded, the Fund's ability to sell such
securities may be limited by the lack of or limited nature of a trading market
for such securities. When restricted securities are sold to the public, the
Fund, under certain circumstances, may be deemed an "underwriter" or a
controlling person with respect thereto for the purposes of the 1933 Act, and be
subject to liabilities as such under that Act.
Because of the illiquidity of the Fund's investments, a substantial portion
of the Fund's assets will be carried at fair value as determined by the board of
directors. This value will not necessarily reflect the value of the assets which
may be realized upon a sale.
Non-Diversified Status. The Fund will be classified as a "non-diversified"
investment company under the 1940 Act. At such time as the Fund meets certain
asset diversification requirements, the Fund intends to qualify as a RIC under
the Internal Revenue Code and will thereafter seek to meet the diversification
standards thereunder. Nevertheless, the Fund's assets may be subject to a
greater risk of loss than if its investments were more widely diversified.
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<PAGE> 20
CONFLICTS OF INTEREST
Transactions by Other Clients. The Manager also serves as manager of VLLI
II, and Venture Lending & Leasing, Inc. ("VLLI"; VLLI and VLLI II are referred
to collectively herein as the "Prior Funds"). VLLI has a similar investment
program to that of the Fund, but is currently making no new investments; VLLI II
is continuing to make new investments. The Fund's board of directors has
determined that, so long as VLLI II has capital available to invest in loan or
lease transactions with final maturities earlier than December 31, 2005 (the
date on which VLLI II will be dissolved), the Fund, coincident with its
receiving its first draw down of the Committed Equity Capital (the "First
Draw"), will invest in each portfolio company in which VLLI II invests
("Investments"). The amount of each Investment will be allocated between the
Fund and VLLI II in accordance with the Committed Equity Capital of the Fund and
VLLI II so long as VLLI II has capital available to invest. The Committed Equity
Capital of VLLI II is $110,000,000. If the offering of Interests by the Limited
Liability Company is fully subscribed, the committed equity capital available to
the Fund would be $250,000,000. Therefore, if the offering is fully subscribed,
each Investment will be allocated approximately 69% to the Fund and 31% to VLLI
II. In any case, VLLI II can only invest to the extent that it has capital
available for investment; after VLLI II no longer has capital available for
investment, VLLI II will no longer invest in transactions in which the Fund
invests. As of February 16, 2000, VLLI II has approximately $33 million capital
committed to VLLI II which has not yet been called from its shareholders but
must be called if at all, by September 15, 2001. This means that the funds with
which VLLI II has available to invest with the Fund consist of (a) $33 million
plus (b) amounts which VLLI II borrows by leveraging its available capital funds
plus (c) any proceeds from principal payments received on loans and leases, plus
(d) the proceeds from the sale of securities in an amount equal to the cost
basis of securities sold. After September 15, 2001, VLLI II will no longer be
permitted to enter into new commitments to borrowers or lessees; however, VLLI
II will be permitted to fund existing commitments from the sources described
above. While investing the Fund's capital in the same companies in which VLLI II
is also investing could provide the Fund with greater diversification and access
to larger transactions, it could also result in a slower pace of investment than
would be the case if the Fund were investing in companies by itself.
Although VLLI II and the Fund intend to invest in the same companies in the
respective proportions described above, it should be noted that VLLI II may have
made investments in companies prior to the Fund's First Draw and in which both
the Fund and VLLI II may thereafter make investments; if the investments are in
the form of loans or leases, depending on the collateral for such loans and
leases, Fund II may have a security interest, with respect to such prior
investment, in the same collateral which, upon a default, would have to be
satisfied prior to applying any remaining proceeds to the subsequent loan or
lease by the Fund and Fund II. In addition, the Fund may, at any time, with the
approval of its board of directors, (i) discontinue investing with VLLI II with
respect to any or all future investments or (ii) choose to invest in different
proportions with VLLI II than described above. Moreover, the Fund has no control
over VLLI II, which is not required to invest with the Fund in any particular
proportion or at all, and may choose to discontinue investing with the Fund or
to invest in different proportions than described in this paragraph. In the
event that VLLI II and the Fund invest other than in the pro rata manner
described above (which can occur only with board approval of each), the Manager
may have a conflict of interest in determining which of VLLI II and the Fund
will invest in a particular company and, if both, in what proportions. The Fund
may also engage in loan or lease transactions with, or make equity investments
in, companies that are preexisting borrowers or lessees from VLLI II, with the
consequences described above where the Fund and VLLI II make a loan or lease to
a company which is a preexisting borrower or lessee of VLLI II.
To the extent that portfolios of clients, other than the Prior Funds, that
are advised by the Manager (but in which the Manager has no proprietary
interest) invest in opportunities available to the Fund, the Manager will
allocate such opportunities among the Fund and such other clients in a manner
19
<PAGE> 21
deemed fair and equitable considering all of the circumstances in accordance
with procedures approved by the Fund's board of directors (including a majority
of the disinterested directors).
Intercreditor Agreements. In transactions in which both the Fund and VLLI
II invest in the loans or lease financings with the same company, it is expected
that the Fund and VLLI II will enter into an intercreditor agreement pursuant to
which the Fund and VLLI II will cooperate in pursuing their remedies following a
default by the borrower or lessee. Under the intercreditor agreements, each
party would agree that its security interest would be treated in parity with the
security interest of the other party, regardless of which security interest
would have priority under applicable law. The proceeds realized from the sale of
any collateral or the exercise of any other creditor's rights will be allocated
between the Fund and VLLI II pro rata in accordance with their respective
investments. As a result of such intercreditor agreements, the Fund would have
less flexibility in pursuing its remedies following a default than it would have
had there been no intercreditor agreement, and the Fund may realize fewer
proceeds. In addition, because the Fund and VLLI II invest at the same time in
the same borrower or lessee, such borrower or lessee would be required to
service two loans rather than one. Any additional administrative costs or
burdens resulting therefrom may make the Fund a less attractive lender, and may
make it more difficult for the Fund to acquire such loans or leases.
Effect of Borrowings. During the first two years of the Fund's investment
operations, the Management Fee will be calculated with reference to the
Committed Equity Capital of the Limited Liability Company which, therefor, is
Committed Equity Capital of the Fund, regardless of when or if all of such
capital is called. Thereafter, the Management Fee will be based on the value of
the Fund's total assets, including assets purchased with borrowed funds.
Therefore, decisions by the Manager to cause the Fund to borrow additional funds
will increase the quarterly fees payable to the Manager and the Adviser to the
Manager. The Fund's overall borrowing limits, however, are set by the Fund's
board of directors in light of its fiduciary duty to the shareholders.
Indemnification and Exculpation. The Fund's Articles of Incorporation
provide for indemnification of directors, officers, employees and agents
(including Westech Advisors and the Adviser to the Manager) of the Fund to the
full extent permitted by Maryland law and the 1940 Act, including the advance of
expenses and reasonable counsel fees. The Articles of Incorporation also contain
a provision eliminating personal liability of a Fund director or officer to the
Fund or its shareholders for monetary damages for certain breaches of their duty
of care.
Selection of Disinterested Directors. Westech Advisors intends that, prior
to the closing of this offering, a majority of the Fund's directors will be
disinterested directors. Although the continued tenure of all directors will be
subject to annual election by shareholders, the initial selection of directors,
including the disinterested directors, is made by the Manager.
Employees.
The Fund expects to have no employees and will rely on the Manager and its
officers (all of whom are employed and paid by the Manager) to administer its
affairs, subject to the supervision of the Fund's Board of Directors.
(d) Financial Information About Foreign and Domestic Operations and Export
Sales
The Fund has not commenced business and has no revenues or assets.
ITEM 2. FINANCIAL INFORMATION
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<PAGE> 22
The Fund has not commenced business and has no revenues or assets.
ITEM 3. PROPERTIES
The Fund has not commenced business and has no assets. It is anticipated
that the Fund's principal assets following commencement of operations will be
securities.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGERS
The Fund has no Shares outstanding as of the date of this Form 10. It is
anticipated that, prior to the first closing of interests in the Limited
Liability Company, the Manager will contribute $1,000 to the Limited Liability
Company, and the Limited Liability Company in turn will purchase 1,000,000
Shares at a price of $0.001 per share as the Fund's initial capital. Therefore,
until immediately subsequent to the first call for further capital contributions
to the Fund, the Manager will be deemed to "control" the Fund through its
control of the Limited Liability Company.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Fund are:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Ronald W. Swenson* 55 Chairman, Chief Executive Officer and Director
2010 North First Street, Suite 310
San Jose, CA 95131
Salvador O. Gutierrez* 56 President and Director
2010 North First Street, Suite 310
San Jose, CA 95151
George W. Siguler 51 Advisory Director
630 Fifth Avenue, 16th Floor
New York, NY 10111
Brian Best 33 Vice President, Chief Financial Officer and Secretary
2010 North First Street, Suite 310
San Jose, CA 95131
</TABLE>
The board of directors of the Fund anticipates electing three additional
disinterested directors. The Fund's disinterested directors will each receive an
annual fee from the Fund of $10,000. Such directors also will be reimbursed by
the Fund for their expenses in attending meetings of the board of directors or
any committee thereof and will receive a fee for attendance in person at any
meeting at a per diem rate of $1,000. The Fund's interested directors and
officers are employees of the Manager and receive no compensation from the Fund
for their services as directors or officers, other than reimbursement of their
expenses in attending meetings. The Fund's advisory directors are employees of
the Adviser to the Manager or the Placement Agent and receive no compensation
from the Fund for their services as directors or officers, other than
reimbursement of their expenses in attending meetings.
The business backgrounds of the Fund's directors and officers are as
follows:
- - --------
* Interested person of the Fund within the meaning of the 1940 Act.
21
<PAGE> 23
RONALD W. SWENSON is Chairman, Chief Executive Officer, and Director of the
Manager and his business background is set forth under "Management -- The
Manager".
SALVADOR O. GUTIERREZ is the President and Chief Financial Officer of the
Manager and his business background is set forth under "Management -- The
Manager".
GEORGE W. SIGULER is Managing Director of the Adviser to the Manager and
his business background is set forth under "Management -- Adviser to the
Manager".
BRIAN BEST is Vice President of the Manager and his business background is
set forth under "Management - the Manager".
THE MANAGER
Westech Advisors, the Investment Manager, is a corporation organized by the
principals of Western Technology for the purpose of serving as Investment
Manager to VLLI and the Fund. Western Technology was an independent asset-based
financing organization headquartered in San Jose, California, founded in 1980,
and originated more than $375 million in asset-based financing for venture
capital-backed companies. Messrs. Swenson and Gutierrez, the sole executive
officers of Westech Advisors, each own 50% of its voting securities. Westech
Advisors' principal business address is 2010 North First Street, Suite 310, San
Jose, California 95131.
Messrs. Swenson and Gutierrez will have primary responsibility for the
Fund's investment program. The business backgrounds of Messrs. Swenson and
Gutierrez are as follows:
RONALD W. SWENSON. Since 1993, Mr. Swenson has been the Chief Executive
Officer of Westech Advisors; from 1980 through 1994, Mr. Swenson was President
and a Director of Western Technology. Mr. Swenson was the founder of Western
Technology in 1980. From 1978-1980, Mr. Swenson was Director of Marketing for
Magnuson Computer Systems, with responsibility for product planning, sales
support and developing financial leasing and service functions. Before that, he
was a Business Manager for Control Data Corp., responsible for P&L, engineering
and marketing for several major computer and peripheral product lines and,
earlier, a Program Manager at Control Data for disk storage licensing with
foreign companies.
SALVADOR O. GUTIERREZ. Since 1993, Mr. Gutierrez has been the President and
Chief Financial Officer of Westech Advisors; from 1987 through 1994, Mr.
Gutierrez was Senior Vice President-Chief Financial Officer and a Director of
Western Technology. Before joining Western Technology in 1987, Mr. Gutierrez was
head of corporate lending for Home Federal Bank of San Diego and, from
1982-1984, was a senior credit officer for Imperial Bank in Palo Alto. In both
positions, Mr. Gutierrez dealt extensively with loans to young high-technology
companies. Prior to joining Imperial Bank, Mr. Gutierrez was a corporate lending
officer for Wells Fargo Bank, holding various senior lending positions over his
ten-year tenure. At Wells Fargo, Mr. Gutierrez handled major leasing companies
and many high-technology companies in the San Francisco Bay Area. Mr. Gutierrez
also had marketing responsibility for Latin America for Wells Fargo Leasing.
BRIAN BEST. Prior to joining Western Technology in 1997, Mr. Best served as
the Director of Finance and Administration for Decisis Corporation, a start-up
software company. He has held various finance positions at Ross Systems, Inc.
and began his career at Ernst & Young. Mr. Best holds a B.S. with honors from
the University of the Pacific and an M.B.A. from U.C. Berkeley's Haas School of
Business.
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<PAGE> 24
ADVISER TO THE MANAGER
Siguler Guff Advisers, LLC, the adviser to Westech Advisors, is an
independent investment advisory firm that, together with its affiliates, manages
or co-manages individual private equity accounts and three private equity funds,
in addition to the Fund and VLLI, with total committed capital in excess of $800
million. Siguler Guff Advisers, LLC is a Delaware limited liability company
whose voting securities are beneficially owned as follows: 45% by George W.
Siguler, 45% by Drew J. Guff and 10% by Donald P. Spencer. The principal
business address of Siguler Guff Advisers, LLC is 630 Fifth Avenue, 16th Floor,
Rockefeller Center, New York, New York 10111.
Messrs. Siguler and Spencer will have primary responsibility for advising
the Manager. The business backgrounds of Messrs. Siguler and Spencer are as
follows:
GEORGE W. SIGULER, a founder and Managing Director of Siguler Guff
Advisers, LLC and its affiliates, was a Managing Director of Mitchell Hutchins
Institutional Investors, Inc. ("Mitchell Hutchins") and head of its Private
Equity Group from 1991 until late 1995. Mr. Siguler was Director and President
of Associated Capital Advisers, Inc. (investment management firm) from 1990
through 1991 and was Vice Chairman and a director of Monarch Capital Corporation
(financial services holding company) from 1984 through 1991. Mr. Siguler was
head of Monarch's investment management subsidiary and oversaw the company's
common stock and bond portfolios and established Monarch's private equity
investment group. From 1983-1984, Mr. Siguler served in the Reagan
Administration as Chief of Staff of the U.S. Department of Health and Human
Services, with oversight responsibility for a $300 billion budget and 150,000
employees. He was a founding partner of the Harvard Management Company in the
early 1970s and initiated and managed its private equity activity. Mr. Siguler
is a director or senior officer of Business Mortgage Investors, Inc. (private
real estate investment trust), Venture Lending & Leasing, Inc. and Venture
Lending & Leasing II, Inc. (business development companies), CommonFund Capital
(private equity investment affiliate of The Common Fund) and Novacare, Inc.
DONALD P. SPENCER, 44, a founder and Managing Director of Siguler Guff
Advisers, LLC and its affiliates, was with Mitchell Hutchins and its parent
corporation from 1989 until late 1995, ultimately serving as a Senior Vice
President and portfolio manager in its Private Equity Group. He also serves as
an officer of Business Mortgage Investors, Inc. and Venture Lending & Leasing,
Inc. He previously was a First Vice President and Associate General Counsel for
Mitchell Hutchins's parent corporation. From 1986-1989, Mr. Spencer was senior
vice president and general counsel of Atalanta/Sosnoff Capital Corporation, an
institutional money manager and, from 1980-1986, was an associate attorney at
two major New York law firms specializing in representation of financial
services companies.
ITEM 6. EXECUTIVE COMPENSATION.
The Fund will pay no compensation to its officers who are "interested
persons" (as defined in the 1940 Act) of the Manager or the Advisor to the
Manager or to its directors other than its disinterested directors. The Fund's
disinterested directors will each receive an annual fee from the Fund of
$10,000. Such directors also will be reimbursed by the Fund for their expenses
in attending meetings of the Board of Directors or any committee thereof and
will receive a fee for attendance in person at any meeting at a per diem rate of
$1,000.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
23
<PAGE> 25
(a) Transactions With Management and Others
The Manager and the Adviser to the Manager also serve as Investment Manager
and Fund Manager, respectively, to the Prior Funds. The Fund will make
investments through venture loans and leases in companies in which VLLI II will
also invest. Under the policies adopted by the Fund's board of directors, the
Fund's investment and VLLI II's investment in the same transaction will be made,
pro rata in accordance with the Committed Equity Capital of the Fund and VLLI II
until such time as VLLI II is no longer able to make such investments by reason
of its term or available capital committed to VLLI II. While investing the
Fund's capital in the same companies in which VLLI II is also investing could
provide the Fund with greater diversification and access to larger transactions,
it could also result in a slower pace of investment than would be the case if
the Fund were investing in companies by itself.
Although VLLI II and the Fund intend to invest in the same companies in the
respective proportions described above, the Fund may, at any time, with the
approval of its board of directors, (i) discontinue investing with VLLI II with
respect to any or all future investments or (ii) choose to invest in different
proportions with VLLI II than described above. In addition, the Fund has no
control over VLLI II, which is not required to invest with the Fund in any
particular proportion or at all, and may choose to discontinue investing with
the Fund or to invest in different proportions than described in this paragraph.
In the event that VLLI II and the Fund invest other than in the pro rata manner
described above (which can occur only with board approval of each), the Manager
may have a conflict of interest in determining which of VLLI II and the Fund
will invest in a particular company and, if both, in what proportions. The Fund
also may engage in loan and lease transactions with, or make equity investments
in, companies that are pre-existing borrowers or lessees from VLLI II.
To the extent that portfolios of clients other than the Prior Funds which
are advised by the Manager (but in which the Manager has no proprietary
interest) invest in opportunities available to the Fund, the Manager will
allocate such opportunities among the Fund and such other clients in a manner
deemed fair and equitable considering all of the circumstances in accordance
with procedures approved by the Fund's board of directors (including a majority
of the disinterested directors).
Until the Fund has called and invested at least 75% of the total amounts of
Committed Equity Capital, except as provided below, neither the Manager nor the
Adviser to the Manager nor any "Controlled Person" of either will, without the
consent of the Fund, act as investment adviser or manager to any pooled
investment vehicle other than the Fund or the Prior Funds or act as investment
adviser or manager to any client if the investment program of such pooled
investment vehicle or client includes the provision of asset-backed financing to
venture capital-backed companies as a primary or major component. In the event
that the Fund elects to irrevocably release the Limited Liability Company and
the Limited Liability Company, in turn, elects to irrevocably release its
Members from any uncalled portion of their respective commitments as to new
investments, the "total amount subscribed for by investors" will be deemed
reduced to reflect such release. The foregoing restriction shall not be deemed
to prohibit the Manager, the Adviser to the Manager, or any Controlled Person of
either from acting as investment adviser or manager with respect to any existing
client of such party as of January 31, 2000; provided, however, that until the
75% investment threshold described above has occurred, such party shall not,
without the consent of the Fund, accept from such existing clients any
additional investment funds (other than amounts required for follow-on
investments to existing investments) beyond the funds invested or committed by
such existing clients as of January 31, 2000. A "Controlled Person" of the
Manager or the Adviser to the Manager as used in this paragraph means any entity
(i) 50% or more of whose voting securities are beneficially owned by the Manager
or (ii) 50% or more of whose voting securities are controlled by any of the "Key
Executives" of the Manager or the Adviser to the Manager. For purposes of this
paragraph, the "Key Executives" of the Manager are Ronald W. Swenson and
Salvador O. Gutierrez; the "Key Executive" of the Adviser to the Manager is
George W. Siguler.
24
<PAGE> 26
The Limited Liability Company will have management rights with respect to
the loans, leases and equity investments made by the Fund co-extensive with such
management rights of the Fund. To the extent different persons manage the Fund,
on the one hand, and the Limited Liability Company, on the other, the two
entities may take conflicting positions with respect to such management rights.
(b) Certain Business Transactions
Certain of the current directors and officers of the Fund are officers of
the Managers. Certain of the current directors are officers of the Adviser to
the Manager. See "Transactions with Promoters" below for a description of the
Fund's Management Agreement with the Managers ("Management Agreement").
(c) Indebtedness of Management
None.
(d) Transactions With Promoters.
Westech Advisors and Siguler Guff Advisers may be deemed promoters of the
Fund. The Fund will enter into a Management Agreement with the Manager and the
Adviser to the Manager, pursuant to which Westech Advisors will, with the advice
of the Adviser to the Manager and subject to the investment policies and
guidelines established by the board of directors, identify, evaluate, structure
and close the investments to be made by the Fund, arrange debt financing for the
Fund, provide portfolio management and servicing of loans or leases held in the
Fund's portfolio, and administer the Fund's day-to-day affairs. Westech Advisors
will have primary responsibility for origination and servicing of venture loans
and leases; the Adviser to the Manager will advise Westech Advisors with respect
to administrative matters for the Fund.
The Fund will be required to pay all organizational and offering expenses
(including accounting, legal, printing, clerical, filing and other expenses)
incurred by the Fund; the Placement Agent; or either of Westech Advisors or the
Adviser to the Manager or their affiliates on behalf of the Fund in connection
with the organization of the Fund and this offering, estimated at $500,000. The
Fund will also pay all operating expenses except those specifically required to
be borne by Westech Advisors or the Adviser to the Manager, including (i)
brokerage and commission expense and other transaction costs incident to the
acquisition and dispositions of investments and the creation and perfection of
security interests with respect thereto, (ii) federal, state and local taxes and
fees, including transfer taxes and filing fees, incurred by or levied upon the
Fund, (iii) interest charges and other fees in connection with borrowings, (iv)
SEC fees and expenses and any fees and expenses of state securities regulatory
authorities, (v) expenses of preparing and distributing reports and notices to
its shareholders, (vi) costs of proxy solicitation, (vii) costs of meetings of
its shareholders and the board of directors, (viii) charges and expenses of the
Fund's custodian, (ix) compensation and expenses of the Fund's disinterested
directors, and expenses of all directors in attending board or shareholder
meetings, (x) legal and auditing expense, including expenses incident to the
documentation for, and consummation of, venture lending and leasing transactions
and equity investments, and legal actions to enforce the Fund's rights under
such loans, leases and equity investments; (xi) costs of any certificates
representing the Shares, (xii) costs of stationery and supplies, (xiii) the
costs of membership by the Fund in any trade organizations and (xiv) expenses
associated with litigation and other extraordinary or non-recurring expenses.
The operating expenses required to be borne by the Manager and the Adviser
to the Manager are: (i) all costs and fees incident to the selection and
investigation of prospective Fund investments, such as
25
<PAGE> 27
travel expenses and professional fees (but excluding legal and accounting fees
and other costs incident to the documentation, closing or consummation of such
transactions), (ii) the cost of adequate office space for the Fund and all
necessary office equipment and services, including telephone service, heat,
utilities and similar items and (iii) the cost of providing the Fund with such
corporate, administrative and clerical personnel (including officers and
directors of the Fund who are interested persons of the Manager and the Adviser
to the Manager and are acting in their respective capacities as officers and
directors) as the Fund's board of directors reasonably deems necessary or
advisable to perform the services required to be performed by the Manager and
the Adviser to the Manager under the Management Agreement.
As compensation for their services to the Fund, the Manager and the Adviser
to the Manager, together, will receive a management fee ("Management Fee"),
whether before or after dissolution on the Fund, computed and paid quarterly for
the first two years following the first closing of this offering, at an annual
rate of 2.5% of the amount of the Committed Equity Capital (regardless of when
or if such committed capital is called) as of the last day of each such fiscal
quarter; and computed and paid quarterly for each quarter thereafter, at an
annual rate of 2.5% of the Fund's total assets (including amounts derived from
borrowed funds) as of the last day of each such fiscal quarter. For purposes of
calculating the Management Fee, any capital committed to the Fund as a result of
a closing of the sale of Interests in the Limited Liability Company subsequent
to the first closing (regardless of when or if such committed capital is called)
will be deemed to have been committed as of the first closing. It should also be
noted that the Manager, as the managing Member of the Limited Liability Company,
will be entitled to (i) a management fee with respect to the Limited Liability
Company commencing after the first two years which is identical to the 2.5% it
receives from the Fund but calculated with reference to the assets of the
Limited Liability Company, excluding its interest in the Fund, and (ii) a 20%
profits interest, subject to the Limited Liability Company allocating to the
Members thereof an 8% per annum cumulative, non-compounded annual return. The
20% profits interest may align the interests of the Manager with that of the
Fund or the Limited Liability Company, but also could encourage the Manager to
make riskier investments than it would in the absence of such profits interest.
The Management Fee will be divided between Westech Advisors and the Adviser
to the Manager in accordance with their agreement. Committed Equity Capital is
the aggregate amount of subscription obligations for the purchase of the
Interests in the Limited Liability Company (including any amounts of such
obligations that have been satisfied). The aggregate fees and profits interests
of the Manager at both the Fund and Limited Liability Company levels are higher
than those of most investment companies, although they are comparable to those
of many privately-offered funds investing in venture capital investments.
If the Manager or the Adviser to the Manager or certain of their affiliates
receives any compensation from a company whose securities are held in the Fund's
portfolio in connection with the provision to that company of significant
managerial assistance, the compensation due to the Manager or the Adviser to the
Manager hereunder shall be reduced by the amount of such fee. Such compensation
could include directors' fees paid to officers of the Manager or the Adviser to
the Manager for serving on the boards of directors of borrowers or lessees, or
finder's or consulting fees paid to Westech Advisors or the Adviser to the
Manager for the services such as locating acquisition candidates or additional
or alternative sources of financing.
Under the Management Agreement, the Manager and the Adviser to the Manager
will not be liable for any error in judgment or mistake of law or for any loss
suffered by the Fund in connection with the Management Agreement, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
the Managers in the performance of their duties or from reckless disregard of
their duties and obligations under the Management Agreement. The Management
Agreement will continue in effect for a period longer than two years from its
date of execution only if such continuation is
26
<PAGE> 28
approved at least annually by the board of directors or a majority of the
outstanding voting securities of the Fund, and by a majority of the directors
who are not parties to the Management Agreement or interested persons of such
parties. The Management Agreement is terminable by vote of the Fund's board of
directors or by the holders of a majority of the outstanding voting securities
of the Fund, at any time without penalty, on 60 days' written notice to the
Manager. The Management Agreement may also be terminated by the Manager on 60
days' written notice to the Fund and will terminate automatically upon its
assignment.
ITEM 8. LEGAL PROCEEDINGS
None.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
(a) Market Information
The offer and sale of the Shares will not be registered under the 1933 Act
as their issuance and sale is exempt from such registration requirements
pursuant to Section 4(2) and Regulation D of the 1933 Act.
Because the Shares will be acquired by investors in one or more
transactions "not involving a public offering," they will be "restricted
securities" and may be required to be held indefinitely. Shares may not be sold,
transferred, assigned, pledged or otherwise disposed of without registration
under applicable securities laws or pursuant to an exemption from registration
(in which case the shareholder will at the option of the Fund be required to
provide the Fund with a legal opinion, in form and substance satisfactory to the
Fund, that registration is not required). Accordingly, an investor must be
willing to bear the economic risk of investment in the Shares until the Fund is
liquidated. No sale, transfer, assignment, pledge or other disposition, whether
voluntary or involuntary, of the Shares may be made except by registration of
the transfer on the Fund's books. Each transferee will be required to execute an
instrument agreeing to be bound by these restrictions and any other restrictions
imposed on the Shares and to execute such other instruments or certifications as
are reasonably required by the Fund or the Manager.
(b) Holders
The Fund has no Shares outstanding as of the date of this Form 10. It is
anticipated that, prior to the first closing of interests in the Limited
Liability Company, the Manager will contribute $1,000 to the Limited Liability
Company, and the Limited Liability Company in turn will purchase 100,000 Shares
at a price of $0.01 per share as the Fund's initial capital. Therefore, until
immediately subsequent to the first call for further capital contributions to
the Fund, the Manager will be deemed to "control" the Fund through its control
of the Limited Liability Company.
(c) Dividends
The Fund intends to distribute to its shareholder, the Limited Liability
Company substantially all of its net investment income and net realized capital
gains, if any, as determined for income tax purposes. Applicable law, including
provisions of the 1940 Act, may limit the amount of dividends and other
distributions payable by the Fund. Income dividends will generally be paid
quarterly to the shareholders of record on the last day of each preceding
calendar quarter end. Substantially all of the Fund's net capital gain (the
excess of net long-term capital gain over net short-term capital loss) and net
short-term capital gain, if any, will be distributed at least annually with the
Fund's final quarterly dividend distribution for
27
<PAGE> 29
the year. The Fund also expects to make in-kind distributions to its
shareholders of any warrants it receives in connection with loans and leases and
any securities acquired as a result of direct equity investments, although as a
result of regulatory issues, under the 1940 Act, equity investments from time to
time may be retained.
Until the fourth anniversary following the first closing of this offering,
the Manager will seek to reinvest the proceeds of matured, repaid or sold
investments, net of required distributions to shareholders, principal payments
on borrowings and expenses or other obligations of the Fund, in new loans or
leases or equity investments. Beginning on the fourth anniversary of the Fund's
first closing, the Fund will also distribute to its shareholders all proceeds
received from principal payments and sales of investments, net of reserves and
expenses, principal repayments on the Fund's borrowings, amounts required to
fund financing commitments entered into before such fourth anniversary, and any
amounts paid on exercise of warrants. Distributions of such amounts are likely
to cause annual distributions to exceed the earnings and profits of the Fund
available for distribution, in which case such excess will be considered a tax
free return of capital to a shareholder to the extent of such shareholder's
adjusted basis in his Shares, and then as capital gain.
ITEM 10. RECENT SALES OF UNREGULATED SECURITIES
See Item 9(b)
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
GENERAL. The Members will instruct the Limited Liability Company, pro rata
in accordance with each Member's percentage interest in the Limited Liability
Company, as to how to vote the Shares held by the Limited Liability Company, as
required by Section 12(d)(1)(E) of the 1940 Act. All Shares will participate
equally in dividends and distributions and in the proceeds of any liquidation.
Shares have no preference, conversion, exchange or cumulative voting rights. The
Fund has 10,000,000 Shares authorized.
Annual meetings be held beginning in 2000 and special meetings may be
called by the Chairman of the board of directors or President, a majority of the
board of directors or Members holding at least 25% of the Interests in the
Limited Liability Company. The Fund anticipates soliciting proxies from Members
for each annual meeting. The Fund's Articles of Incorporation can be amended by
the affirmative vote of at least a majority of the Interests in the Limited
Liability Company.
DISSOLUTION OF THE FUND. Until the fourth anniversary following the first
closing of the offering of interests in the Limited Liability Company, the Fund
will, subject to market conditions, invest the proceeds of repayment, prepayment
or sale of its investments, net of any principal repayments on borrowings and
expenses or other obligations of the Fund, in additional venture loans, leases
and equity investments. Thereafter, the Fund will cease to make new investments
in venture loans, leases (other than amounts required to fund financing
commitments entered into before such fourth anniversary) and equity investments
and will distribute to investors the proceeds of repayment, prepayment or sale
of its investments, net of (i) any principal repayments on borrowings, (ii)
expenses or other obligations of the Fund, (iii) amounts paid on exercise of
warrants or other convertible securities and (iv) any follow-on investment to an
existing venture loan or lease made to increase the likelihood of ultimate
realization of the investment and determined by the board of directors to be in
the best interests of the Fund.
The Fund's Articles of Incorporation provide that, on December 31, 2008,
the Fund automatically will be dissolved without any action by shareholders.
From and after such dissolution, the Fund's activities will be limited to the
winding-up of its affairs, the liquidation of its remaining assets and the
28
<PAGE> 30
distribution of the net proceeds thereof to shareholders. Although the Fund
generally will not invest in any loan or lease with a maturity date later than
December 31, 2008, it is possible that, due to a default by a borrower or lessee
or a transaction restructuring due to a borrower's or lessee's financial
difficulties, the Fund will not fully realize on a loan or lease by the original
maturity date. Furthermore, the Fund may not be able to sell warrants it
receives from borrowers or lessees, or the equity securities it receives upon
exercise of such warrants, for a significant period of time due to legal or
contractual restrictions on resale or the absence of a liquid secondary market.
As a result, the liquidation process might not be completed for a significant
period after the Fund's dissolution. In addition, it is possible that, if
certain of the Fund's assets are not liquidated within a reasonable time after
the Fund's dissolution, the Fund may elect to make a distribution in kind of all
or part of such assets to shareholders. In such case, shareholders would bear
any expenses attendant to the liquidation of such assets.
TRANSFERABILITY OF SHARES. The offer and sale of the Shares will not be
registered under the 1933 Act as their issuance and sale are exempt from such
registration requirements pursuant to Section 4(2) of the 1933 Act and
Regulation D promulgated thereunder.
Because the Shares will be acquired by investors in transactions "not
involving a public offering", they will be "restricted securities" and may be
required to be held indefinitely. Shares may not be sold, transferred, assigned,
pledged or otherwise disposed of without registration under applicable
securities laws or pursuant to an exemption from registration (in which case the
shareholder will at the option of the Fund be required to provide the Fund with
a legal opinion, in form and substance satisfactory to the Fund, that
registration is not required). No sale, transfer, assignment, pledge or other
disposition, whether voluntary or involuntary, of the Shares may be made except
by registration of the transfer on the Fund's books. Each transferee will be
required to execute an instrument agreeing to be bound by these restrictions and
any other restrictions imposed on the Shares and to execute such other
instruments or certifications as are reasonably required by the Fund or the
Manager.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The corporation law of the State of Maryland, under which the Fund is
incorporated, permits the articles of incorporation of a Maryland corporation to
include a provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages, subject to specified
restrictions. The law does not, however, allow the liability of directors and
officers to the corporation or its stockholders to be limited to the extent that
(1) it is proved that the person actually received an improper benefit or profit
or (2) a judgment or other final adjudication is entered in a proceeding based
on a finding that the person's action, or failure to act, was the result of
active and deliberate dishonesty and was material to the cause of action
adjudicated in the proceeding. The Articles of Incorporation of the Fund contain
a provision limiting the liability of its directors and officers to the Fund and
its shareholders to the fullest extent permitted from time to time by the laws
of Maryland (but not in violation of the 1940 Act). The Maryland corporation law
also permits a corporation to indemnify its directors, officers and agents,
among others, against judgments, penalties, fines, settlements and reasonable
expenses actually incurred by them in connection with any proceeding to which
they may be made a party by reason of their service in those or other capacities
unless it is established that the act or omissions of the party seeking to be
indemnified was material to the matter giving rise to the proceeding and was
committed in bad faith or was the result of active and deliberate dishonesty, or
the party actually received an improper personal benefit, or, in the case of any
criminal proceeding, the party had reasonable cause to believe that the act or
omission was unlawful. The Fund's Articles of Incorporation and Bylaws require
the Fund to indemnify its directors, officers and agents (including the Manager
and Adviser to the Manager) to the fullest extent permitted from time to time by
the laws of Maryland, subject to the limitations on indemnification under the
1940 Act.
29
<PAGE> 31
The Fund's Bylaws provide that the Fund may purchase and maintain insurance
on behalf of any person who is or was a director, officer or agent of the Fund
against any liability asserted against that person and incurred by that person
in or arising out of his or her position, whether or not the Fund would have the
power to indemnify him or her against such liability provided no such insurance
so purchased will protect or purport to protect any officer or director against
liabilities for willful misfeasance, bad faith, gross negligence or reckless
disregard of duty.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Fund has not commenced business and has prepared no financial
statements.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The Fund has not commenced business and has prepared no financial
statements.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements - None
(b) Exhibits - See Exhibit Index following signature page in this
Registration Statement, which Exhibit Index is incorporated herein by reference.
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the Registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
VENTURE LENDING & LEASING III, INC.
Date: February 17, 2000 By: /s/ Ronald W. Swenson
-------------------------------
Ronald W. Swenson,
Chief Executive Officer
30
<PAGE> 32
VENTURE LENDING & LEASING III, INC.
(the "Fund")
EXHIBIT INDEX
TO
FORM 10 REGISTRATION STATEMENT
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
<S> <C>
3(i) Articles of Incorporation of the Fund filed with the Maryland Secretary
of State on February 1, 2000.
3(ii) Certificate of Correction of the Fund filed with the Maryland Secretary
of State on February 11, 2000.
3(iii) Bylaws of the Fund as of February 1, 2000.
4.1 Form of Purchase Agreement between the Fund and the Limited Liability
Company.*
10.1 Form of Custodian Agreement between the Fund and Investors Bank & Trust.*
10.2 Form of Intercreditor Agreement between the Fund and Venture Lending &
Leasing, Inc.*
10.3 Form of Management Agreement between the Fund, the Manager and the
Adviser to the Manager.*
</TABLE>
- - ------------------------------
* To be filed by Amendment
31
<PAGE> 1
EXHIBIT 3(i)
ARTICLES OF INCORPORATION
OF
VENTURE LENDING & LEASING III, INC.
FIRST: Incorporation: The undersigned Ronald W. Swenson, whose address is 2010
North First Street, Suite 310, San Jose California 95131, being at least
eighteen years of age, does hereby form a corporation under the general laws of
the State of Maryland.
SECOND: Name of Corporation: The name of the Corporation is Venture Lending &
Leasing III, Inc.
THIRD: Corporate Purposes: The Corporation is formed for the following purpose
or purposes:
A. To conduct, operate, and carry on the business of a closed-end,
management investment company that has elected to be treated as a business
development company, pursuant to the Investment Company Act of 1940, as amended
("1940 Act"); provided, however, that the Corporation may cease to be treated as
a business development company upon compliance with the requirements of the 1940
Act with respect thereto; and
B. To exercise and enjoy all powers, rights and privileges granted to and
conferred upon corporations by the Maryland General Corporation Law now or
hereafter in force.
FOURTH: Address of Principal Office. The post office address of the principal
office of the Corporation in the State of Maryland is The Corporation Trust
Incorporated, 300 East Lombard Street, Baltimore, Maryland 21202-3242.
FIFTH: Name and Address of Resident Agent. The name and address of the resident
agent of the Corporation in the State of Maryland is The Corporation Trust
Incorporated, 300 East Lombard Street, Baltimore, Maryland 21202-3242.
SIXTH: Shares of Stock:
A. The total number of shares of all classes of capital stock which the
Corporation has authority to issue is 200,000 shares of Common Stock, $.001 par
value, having an aggregate par value of $200.
<PAGE> 2
B. Stockholders shall not have preemptive or preferential rights to acquire
any shares of the capital stock of the Corporation, and any or all of such
shares, whenever authorized, may be issued, or may be reissued and transferred
if such shares have been reacquired and have treasury status, to any person,
firm, corporation, trust, partnership, association or other entity for such
lawful consideration and on such terms as the Board of Directors determines in
its discretion without first offering the shares to any such holder.
C. All shares of the Corporation's authorized capital stock, when issued
for such consideration as the Board of Directors may determine, shall be fully
paid and nonassessable.
D. The Board of Directors of the Corporation may, by adoption of a
resolution or Bylaw, impose restrictions upon the transferability by
shareholders of shares of the Corporation's capital stock.
E. No shares of the Corporation's capital stock shall have any conversion
or exchange rights or privileges or have cumulative voting rights.
F. Except as otherwise required under the 1940 Act, voting power for the
election of directors and for all other purposes shall be vested exclusively in
the holders of the Common Stock. Each holder of a full or fractional share of
Common Stock shall be entitled, in the case of full shares, to one vote for each
such share and, in the case of fractional shares, to a fraction of one vote
corresponding to the fractional amount of each such fractional share, in each
case based upon the number of shares registered in such holder's name on the
books of the Corporation.
G. The assets so distributed to the stockholders shall be distributed among
such stockholders, in cash or in kind at the option of the directors, in
proportion to the number of full and fractional shares of Common Stock held by
them and recorded on the books of the Corporation.
H. Each holder of shares of capital stock shall, upon demand, disclose to
the Corporation such information with respect to direct or indirect holdings of
such shares as the directors or any officer or agent of the Corporation
designated by the directors deem necessary to comply with provisions of the
Internal Revenue Code of 1986 applicable to the Corporation, to comply with
requirements of any other appropriate taxing authority, or to comply with the
provisions of the 1940 Act or of the Employee Retirement Income Security Act of
1974, as any of said laws may be amended from time to time.
SEVENTH: Board of Directors: The Corporation shall have at least three
directors; provided that if there is no stock outstanding, the number of
directors may be less than three but not less than one. The directors shall be:
Ronald W. Swenson, Salvador O. Gutierrez, and George W. Siguler.
-2-
<PAGE> 3
EIGHTH: Management of the Affairs of the Corporation.
A. All corporate powers and authority of the Corporation shall be vested in
and exercised by the Board of Directors except as otherwise provided by statute,
these Articles, or the Bylaws of the Corporation.
B. The Board of Directors shall have the power to adopt, alter, or repeal
the Bylaws of the Corporation, unless the Bylaws otherwise provide.
C. The Board of Directors shall have the power to determine whether and to
what extent, and at what times and places, and under what conditions and
regulations, the accounts and books of the Corporation (other than the stock
ledger) shall be open to inspection by stockholders. No stockholder shall have
any right to inspect any account, book, or document of the Corporation except to
the extent permitted by statute or the Bylaws.
D. The Board of Directors shall have the power to determine, in accordance
with generally accepted accounting principles, the Corporation's net income, its
total assets and liabilities, and the net asset value of the shares of capital
stock of the Corporation. The Board of Directors may delegate such power to any
one or more of the directors or officers of the Corporation, its investment
adviser, administrator, custodian, or depositary of the Corporation's assets, or
another agent of the Corporation appointed for such purposes.
E. Except as otherwise required under the 1940 Act, the Board of Directors
shall have the power to make distributions, including dividends, from any
legally available funds in such amounts, and in a manner and to the stockholders
of record as of such a date, as the Board of Directors may determine.
NINTH: Stockholder Liability. The stockholders shall not be liable to any extent
for the payment of any debt of the Corporation.
TENTH: Majority of Votes. Except as otherwise provided in these Articles, under
the 1940 Act, or under any provision of Maryland law requiring approval by a
greater proportion than a majority of the votes entitled to be cast in order to
take or authorize any action, any action may be taken or authorized by the
Corporation upon the affirmative vote of a majority of the votes entitled to be
cast thereon.
ELEVENTH: Special Voting Requirements: Control Shares.
A. The Corporation shall not be governed by the provisions of Section 3-602
of the Maryland General Corporation Law.
B. Any acquisition of shares of the stock of the Corporation, by any person
and at any time, shall be generally exempted from the requirements of subtitle 7
of Title 3 of the
-3-
<PAGE> 4
Maryland General Corporation Law.
TWELFTH: Limitation on Liability.
A. To the maximum extent permitted by the laws of Maryland law (but not in
violation of any applicable requirement or limitation of the 1940 Act), in each
case as currently in effect or as may hereafter be amended:
1. No director or officer of the Corporation shall be liable to the
Corporation or its stockholders for money damages; and
2. The Corporation shall indemnify and advance expenses as provided
in the Bylaws of the Corporation to its present and past
directors, officers, employees and agents (including any person
or firm appointed by the Corporation to serve as investment
adviser or any similar function), and persons who are serving or
have served at the request of the Corporation in similar
capacities for other entities.
B. No amendment, alteration, or repeal of this Article or the adoption,
alteration, or amendment of any other provision of these Articles or the Bylaws
of the Corporation inconsistent with this Article, shall adversely affect any
limitation on liability or indemnification of any person under this Article with
respect to any act or failure to act which occurred prior to such amendment,
alteration, repeal, or adoption.
THIRTEENTH: Limited Term of Existence. The Corporation shall have a limited
period of existence and shall cease to exist at the close of business on
December 31, 2008, except that the Corporation shall continue to exist for the
purpose of paying, satisfying, and discharging any existing debts or
obligations, collecting and distributing its assets, and doing all other acts
required to liquidate and wind up its business and affairs. After the close of
business on December 31, 2008, if the Corporation has not liquidated and wound
up its business and affairs, the directors shall become trustees of the
Corporation's assets for purposes of liquidation with the full powers granted to
directors of a corporation which has voluntarily dissolved under subtitle 4 of
Title 3 of the Maryland General Corporation Law or any successor statute as are
necessary to liquidate the Corporation and wind up its affairs, but in no event
with lesser power than the powers granted by such subtitle granted under the
Maryland General Corporation Laws as of the date of incorporation of the
Corporation.
FOURTEENTH: Right of Amendment. Any provision of these Articles may be amended,
altered, or repealed upon the affirmative vote of a two-thirds of all the votes
entitled to be cast on the matter.
-4-
<PAGE> 5
IN WITNESS WHEREOF, I have signed these Articles of Incorporation and
acknowledge the same to be my act on this 28th day of January, 2000.
/s/ Ronald W. Swenson
---------------------------
Ronald W. Swenson
I hereby consent to act as resident agent for the entity named in this document.
THE CORPORATION TRUST INCORPORATED
/s/ Billie J. Swoboda
- - ----------------------------------
Billie J. Swoboda, V.P.
-5-
<PAGE> 1
EXHIBIT 3(ii)
CERTIFICATE OF CORRECTION
FIRST: Title of Document: Articles of Incorporation of Venture Lending & Leasing
III, INC.
SECOND: Name of Party: Venture Lending & Leasing III, INC.
THIRD: Date Document Was Filed: February 1, 2000
FOURTH: Provisions In Document As Previously Filed:
SIXTH: Shares of Stock:
A. The total number of shares of all classes of capital stock which the
Corporation has authority to issue is 200,000 shares of Common Stock, $.001 par
value, having an aggregate par value of $200.
G. The assets so distributed to the stockholders shall be distributed among
such stockholders, in cash or in kind at the option of the directors, in
proportion to the number of full and fractional shares of the class held by them
and recorded on the books of the Corporation.
SEVENTH: Board of Directors: The Corporation shall have at least three
directors; provided that if there is no stock outstanding, the number of
directors may be less than three but not less than one. The directors shall be:
Ronald W. Swenson, Salvador O. Gutierrez, and George W. Siguler.
EIGHTH: Management of the Affairs of the Corporation.
C. The Board of Directors shall have the power to determine whether and to
what extent, and at what times and places, and under what conditions and
regulations the accounts and books of the Corporation (other than the stock
ledger) shall be open to inspection by stockholders. No stockholder shall have
any right to inspect any account, book, or document of the Corporation except to
the extent permitted by statute or the Bylaws.
FOURTEENTH: Right of Amendment. Any provision of these Articles may be
amended, altered, or repealed upon the affirmative vote of a two-thirds of all
the votes entitled to be cast on the matter.
<PAGE> 2
Provisions In Document As Corrected:
SIXTH: Shares of Stock:
A. The total number of shares of all classes of capital stock which the
Corporation has authority to issue is ten million (10,000,000) shares of Common
Stock, $.001 par value, having an aggregate par value of $10,000.
G. The assets so distributed to the stockholders shall be distributed among
such stockholders, in cash or in kind at the option of the directors, in
proportion to the number of full and fractional shares of Common Stock held by
them and recorded on the books of the Corporation.
SEVENTH: Board of Directors: The Corporation shall have at least three
directors; provided that if there is no stock outstanding, the number of
directors may be less than three but not less than one. Ronald W. Swenson and
Salvador O. Gutierrez shall act as directors of the Corporation until their
successors have been duly chosen and qualified.
EIGHTH: Management of the Affairs of the Corporation.
C. The Board of Directors shall have the power to determine whether and to
what extent, and at what times and places, and under what conditions and
regulations, the accounts and books of the Corporation (other than the stock
ledger) shall be open to inspection by stockholders. No stockholder shall have
any right to inspect any account, book, or document of the Corporation except to
the extent permitted by statute or the Bylaws.
FOURTEENTH: Right of Amendment. Any provision of these Articles may be
amended, altered, or repealed upon the affirmative vote of a majority of all the
votes entitled to be cast on the matter.
/s/ Ronald W. Swenson
-------------------------
Ronald W. Swenson
-2-
<PAGE> 1
EXHIBIT 3(iii)
VENTURE LENDING & LEASING III, INC.
A Maryland Corporation
BYLAWS
February 1, 2000
<PAGE> 2
BYLAWS
OF
VENTURE LENDING & LEASING III, INC.
(A MARYLAND CORPORATION)
ARTICLE I
NAME OF CORPORATION, LOCATION OF
OFFICES AND SEAL
Section 1. Name. The name of the Corporation is Venture Lending & Leasing III,
Inc.
Section 2. Principal Offices. The principal office of the Corporation is in the
City of Baltimore. The Corporation may, in addition, establish and maintain such
other offices and places of business as the Board of Directors may, from time to
time, determine.
Section 3. Seal. The corporate seal of the Corporation shall be circular in form
and shall bear the name of the Corporation, the year of its incorporation, and
the word "Maryland." The form of the seal shall be subject to alteration by the
Board of Directors and the seal may be used by causing it or a facsimile to be
impressed or affixed or printed or otherwise reproduced. Any officer or director
of the Corporation shall have authority to affix the corporate seal of the
Corporation to any document requiring the same.
ARTICLE II
SHAREHOLDERS
Section 1. Annual Meetings. An annual meeting of shareholders to elect directors
and transact any other business within the Corporation's powers will be held at
such time as is set by the Board of Directors during the month of May of each
calendar year.
Section 2. Special Meetings. Special meetings of shareholders may be called at
any time by the Chairman of the Board, or Chief Executive Officer, or President,
or by a majority of the Board of Directors, and shall be held at such time and
place as may be stated in the notice of the meeting.
Special meetings of the shareholders may be called by the Secretary upon the
written request of the holders of shares entitled to vote not less than
twenty-five percent of all the votes entitled to be cast at such meeting,
provided that (1) such request shall state the purposes of such meeting and the
matters proposed to be acted on, and (2) the shareholders requesting such
meeting shall have paid to the Corporation the reasonably estimated cost of
preparing and mailing the notice
<PAGE> 3
thereof, which the Secretary shall determine and specify to such shareholders.
No special meeting shall be called upon the request of shareholders to consider
any matter which is substantially the same as a matter voted upon at any special
meeting of the shareholders held during the preceding twelve months, unless
requested by the holders of a majority of all shares entitled to be voted at
such meeting.
Section 3. Notice of Meetings. The Secretary shall cause notice of the place,
date, and hour, and, in the case of a special meeting, the purpose or purposes
for which the meeting is called, to be mailed, postage prepaid, not less than
ten nor more than ninety days before the date of the meeting, to each
shareholder entitled to vote at such meeting at his or her address as it appears
on the records of the Corporation at the time of such mailing. Notice shall be
deemed to be given when deposited in the United States mail addressed to the
shareholders as aforesaid. Notice of any shareholders' meeting need not be given
to any shareholder who shall sign a written waiver of such notice whether before
or after the time of such meeting, or to any shareholder who is present at such
meeting in person or by proxy. Notice of adjournment of a shareholders' meeting
to another time or place need not be given if such time and place are announced
at the meeting. Irregularities in the notice of any meeting to, or the
nonreceipt of any such notice by, any of the shareholders shall not invalidate
any action otherwise properly taken by or at any such meeting.
Section 4. Quorum and Adjournment of Meetings. The presence at any shareholders'
meeting, in person, by telephone conference, or by proxy, of shareholders
entitled to cast a majority of the votes shall be necessary and sufficient to
constitute a quorum for the transaction of business. In the absence of a quorum,
the holders of a majority of shares entitled to vote at the meeting and present
in person or by proxy, or, if no shareholder entitled to vote is present in
person or by proxy, any officer present entitled to preside or act as secretary
of such meeting may adjourn the meeting without determining the date of the new
meeting or from time to time without further notice to a date not more than 120
days after the original record date. Any business that might have been
transacted at the meeting originally called may be transacted at any such
adjourned meeting at which a quorum is present.
Section 5. Voting. Except as otherwise provided in the Articles of Incorporation
or by applicable law, at each shareholders' meeting each shareholder shall be
entitled to one vote for each share of stock of the Corporation validly issued
and outstanding and registered in his or her name on the books of the
Corporation on the record date fixed in accordance with Section 5 of Article VI
hereof, either in person or by proxy appointed by instrument in writing
subscribed by such shareholder or his or her duly authorized attorney, except
that no shares held by the Corporation shall be entitled to a vote.
Except as otherwise provided in the Articles of Incorporation, these Bylaws, as
required by provisions of the Investment Company Act of 1940, as amended ("1940
Act") or as required under Maryland law, all matters shall be decided by a vote
of the majority of the votes validly cast. The vote upon any question shall be
by ballot whenever requested by any person entitled
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to vote, but, unless such a request is made, voting may be conducted in any way
approved at the meeting.
At any meeting at which there is an election of Directors, the chairman of the
meeting may, and upon the request of the holders of ten percent of the stock
entitled to vote at such election shall, appoint two inspectors of election who
shall first subscribe an oath or affirmation to execute faithfully the duties of
inspectors at such election with strict impartiality and according to the best
of their ability, and shall, after the election, make a certificate of the
result of the vote taken. No candidate for the office of Director shall be
appointed as an inspector.
Section 6. Validity of Proxies. The right to vote by proxy shall exist only if
the instrument authorizing such proxy to act shall have been signed by the
shareholder or by his or her duly authorized attorney. Unless a proxy provides
otherwise, it shall not be valid more than eleven months after its date. All
proxies shall be delivered to the Secretary of the Corporation or to the person
acting as Secretary of the meeting before being voted, who shall decide all
questions concerning qualification of voters, the validity of proxies, and the
acceptance or rejection of votes. If inspectors of election have been appointed
by the chairman of the meeting, such inspectors shall decide all such questions.
A proxy with respect of stock held in the name of two or more persons shall be
valid if executed by one of them unless at or prior to exercise of such proxy
the Corporation receives a specific written notice to the contrary from any one
of them. A proxy purporting to be executed by or on behalf of a shareholder
shall be deemed valid unless challenged at or prior to its exercise.
Section 7. Stock Ledger and List of Shareholders. It shall be the duty of the
Secretary or Assistant Secretary of the Corporation to cause an original or
duplicate stock ledger to be maintained at the office of the Corporation's
transfer agent. Such stock ledger may be in written form or any other form
capable of being converted into written form within a reasonable time for visual
inspection.
Any one or more persons, each of whom has been a shareholder of record of the
Corporation for more than six months next preceding such request, who owns in
the aggregate five percent or more of the outstanding capital stock of the
Corporation, may submit (unless the Corporation at the time of the request
maintains a duplicate stock ledger at its principal office in Maryland) a
written request to any officer of the Corporation or its resident agent in
Maryland for a list of the shareholders of the Corporation. Within twenty days
after such a request, there shall be prepared and filed at the Corporation's
principal office in Maryland a list containing the names and addresses of all
shareholders of the Corporation and the number of shares of each class held by
each shareholder, certified as correct by an officer of the Corporation, by its
stock transfer agent, or by its registrar.
Section 8. Action Without Meeting. Any action required or permitted to be taken
by shareholders at a meeting of shareholders may be taken without a meeting if
(1) all shareholders entitled to vote on the matter sign a written consent to
the action, (2) all
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shareholders entitled to notice of the meeting but not entitled to vote at it
sign a written waiver of any right to dissent, and (3) the consents and waivers
are filed with the records of the meetings of shareholders. Such consent shall
be treated for all purposes as a vote at the meeting.
ARTICLE III
BOARD OF DIRECTORS
Section 1. Powers. Except as otherwise provided by operation of law, by the
Articles of Incorporation, or by these Bylaws, the business and affairs of the
Corporation shall be managed under the direction of and all the powers of the
Corporation shall be exercised by or under authority of its Board of Directors.
Section 2. Number and Term of Directors. Except for the initial Board of
Directors, the Board of Directors shall consist of not fewer than three nor more
than seven Directors, as specified by a resolution of a majority of the entire
Board of Directors. Directors need not be shareholders of the Corporation. All
acts done at any meeting of the Directors or by any person acting as a Director,
so long as his or her successor shall not have been duly elected or appointed,
shall, notwithstanding that it be afterwards discovered that there was some
defect in the election of the Directors or of such person acting as a Director,
or that they or any of them were disqualified, be as valid as if the Directors
or such other person, as the case may be, had been duly elected and were or was
qualified to be Directors or a Director of the Corporation. Each Director shall
hold office until his or her successor is elected and qualified or until his or
her earlier death, resignation, or removal.
Section 3. Election. Unless otherwise required by the 1940 Act, at each annual
meeting of shareholders, Directors shall be elected by vote of the holders of a
majority of the shares present in person or by proxy and entitled to vote
thereon. A plurality of all the votes cast at a meeting at which a quorum is
present is sufficient to elect a Director.
Section 4. Vacancies and Newly Created Directorships. If any vacancies shall
occur in the Board of Directors by reason of death, resignation, removal, or
otherwise, or if the authorized number of Directors shall be increased, the
Directors then in office shall continue to act, and such vacancies (if not
previously filled by the shareholders) may be filled by a majority of the
Directors then in office, although less than a quorum, except that a newly
created Directorship may be filled only by a majority vote of the entire Board
of Directors; provided, however, that if, at any time that there are
shareholders of the Corporation, immediately after filling such vacancy at least
two-thirds (2/3) of the Directors then holding office shall have been elected to
such office by the shareholders of the Corporation. In the event that at any
time, other than the time preceding the first annual shareholders' meeting, less
than a majority of the Directors of the Corporation holding office at that time
were elected by the shareholders, a meeting of the shareholders shall be held
promptly, and in any event within sixty days, for the purpose of
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electing Directors to fill any existing vacancies in the Board of Directors,
unless the Securities and Exchange Commission shall by order extend such period.
Section 5. Removal. At any shareholders' meeting duly called, provided a quorum
is present, the shareholders may remove any director from office (either with or
without cause) and may elect a successor or successors to fill any resulting
vacancies for the unexpired terms of the removed director or directors. A
majority of all the votes entitled to be cast for the election of directors is
sufficient to remove a Director.
Section 6. Annual and Regular Meetings. The annual meeting of the Board of
Directors for choosing officers and transacting other proper business shall be
held at such other time and place as the Board may determine. The Board of
Directors from time to time may provide by resolution for the holding of regular
meetings and fix their time and place within or outside the State of Maryland.
Except as otherwise provided in the 1940 Act, notice of such annual and regular
meetings need not be given, provided that notice of any change in the time or
place of such meetings shall be sent promptly to each Director not present at
the meeting at which such change was made, in the manner provided for notice of
special meetings. Except as otherwise provided under the 1940 Act, members of
the Board of Directors or any committee designated thereby may participate in a
meeting of such Board or committee by means of a conference telephone or similar
communications equipment that allows all persons participating in the meeting to
hear each other at the same time.
Section 7. Special Meetings. Special meetings of the Board of Directors shall be
held whenever called by the Chairman of the Board, the Vice Chairman, the Chief
Executive Officer, the President (or, in the absence or disability of the
President, by any Vice President), the Treasurer, or by two or more Directors,
at the time and place (within or without the State of Maryland) specified in the
respective notice or waivers of notice of such meetings. Notice of special
meetings, stating the time and place, shall be (1) mailed to each Director at
his or her residence or regular place of business at least three days before the
day on which a special meeting is to be held, or (2) delivered to him or her
personally or transmitted to him or her by telegraph, telecopy, telex, cable, or
wireless at least one day before the meeting.
Section 8. Waiver of Notice. No notice of any meeting need be given to any
Director who is present at the meeting or who waives notice of such meeting in
writing (which waiver shall be filed with the records of such meeting) either
before or after the time of the meeting.
Section 9. Quorum and Voting. At all meetings of the Board of Directors, the
presence of one half or more of the number of Directors then in office shall
constitute a quorum for the transaction of business, provided that, at any time
that there shall be more than one director, there shall be present at least two
directors. In the absence of a quorum, a majority of the Directors present may
adjourn the meeting, from time to time, until a quorum shall be present. The
action of a majority of the Directors present at a meeting at which a quorum is
present
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shall be the action of the Board of Directors, unless concurrence of a greater
proportion is required for such action by law, by the Articles of Incorporation,
or by these Bylaws.
Section 10. Action Without a Meeting. Except as otherwise provided under the
1940 Act, any action required or permitted to be taken at any meeting of the
Board of Directors or of any committee thereof may be taken without a meeting if
a written consent to such action is signed by all members of the Board or of
such committee, as the case may be, and such written consent is filed with the
minutes of proceedings of the Board or committee.
Section 11. Compensation of Directors. Directors shall be entitled to receive
such compensation from the Corporation for their services as may from time to
time be determined by resolution of the Board of Directors.
ARTICLE IIIA
ADVISORY DIRECTORS
Section 1. Advisory Directors. The Board of Directors may elect one or more
persons (who may or may not be officers of the Corporation) to serve as Advisory
Directors of the Corporation. Advisory Directors shall attend meetings of the
Board of Directors, and provide advice and assistance to the Board of Directors
as requested. Advisory Directors will not be deemed members of the Board of
Directors, and will not vote on any matter requiring a vote of the Board of
Directors.
Section 2. Election, Removal, etc. The election, tenure, qualifications, removal
and resignation of Advisory Directors shall be governed by the provisions of
Article V of these By-Laws dealing with the election, tenure, qualifications,
removal and resignation of officers.
Section 3. Indemnification and Insurance. An Advisory Director shall be entitled
to the same Indemnification and Insurance provided under Article IX of these
Bylaws as that which would apply to an officer or director of the Corporation.
ARTICLE IV
COMMITTEES
Section 1. Organization. By resolution adopted by the Board of Directors, the
Board may designate one or more committees of the Board of Directors, including
an Executive Committee. The Chairmen of such committees shall be elected by the
Board of Directors. Each committee must be comprised of one or more members,
each of whom must be a Director and shall hold committee membership at the
pleasure of the Board. The Board of Directors shall have the power at any time
to change the members of such committees and to fill vacancies in the
committees. The Board may delegate to these committees any of its
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powers, except the power to authorize dividends on stock, authorize the issuance
of stock (except as permitted under Title 2 of the Annotated Corporations and
Associations Code of Maryland ("Code")), recommend to shareholders any action
requiring shareholders' approval, amend these Bylaws, approve any merger or
share exchange which does not require shareholder approval, approve or terminate
any contract with an "investment adviser" or "principal underwriter," as those
terms are defined in the 1940 Act, or to take any other action required by the
1940 Act to be taken by the Board of Directors.
Section 2. Executive Committee. Unless otherwise provided by resolution of the
Board of Directors, when the Board of Directors is not in session, the Executive
Committee, if one is designated by the Board, shall have and may exercise all
powers of the Board of Directors in the management of the business and affairs
of the Corporation that may lawfully be exercised by an Executive Committee. The
Chief Executive Officer, President and Chairman shall automatically be members
of the Executive Committee.
Section 3. Proceedings and Quorum. In the absence of an appropriate resolution
of the Board of Directors, each committee may adopt such rules and regulations
governing its proceedings, quorum, and manner of acting as it shall deem proper
and desirable. In the event any member of any committee is absent from any
meeting, the members thereof present at the meeting, whether or not they
constitute a quorum, may appoint a member of the Board of Directors to act in
the place of such absent member.
Section 4. Other Committees. The Board of Directors may appoint other
committees, each consisting of one or more persons, who need not be Directors.
Each such committee shall have such powers and perform such duties as may be
assigned to it from time to time by the Board of Directors, but shall not
exercise any power which may lawfully be exercised only by the Board of
Directors or a committee thereof.
ARTICLE V
OFFICERS
Section 1. General. The officers of the Corporation shall be a Chairman, Chief
Executive Officer, President, Vice President, Treasurer, and Secretary and may
include one or more Vice Presidents, Assistant Secretaries, or Assistant
Treasurers, and such other officers as may be appointed in accordance with the
provisions of Section 11 of this Article.
Section 2. Election, Tenure and Qualifications. The officers of the Corporation,
except those appointed as provided in Section 11 of this Article V, shall be
elected by the Board of Directors at its first meeting or such subsequent
meetings as shall be held prior to its first annual meeting, and thereafter
annually at its annual meeting. If any officers are not elected at any annual
meeting, such officers may be elected at any subsequent regular or special
meeting of the Board. Except as otherwise provided in this Article V, each
officer elected by the Board
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of Directors shall hold office until the next annual meeting of the Board of
Directors and until his or her successor shall have been elected and qualified.
Any person may hold one or more offices of the Corporation, except that no one
person may serve concurrently as both President and Vice President. A person who
holds more than one office in the Corporation may not act in more than one
capacity to execute, acknowledge, or verify an instrument required by law to be
executed, acknowledged, or verified by more than one officer. No officer, other
than the Chairman or [Vice Chairman], need be a Director.
Section 3. Vacancies and Newly Created Officers. If any vacancy shall occur in
any office by reason of death, resignation, removal, disqualification, or other
cause, or if any new office shall be created, such vacancies or newly created
offices may be filled by the Board of Directors at any regular or special
meeting or, in the case of any office created pursuant to Section 11 hereof, by
any officer upon whom such power shall have been conferred by the Board of
Directors.
Section 4. Removal and Resignation. Any officer may be removed from office by
the vote of a majority of the members of the Board of Directors given at a
regular meeting or any special meeting called for such purpose. Any officer may
resign from office at any time by delivering a written resignation to the Board
of Directors, the Chief Executive Officer, the President, the Chairman, the
Secretary, or any Assistant Secretary. Unless otherwise specified therein, such
resignation shall take effect upon delivery.
Section 5. Chief Executive Officer. The Chief Executive Officer shall preside at
all shareholders' meetings and at all meetings of the Board of Directors.
Subject to the supervision of the Board of Directors, the Chief Executive
Officer shall have general charge of the business, affairs, and property of the
Corporation and general supervision over its officers, employees, and agents.
Except as the Board of Directors may otherwise order, the Chief Executive
Officer may sign in the name and on behalf of the Corporation all deeds, bonds,
contracts, or agreements. The Chief Executive Officer shall exercise such other
powers and perform such other duties as from time to time may be assigned by the
Board of Directors.
Section 6. President. The President shall actively manage the business, affairs
and property of the Corporation and shall supervise its officers, employees and
agents. Except as the Board of Directors may otherwise order, the President may
sign in the name and on behalf of the Corporation all deeds, bonds, contracts,
or agreements. The President shall exercise such other powers and perform such
other duties as from time to time may be assigned by the Board of Directors.
Section 7. Chairman. The Chairman shall be the Chief Executive Officer of the
Corporation and shall preside at all shareholders' meetings and at all meetings
of the Board of Directors, and may be ex officio a member of all committees of
the Board of Directors. Except as the Board of Directors may otherwise order,
the Chairman may sign in the name and on behalf of the Corporation all deeds,
bonds, contracts, or agreements. The Chairman shall exercise such
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other powers and perform such other duties as from time to time may be assigned
by the Board of Directors.
Section 8. Vice Chairman. The Vice Chairman shall be the President of the
Corporation and, in the absence of the Chairman, shall preside at the all
shareholders' meetings and at all meetings of the Board of Directors. Except as
the Board of Directors may otherwise order, the Vice Chairman may sign in the
name and on behalf of the Corporation all deeds, bonds, contracts, or
agreements. The Vice Chairman shall exercise such other powers and perform such
other duties as from time to time may be assigned by the Board of Directors.
Section 9. Vice President. The Board of Directors may from time to time elect
one or more Vice Presidents who shall have such powers and perform such duties
as from time to time may be assigned to them by the Board of Directors or the
President. The Board of Directors may establish titles among the Vice Presidents
denoting their relative seniority. At the request of, or in the absence or in
the event of the disability of, the President, the Vice President (or, if there
are two or more Vice Presidents, then the senior of the Vice Presidents present
and able to act) may perform all the duties of the President and, when so
acting, shall have all the powers of and be subject to all the restrictions upon
the President.
Section 10. Treasurer and Assistant Treasurers. The Treasurer shall be the
principal financial and accounting officer of the Corporation and shall have
general charge of the finances and books of account of the Corporation. Except
as otherwise provided by the Board of Directors, the Treasurer shall have
general supervision of the funds and property of the Corporation and of the
performance by the Custodian of its duties with respect thereto. The Treasurer
shall render to the Board of Directors, whenever directed by the Board, an
account of the financial condition of the Corporation and of all transactions as
Treasurer; and as soon as possible after the close of each financial year the
Treasurer shall make and submit to the Board of Directors a like report for such
financial year. The Treasurer shall perform all acts incidental to the office of
Treasurer, subject of the control of the Board of Directors.
Any Assistant Treasurer may perform such duties of the Treasurer as the
Treasurer or the Board of Directors may assign, and, in the absence of the
Treasurer, may perform all the duties of the Treasurer.
Section 11. Secretary and Assistant Secretaries. The Secretary shall attend to
the giving and serving of all notices of the Corporation and shall record all
proceedings of the meetings of the shareholders and Directors in books to be
kept for that purpose. The Secretary shall keep in safe custody the seal of the
Corporation, and shall have responsibility for the records of the Corporation,
including the stock books and such other books and papers as the Board of
Directors may direct and such books, reports, certificates, and other documents
required by law to be kept, all of which shall at all reasonable times be open
to inspection by any Director. The Secretary shall perform such other duties
which appertain to this office or as may be required by the Board of Directors.
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Any Assistant Secretary may perform such duties of the Secretary as the
Secretary or the Board of Directors may assign, and, in the absence of the
Secretary, may perform all the duties of the Secretary.
Section 12. Subordinate Officers. The Board of Directors from time to time may
appoint such other officers and agents as it may deem advisable, each of whom
shall have such title, hold office for such period, have such authority, and
perform such duties as the Board of Directors may determine. The Board of
Directors from time to time may delegate to one or more officers or agents the
power to appoint any such subordinate officers or agents and to prescribe their
respective rights, terms of office, authorities, and duties. Any officer or
agent appointed in accordance with the provisions of this Section 11 may be
removed, either with or without cause, by any officer upon whom such power of
removal shall have been conferred by the Board of Directors.
Section 13. Remuneration. The salaries or other compensation, if any, of the
officers of the Corporation shall be fixed from time to time by resolution of
the Board of Directors in the manner provided by Section 9 of Article III,
except that the Board of Directors may by resolution delegate to any person or
group of persons the power to fix the salaries or other compensation of any
subordinate officers or agents appointed in accordance with the provisions of
Section 11 of this Article V.
Section 14. Surety Bond. The Board of Directors may require any officer or agent
of the Corporation to execute a bond (including, without limitation, any bond
required by the 1940 Act and the rules and regulations of the Securities and
Exchange Commission promulgated thereunder) to the Corporation in such sum and
with such surety or sureties as the Board of Directors may determine,
conditioned upon the faithful performance of his or her duties to the
Corporation, including responsibility for negligence and for the accounting of
any of the Corporation's property, funds or securities that may come into his or
her hands.
ARTICLE VI
CAPITAL STOCK
Section 1. Certificates of Stock. The interest of each shareholder of the
Corporation may be evidenced by certificates for shares of stock in such form as
the Board of Directors may from time to time authorize; provided, however, the
Board of Directors may, in its discretion, authorize the issuance of
non-certificated shares. No certificate shall be valid unless it is signed by
the Chairman, President, or a Vice President and countersigned by the Secretary
or an Assistant Secretary, or the Treasurer or an Assistant Treasurer of the
Corporation and sealed with the seal of the Corporation, or bears the facsimile
signatures of such officers and a facsimile of such seal. In case any officer
who shall have signed any such certificate, or whose facsimile signature has
been placed thereon, shall cease to be such an officer (because of death,
resignation, or otherwise) before such certificate is issued, such certificate
may be issued and
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delivered by the Corporation with the same effect as if he or she were such
officer at the date of issue.
In the event that the Board of Directors authorizes the issuance of
non-certificated shares of stock, the Board of Directors may, in its discretion
and at any time, discontinue the issuance of share certificates and may, by
written notice to the registered owners of each certificated share, require the
surrender of share certificates to the Corporation for cancellation. Such
surrender and cancellation shall not affect the ownership of shares of the
Corporation.
Section 2. Transfer of Shares. Subject to the provisions of the next sentence of
this Section 2 of Article VI, Shares of the Corporation shall be transferable on
the books of the Corporation by the holder of record thereof in person or by his
or her duly authorized attorney or legal representative (i) upon surrender and
cancellation of any certificate or certificates for the same number of shares of
the same class, duly endorsed or accompanied by proper instruments of assignment
and transfer, with such proof of the authenticity of the signature as the
Corporation or its agents may reasonably require, or (ii) as otherwise
prescribed by the Board of Directors. The Board of Directors may, from time to
time, adopt limitations and rules and regulations with reference to the transfer
of the shares of stock of the Corporation to comply with the requirements of the
Securities Act of 1933, as amended, or other applicable laws. The Corporation
shall be entitled to treat the holder of record of any share of stock as the
absolute owner thereof for all purposes, and accordingly shall not be bound to
recognize any legal, equitable, or other claim or interest in such share on the
part of any other person, whether or not it shall have express or other notice
thereof, except as otherwise expressly provided by law or the statutes of the
State of Maryland.
Section 3. Stock Ledgers. The stock ledgers of the Corporation, containing the
names and addresses of the shareholders and the number of shares held by them
respectively, shall be kept at the principal offices of the Corporation or, if
the Corporation employs a transfer agent, at the offices of the transfer agent
of the Corporation.
Section 4. Transfer Agents and Registrars. The Board of Directors may from time
to time appoint or remove transfer agents and registrars of transfers for shares
of stock of the Corporation, and it may appoint the same person as both transfer
agent and registrar. Upon any such appointment being made, all certificates
representing shares of capital stock thereafter issued shall be countersigned by
one of such transfer agents or by one of such registrars or by both and shall
not be valid unless so countersigned. If the same person shall be both transfer
agent and registrar, only one countersignature by such person shall be required.
Section 5. Fixing of Record Date. The Board of Directors may fix in advance a
date as a record date for the determination of the shareholders entitled to
notice of or to vote at any shareholders' meeting or any adjournment thereof, or
to express consent to corporate action in writing without a meeting, or to
receive payment of any dividend or other distribution or allotment of any
rights, or to exercise any rights in respect of any change, conversion, or
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exchange of stock, or for the purpose of any other lawful action, provided that
(1) such record date shall be within ninety days prior to the date on which the
particular action requiring such determination will be taken, (2) the transfer
books shall not be closed for a period longer than twenty days, and (3) in the
case of a meeting of shareholders, the record date shall be at least ten days
before the date of the meeting.
Section 6. Lost, Stolen or Destroyed Certificates. Before issuing a new
certificate for stock of the Corporation alleged to have been lost, stolen, or
destroyed, the Board of Directors or any officer authorized by the Board may, in
their discretion, require the owner of the lost, stolen, or destroyed
certificate (or his or her legal representative) to give the Corporation a bond
or other indemnity, in such form and in such amount as the Board or any such
officer may direct and with such surety or sureties as may be satisfactory to
the Board or any such officer, sufficient to indemnify the Corporation against
any claim that may be made against it on account of the alleged loss, theft, or
destruction of any such certificate or the issuance of such new certificate.
ARTICLE VII
FISCAL YEAR AND ACCOUNTANT
Section 1. Fiscal Year. The fiscal year of the Corporation shall, unless
otherwise ordered by the Board of Directors, be twelve calendar months ending on
the 30th day of June.
Section 2. Accountant.
A. The Corporation shall employ an independent public accountant or a firm
of independent public accountants as its Accountant to examine the accounts of
the Corporation and to sign and certify financial statements filed by the
Corporation. The Accountant's certificates and reports shall be addressed both
to the Board of Directors and to the shareholders. The employment of the
Accountant shall be conditioned upon the right of the Corporation to terminate
the employment forthwith without any penalty by vote of a majority of the
outstanding voting securities at any shareholders' meeting called for that
purpose.
B. A majority of the members of the Board of Directors who are not
"interested persons" (as defined in the 1940 Act) of the Corporation shall
select the Accountant at any meeting held within thirty days before or after the
beginning of the fiscal year of the Corporation or before the annual
shareholders' meeting in that year. The selection shall be submitted for
ratification or rejection at the next succeeding annual shareholders' meeting.
If the selection is rejected at that meeting, the Accountant shall be selected
by majority vote of the Corporation's outstanding voting securities, either at
the meeting at which the rejection occurred, or at a subsequent meeting of
shareholders called for the purpose of selecting an Accountant.
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C. Any vacancy occurring between annual meetings due to the resignation of the
Accountant may be filled by the vote of a majority of the members of the Board
of Directors who are not interested persons.
ARTICLE VIII
CUSTODY OF SECURITIES
Section 1. Employment of a Custodian. The Corporation shall place and at all
times maintain in the custody of a Custodian (including any sub-custodian for
the Custodian) all funds, securities and similar investments owned by the
Corporation. The Custodian (and any sub-custodian) shall be a bank or trust
company of good standing having an aggregate capital, surplus, and undivided
profits not less than fifty million dollars ($50,000,000) or such other
financial institution or other entity as shall be permitted by rule or order of
the Securities and Exchange Commission. The Custodian shall be appointed from
time to time by the Board of Directors, which shall fix its remuneration.
Section 2. Termination of Custodian Agreement. Upon termination of the agreement
for services with the Custodian or inability of the Custodian to continue to
serve, the Board of Directors shall promptly appoint a successor Custodian, but
in the event that no successor Custodian can be found who has the required
qualifications and is willing to serve, the Board of Directors shall call as
promptly as possible a special meeting of the shareholders to determine whether
the Corporation shall function without a Custodian or shall be liquidated. If so
directed by resolution of the Board of Directors, or by vote of the holders of a
majority of the outstanding shares of stock of the Corporation, the Custodian
shall deliver and pay over all property of the Corporation held by it as
specified in such vote.
Section 3. Other Arrangements. The Corporation may make such other arrangements
for the custody of its assets (including deposit arrangements) as may be
required by any applicable law, rule, or regulation.
ARTICLE IX
INDEMNIFICATION AND INSURANCE
Section 1. Indemnification of Officers, Directors, Employees and Agents. The
Corporation shall indemnify its present and past directors, officers, employees,
and agents (including any "investment adviser" or "principal underwriter," as
those terms are defined in the 1940 Act), and any persons who are serving or
have served at the request of the Corporation as a director,
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officer, employee, or agent of another corporation, partnership, joint venture,
trust, or enterprise, to the full extent provided and allowed by Section 2-418
of the Code concerning corporations, as amended from time to time or any other
applicable provisions of law. Notwithstanding anything herein to the contrary,
no director, officer, investment adviser, or principal underwriter of the
Corporation shall be indemnified in violation of Sections 17(h) and (i) of the
1940 Act. Expenses incurred by any such person in defending any proceeding to
which he or she is a party by reason of service in the above-referenced
capacities shall be paid in advance or reimbursed by the Corporation to the full
extent permitted by law, including Sections 17(h) and (i) of the 1940 Act.
Section 2. Insurance of Officers, Directors, Employees and Agents. The
Corporation may purchase and maintain insurance on behalf of any person who is
or was serving at the request of the Corporation as a director, officer,
employee, or agent of another corporation, partnership, joint venture, trust, or
other enterprise, against any liability asserted against that person and
incurred by that person in or arising out of his or her position, whether or not
the Corporation would have the power to indemnify him or her against such
liability. Notwithstanding the foregoing, any insurance so purchased will not
protect or purport to protect any officer or director against liabilities for
willful misfeasance, bad faith, gross negligence, or reckless disregard of duty.
Section 3. Amendment. No amendment, alternation, or repeal of this Article or
the adoption, alteration, or amendment of any other provision of the Articles of
Incorporation or Bylaws inconsistent with this Article shall adversely affect
any right or protection of any person under this Article with respect to any act
or failure to act which occurred prior to such amendment, alteration, repeal, or
adoption.
ARTICLE X
AMENDMENTS
Section 1. General. Except as provided in Section 2 of this Article X, all
Bylaws of the Corporation, whether adopted by the Board of Directors or the
shareholders, shall be subject to amendment, alteration, or repeal, and new
Bylaws may be made by the affirmative vote of a majority of either: (1) the
holders of record of the outstanding shares of stock of the Corporation entitled
to vote, at any annual or special meeting, the notice or waiver of notice of
which shall have specified or summarized the proposed amendment, alteration,
repeal, or new Bylaw; or (2) the Directors, at any regular or special meeting
the notice or waiver of notice of which shall have specified or summarized the
proposed amendment, alteration, repeal, or new Bylaw.
Section 2. By Shareholders Only. No amendment of any section of these Bylaws
shall be made except by the shareholders of the Corporation if the Bylaws
provide that such section may not be amended, altered, or repealed except by the
shareholders. From and after the issue of any
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shares of the capital stock of the Corporation, no amendment, alteration, or
repeal of this Article X shall be made except by the affirmative vote of the
holders of either: (a) more than two-thirds of the Corporation's outstanding
shares present at a meeting at which the holders of more than fifty percent of
the outstanding shares are present in person or by proxy, or (b) more than fifty
percent of the Corporation's outstanding shares.
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