Glossary

A loan with minimal or inadequate tangible collateral, as opposed to an asset-based loan, which is a loan with collateral.

A loan made to a borrower with inadequate or no collateral is judged by the fact that the loan amount exceeds the collateral’s liquidation value. These kinds of loans, loans made to small and middle-market businesses that could be called pre-revenue loans, pre-profit loans, or bridge loans, are extremely rare. Banks seem to avoid such loans. A lender with incentive to make such a loan can use interesting ways to assess and manage the risks of doing so. Instead of looking to hard assets or years of profitability, some lenders might look to different sources for comfort. Specifically, they could look for:

* Professional managers deeply knowledgeable about their industry;

* An outside board of directors equally steeped in the industry;

* Investors prepared to participate in an upcoming round of equity financing;

* Other signs of the borrower’s ability to repay a loan.

Capital of this kind may be available, but at a high cost, to these companies from a few non-bank lenders. Because these loans are difficult to obtain, lenders can get highly competitive terms, high interest rates, and a substantial amount of warrants to purchase stock in the companies to which they lend.

A class of investments that includes venture capital, leveraged buyouts, hedge funds, real estate, and oil and gas, but excludes publicly traded securities. Pension plans, college endowments, and other relatively large institutional investors typically allocate a certain percentage of their investments to alternative assets with the objective of diversifying their portfolios.

Organizations, associations, clubs, and networking groups of angel investors formed for the purpose of studying, facilitating and executing angel investments in start-up and early-stage businesses.

Typically, an angel is a high net worth individual and often an angel investor is called a smart-money investor because frequently an angel will also be an accomplished entrepreneur and/or business executive with a wealth of valuable experience and contacts.  Angel investors provide to startup and early-stage businesses some of the early-stage funding (and, in appropriate cases, other “value” that comes with the angel investor’s business experience).

Angel investments usually would precede any investments by early-stage venture capital funds. Angel investment typically does not take place until after a company has already raised as much money as practicable from among themselves, their friends and family, the directors and officers (and, in appropriate cases) employees or other individuals known by the founders, directors or officers. Angel investment rounds are much more formal than the founders’ round and any friends and family rounds completed by the corporation before the angel round.  Angel investors do not require a business to be well-established before angels will invest in it.  Angel investors desire to invest before a company has reached its potential.  It is important for an angel investor to correctly judge the qualifications of the company’s management team and examine the fundamental aspects of the company’s business plan.  Angel groups provide companies early stage capital, usually in amounts of less than $1 million.

The bond issuer makes a payment for the bonds to the holder who tendered or surrendered bonds. The redemption price usually includes the total of the principal amount of the bonds, accrued but unpaid interest, plus a call premium expressed in terms of a percentage and basis points of the original principal amount of the bond.

When an issuer calls a bond, the call price always includes the total of the principal amount of the bonds, the accrued but unpaid interest, plus a call premium. Usually a call price is expressed in terms of the original principal amount of the bond being retired, all accrued interest being repaid concurrently, such as callable at 105, which means $1,000 in original principal amount can be called for $1,050 plus accrued and unpaid interest.

A fund provides for capital commitments in lieu of payment of all of the investor’s capital commitment in cash immediately. The capital calls are made at times chosen by the fund manager so that funds are available when needed for making investments in portfolio companies.

Usually, an investor prefers to defer capital gains taxes as long as possible so that the untaxed value of the asset can grow and compound. Legitimate capital gains deferral is the primary purpose of every Tax-Free Corporate Reorganization and every Section 1031 Exchange. But ultimately, many transactions of that kind are taxable, and in that case if the capital asset was held for one year or more then the investment earnings would be further classifiable as long-term capital gains. A capital asset held for one year or longer, when sold, results in the earnings that are recognized being taxed at a lower rate than the tax rates on ordinary income.

See also Equity Securities.

The Cap Table lists all the form of securities (whether equity or debt). It is necessary that all securities are included on this list, such as common stock, preferred stock, options, warrants, senior debt, mezzanine debt and subordinated debt.

The effect of capping is to limit, but not below zero, an amount by mutual agreement. Negotiating, setting, performing under and exceeding a cap each has a different meaning in different contexts. One of the “capped” amounts in a definitive acquisition agreement can be a cap on indemnity, in which case then there is no obligation for indemnity beyond an amount that equals or is defined by the cap. If there is not a cap on a specified thing, then there is possibly too much for one party or the other or both. An unlimited amount of obligation or liability is never ideal. A indemnity liability cap is commonly called just a “cap”.

In a liquidation or a transaction treated as one, a series of preferred stock can participate in the value of the common equity on a parity with the outstanding common stock by receiving distributions pro rata alongside holders of common stock, which is called participating in a distribution on an as-if-converted basis. If an unlimited amount can be distributed in this way, there is no limit or cap set by the original terms of the participating preferred stock. A capped-participating preferred stock is the product of a conscious design and a mutual agreement on the amount that the participating preferred stock can receive because that amount of participation is limited. If an investor cannot on a liquidation or a sale of the company receive as a holder of the capped-participating preferred stock, a participation amount per share greater than a specified limit, it can consider whether it is beneficial to exercise a right, if any, to convert the preferred stock into common stock. The unlimited participation of common stock can be more or less valuable than the preferred stock’s liquidation preference and its limit of participation. If not limited or capped, a participating preferred stock could be entitled in a liquidation to a pro rata distribution along with common stockholders of the net value of the company that remains after all the company’s debts, obligations, and liabilities are satisfied and after all the preferred shares receive their preferences. See Participating Preferred Stock.

Typically, a fund must return the capital invested in it by limited partners (plus any agreed hurdle rate or preferred rate of return) before the general partner can share in the gains of the fund. The general partner will then receive its agreed carried interest (also known as its “carry”), which is the agreed share or split (with the limited partners) of the remaining gains. The carried interest is the general partner’s principal financial incentive to perform well and generate strong fund returns.

(1.) Physical Certificate – The security is registered in your name on the issuer’s books, and you receive an actual, hard copy stock or bond certificate representing your ownership of the security.

(2.) Street Name Registration – The security is registered in the name of your brokerage firm on the issuer’s books, and your brokerage firm holds the security for you in ‘book-entry’ form. ‘Book-entry’ simply means that you do not receive a certificate. Instead, your broker keeps a record in its books that you own that particular security.

(3.) Direct Registration – The security is registered in your name on the issuer’s books, and either the company or its transfer agent holds the security for you in book-entry form. The ‘Direct Registration System’ (also known as ‘DRS’) allows investors to transfer securities held this way.

Originally, 1031 cases needed to be simultaneous transfers of ownership. But since Starker vs. U.S. (602 F.2d 1341), a contract to exchange properties in the future is practically the same as a simultaneous transfer. It is under this case, decided in 1979, that the rules for election of a delayed 1031 originated. To elect the 1031 recognition, a taxpayer must identify the property for exchange before closing, identify the replacement property within 45 days of closing, and acquire the replacement property within 180 days of closing. A Qualified Intermediary must also be used to facilitate the transaction, by holding all the profits from the sale, and then disbursing those monies at the closing, or sometimes for fees associated with acquiring the new property.

To qualify for Section 1031 of the Internal Revenue Code, the properties exchanged must be held for productive use in a trade or business or for investment. Stocks, bonds, and other properties are listed as expressly excluded by Section 1031 of the Internal Revenue Code, though securitized properties are not excluded.

The properties exchanged must be of “like kind”, i.e., of the same nature or character, even if they differ in grade or quality. Personal properties of a like class are like-kind properties. Real properties generally are of like kind, regardless of whether the properties are improved or unimproved. Generally, “like kind” in terms of real estate, means any property that is classified as real estate in any of the 50 US states, and in some cases, the US Virgin Islands.

Taxpayers who hold real estate as inventory, or purchase for re-sell are considered “dealers”. These properties are not eligible for Section 1031 treatment. However, if a taxpayer is a dealer and also an investor, she/he can utilize Section 1031 on qualifying properties. Personal use property will not qualify for Section 1031.

If liabilities assumed by the buyer exceed those of the seller (taxpayer), the realized gain of the seller will not only be realized, but recognized as well. If however, the seller assumes a greater liability than the buyer, the realized loss cannot offset any realized and recognized gain of receiving boot such as cash or other personal property considered boot.

Items such as equipment used on a property included in the lump-sum sale of the property may be able to be deferred. Under Treasury regulation §1.1031(k)-1(c)(5)(i), property that is transferred together with the larger item of value that does not exceed 15% of the fair market value of the larger property does not need to be identified within the 45 day identification period but still needs to be exchanged for like kind property to defer gain.

• Equipment (machines, etc.) purchased for business use
• Tangible personal property used in business
• Business vehicles with a gross vehicle weight in excess of 6,000 lbs
• Computers
• Computer software (available “Off-the-Shelf” not custom-written)
• Office furniture
• Office equipment
• Property attached to your building that is not a structural component of the building (i.e.: a printing press, large manufacturing tools and equipment)

This commonly refers to the U.S. Federal Securities Act of 1933, as amended, which law affects and regulates the offering and sale of securities both within the United States and offers directed to United States persons whereever those persons may be. The law applies to offers made from anywhere in the world.  This term is used synonymously with the term 1933 Act.

The JOBS Act amends Section 12(g) of the Exchange Act and establishes a concept called unaccredited shareholder, which is synonymous with accredited investor already holding securities.  Another difference, the determination of accredited status is made on a current basis, rather than at the time of acquisition.

Having more than 500 unaccredited shareholders results in a company being required to register securities and file reports under the Exchange Act, an onerous task.  Often companies unexpectedly exceed this limit as a result of secondary distribution of their shares.

Delivery of bulky and heavy documents is replaced with an electronic counterpart that is more functional and efficient, where material documents, instruments, contracts, plans, books, and records can be shared with a select person or persons for examination, such as a company providing a copy of its corporate books to its potential investors in connection with the due diligence investigations those investors like to make. Attorneys, accountants, investment bankers or other professionals use virtual data rooms often as administrators and users. Users of these rooms are often expressly held responsible for protecting their access credentials and passwrods. The virtual data room platforms are generally designed to assure that a data room is secured.