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As filed with the Securities and Exchange Commission on October 18, 2010
Securities Act Registration No. 333-165570
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
Form N-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 
Pre-Effective Amendment No. 4  x
Post-Effective Amendment No.   o
 
Horizon Technology Finance Corporation
(Exact name of Registrant as specified in its charter)
 
76 Batterson Park Road
Farmington, Connecticut 06032
(Address of Principal Executive Offices)
 
(860) 676-8654
(Registrant’s Telephone Number, Including Area Code)
 
Robert D. Pomeroy, Jr.
Chief Executive Officer
Horizon Technology Finance Corporation
76 Batterson Park Road
Farmington, Connecticut 06032
(Name and Address of Agent for Service)
 
Copies to:
 
     
Stephen C. Mahon, Esq.    Valerie Ford Jacob, Esq.
Squire, Sanders & Dempsey L.L.P.    Paul D. Tropp, Esq.
221 East Fourth Street, Suite 2900   Fried, Frank, Harris, Shriver & Jacobson LLP
Cincinnati, Ohio 45202   One New York Plaza
(513) 361-1200   New York, NY 10004
(513) 361-1201 – Facsimile   (212) 859-8000
    (212) 859-4000 – Facsimile
 
 
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after the effective date of this Registration Statement.
 
 
If any securities being registered on this form will be offered on a delayed or continuous basis in reliance on Rule 415 under the Securities Act of 1933, other than securities offered in connection with a dividend reinvestment plan, check the following box.  o
 
It is proposed that this filing will become effective (check the appropriate box)
 
o  When declared effective pursuant to section 8(c)
 
If appropriate, check the following box:
 
o  This [post-effective] amendment designates a new effective date for a previously filed [post-effective amendment][registration statement].
 
o  This form is filed to register additional securities for an offering pursuant to Rule 462 (b) under the Securities Act and the Securities Act registration number of the earlier effective registration statement for the same offering is          .
 
 
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
 
             
      Proposed Maximum
    Amount of
      Aggregate
    Registration
Title of Securities Being Registered     Offering Price(1)     Fee
Common Stock, $0.001 par value per share
    $136,562,000     $9,737(2)
             
 
(1) Estimated pursuant to Rule 457(o) solely for the purpose of determining the registration fee.
 
(2) Of which $8,912.50 was previously paid.
 
 
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that the Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such dates as the Commission, acting pursuant to said Section 8(a), may determine.
 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the Securities and Exchange Commission declares our registration statement effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
 
Subject to Completion, dated October 18, 2010
PRELIMINARY PROSPECTUS
6,250,000 Shares
Horizon Technology Finance Corporation
COMMON STOCK
 
We are a non-diversified closed-end management investment company that intends to file an election to be regulated as a business development company under the Investment Company Act of 1940. We were formed to continue and expand the business of Compass Horizon Funding Company LLC, a Delaware limited liability company, which commenced operations in March 2008 and will become our wholly owned subsidiary in connection with this offering. We are externally managed by Horizon Technology Finance Management LLC.
 
Our investment objective is to maximize our investment portfolio’s return by generating current income from the loans we make and capital appreciation from the warrants we receive when making such loans. We make secured loans to development-stage companies in the technology, life science, healthcare information and services, and cleantech industries.
 
This is our initial public offering, and there is no prior public market for our shares. We are offering 4,850,000 shares of common stock, and the selling stockholder, Compass Horizon Partners, LP, is offering 1,400,000 shares of our common stock. We will not receive any of the net proceeds from the sale of shares of our common stock by Compass Horizon Partners, LP. Following the completion of this offering, Compass Horizon Partners, LP will own approximately 15.1% of our common stock assuming no exercise of the underwriters’ over-allotment option.
 
We anticipate that the initial public offering price will be between $18.00 and $19.00 per share. We have applied to have our common stock approved for listing on The NASDAQ Global Market under the symbol “HRZN.”
 
This prospectus contains important information you should know before investing in our common stock and should be retained for future reference. Upon completion of this offering, we will file annual, quarterly and current reports, proxy statements and other information about us with the Securities and Exchange Commission. Upon the closing of this offering, we will maintain a website at http://www.horizontechnologyfinancecorp.com and intend to make all of the foregoing information available, free of charge, on or through our website. You may also obtain such information by contacting us at 76 Batterson Park Road, Farmington, Connecticut 06032 or by calling us at (860) 676-8654. The Securities and Exchange Commission maintains a website at http://www.sec.gov where such information is available without charge. Information contained on our website is not incorporated by reference into this prospectus, and you should not consider information contained on our website to be part of this prospectus.
 
Investing in our common stock should be considered highly speculative and involves a high degree of risk. See “Risk Factors” beginning on page 16. This is our initial public offering, and there is no prior public market for our shares. Based on an assumed initial public offering price of $18.50 per share (the mid-point of the range set forth herein), purchasers in this offering will experience immediate dilution of approximately $0.51 per share. Shares of closed-end investment companies, including business development companies, frequently trade at a discount from their net asset value. If our shares trade at a discount to our net asset value, the risk of loss for purchasers in this offering may increase. See “Risk Factors — Risks Related to this Offering and our Common Stock — Investors in this offering will incur immediate dilution upon the closing of this offering” on page 34 and “Dilution” on page 48.
 
                 
        Sales Load
  Proceeds, Before Expenses, to
   
    Price to
  (Underwriting Discount
  Horizon Technology
  Proceeds to Selling
   
Public
 
and Commissions)
  Finance Corporation(1)   Stockholder(2)
 
Per Share
  $          $                       $                            $               
Total
  $          $                       $                            $               
(1) We estimate that we will incur expenses of approximately $1.5 million in connection with this offering. Stockholders will indirectly bear such expenses as investors in Horizon Technology Finance Corporation.
(2) We will pay all offering expenses incident to the offer and sale of shares of our common stock in this offering by the selling stockholder (excluding underwriting discounts and commissions). We estimate that we will incur approximately $27,500 of such expenses.
 
The underwriters may also purchase up to an additional 937,500 shares of common stock from us at the public offering price, less the sales load, within 30 days of the date of this prospectus to cover any over-allotments. If the underwriters exercise this option in full, the total price to the public, sales load and proceeds will be $          , $          , and $          , respectively.
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
 
The underwriters expect to deliver the shares of common stock to purchasers on or about          , 2010.
 
Morgan Stanley UBS Investment Bank
Stifel Nicolaus Weisel
 
   Morgan Keegan & Company, Inc.
 
   RBC Capital Markets
 
  BMO Capital Markets
Lazard Capital Markets          Northland Capital Markets
The date of this prospectus is          , 2010


 

 
You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information in this prospectus is accurate only as of the date of this prospectus. Our business, financial condition and prospects may have changed since that date. We will update this prospectus to reflect material changes to the information contained herein. Additionally, there is no minimum offering requirement and, as a result, there is a risk that we could be undercapitalized after the completion of this offering.
 
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PROSPECTUS SUMMARY
 
This summary highlights some of the information in this prospectus. It is not complete and may not contain all of the information that you may want to consider before investing in our common stock. You should read the entire prospectus carefully, including “Risk Factors.” Horizon Technology Finance Corporation, a Delaware corporation, was formed on March 16, 2010. The shares of common stock being offered to investors in this offering are shares of Horizon Technology Finance Corporation. Compass Horizon Funding Company LLC, a Delaware limited liability company, which we refer to as “Compass Horizon,” currently owns all of our portfolio investments and will become our wholly owned subsidiary in connection with this offering. Except where the context suggests otherwise, the terms “we,” “us,” “our” and “Company” refer to Compass Horizon and its consolidated subsidiary prior to the Share Exchange and to Horizon Technology Finance Corporation and its consolidated subsidiaries after the Share Exchange. See “The Exchange Transaction” in this prospectus for a more detailed discussion of the Share Exchange. In addition, we refer to Horizon Technology Finance Management LLC, a Delaware limited liability company, as “HTFM,” our “Advisor” or our “Administrator.”
 
From the date of its organization through the date of this prospectus, all of the outstanding limited liability company interests in Compass Horizon have been owned by its members, Compass Horizon Partners, LP, an exempted limited partnership registered in Bermuda which we refer to as “CHP,” and HTF-CHF Holdings LLC, a Delaware limited liability company which we refer to as “HTF-CHF.” Collectively, we refer to CHP and HTF-CHF as the “Compass Horizon Owners.” CHP is the selling stockholder in this offering.
 
Our Company
 
We are an externally-managed, non-diversified closed-end management investment company that intends to file an election to be regulated as a business development company under the Investment Company Act of 1940, as amended, which we refer to as the 1940 Act. In addition, we intend to elect to be treated, and intend to qualify, as a regulated investment company, frequently referred to as a RIC, under Subchapter M of the Internal Revenue Code of 1986, as amended, which we refer to as the “Code,” commencing with our taxable year ending on December 31, 2010. We were formed to continue and expand the business of Compass Horizon which was formed in January 2008 and commenced operations in March 2008 and which will become our wholly owned subsidiary in connection with this offering. Our Advisor manages our day-to-day operations and also provides all administrative services necessary for us to operate. We invest in development-stage companies in the technology, life science, healthcare information and services, and cleantech industries, which we refer to as our “Target Industries.” Our investment objective is to generate current income from the loans we make and capital appreciation from the warrants we receive when making such loans. We make secured loans, which we refer to as “Technology Loans,” to development-stage companies backed by established venture capital and private equity firms in our Target Industries, which we refer to as “Technology Lending.” To a limited extent, we also selectively lend to publicly traded companies in our Target Industries. See “Business — General” on page 64 for more information about us.
 
Our existing loan portfolio will continue to generate revenue for us. We believe our existing investment portfolio has performed well since its inception notwithstanding the economic downturn starting in 2008 and continuing through 2009. With the improvement in the broader economy in 2010, we continue to experience favorable portfolio quality and outcomes with no realized losses (charge-offs) in our loan portfolio since we commenced operations in March 2008. Our existing portfolio of investments and loan commitments provides the following benefits:
 
  •  Interest income from the portfolio will provide immediate income and cash flow allowing for potential near term dividends to our stockholders;
 
  •  Capital gains from warrants to purchase either common stock or preferred stock received from our existing investments are expected to be realized sooner than if we were beginning our initial investment operations without an existing portfolio of earning assets; and
 
  •  Warrants to purchase either common stock or preferred stock issued to us through the economic downturn have exercise prices at relatively lower valuations due to the depressed equity and debt markets in 2008 and 2009.


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Since our inception and through September 30, 2010, we have funded 51 portfolio companies and have invested $228.2 million in loans (including 17 loans that have been repaid). See our “Investment Summary” below. As of September 30, 2010, our total investment portfolio consisted of 34 loans which totaled $135.8 million and our members’ capital was $70.1 million. As of September 30, 2010, our debt portfolio consisted of 33 secured term loans in the aggregate amount of $133.2 million, and one secured equipment loan in the aggregate amount of $2.6 million. All of our existing loans are secured by all or a portion of the tangible and intangible assets of the applicable portfolio company. The loans in our loan portfolio will generally not be rated by any rating agency. For the nine months ended September 30, 2010, our loan portfolio had a dollar-weighted average annualized yield of approximately 14.3% (excluding any yield from warrants). As of September 30, 2010, our loan portfolio had a dollar-weighted average term of approximately 41 months from inception and a dollar-weighted average remaining term of approximately 30 months. In addition, we held warrants to purchase either common stock or preferred stock in 45 portfolio companies.
 
As of September 30, 2010, our loans had an original committed principal amount of between $1 million and $12 million, repayment terms of between 30 and 48 months, and bore current pay interest at annual interest rates of between 10% and 14%.
 
Pipeline
 
As of September 30, 2010, we had unfunded loan commitments to six companies, representing $12.3 million. While our portfolio companies have discretion whether to draw down such commitments, in some cases, the right of a company to draw down its commitment is subject to the portfolio company achieving specific milestones (e.g. an additional capital issuance or the completion of a clinical trial).
 
As of October 12, 2010, our Advisor had issued non-binding term sheets to 12 companies representing $53 million in potential loans. There is no guarantee that we will enter into any of these transactions. In addition, our Advisor was evaluating an additional 12 companies representing $79 million in potential loans. There is no guarantee that the Advisor will issue term sheets to these companies or that we will enter into loans with any of the companies being evaluated.
 
Our Advisor and Its Personnel
 
Our investment activities are managed by HTFM, and we expect to continue to benefit from our Advisor’s ability to identify attractive investment opportunities, conduct diligence on and value prospective investments, negotiate investments and manage our diversified portfolio of investments. In addition to the years that they have worked together both at our Advisor and prior to the formation by our Advisor of the Company, the members of our investment team have broad lending backgrounds, with substantial experience at a variety of commercial finance companies and private debt funds, and have developed a broad network of contacts within the venture capital and private equity community. This network of contacts provides a principal source of investment opportunities.
 
Our Advisor is led by five senior managers, including its two co-founders, Robert D. Pomeroy, Jr., our Chief Executive Officer, and Gerald A. Michaud, our President, each of whom has more than 21 years of experience in Technology Lending. Christopher M. Mathieu, our SVP and Chief Financial Officer, has more than 17 years of Technology Lending experience, and each of John C. Bombara, our SVP and General Counsel, and Daniel S. Devorsetz, our SVP and Chief Credit Officer, has more than nine years experience in Technology Lending. Our Advisor has an additional eight experienced professionals with marketing, legal, accounting, and portfolio management experience in Technology Lending. Our Advisor’s predecessor, Horizon Technology Finance, LLC, which we refer to as “HTF,” was formed in May 2003 by Messrs. Pomeroy and Michaud and began originating loans and investments in April 2004. All of the senior managers of our Advisor were employed by HTF prior to the formation of our Advisor. Our Advisor assumed all of the management operations of HTF. When we refer to our Advisor’s historical performance we include the performance of HTF.
 
Prior to the formation of HTF, members of senior management of our Advisor grew a Technology Lending business for GATX Ventures, Inc., a unit of GATX Corporation, founded and led Transamerica Technology Finance, a division of Transamerica Corporation, and were instrumental in the growth of Financing for Science International, Inc., a healthcare equipment leasing and Technology Lending company. We believe the personnel of our Advisor have achieved strong returns at each of these institutions throughout multiple business cycles.


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Our Strategy
 
Our investment objective is to maximize our investment portfolio’s total return by generating current income from the loans we make and capital appreciation from the warrants we receive when making such loans. We believe our Advisor has demonstrated that its expertise in debt product development, transaction sourcing, its knowledge of our Target Industries, and its disciplined underwriting process create value for our investors. We believe that this expertise results in returns that exceed those typically available from more traditional commercial finance products (such as equipment leasing or middle market lending) while mitigating the risks typically associated with investments in development-stage technology companies.
 
To further implement our business strategy, our Advisor will continue to employ the following core strategies:
 
  •  Structured Investments in the Venture Capital and Private Equity Markets.  We make loans to development-stage companies within our Target Industries typically in the form of secured amortizing loans. The secured amortizing debt structure provides a lower risk strategy, as compared to equity investments, to participate in the emerging technology markets, because the debt structures we typically utilize provide collateral against the downside risk of loss, provide return of capital in a much shorter timeframe through current pay interest and amortization of loan principal and have a senior position in the capital structure to equity in the case of insolvency, wind down or bankruptcy. Unlike venture capital and private equity-backed investments, our investment returns and return of our capital do not require equity investment exits such as mergers and acquisitions or initial public offerings. Instead, we receive returns on our loans primarily through regularly scheduled payments of principal and interest and, if necessary, liquidation of the collateral supporting the loan. Only the potential gains from warrants are dependent upon exits.
 
  •  “Enterprise Value” Lending.  We take an enterprise value approach to the loan structuring and underwriting process. We secure a senior or subordinated lien position against the enterprise value of a portfolio company and generally our exposure is less than 25% of the enterprise value.
 
  •  Creative Products with Attractive Risk-Adjusted Pricing.  Each of our existing and prospective portfolio companies has its own unique funding needs for the capital provided from the proceeds of our Technology Loans. These funding needs include, but are not limited to, funds for additional development runways, funds to hire or retain sales staff, or funds to invest in research and development in order to reach important technical milestones in advance of raising additional equity. Our loans include current pay interest, commitment fees, pre-payment fees and non-utilization fees. We believe we have developed pricing tools, structuring techniques and valuation metrics that satisfy our portfolio companies’ requirements while mitigating risk and maximizing returns on our investments.
 
  •  Opportunity for Enhanced Returns.  To enhance our loan portfolio returns, in addition to interest and fees, we obtain warrants to purchase the equity of our portfolio companies, as additional consideration for making loans. The warrants we obtain generally include a “cashless exercise” provision to allow us to exercise these rights without requiring us to make any additional cash investment. Obtaining warrants in our portfolio companies has allowed us to participate in the equity appreciation of our portfolio companies which we expect will enable us to generate higher returns for our investors.
 
  •  Direct Origination.  We originate transactions directly with technology, life science, healthcare information and services, and cleantech companies. Since it commenced operations in 2004, our Advisor has directly originated more than 115 transactions resulting in over $700 million of Technology Loans. These transactions were referred to our Advisor from a number of sources, including referrals from, or direct solicitation of, venture capital and private equity firms, portfolio company management teams, legal firms, accounting firms, investment banks and other lenders that represent companies within our Target Industries. Our Advisor has been the sole or lead originator in substantially all transactions in which the funds it managed have invested.
 
  •  Disciplined and Balanced Underwriting and Portfolio Management.  We use a disciplined underwriting process that includes obtaining information validation from multiple sources, extensive knowledge of our Target Industries, comparable industry valuation metrics, and sophisticated financial analysis related to development-stage companies. Our Advisor’s due diligence on investment prospects includes obtaining and evaluating information on the prospective portfolio company’s technology, market opportunity,


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  management team, fund raising history, investor support, valuation considerations, financial condition and projections. We seek to balance our investment portfolio to reduce the risk of down market cycles associated with any particular industry or sector, development-stage or geographic area. Our Advisor employs a “hands on” approach to portfolio management requiring private portfolio companies to provide monthly financial information and to participate in regular updates on performance and future plans.
 
  •  Use of Leverage; SBA Debenture Program.  We believe our existing credit facility provides us with a substantial amount of capital for deployment into new investment opportunities. Since its inception, Compass Horizon has employed leverage to increase its return on equity through a revolving credit facility provided by WestLB AG, which we refer to as the “Credit Facility.” The Credit Facility, pursuant to which we will be able to borrow up to $125 million upon completion of this offering, matures on March 4, 2015. The Credit Facility will begin to amortize on March 4, 2011. In addition, on July 14, 2009, our Advisor received a letter, which we refer to as the “Move Forward Letter,” from the Investment Division of the Small Business Administration, which we refer to as the “SBA,” that invited our Advisor to continue moving forward with the licensing of a small business investment company, or “SBIC.” To the extent that our Advisor receives an SBIC license, we expect to form an SBIC subsidiary which will issue SBA-guaranteed debentures at long-term fixed rates. Under the regulations applicable to SBICs, an SBIC generally may have outstanding debentures guaranteed by the SBA in an aggregate amount of up to twice its regulatory capital. In connection with the filing of the SBA license application, we will be applying for exemptive relief from the Securities and Exchange Commission, which we refer to as the “SEC,” to permit us to exclude the debt of the SBIC subsidiary guaranteed by the SBA from the consolidated asset coverage ratio, and, if obtained, will enable us to fund more investments with debt capital. However, there can be no assurance that we will be granted an SBIC license or that if granted it will be granted in a timely manner or that we will receive the exemptive relief from the SEC.
 
See “Business — Our Strategy” on page 64 for more information about our strategy.
 
Market Opportunity
 
Our Target Industries.  We intend to focus our investments primarily in four key industries of the emerging technology market: technology, life science, healthcare information and services, and cleantech. The technology industry sectors we intend to focus on include communications, networking, wireless communications, data storage, software, cloud computing, semiconductor, internet and media, and consumer-related technologies. Life science sectors we intend to focus on include biotechnology, drug delivery, bioinformatics, and medical devices. Healthcare information and services sectors we intend to focus on include diagnostics, medical record services and software, and other healthcare related services and technologies that improve efficiency and quality of administered healthcare. Cleantech sectors we intend to focus on include alternative energy, water purification, energy efficiency, green building materials, and waste recycling.
 
Technology Lending.  We believe that Technology Lending has the potential to achieve enhanced returns that are attractive notwithstanding the increased level of risk associated with lending to development-stage companies. Potential benefits include:
 
  •  interest rates that typically exceed rates that would be available to portfolio companies if they could borrow in traditional commercial financing transactions;
 
  •  the loan support provided by cash proceeds from equity capital invested by venture capital and private equity firms;
 
  •  relatively rapid amortization of loans;
 
  •  senior ranking to equity and collateralization of loans to minimize potential loss of capital; and
 
  •  potential equity appreciation through warrants.
 
We believe that Technology Lending also provides an attractive financing source for portfolio companies, their management teams and their equity capital investors, as it:
 
  •  is typically less dilutive to the equity holders than additional equity financing;


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  •  extends the time period during which a portfolio company can operate before seeking additional equity capital or pursuing a sale transaction or other liquidity event; and
 
  •  allows portfolio companies to better match cash sources with uses.
 
Market Size.  Our Advisor estimates, based upon our 16 years of experience making Technology Loans to companies in our Target Industries, that during such period the ratio of the aggregate principal amount of debt investments made to the aggregate capital invested by venture capital investors has been approximately 10% to 20%. According to Dow Jones VentureSource, $23.3 billion of venture capital equity was invested in companies in our Target Industries during 2009. Accordingly, based on our Advisor’s past experience, we would estimate that the size of the Technology Loan market for 2009 was in the range of approximately $2.0 billion to $4.0 billion. We believe that the market for Technology Loans should grow over the next several years based upon several factors. We believe the level of venture capital investment for 2009 is at a cyclical low, as shown by the $33.5 billion and 31.9 billion of venture capital investment for 2007 and 2008, respectively, as reported by Dow Jones VentureSource. We believe that the comparable period of 2009 in the venture capital investment cycle is 2003, because 2003 represented the last period of decline in the amount of venture capital investment following the burst of the technology bubble in 2000. Venture capital investment steadily increased from $23.5 billion in 2004 to $33.5 billion in 2007 as, reported by Dow Jones VentureSource, representing a compounded annual growth rate of 9.3% for that period. Our belief that 2009 was a low point in the venture capital investment cycle is further supported by the fact that the amount of venture capital investment in the last three quarters of 2009 increased from a 13 year low of $4.3 billion in the first quarter of 2009 to $6.1 billion in the second quarter of 2009, $5.9 billion in the third quarter of 2009, and $7.0 billion in the fourth quarter of 2009. Dow Jones VentureSource further reported venture capital investments of $7.0 billion in the fourth quarter of 2009 compared to $6.5 billion in the fourth quarter of 2008, representing a 8% increase period to period. That positive trend continued into 2010 with venture capital investments of $4.7 billion and $7.7 billion for the first and second quarters of 2010, respectively, compared to $4.3 billion and $6.1 billion, for the first and second quarters of 2009, respectively, representing comparable period to period increases of 9% and 26%, respectively. The potential for future growth in the market for Technology Loans is also supported by the fact that, according to Dow Jones VentureSource, there was $17 billion of liquidity events related to M&A and IPO activity for companies in our Target Industries in 2009, of which $7.3 billion was generated in the fourth quarter, representing 44% of the total activity for the year. This not only returns capital to investors which can be reinvested in venture capital investments, but also makes venture capital a more attractive investment class to investors, thus attracting additional capital. In addition, nearer term exits for venture capital investors, reinforces Technology Loans as a cheaper financing alternative than venture capital for companies in our Target Industries and their investors, thus driving up demand for Technology Loans.
 
Portfolio Company Valuations.  According to Dow Jones VentureSource, from 2007 through 2009 valuations of existing companies in our Target Industries significantly decreased, as they did for most asset classes. We believe this decrease was due to general macroeconomic conditions, including lower demand for products and services, lack of availability of capital and investors’ decreased risk tolerance. We believe the decrease in valuations in our Target Industries caused by macroeconomic factors may present a cyclical opportunity to participate in warrant gains in excess of those which are typically experienced by Technology Lenders. Our future portfolio companies may not only increase in value due to their successful technology development and/or revenue growth, but as macroeconomic conditions improve, valuations may also increase due to the general increase in demand for goods and services, the greater availability of capital and an increase in investor risk tolerance. An example of the positive and negative macroeconomic impact on valuations last occurred in the years between 2001 and 2005. Following the macroeconomic impact of the technology downturn of 2001 and the events of “9/11”, according to Dow Jones VentureSource, median valuations for venture capital backed technology-related financing fell from $25 million at December 2000 to $10 million at January 2003, but by December 2005, median valuations for venture capital backed technology related financings had risen to $15 million.
 
See “Business — Market Opportunity” on page 67 for more information about our market opportunity.
 
Competitive Strengths
 
We believe that we, together with our Advisor, possess significant competitive strengths, including:


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Consistently execute commitments and close transactions.  Our Advisor and its senior management and investment professionals have an extensive track record of originating, underwriting and closing Technology Loans. Our Advisor has directly originated, underwritten, and managed more than 115 Technology Loans with an aggregate original principal amount of $700 million since it commenced operations in 2004 to the present. In our experience, prospective portfolio companies prefer lenders that have demonstrated their ability to deliver on their commitments. Our Advisor’s ability to deliver on its commitments has resulted in satisfied portfolio companies, management teams and venture capital and private equity investors and created an extensive base of transaction sources and references for our Advisor.
 
Robust direct origination capabilities.  Our Advisor’s managing directors each have significant experience originating Technology Loans in our Target Industries. This experience has given each managing director a deep knowledge of our Target Industries and, assisted by their long standing working relationships with our Advisor’s senior management and our Advisor’s brand name recognition in our market, has resulted in a steady flow of high quality investment opportunities that are consistent with the strategic vision and expectations of our Advisor’s senior management. The combination of the managing directors’ experience and their close working relationship with our Advisor’s senior management, together with the extensive base of transaction sources and references generated by our Advisor’s active participation in the Technology Lending market, has created an efficient marketing and sales organization.
 
Access to capital.  Since it commenced operations in 2004, our Advisor has always had access to capital which allowed it to consistently offer Technology Loans to companies in our Target Industries, including offering loans through Compass Horizon during the difficult economic markets of 2008 and 2009. Our Advisor’s demonstrated access to capital, including through the Credit Facility, has created awareness among companies in our Target Industries of our Advisor’s consistent ability to make Technology Loans without interruption in all market conditions, thus making our Advisor a trusted source for Technology Loans to companies, their management teams and their venture capital and private equity investors.
 
Highly experienced and cohesive management team.  Our Advisor has had the same senior management team of experienced professionals since its inception, thereby creating awareness among companies in our Target Industries, their management and their investors that prospective portfolio companies of Horizon will receive consistent and predictable service, in terms of available loan products and economic terms, underwriting requirements, loan closing process and portfolio management. This consistency allows companies, their management teams and their investors to predict likely outcomes when expending resources in seeking and obtaining Technology Loans from us. Companies may not have the same level of predictability when dealing with other lenders in the Technology Lending market.
 
Relationships with venture capital and private equity investors.  Our Advisor’s senior management team and managing directors have developed a comprehensive knowledge of the venture capital and private equity firms and their partners that participate in our Target Industries. Because of our Advisor’s senior management and managing directors’ demonstrated history of delivering loan commitments and value to many of these firms’ portfolio companies, our Advisor has developed strong relationships with many of these firms and their partners. The strength and breadth of our Advisor’s venture capital and private equity relationships would take considerable time and expense to develop. We will rely on these relationships to implement our business plan.
 
Well-known brand name.  Our Advisor has originated over $700 million in Technology Loans to more than 115 companies in our Target Industries under the “Horizon Technology Finance” brand. Each of these companies is backed by one or more venture capital or private equity firms, thus creating a network of Target Industry companies and equity sponsors who know of, and have worked with, “Horizon Technology Finance.” In addition, our Advisor has attended, participated in, or moderated venture lending or alternative financing panel sessions at venture capital, technology, life sciences and other industry related events over the past six years. This pro-active participation in the lending market for our Target Industries has created strong and positive brand name recognition for our Advisor. We believe that the “Horizon Technology Finance” brand is a competent, knowledgeable and active participant in the Technology Lending marketplace and will continue to result in a significant number of referrals and prospective investment opportunities in our Target Industries.


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Investment Summary
 
The following table summarizes our total original funded investments since inception, including 17 loans that have been fully repaid. See “Business — General” on page 64 for a description of the general terms of our loans and other investments.
 
             
Portfolio Company
 
Target Industry — Sector
  Investment  
 
ACT Biotech, Inc. 
  Life Science — Biotechnology   $ 2,000,000  
Advanced Biohealing, Inc. 
  Life Science — Biotechnology   $ 5,000,000  
Ambit Biosciences Corporation
  Life Science — Biotechnology   $ 8,000,000  
Anesiva, Inc. 
  Life Science — Biotechnology   $ 3,333,333  
Arcot Systems, Inc. 
  Technology — Software   $ 1,250,000  
Authoria, Inc. 
  Technology — Software   $ 1,575,000  
BioScale, Inc. 
  Healthcare Information and Services — Diagnostics   $ 4,000,000  
Brix Networks, Inc. 
  Technology — Communications   $ 3,150,000  
Calypso Medical Technologies, Inc. 
  Life Science — Medical Device   $ 4,800,001  
Cartera Commerce, Inc.
  Technology — Internet and Media   $ 2,500,000  
Clarabridge, Inc. 
  Technology — Software   $ 2,250,000  
Concentric Medical, Inc. 
  Life Science — Medical Device   $ 10,333,333  
Configuresoft, Inc. 
  Technology — Software   $ 1,750,000  
Courion Corporation
  Technology — Software   $ 2,500,000  
DriveCam, Inc. 
  Technology — Software   $ 4,200,000  
Enphase Energy, Inc. 
  Cleantech — Energy Efficiency   $ 7,000,000  
EnteroMedics, Inc. 
  Life Science — Medical Device   $ 5,000,000  
Everyday Health, Inc. 
  Technology — Consumer-related Technologies   $ 5,000,000  
Genesis Networks, Inc. 
  Technology — Networking   $ 4,000,000  
Grab Networks, Inc. 
  Technology — Networking   $ 4,000,000  
Hatteras Networks, Inc. 
  Technology — Communications   $ 3,500,000  
Impinj, Inc. 
  Technology — Semiconductor   $ 1,000,000  
IntelePeer, Inc. 
  Technology — Networking   $ 4,000,000  
iSkoot, INC
  Technology — Software   $ 4,000,000  
Motion Computing, Inc. 
  Technology — Networking   $ 5,000,000  
Netuitive, Inc. 
  Technology — Software   $ 1,000,000  
NewRiver, Inc. 
  Technology — Software   $ 4,000,000  
Novalar Pharmaceuticals, Inc. 
  Life Science — Biotechnology   $ 5,000,000  
OpenPeak, Inc. 
  Technology — Communications   $ 6,666,667  
OraMetrix, Inc. 
  Life Science — Medical Device   $ 5,000,000  
Pharmasset, Inc. 
  Life Science — Biotechnology   $ 10,000,000  
PixelOptics, Inc. 
  Life Science — Medical Device   $ 5,000,000  
Plateau Systems, Ltd. 
  Technology — Software   $ 2,500,000  
Precision Therapeutics, Inc. 
  Healthcare Information and Services — Diagnostics   $ 5,000,000  
Radisphere National Radiology Group, Inc. 
  Healthcare Information and Services — Diagnostics   $ 10,000,000  
Revance Therapeutics, Inc. 
  Life Science — Biotechnology   $ 8,250,000  
Satcon Technology Corporation
  Cleantech — Energy Efficiency   $ 12,000,000  
SnagAJob.com, Inc. 
  Technology — Consumer-related Technologies   $ 3,500,000  
Softrax Corporation
  Technology — Software   $ 2,000,000  
StarCite, Inc. 
  Technology — Consumer-related Technologies   $ 4,000,000  
StreamBase Systems, Inc. 
  Technology — Software   $ 4,000,000  
Tagged, Inc. 
  Technology — Consumer-related Technologies   $ 3,000,000  
Talyst, Inc. 
  Life Science — Other Healthcare   $ 5,000,000  
Tengion, Inc. 
  Life Science — Medical Device   $ 5,772,622  
Transave, Inc. 
  Life Science — Biotechnology   $ 5,199,980  


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Portfolio Company
 
Target Industry — Sector
  Investment  
 
Tranzyme, Inc. 
  Life Science — Biotechnology   $ 5,000,000  
Vette Corp. 
  Technology — Data Storage   $ 5,000,000  
ViOptix, Inc. 
  Life Science — Medical Device   $ 2,000,000  
Xcovery Holding Company LLC
  Life Science — Biotechnology   $ 1,500,000  
XIOTech Corporation
  Technology — Data Storage   $ 5,000,000  
Xoft, Inc. 
  Life Science — Medical Device   $ 3,701,000  
             
Total investment
      $ 228,231,936  
             
 
Distribution and Share Exchange
 
We were formed in March 2010 to continue and expand the business of Compass Horizon. Compass Horizon is the entity that currently owns all of the portfolio investments that we will own upon the closing of this offering. Prior to the completion of this offering, Compass Horizon intends to make a cash distribution to CHP of approximately $18.0 million from net income and as a return of capital, which we refer to as the “Pre-IPO Distribution.” After the Pre-IPO Distribution and immediately prior to the completion of this offering, the Compass Horizon Owners will exchange their membership interests in Compass Horizon for 2,628,624 shares of our common stock based upon a net asset value of $52.6 million as of September 30, 2010, which we refer to as the “Share Exchange.” Upon completion of the Share Exchange and this offering, Compass Horizon will become our wholly owned subsidiary, and we will effectively own all of Compass Horizon’s assets, including all of its investments. See “The Exchange Transaction” on page 38 for more information about the Pre-IPO Distribution and the Share Exchange.
 
Risk Factors
 
The value of our assets, as well as the market price of our shares, will fluctuate. Our investments may be risky, and you may lose all or part of your investment in us. Investing in us involves other risks, including the following:
 
  •  We have a limited operating history and may not be able to achieve our investment objective or generate sufficient revenue to make or sustain distributions to our stockholders and your investment in us could decline substantially;
 
  •  We may not replicate the historical results achieved by other entities managed or sponsored by members of our Advisor or its affiliates;
 
  •  Neither we nor our Advisor has any experience operating under the constraints imposed on a business development company or managing an investment company, which may affect our ability to manage our business and impair your ability to assess our prospects;
 
  •  We are dependent upon key personnel of our Advisor and our Advisor’s ability to hire and retain qualified personnel;
 
  •  If we are unable to satisfy the requirements under the Code for qualification as a RIC, we will be subject to corporate-level federal income tax;
 
  •  We have not yet identified many of the potential investment opportunities for our portfolio that we will invest in with the proceeds of this offering;
 
  •  If our investments do not meet our performance expectations, you may not receive distributions;
 
  •  Most of our portfolio companies will need additional capital, which may not be readily available;
 
  •  Economic recessions or downturns could adversely affect our business and that of our portfolio companies which may have an adverse effect on our business, results of operations and financial condition;

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  •  Our investment strategy will focus on investments in development-stage companies in our Target Industries, which are subject to many risks, including volatility, intense competition, shortened product life cycles and periodic downturns, and would be typically rated below “investment grade”;
 
  •  Prior to this offering, there has been no public market for our common stock, and we cannot assure you that the market price of shares of our common stock will not decline following the offering;
 
  •  Subsequent sales in the public market of substantial amounts of our common stock issued to insiders or others may have an adverse effect on the market price of our common stock;
 
  •  Our common stock price may be volatile and may decrease substantially;
 
  •  We may allocate the net proceeds from this offering in ways with which you may not agree; and
 
  •  Investors in this offering will incur immediate dilution upon the closing of this offering.
 
See “Risk Factors” beginning on page 16 and the other information included in this prospectus, for a more detailed discussion of the material risks you should carefully consider before deciding to invest in our common stock.
 
Company Information
 
Our administrative and executive offices are located at 76 Batterson Park Road, Farmington, Connecticut 06032, and our telephone number is (860) 676-8654. We expect to establish a website at http://www.horizontechnologyfinancecorp.com upon completion of this offering. Information contained on our website is not incorporated by reference into this prospectus, and you should not consider information contained on our website to be part of this prospectus.


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THE OFFERING
 
Common stock offered:
 
By us 4,850,000 shares
 
By the selling stockholder 1,400,000 shares
 
  Total 6,250,000 shares
 
Over-allotment option 937,500 shares
 
Common stock to be outstanding immediately after this offering
7,478,624 shares, excluding 937,500 shares of common stock issuable pursuant to the over-allotment option granted to the underwriters.
 
Proposed NASDAQ Global Market symbol “HRZN”
 
Use of proceeds We estimate that we will receive net proceeds from our sale of shares of common stock in this offering of approximately $81.9 million (approximately $98.1 million if the underwriters exercise their over-allotment option to purchase additional shares in full), assuming an initial public offering price of $18.50 per share (based on the mid-point of the range set forth on the cover of this prospectus), after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We plan to use the net proceeds of this offering for new investments in portfolio companies in accordance with our investment objective and strategies as described in this prospectus, for general working capital purposes, and for temporary repayment of debt under our credit facility (which amounts are subject to reborrowing). We will also pay operating expenses, including management and administrative fees, and may pay other expenses such as due diligence expenses of potential new investments, from the net proceeds of this offering. We may also use a portion of the net proceeds to capitalize an SBIC subsidiary to the extent our Advisor’s application to license such entity as an SBIC is approved. Pending such use, we will invest the remaining net proceeds of this offering primarily in cash, cash equivalents, U.S. Government securities and other high-quality debt investments that mature in one year or less from the date of investment. See “Use of Proceeds.” We will not receive any of the proceeds from the shares sold by the selling stockholder.
 
Investment Management Agreement We have entered into an investment management agreement with our Advisor, under which our Advisor, subject to the overall supervision of our board of directors, manages our day-to-day operations and provides investment advisory services to us. For providing these services, our Advisor receives a base management fee from us, paid monthly in arrears, at an annual rate of 2.00% of our gross assets, including any assets acquired with the proceeds of leverage. The investment management agreement also provides that our Advisor or its affiliates may be entitled to an incentive fee under certain circumstances. The incentive fee has two parts, which are independent of each other, with the result that one part may be payable even if the other is not. Under the first part we will pay our Advisor each quarter 20.00% of the amount by which our accrued net income for the quarter after expenses and excluding the effect of any realized capital gains


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and losses and any unrealized appreciation and depreciation for the quarter exceeds 1.75% (which is 7.00% annualized) of our average net assets at the end of the immediately preceding calendar quarter, subject to a “catch-up” feature. Under the second part of the incentive fee, we will pay our Advisor at the end of each calendar year 20.00% of our realized capital gains from inception through the end of that year, computed net of all realized capital losses and all unrealized depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees. The second part of the incentive fee is not subject to any minimum return to stockholders. The investment management agreement also provides that we will bear the costs payable to the Advisor under the separate administration agreement. The investment management agreement may be terminated by either party without penalty by delivering written notice to the other party upon not more than 60 days’ written notice. See “Investment Management and Administration Agreements — Investment Management Agreement.”
 
Distributions In connection with certain RIC requirements described below in “— Taxation,” to the extent we have income available, we intend to distribute quarterly dividends to stockholders. Our quarterly distributions, if any, will be determined by our board of directors.
 
Taxation We intend to elect to be treated, and intend to qualify, as a RIC under Subchapter M of the Code commencing with our taxable year ending on December 31, 2010. As a RIC, we generally will not pay corporate-level federal income taxes on any ordinary income or capital gains that we timely distribute to our stockholders as dividends. To maintain our RIC status, we must meet specified source-of-income and asset diversification requirements and distribute annually at least 90% of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any. See “Distributions” and “Material U.S. Federal Income Tax Considerations.”
 
Borrowings As of September 30, 2010, we had $88.9 million of indebtedness outstanding under the Credit Facility. We will borrow additional money or issue debt securities within the levels permitted by the 1940 Act when the terms and conditions available are favorable to long-term investing and well-aligned with our investment strategy and portfolio composition in an effort to increase returns to our common stockholders. Borrowing involves significant risks. See “Risk Factors.”
 
Trading at a Discount Shares of closed-end investment companies frequently trade at a discount to their net asset value. The possibility that our shares may trade at a discount to our net asset value is separate and distinct from the risk that our net asset value per share may decline. Our net asset value immediately following this offering will reflect reductions resulting from the sales load and the amount of the organization and offering expenses paid by us. This risk may have a greater effect on investors expecting to sell their shares soon after completion of the public offering, and our shares may be more appropriate for long-term investors than for investors with shorter investment horizons. We


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cannot predict whether our shares will trade above, at or below net asset value.
 
Dividend Reinvestment Plan We are adopting a dividend reinvestment plan for our stockholders. This will be an “opt out” dividend reinvestment plan. As a result, if we declare cash distributions, each stockholder’s cash distributions will be automatically reinvested in additional shares of our common stock unless they specifically “opt out” of our dividend reinvestment plan so as to receive cash distributions. Stockholders who receive distributions in the form of shares of common stock will be subject to the same federal income tax consequences as if they received their distributions in cash. See “Dividend Reinvestment Plan.”
 
Anti-Takeover Provisions Our certificate of incorporation and bylaws, as well as certain statutory and regulatory requirements, contain certain provisions that may have the effect of discouraging a third party from making an acquisition proposal for us. These anti-takeover provisions may inhibit a change in control in circumstances that could give the holders of our common stock the opportunity to realize a premium over the market price for our common stock. See “Description of Capital Stock.”
 
In addition, our board of directors will be divided into three classes with the term of one class expiring at each annual meeting of stockholders. This structure is intended to provide us with a greater likelihood of continuity of management. A staggered board of directors also may serve to deter hostile takeovers or proxy contests, as may certain other measures we have adopted. See “Description of Capital Stock.”
 
Administration Agreement Under a separate administration agreement, our Advisor will also serve as our administrator. We will reimburse our Advisor for the allocable portion of overhead and other expenses incurred by our Advisor in performing its obligations under the Administration Agreement, including furnishing us with office facilities, equipment and clerical, bookkeeping and record keeping services at such facilities, as well as providing us with other administrative services. In addition, we will reimburse our Advisor for the fees and expenses associated with performing compliance functions, and our allocable portion of the compensation of our chief financial officer and chief compliance officer and their respective staffs. See “Investment Management and Administration Agreement — Administration Agreement.”
 
Dilution Based on an assumed initial public offering price of $18.50 per share (the mid-point of the range set forth on the cover of this prospectus), purchasers in this offering will experience immediate dilution of approximately $0.51 per share. See “Risk Factors — Risks Related to this Offering and our Common Stock — Investors in this offering will incur immediate dilution upon the closing of this offering” on page 34 and “Dilution” on page 48.
 
Available Information We have filed with the SEC a registration statement on Form N-2 under the Securities Act of 1933, as amended, or the Securities Act, which contains additional information about us and the shares of our common stock being offered by this prospectus. After completion of this offering, we will be obligated to file periodic reports, proxy statements and other information with the SEC. This information will


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be available at the SEC’s public reference room in Washington, D.C. and on the SEC’s website at http://www.sec.gov.
 
Upon closing of this offering, we will maintain a website at http://www.horizontechnologyfinancecorp.com and intend to make all of our annual, quarterly and current reports, proxy statements and other publicly filed information available, free of charge, on or through our website. You may also obtain such information by contacting us at 76 Batterson Park Road, Farmington, Connecticut 06032, or by calling us at (860) 676-8654. Information contained on our website is not incorporated by reference into this prospectus, and you should not consider information contained on our website to be part of this prospectus.
 
See “Where You Can Find More Information.”
 
Unless the context otherwise requires, the number of shares of our common stock to be outstanding immediately following the completion of this offering is based on the number of shares outstanding as of September 30, 2010 and assumes the sale of 1,400,000 shares of our common stock by the selling stockholder and the issuance of 4,850,000 shares of our common stock in this offering at the mid-point of the range set forth on the cover of this prospectus. Unless otherwise noted, all information in this prospectus assumes no exercise by the underwriters of their right to purchase up to 937,500 shares of common stock to cover over-allotments.


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FEES AND EXPENSES
 
The following table is intended to assist you in understanding the costs and expenses that an investor in this offering will bear directly or indirectly. However, we caution you that some of the percentages indicated in the table below are estimates and may vary. The following table and example should not be considered a representation of our future expenses. Actual expenses may be greater or less than shown. Except where the context suggests otherwise, whenever this prospectus contains a reference to fees or expenses paid by “you” or “us” or that “we” will pay fees or expenses, stockholders will indirectly bear such fees or expenses as investors in the Company.
 
                         
Stockholder Transaction Expenses
                       
Sales Load (as a percentage of offering price)
    7.00 %(1)                
Offering Expenses (as a percentage of offering price)
    1.20 %(2)                
Dividend Reinvestment Plan Fees
    None  (3)                
                         
Total Stockholder Transaction Expenses (as a percentage of offering price)
    8.20 %                
                         
Annual Expenses (as a Percentage of Net Assets Attributable to Common Stock)
                       
Management Fee
    3.34 %(4)                
Incentive Fees Payable Under the Investment Management Agreement
    0.00 %(5)                
Interest Payments on Borrowed Funds
    2.49 %(6)                
Other Expenses (estimated for the current fiscal year)
    1.46 %(7)                
                         
Total Annual Expenses (estimated)
    7.29 %(4)(8)                
                         
 
 
(1) The underwriting discounts and commissions with respect to shares sold in this offering, which are one-time fees to the underwriters in connection with this offering, is the only sales load being paid in connection with this offering.
(2) Amount reflects estimated offering expenses of approximately $1.5 million.
(3) The expenses of the dividend reinvestment plan are included in “other expenses.” See “Dividend Reinvestment Plan.”
(4) Our base management fee under the investment management agreement is based on our gross assets, which includes assets acquired using leverage, and is payable monthly in arrears. The management fee referenced in the table above is based on $224.4 million of gross assets, $134.5 million of net assets, which reflects our gross assets and net assets on a pro forma basis after giving effect to this offering and $88.9 million of expected outstanding indebtedness immediately upon the closing of this offering. See “Investment Management and Administration Agreements — Investment Management Agreement.”
(5) We may have capital gains and interest income that could result in the payment of an incentive fee to our Advisor in the first year after completion of this offering. However, the incentive fee payable to our Advisor is based on our performance and will not be paid unless we achieve certain goals. As we cannot predict whether we will meet the necessary performance targets, we have assumed an incentive fee of 0% in this chart. Based on our current business plan, we anticipate that substantially all of the net proceeds of this offering will be used within nine months, depending on the availability of appropriate investment opportunities, consistent with our investment objective and market conditions. We expect that during this period we will not have any capital gains and that the amount of our interest income will not exceed the quarterly minimum hurdle rate discussed below. As a result, we do not anticipate paying any incentive fees in the first year after the completion of this offering.
 
The incentive fee consists of two parts:
 
The first part, which is payable quarterly in arrears, will equal 20.00% of the excess, if any, of our “Pre-Incentive Fee Net Investment Income” over a 1.75% quarterly (7.00% annualized) hurdle rate and a “catch-up” provision measured as of the end of each calendar quarter. Under this provision, in any calendar quarter, our Advisor receives no incentive fee until our net investment income equals the hurdle rate of 1.75% but then receives, as a “catch-up,” 100.00% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.1875%. The effect of this provision is that, if pre-incentive fee net investment income exceeds 2.1875% in any calendar quarter, our Advisor will receive 20.00% of our pre-incentive fee net investment income as if a hurdle rate did not apply. The first part of the incentive fee will be computed and paid on income that may include interest that is accrued but not yet received in cash.
 
The second part of the incentive fee will equal 20.00% of our “Incentive Fee Capital Gains,” if any, which will equal our realized capital gains on a cumulative basis from inception through the end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees. The second part of the incentive fee will be payable, in arrears, at the end of each calendar year (or upon termination of the investment management agreement, as of the termination date), commencing with the year ending December 31, 2010. For a more detailed discussion of the calculation of this fee, see “Investment Management and Administration Agreements — Investment Management Agreement.”


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(6) We will borrow funds from time to time to make investments to the extent we determine that the economic situation is conducive to doing so. The costs associated with our borrowings are indirectly borne by our investors. As of September 30, 2010, we had $88.9 million outstanding under our Credit Facility. For purposes of this section, we have computed interest expense using the balance outstanding at, and the LIBOR rate on, September 30, 2010 and the interest rate on our Credit Facility of LIBOR plus 2.50%. The LIBOR rate on September 30, 2010 was 0.26%. We have also included the estimated amortization of fees incurred in establishing our Credit Facility and estimated settlements under existing interest rate swap agreements. We may also issue preferred stock, subject to our compliance with applicable requirements under the 1940 Act, however, we currently have no intention to do so during the first year following the effective date of this registration statement.
(7) Includes our assumed overhead expenses, including payments under the administration agreement, based on our projected assumed allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations under the administration agreement during the first full year of operations. See “Investment Management and Administration Agreements — Administration Agreement.”
(8) “Total annual expenses” as a percentage of consolidated net assets attributable to common stock are higher than the total annual expenses percentage would be for a company that is not leveraged. We borrow money to leverage our net assets and increase our total assets. The SEC requires that the “Total annual expenses” percentage be calculated as a percentage of net assets (defined as total assets less indebtedness and after taking into account any incentive fees payable during the period), rather than the total assets, including assets that have been funded with borrowed monies. The reason for presenting expenses as a percentage of net assets attributable to common stockholders is that our common stockholders bear all of our fees and expenses.
 
Example
 
The following example demonstrates the projected dollar amount of total cumulative expenses that would be incurred over various periods with respect to a hypothetical investment in our common stock. In calculating the following expense amounts, we have assumed that our annual operating expenses remain at the levels set forth in the table above.
 
                                 
    1 Year   3 Years   5 Years   10 Years
 
You would pay the following expenses on a $1,000 investment, assuming a 5% annual return
  $ 149     $ 277     $ 399     $ 676  
 
While the example assumes, as required by the applicable rules of the SEC, a 5% annual return, our performance will vary and may result in a return greater or less than 5%. The incentive fee under our investment management agreement is unlikely to be significant assuming a 5% annual return and is not included in the example. If we achieve sufficient returns on our investments, including through the realization of capital gains, to trigger an incentive fee of a material amount, our distributions to our common stockholders and our expenses would likely be higher. See “Investment Management and Administration Agreements — Examples of Incentive Fee Calculation” for additional information regarding the calculation of incentive fees. In addition, while the example assumes reinvestment of all dividends and other distributions at net asset value, participants in our dividend reinvestment plan will receive a number of shares of our common stock determined by dividing the total dollar amount of the distribution payable to a participant by the market price per share of our common stock at the close of trading on the valuation date for the distribution. This price may be at, above or below net asset value. See “Dividend Reinvestment Plan” for additional information regarding our dividend reinvestment plan.


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RISK FACTORS
 
Investing in our common stock involves a high degree of risk. Before you invest in shares of our common stock, you should be aware of various risks, including those described below. You should carefully consider these risk factors, together with all of the other information included in this prospectus, before you decide whether to make an investment in our common stock. The risks set forth below are not the only risks we face. If any of the following events occur, our business, financial condition and results of operations could be materially adversely affected. In such case, our net asset value and the trading price of our common stock could decline, and you may lose all or part of your investment.
 
Risks Related to our Business and Structure
 
We have a limited operating history and may not be able to achieve our investment objective or generate sufficient revenue to make or sustain distributions to our stockholders and your investment in us could decline substantially.
 
We commenced operations in March 2008. As a result of our limited operating history, we are subject to certain business risks and uncertainties associated with any recently formed business enterprise, including the risk that we will not achieve our investment objective and that the value of your investment in us could decline substantially. As a public company, we will be subject to the regulatory requirements of the SEC, in addition to the specific regulatory requirements applicable to business development companies under the 1940 Act and RICs under the Code. Our management and that of our Advisor has not had any prior experience operating under this regulatory framework, and we may incur substantial additional costs, and expend significant time or other resources, to do so. From time to time our Advisor may pursue investment opportunities, like equity investments, in which our Advisor has more limited experience. We may also be unable to replicate the historical performance of prior investment funds. In addition, we may be unable to generate sufficient revenue from our operations to make or sustain distributions to our stockholders.
 
We may not replicate the historical results achieved by other entities managed or sponsored by members of our Advisor or its affiliates.
 
We may be unable to replicate the historical results achieved by our Advisor or its affiliates, and our investment returns could be substantially lower than the returns achieved by them in prior periods. In particular, our Advisor’s returns from several of its other investment vehicles may not be comparable because they were capital call funds and their respective returns were not negatively impacted by uninvested cash. We also may not be able to replicate the performance of our warrants and may not have returns on warrants from our existing portfolio that we hold. Neither our Advisor nor its affiliates were subject to the same tax and regulatory conditions that we intend to operate under following the offering. Furthermore, none of the prior results were from public reporting companies. Additionally, all or a portion of these prior results may have been achieved in particular market conditions which may never be repeated. We are not a capital call fund and, as a result, may have more limited access to cash for investment opportunities than our Advisor historically experienced which could impair our ability to make future investments. Moreover, current or future market volatility and regulatory uncertainty may also have an adverse impact on our future performance.
 
Neither we nor our Advisor has any experience operating under the constraints imposed on a business development company or managing an investment company, which may affect our ability to manage our business and impair your ability to assess our prospects.
 
Prior to this offering, we did not operate as a business development company or manage an investment company under the 1940 Act. As a result, we have no operating results under this regulatory framework that can demonstrate to you either its effect on our business or our ability to manage our business within this framework. The 1940 Act imposes numerous constraints on the operations of business development companies. For example, business development companies are required to invest at least 70% of their total assets in specified types of securities, primarily securities of “eligible portfolio companies” (as defined in the 1940 Act), cash, cash equivalents, U.S. government securities and other high quality debt investments that mature in one year or less. See


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“Regulation.” Our Advisor’s lack of experience in managing a portfolio of assets under these constraints may hinder our ability to take advantage of attractive investment opportunities and, as a result, could impair our ability to achieve our investment objective. Furthermore, if we are unable to comply with the requirements imposed on business development companies by the 1940 Act, the SEC could bring an enforcement action against us and/or we could be exposed to claims of private litigants. In addition, we could be regulated as a closed-end management investment company under the 1940 Act, which could further decrease our operating flexibility and may prevent us from operating our business as described in this prospectus, either of which could have a material adverse effect on our business, results of operations or financial condition.
 
We are dependent upon key personnel of our Advisor and our Advisor’s ability to hire and retain qualified personnel.
 
We depend on the members of our Advisor’s senior management, particularly Mr. Pomeroy, our Chairman and Chief Executive Officer, and Mr. Michaud, our President, as well as other key personnel for the identification, evaluation, final selection, structuring, closing and monitoring of our investments. These employees have critical industry experience and relationships that we will rely on to implement our business plan to originate Technology Loans in our Target Industries. Our future success will depend on the continued service of Messrs. Pomeroy and Michaud as well as the other senior members of our Advisor’s management team. If our Advisor were to lose the services of either Mr. Pomeroy or Mr. Michaud or any of the other senior members of our Advisor’s management team, we may not be able to operate our business as we expect, and our ability to compete could be harmed, either of which could cause our business, results of operations or financial condition to suffer. In addition, if either of Mr. Pomeroy or Mr. Michaud ceases to be employed by us, the lender under our Credit Facility could, absent a waiver or cure, refuse to advance future funds to us under the facility. Our future success will also depend, in part, on our Advisor’s ability to identify, attract and retain sufficient numbers of highly skilled employees. Absent exemptive or other relief granted by the SEC and for so long as we remain externally managed, the 1940 Act will prevent us from granting options to our employees and adopting a profit sharing plan, which may make it more difficult for us to attract and retain highly skilled employees. If we are not successful in identifying, attracting and retaining these employees, we may not be able to operate our business as we expect. Moreover, we cannot assure you that our Advisor will remain our investment adviser or that we will continue to have access to our Advisor’s investment professionals or its relationships. For example, our Advisor may in the future manage investment funds with investment objectives similar to ours thereby diverting the time and attention of its investment professionals that we rely on to implement our business plan.
 
We operate in a highly competitive market for investment opportunities, and if we are not able to compete effectively, our business, results of operations and financial condition may be adversely affected and the value of your investment in us could decline.
 
A number of entities compete with us to make the types of investments that we plan to make in prospective portfolio companies in our Target Industries. We compete with other business development companies and a large number of venture capital and private equity firms, as well as other investment funds, investment banks and other sources of financing, including traditional financial services companies such as commercial banks and finance companies. Some of our competitors are larger and have greater financial, technical, marketing and other resources than we have. For example, some competitors may have a lower cost of funds and access to funding sources that are not available to us. This may enable these competitors to make commercial loans with interest rates that are comparable to, or lower than, the rates we typically offer. We may lose prospective portfolio companies if we do not match our competitors’ pricing, terms and structure. If we do match our competitors’ pricing, terms or structure, we may experience decreased net interest income and increased risk of credit losses. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments, establish more relationships than us and build their market shares. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act will impose on us as a business development company or that the Code will impose on us as a RIC. If we are not able to compete effectively, we may not be able to identify and take advantage of attractive investment opportunities that we identify and may not be able to fully invest our available capital. If this occurs, our business, financial condition and results of operations could be materially adversely affected.


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We will borrow money, which will magnify the potential for gain or loss on amounts invested and may increase the risk of investing in us.
 
Leverage is generally considered a speculative investment technique, and we intend to continue to borrow money as part of our business plan. The use of leverage will magnify the potential for gain or loss on amounts invested and, therefore, increases the risks associated with investing in us. We expect to borrow from and issue senior debt securities to banks and other lenders including under the Credit Facility pursuant to which we will be able to borrow up to $125 million upon completion of this offering. As of September 30, 2010, we had outstanding indebtedness of $88.9 million. We also intend to issue debt securities guaranteed by the SBA and sold in the capital markets, to the extent that we or one of our subsidiaries becomes licensed by the SBA. The SBIC regulations, subject to certain regulatory capital requirements among other things, currently permit an SBIC subsidiary to borrow up to $150 million. Lenders of senior securities, including the SBA, will have fixed dollar claims on our assets that will be superior to the claims of our common stockholders. If the value of our assets increases, then leveraging would cause the net asset value attributable to our common stock to increase more sharply than it would have had we not leveraged. However, any decrease in our income would cause net income to decline more sharply than it would have had we not leveraged. This decline could adversely affect our ability to make common stock dividend payments. In addition, because our investments may be illiquid, we may be unable to dispose of them or to do so at a favorable price in the event we need to do so if we are unable to refinance any indebtedness upon maturity, and, as a result, we may suffer losses.
 
Our ability to service any debt that we incur will depend largely on our financial performance and will be subject to prevailing economic conditions and competitive pressures. Moreover, as our Advisor’s management fee will be payable to our Advisor based on our gross assets, including those assets acquired through the use of leverage, our Advisor may have a financial incentive to incur leverage which may not be consistent with our stockholders’ interests. In addition, holders of our common stock will bear the burden of any increase in our expenses, as a result of leverage, including any increase in the management fee payable to our Advisor.
 
Illustration:  The following table illustrates the effect of leverage on returns from an investment in our common stock assuming various annual returns, net of expenses. The calculations in the table below are hypothetical and actual returns may be higher or lower than those appearing in the table below:
 
                                         
    Assumed Return on our Portfolio
    (net of expenses)
    −10%   −5%   0%   5%   10%
 
Corresponding return to stockholder(1)
    −27%       −16%       −5%       7%       18%  
 
 
(1) Assumes $160 million in total assets, $89 million in debt outstanding, $70 million in stockholders’ equity, and an average cost of funds of 3.63%. Assumptions are based on our financial condition and our average costs of funds at September 30, 2010. Actual interest payments may be different.
 
If we are unable to comply with the covenants or restrictions in the Credit Facility, our business could be materially adversely affected.
 
Our wholly owned subsidiary, Horizon Credit I LLC, which we refer to as “Credit I,” is party to our Credit Facility with WestLB AG. This Credit Facility includes covenants that, among other things, restrict the ability of Compass Horizon and Credit I to make loans to, or investments in, third parties (other than Technology Loans and warrants or other equity participation rights), pay dividends and distributions, incur additional indebtedness and engage in mergers or consolidations. The Credit Facility also restricts the ability of Compass Horizon, Credit I, and our Advisor to create liens on the collateral securing the Credit Facility, permit additional negative pledges on such collateral and change the business currently conducted by them. The Credit Facility also includes provisions that permit our lender to refuse to advance funds under the facility in the event of a change of control of us or Compass Horizon. For this purpose a change of control generally means a merger or other consolidation, a liquidation, a sale of all or substantially all of our assets, or a transaction in which any person or group acquires more than 50% of our shares. In addition, the Credit Facility also requires Compass Horizon, Credit I and our Advisor to comply with


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various financial covenants, including, among other covenants, maintenance by Compass Horizon and our Advisor of a minimum tangible net worth and limitations on the value of, and modifications to, the loan collateral that secures the Credit Facility. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.” Complying with these restrictions may prevent us from taking actions that we believe would help us to grow our business or are otherwise consistent with our investment objective. These restrictions could also limit our ability to plan for or react to market conditions or meet extraordinary capital needs or otherwise restrict corporate activities or could result in our failing to qualify as a RIC and thus becoming subject to corporate-level income tax. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” for additional information regarding our credit arrangements.
 
The breach of certain of the covenants or restrictions unless cured within the applicable grace period, would result in a default under the Credit Facility that would permit the lender to declare all amounts outstanding to be due and payable. In such an event, we may not have sufficient assets to repay such indebtedness and the lender may exercise rights available to it under the security interest granted in the assets of Credit I, including, to the extent permitted under applicable law, the seizure of such assets without adjudication. As a result, any default could have serious consequences to our financial condition. An event of default or an acceleration under the Credit Facility could also cause a cross-default or cross-acceleration of another debt instrument or contractual obligation, which would adversely impact our liquidity. We may not be granted waivers or amendments to the Credit Agreement if for any reason we are unable to comply with it, and we may not be able to refinance the Credit Agreement on terms acceptable to us, or at all.
 
Because we will distribute all or substantially all of our income and any realized net short-term capital gains over realized net long-term capital losses to our stockholders, we will need additional capital to finance our growth, if any. If additional funds are unavailable or not available on favorable terms, our ability to grow will be impaired.
 
To satisfy the requirements applicable to a RIC, to avoid payment of excise taxes and to minimize or avoid payment of corporate-level federal income taxes, we intend to distribute to our stockholders all or substantially all of our net ordinary income and realized net short-term capital gains over realized net long-term capital losses except that we may retain certain net long-term capital gains, pay applicable income taxes with respect thereto, and elect to treat such retained capital gains as deemed distributions to our stockholders. As a business development company, we will generally be required to meet a coverage ratio of total assets to total senior securities, which includes all of our borrowings and any preferred stock we may issue in the future, of at least 200%. This requirement limits the amount that we may borrow. Because we will continue to need capital to grow our loan and investment portfolio, this limitation may prevent us from incurring debt and require us to raise additional equity at a time when it may be disadvantageous to do so. We cannot assure you that debt and equity financing will be available to us on favorable terms, or at all, and debt financings may be restricted by the terms of any of our outstanding borrowings. In addition, as discussed above, as a business development company, we will be limited in our ability to issue equity securities priced below net asset value. If additional funds are not available to us, we could be forced to curtail or cease new lending and investment activities, and our net asset value could decline.
 
If we are unable to obtain additional debt financing, our business could be materially adversely affected.
 
We may want to obtain additional debt financing, or need to do so upon maturity of the Credit Facility, in order to obtain funds which may be made available for investments. The Credit Facility matures in March 2015. We may request advances under the Credit Facility, which we refer to as the “Revolving Period,” through March 4, 2011, unless the Revolving Period is extended upon Credit I’s request and upon mutual agreement of WestLB and Credit I. Upon the date of termination of the Revolving Period, we may not request new advances and we must repay the outstanding advances under the Credit Facility as of such date at such times and in such amounts as are necessary to maintain compliance with the terms and conditions of the Credit Facility, particularly the condition that the principal balance of the Credit Facility does not exceed 75% of the aggregate principal balance of our eligible loans to our portfolio companies. All outstanding advances under the Credit Facility are due and payable on March 4, 2015, unless such date is extended upon Credit I’s request and upon mutual agreement of WestLB and Credit I. If we


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are unable to increase, renew or replace any such facility and enter into a new debt financing facility on commercially reasonable terms, our liquidity may be reduced significantly. In addition, if we are unable to repay amounts outstanding under any such facilities and are declared in default or are unable to renew or refinance these facilities, we may not be able to make new investments or operate our business in the normal course. These situations may arise due to circumstances that we may be unable to control, such as lack of access to the credit markets, a severe decline in the value of the U.S. dollar, a further economic down turn or an operational problem that affects third parties or us, and could materially damage our business.
 
If we do not receive qualification from the SBA to form an SBIC or we are unable to comply with SBA regulations after our SBIC subsidiary is formed, our business plan and investment objective could be materially adversely affected.
 
We are currently seeking qualification as an SBIC for a to-be-formed wholly owned subsidiary which will be regulated by the SBA. On July 14, 2009, our Advisor received notification from the SBA that invited our Advisor to continue with the application process for licensing this subsidiary as an SBIC. However, the application to license this subsidiary as an SBIC is subject to SBA approval. If we do not receive SBA approval to license an SBIC our business plan and investment objective could be materially adversely affected. If we or one of our subsidiaries receives this qualification, we will become subject to SBA regulations that may constrain our activities or the activities of one of our subsidiaries. We may need to make allowances in our investment activity or the investment activity of our subsidiaries to comply with SBA regulations. In addition, SBA regulations may impose parameters on our business operations and investment objectives that are different than what we otherwise would do if we were not subject to these regulations. Failure to comply with the SBA regulations could result in the loss of the SBIC license and the resulting inability to participate in the SBA-sponsored debenture program. The SBA also limits the maximum amount that may be borrowed by any single SBIC. The SBA prohibits, without prior SBA approval, a “change of control” of an SBIC or transfers that would result in any person (or a group of persons acting in concert) owning 10% or more of a class of capital stock of a licensed SBIC. A “change of control” is any event which would result in the transfer of the power, direct or indirect, to direct the management and policies of an SBIC, whether through ownership, contractual arrangements or otherwise. To the extent that we form an SBIC subsidiary, this would prohibit a change of control of us without prior SBA approval. If we are unable to comply with SBA regulations, our business plan and growth strategy could be materially adversely affected.
 
Changes in interest rates may affect our cost of capital and net investment income.
 
Because we may incur indebtedness to fund our investments, a portion of our income will depend upon the difference between the interest rate at which we borrow funds and the interest rate at which we invest these funds. Some of our investments will have fixed interest rates, while other borrowings will likely have floating interest rates. As a result, a significant change in interest rates could have a material adverse effect on our net investment income. In periods of rising interest rates, our cost of funds could increase, which would reduce our net investment income. We may hedge against interest rate fluctuations by using hedging instruments such as swaps, futures, options and forward contracts, subject to applicable legal requirements, including, without limitation, all necessary registrations (or exemptions from registration) with the Commodity Futures Trading Commission. These activities may limit our ability to benefit from lower interest rates with respect to the hedged portfolio. We also have limited experience in entering into hedging transactions, and we will initially have to rely on the advice of outside parties with respect to the use of these financial instruments or develop this expertise internally. Adverse developments resulting from changes in interest rates or hedging transactions or any adverse developments from our use of hedging instruments could have a material adverse effect on our business, financial condition and results of operations. In addition, we may be unable to enter into appropriate hedging transactions when desired and any hedging transactions we enter into may not be effective.


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Because many of our investments typically will not be in publicly traded securities, the value of our investments may not be readily determinable, which could adversely affect the determination of our net asset value.
 
We expect our investments to consist primarily of loans or securities issued by privately held companies. As a result, the fair value of these investments that are not publicly traded may not be readily determinable. In addition, we will not be permitted to maintain a general reserve for anticipated loan losses. Instead, we will be required by the 1940 Act to specifically value each investment and record an unrealized gain or loss for any asset that we believe has increased or decreased in value. We will value these investments on a quarterly basis, or more frequently as circumstances require, in accordance with our valuation policy consistent with generally accepted accounting principles. Our board of directors will employ an independent third-party valuation firm to assist the board in arriving at the fair value of our investments. The board will discuss valuations and determine the fair value in good faith based on the input of our Advisor and the third-party valuation firm. The factors that may be considered in fair value pricing our investments include the nature and realizable value of any collateral, the portfolio company’s earnings and its ability to make payments on its indebtedness, the markets in which the portfolio company does business, comparisons to publicly traded companies, discounted cash flow and other relevant factors. Because such valuations are inherently uncertain and may be based on estimates, our determinations of fair value may differ materially from the values that would be assessed if a ready market for these securities existed. Our net asset value could be adversely affected if our determinations regarding the fair value of our investments are materially higher than the values that we ultimately realize upon the disposal of these investments. See “Determination of Net Asset Value.”
 
Disruption in the capital markets and the credit markets could adversely affect our business.
 
Without sufficient access to the capital markets or credit markets, we may be forced to curtail our business operations or we may not be able to pursue new investment opportunities. Beginning in 2007, the global capital markets entered into a period of disruption and extreme volatility and, accordingly, there has been and will continue to be uncertainty in the financial markets in general. Ongoing disruptive conditions in the financial industry could restrict our business operations and could adversely impact or results of operations and financial condition. We are unable to predict when economic and market conditions may become more favorable. Even if these conditions improve significantly over the long term, adverse conditions in particular sectors of the financial markets could adversely impact our business.
 
We may not realize gains from our equity investments.
 
All of our investments that we have made in the past include, and investments we may make in the future are expected to include warrants. In addition, we may from time to time make non-control, equity co-investments in companies in conjunction with private equity sponsors. Our goal with respect to these equity investments is to ultimately realize gains upon disposition. The equity interests we receive may not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from our equity interests, and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses we experience. We also may be unable to realize any value if a portfolio company does not have a liquidity event, such as a sale of the business, refinancing or public offering, which would allow us to sell the underlying equity interests. In addition, the time and attention of the investment personnel of our Advisor could be diverted from managing our debt portfolio in order to manage any equity investments we receive thereby impacting the value of our remaining portfolio, and our Advisor’s significant experience in Technology Lending may not result in returns on our equity investments.
 
From time to time we may also acquire equity participation rights in connection with an investment which will allow us, at our option, to participate in future rounds of equity financing through direct capital investments in our portfolio companies. Our Advisor will determine whether to exercise any of these rights. Accordingly, you will have no control over whether or to what extent these rights are exercised, if at all. If we exercise these rights, we will be making an additional investment completely in the form of equity which will subject us to significantly more risk than our Technology Loans and we may not receive the returns that are anticipated with respect to these investments.


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We may not realize expected returns on warrants received in connection with our debt investments.
 
As discussed above, we generally receive warrants in connection with our debt investments. If we do not receive the returns that are anticipated on the warrants, our investment returns on our portfolio companies, and the value of your investment in us, may be lower than expected.
 
Regulations governing our operation as a business development company will affect our ability to, and the way in which, we raise additional capital, which may expose us to additional risks.
 
Our business plans contemplate a substantial amount of capital in addition to the proceeds of this offering. We may obtain additional capital through the issuance of debt securities, other indebtedness or preferred stock, and we may borrow money from banks or other financial institutions, which we refer to collectively as “senior securities,” up to the maximum amount permitted by the 1940 Act. Moreover, in connection with the filing of the SBA license application, we expect to seek exemptive relief from the SEC to permit us to exclude the debt of the SBIC subsidiary guaranteed by the SBA from the 200% consolidated asset coverage ratio requirements. If we issue senior securities, we would be exposed to typical risks associated with leverage, including an increased risk of loss. In addition, if we issue preferred stock, it would rank “senior” to common stock in our capital structure and preferred stockholders would have separate voting rights and may have rights, preferences or privileges more favorable than those of holders of our common stock.
 
The 1940 Act permits us to issue senior securities in amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after each issuance of senior securities. If our asset coverage ratio is not at least 200%, we will not be permitted to pay dividends or issue additional senior securities. If the value of our assets declines, we may be unable to satisfy this asset coverage test. If that happens, we may be required to liquidate a portion of our investments and repay a portion of our indebtedness at a time when we may be unable to do so or to do so on favorable terms.
 
As a business development company, we will generally not be able to issue our common stock at a price below net asset value without first obtaining the approval of our stockholders and our independent directors. This requirement will not apply to stock issued upon the exercise of options, warrants or rights that we may issue from time to time. If we raise additional funds by issuing more common stock or senior securities convertible into, or exchangeable for, our common stock, the percentage ownership of our stockholders at that time would decrease, and you may experience dilution.
 
If we are unable to satisfy the requirements under the Code for qualification as a RIC, we will be subject to corporate-level federal income tax.
 
To qualify as a RIC under the Code, we must meet certain source of income, diversification and distribution requirements contained in Subchapter M of the Code and maintain our election to be regulated as a business development company under the 1940 Act.
 
The source of income requirement is satisfied if we derive in each taxable year at least 90% of our gross income from dividends, interest (including tax-exempt interest), payments with respect to certain securities loans, gains from the sale or other disposition of stock, securities or foreign currencies, other income (including but not limited to gain from options, futures or forward contracts) derived with respect to our business of investing in stock, securities or currencies, or net income derived from an interest in a “qualified publicly traded partnership.” The status of certain forms of income we receive could be subject to different interpretations under the Code and might be characterized as non-qualifying income that could cause us to fail to qualify as a RIC and, thus, may cause us to be subject to corporate-level federal income taxes.
 
The annual distribution requirement for a RIC is satisfied if we distribute to our stockholders on an annual basis an amount equal to at least 90% of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any. If we borrow money, we may be subject to certain asset coverage ratio requirements under the 1940 Act and loan covenants that could, under certain circumstances, restrict us from making distributions necessary to qualify as a RIC. If we are unable to obtain cash from other sources, we may fail to qualify as a RIC and, thus, may be subject to corporate-level income tax.


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To qualify as a RIC, we must also meet certain asset diversification requirements at the end of each calendar quarter. Failure to meet these tests may result in our having to (i) dispose of certain investments quickly or (ii) raise additional capital to prevent the loss of RIC status. Because most of our investments will be in development-stage companies within our Target Industries, any such dispositions could be made at disadvantageous prices and may result in substantial losses. If we raise additional capital to satisfy the asset diversification requirements, it could take a longer time to invest such capital. During this period, we will invest in temporary investments, such as cash and cash equivalents, which we expect will earn yields substantially lower than the interest income that we anticipate receiving in respect of our investments in secured and amortizing loans.
 
If we were to fail to qualify for the federal income tax benefits allowable to RICs for any reason and become subject to a corporate-level federal income tax, the resulting taxes could substantially reduce our net assets, the amount of income available for distribution to our stockholders, and the actual amount of our distributions. Such a failure would have a material adverse effect on us, the net asset value of our common stock and the total return, if any, obtainable from your investment in our common stock. In addition, we could be required to recognize unrealized gains, pay substantial taxes and interest and make substantial distributions before requalifying as a RIC. See “Regulation” and “Material U.S. Federal Income Tax Considerations.”
 
We may have difficulty paying our required distributions if we recognize taxable income before or without receiving cash.
 
We may be required to recognize taxable income in circumstances in which we do not receive cash. For example if we hold debt instruments that are treated under applicable tax rules as having original issue discount (such as debt instruments with payment-in-kind interest or, in certain cases, increasing interest rates or issued with warrants), we must include in taxable income each year a portion of the original issue discount that accrues over the life of the debt instrument, regardless of whether cash representing such income is received by us in the same taxable year. Because in certain cases we may recognize taxable income before or without receiving cash representing such income, we may have difficulty meeting the requirement that we distribute an amount equal to at least 90% of our net ordinary income and realized net short-term capital gains in excess of realized long-term capital losses, if any (the “Annual Distribution Requirement”). For example, the proportion of our income that resulted from original issue discount for the fiscal years ended December 31, 2008 and December 31, 2009 and the nine month period ended September 30, 2010 was approximately 4.3%, 8.2% and 8.5%, respectively.
 
Accordingly, we may need to sell some of our assets at times that we would not consider advantageous, raise additional debt or equity capital or forego new investment opportunities or otherwise take actions that are disadvantageous to our business (or be unable to take actions that we believe are necessary or advantageous to our business) in order to satisfy the Annual Distribution Requirement. If we are unable to obtain cash from other sources to satisfy the Annual Distribution Requirement, we may fail to qualify for the federal income tax benefits allowable to RICs and, thus, become subject to a corporate-level federal income tax on all our income. See “Material U.S. Federal Income Tax Considerations.”
 
If we do not invest a sufficient portion of our assets in qualifying assets, we could fail to qualify as a business development company or be precluded from investing according to our current business strategy.
 
As a business development company, we will be prohibited from acquiring any assets other than “qualifying assets” unless, at the time of and after giving effect to such acquisition, at least 70% of our total assets are qualifying assets. We expect that substantially all of our assets that we may acquire in the future will be “qualifying assets,” although we may decide to make other investments that are not “qualifying assets” to the extent permitted by the 1940 Act. If we acquire debt or equity securities from an issuer that has outstanding marginable securities at the time we make an investment, these acquired assets may not be treated as qualifying assets. This result is dictated by the definition of “eligible portfolio company” under the 1940 Act, which in part looks to whether a company has outstanding marginable securities. See “Regulation — Qualifying assets.” If we do not invest a sufficient portion of our assets in qualifying assets, we could lose our status as a business development company, which would have a material adverse effect on our business, financial condition and results of operations.


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Changes in laws or regulations governing our business could adversely affect our business, results of operations and financial condition.
 
Changes in the laws or regulations or the interpretations of the laws and regulations that govern business development companies, RICs, SBICs or non-depository commercial lenders could significantly affect our operations, our cost of doing business and our investment strategy. We are subject to federal, state and local laws and regulations and judicial and administrative decisions that affect our operations, including our loan originations, maximum interest rates, fees and other charges, disclosures to portfolio companies, the terms of secured transactions, collection and foreclosure procedures, portfolio composition and other trade practices. If these laws, regulations or decisions change, or if we expand our business into jurisdictions that have adopted more stringent requirements, we may incur significant expenses to comply with these laws, regulations or decisions or we might have to restrict our operations or alter our investment strategy. For example, any change to the SBA’s current debenture SBIC program could have a significant impact on our ability to obtain lower-cost leverage and our ability to compete with other finance companies. In addition, if we do not comply with applicable laws, regulations and decisions, we may lose licenses needed for the conduct of our business and be subject to civil fines and criminal penalties, any of which could have a material adverse effect upon our business, results of operations or financial condition.
 
Our Advisor has significant potential conflicts of interest with us and your interests as stockholders.
 
As a result of our arrangements with our Advisor, there may be times when our Advisor has interests that differ from those of our stockholders, giving rise to a potential conflict of interest. Our executive officers and directors, as well as the current and future executives and employees of our Advisor, serve or may serve as officers, directors or principals of entities that operate in the same or a related line of business as we do. Accordingly, they may have obligations to investors in those entities, the fulfillment of which might not be in the best interests of our stockholders. In addition, our Advisor may manage other funds in the future that may have investment objectives that are similar, in whole or in part, to ours. Our Advisor may determine that an investment is appropriate for us and for one or more of those other funds. In such an event, depending on the availability of the investment and other appropriate factors, our Advisor will endeavor to allocate investment opportunities in a fair and equitable manner. It is also possible that we may not be given the opportunity to participate in these other investment opportunities.
 
We pay management and incentive fees to our Advisor and reimburse our Advisor for certain expenses it incurs. As a result, investors in our common stock will invest on a “gross” basis and receive distributions on a “net” basis after expenses, resulting in a lower rate of return than an investor might achieve through direct investments. Also, the incentive fee payable by us to our Advisor may create an incentive for our Advisor to pursue investments on our behalf that are riskier or more speculative than would be the case in the absence of such compensation arrangements.
 
We have entered into a license agreement with our Advisor pursuant to which our Advisor has agreed to grant us a non-exclusive, royalty-free right and license to use the service mark “Horizon Technology Finance.” Under this agreement, we have a right to use the “Horizon Technology Finance” service mark for so long as the investment management agreement is in effect. In addition, we pay our Advisor, our allocable portion of overhead and other expenses incurred by our Advisor in performing its obligations under the administration agreement, including rent, the fees and expenses associated with performing compliance functions, and our allocable portion of the compensation of our chief financial officer and any administrative support staff. Any potential conflict of interest arising as a result of our arrangements with our Advisor could have a material adverse effect on our business, results of operations and financial condition.
 
Our incentive fee may impact our Advisor’s structuring of our investments, including by causing our Advisor to pursue speculative investments.
 
The incentive fee payable by us to our Advisor may create an incentive for our Advisor to pursue investments on our behalf that are riskier or more speculative than would be the case in the absence of such compensation arrangement. The incentive fee payable to our Advisor is calculated based on a percentage of our return on invested capital. This may encourage our Advisor to use leverage to increase the return on our investments. Under certain


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circumstances, the use of leverage may increase the likelihood of default, which would impair the value of our common stock. In addition, our Advisor receives the incentive fee based, in part, upon net capital gains realized on our investments. Unlike that portion of the incentive fee based on income, there is no hurdle rate applicable to the portion of the incentive fee based on net capital gains. As a result, our Advisor may have a tendency to invest more capital in investments that are likely to result in capital gains as compared to income-producing securities. Such a practice could result in our investing in more speculative securities than would otherwise be the case, which could result in higher investment losses, particularly during economic downturns. In addition, the incentive fee may encourage our Advisor to pursue different types of investments or structure investments in ways that are more likely to result in warrant gains or gains on equity investments, including upon exercise of equity participation rights, which are inconsistent with our investment strategy and disciplined underwriting process.
 
The incentive fee payable by us to our Advisor also may induce our Advisor to pursue investments on our behalf that have a deferred interest feature, even if such deferred payments would not provide cash necessary to enable us to pay current distributions to our stockholders. Under these investments, we would accrue interest over the life of the investment but would not receive the cash income from the investment until the end of the term. Our net investment income used to calculate the income portion of our investment fee, however, includes accrued interest. Thus, a portion of this incentive fee would be based on income that we have not yet received in cash. In addition, the “catch-up” portion of the incentive fee may encourage our Advisor to accelerate or defer interest payable by portfolio companies from one calendar quarter to another, potentially resulting in fluctuations in the timing and amounts of dividends. Our governing documents do not limit the number of loans we may make with deferred interest features or the proportion of our income we derive from such loans. For the fiscal years ended December 31, 2008 and December 31, 2009 and the nine month period ended September 30, 2010, we derived approximately 1.6%, 3.4% and 4.6%, respectively, of our income from the deferred interest component of our loans and approximately 2.7%, 4.8% and 3.9%, respectively, of our income from discount accretion associated with warrants we have received in connection with the making of our loans.
 
If we are unable to manage our future growth effectively, we may be unable to achieve our investment objective, which could adversely affect our business, results of operations and financial condition and cause the value of your investment in us to decline.
 
Our ability to achieve our investment objective will depend on our ability to achieve and sustain growth, which will depend, in turn, on our Advisor’s direct origination capabilities and disciplined underwriting process in identifying, evaluating, financing, investing in and monitoring suitable companies that meet our investment criteria. Accomplishing this result on a cost-effective basis is largely a function of our Advisor’s marketing capabilities, management of the investment process, ability to provide efficient services and access to financing sources on acceptable terms. In addition to monitoring the performance of our existing investments, our Advisor may also be called upon to provide managerial assistance to our portfolio companies. These demands on their time may distract them or slow the rate of investment. If we fail to manage our future growth effectively, our business, results of operations and financial condition could be materially adversely affected and the value of your investment in us could decrease.
 
Our board of directors may change our operating policies and strategies, including our investment objective, without prior notice or stockholder approval, the effects of which may adversely affect our business.
 
Our board of directors may modify or waive our current operating policies and strategies, including our investment objectives, without prior notice and without stockholder approval (provided that no such modification or waiver may change the nature of our business so as to cease to be, or withdraw our election, as a business development company as provided by the 1940 Act without stockholder approval at a special meeting called upon written notice of not less than ten or more than sixty dates before the date of such meeting). We cannot predict the effect any changes to our current operating policies and strategies would have on our business, results of operations or financial condition or on the value of our stock. However, the effects of any changes might adversely affect our business, any or all of which could negatively impact our ability to pay dividends or cause you to lose all or part of your investment in us.


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Our quarterly and annual operating results may fluctuate due to the nature of our business.
 
We could experience fluctuations in our quarterly and annual operating results due to a number of factors, some of which are beyond our control, including: our ability to make investments in companies that meet our investment criteria, the interest rate payable on our loans, the default rate on these investments, the level of our expenses, variations in, and the timing of, the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our markets and general economic conditions. For example, we have historically experienced greater investment activity during the second and fourth quarters relative to other periods. As a result of these factors, you should not rely on the results for any prior period as being indicative of our performance in future periods.
 
Our business plan and growth strategy depends to a significant extent upon our Advisor’s referral relationships. If our Advisor is unable to develop new or maintain existing relationships, or if these relationships fail to generate investment opportunities, our business could be materially adversely affected.
 
We have historically depended on our Advisor’s referral relationships to generate investment opportunities. For us to achieve our future business objectives, members of our Advisor will need to maintain these relationships with venture capital and private equity firms and management teams and legal firms, accounting firms, investment banks and other lenders, and we will rely to a significant extent upon these relationships to provide us with investment opportunities. If they fail to maintain their existing relationships or develop new relationships with other firms or sources of investment opportunities, we may not be able to grow our investment portfolio. In addition, persons with whom our Advisor has relationships are not obligated to provide us with investment opportunities, and, therefore, there is no assurance that such relationships will lead to the origination of debt or other investments.
 
Our Advisor can resign on 60 days’ notice, and we may not be able to find a suitable replacement within that time, resulting in a disruption in our operations that could adversely affect our business, results of operations or financial condition.
 
Under our investment management agreement, our Advisor has the right to resign at any time, including during the first two years following the investment management agreement’s effective date, upon not more than 60 days’ written notice, whether we have found a replacement or not. If our Advisor resigns, we may not be able to find a new investment adviser or hire internal management with similar expertise and ability to provide the same or equivalent services on acceptable terms within 60 days, or at all. If we are unable to do so, our operations are likely to be disrupted, our business, results of operations and financial condition and our ability to pay distributions may be adversely affected and the market price of our shares may decline. In addition, the coordination of our internal management and investment activities is likely to suffer if we are unable to identify and reach an agreement with a single institution or group of executives having the expertise possessed by our Advisor and its affiliates. Even if we are able to retain comparable management, whether internal or external, the integration of new management and their lack of familiarity with our investment objective may result in additional costs and time delays that may adversely affect our business, results of operations or financial condition.
 
Our ability to enter into transactions with our affiliates will be restricted.
 
As a business development company, we will be prohibited under the 1940 Act from participating in certain transactions with our affiliates without the prior approval of our independent directors and, in some cases, the SEC. Any person that owns, directly or indirectly, 5% or more of our outstanding voting securities will be considered our affiliate for purposes of the 1940 Act. We will generally be prohibited from buying or selling any security from or to an affiliate, absent the prior approval of our independent directors. The 1940 Act also prohibits certain “joint” transactions with an affiliate, which could include investments in the same portfolio company (whether at the same or different times), without prior approval of our independent directors. If a person acquires more than 25% of our voting securities, we will be prohibited from buying or selling any security from or to that person or certain of that person’s affiliates, or entering into prohibited joint transactions with those persons, absent the prior approval of the SEC. Similar restrictions limit our ability to transact business with our officers or directors or their affiliates.


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We will incur significant costs as a result of being a publicly traded company.
 
As a publicly traded company, we will incur legal, accounting and other expenses, including costs associated with the periodic reporting requirements applicable to a company whose securities are registered under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as well as additional corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002, and other rules implemented by the SEC.
 
Terrorist attacks and other catastrophic events may disrupt the businesses in which we invest and harm our operations and our profitability.
 
Terrorist attacks and threats, escalation of military activity or acts of war may significantly harm our results of operations and your investment. We cannot assure you that there will not be further terrorist attacks against the United States or United States businesses. Such attacks or armed conflicts in the United States or elsewhere may impact the businesses in which we invest directly or indirectly, by undermining economic conditions in the United States or elsewhere. In addition, because many of our portfolio companies operate and rely on network infrastructure and enterprise applications and internal technology systems for development, marketing, operational, support and other business activities, a disruption or failure of any or all of these systems in the event of a major telecommunications failure, cyber-attack, fire, earthquake, severe weather conditions or other catastrophic event could cause system interruptions, delays in product development and loss of critical data and could otherwise disrupt their business operations. Losses resulting from terrorist attacks are generally uninsurable.
 
Risks Related to our Investments
 
We have not yet identified many of the potential investment opportunities for our portfolio that we will invest in with the proceeds of this offering.
 
We have not yet identified many of the potential investment opportunities for our portfolio that we will acquire with the proceeds of this offering. Our investments will be selected by our Advisor, subject to the approval of its investment committee. Our stockholders will not have input into our Advisor’s investment decisions. As a result, you will be unable to evaluate any future portfolio company investments prior to purchasing shares of our common stock in this offering. These factors will increase the uncertainty, and thus the risk, of investing in our shares of common stock.
 
If our investments do not meet our performance expectations, you may not receive distributions.
 
We intend to make distributions of income on a quarterly basis to our stockholders. We may not be able to achieve operating results that will allow us to make distributions at a specific level or increase the amount of these distributions from time to time. In addition, due to the asset coverage test applicable to us as a business development company, we may be limited in our ability to make distributions. See “Regulation.” Also, restrictions and provisions in any existing or future credit facilities may limit our ability to make distributions. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including failure to obtain, or possible loss of, the federal income tax benefits allowable to RICs. See “Material U.S. Federal Income Tax Considerations.” We cannot assure you that you will receive distributions at a particular level or at all.
 
Most of our portfolio companies will need additional capital, which may not be readily available.
 
Our portfolio companies will typically require substantial additional financing to satisfy their continuing working capital and other capital requirements and service the interest and principal payments on our investments. We cannot predict the circumstances or market conditions under which our portfolio companies will seek additional capital. Each round of institutional equity financing is typically intended to provide a company with only enough capital to reach the next stage of development. It is possible that one or more of our portfolio companies will not be able to raise additional financing or may be able to do so only at a price or on terms that are unfavorable to the portfolio company, either of which would negatively impact our investment returns. Some of these companies may be unable to obtain sufficient financing from private investors, public capital markets or lenders thereby requiring these companies to cease or curtail business operations. Accordingly, investing in these types of companies


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generally entails a higher risk of loss than investing in companies that do not have significant incremental capital raising requirements.
 
Economic recessions or downturns could adversely affect our business and that of our portfolio companies which may have an adverse effect on our business, results of operations and financial condition.
 
General economic conditions may affect our activities and the operation and value of our portfolio companies. Economic slowdowns or recessions may result in a decrease of institutional equity investment, which would limit our lending opportunities. Furthermore, many of our portfolio companies may be susceptible to economic slowdowns or recessions and may be unable to repay our loans during these periods. Therefore, our non-performing assets are likely to increase and the value of our portfolio is likely to decrease during these periods. Adverse economic conditions also may decrease the value of collateral securing some of our loans and the value of our equity investments. Economic slowdowns or recessions could lead to financial losses in our portfolio and a decrease in revenues, net income and assets. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us.
 
A portfolio company’s failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially, termination of its loans and foreclosure on its secured assets, which could trigger cross-defaults under other agreements and jeopardize the portfolio company’s ability to meet its obligations under the loans that we hold. We may incur expenses to the extent necessary to recover our investment upon default or to negotiate new terms with a defaulting portfolio company. These events could harm our financial condition and operating results.
 
Our investment strategy will focus on investments in development-stage companies in our Target Industries, which are subject to many risks, including volatility, intense competition, shortened product life cycles and periodic downturns, and are typically rated below “investment grade”.
 
We intend to invest, under normal circumstances, most of the value of our total assets (including the amount of any borrowings for investment purposes) in development-stage companies, which may have relatively limited operating histories, in our Target Industries. Many of these companies may have narrow product lines and small market shares, compared to larger established publicly-owned firms, which tend to render them more vulnerable to competitors’ actions and market conditions, as well as general economic downturns. The revenues, income (or losses) and valuations of development-stage companies in our Target Industries can and often do fluctuate suddenly and dramatically. For these reasons, investments in our portfolio companies, if rated by one or more ratings agency, would typically be rated below “investment grade,” which refers to securities rated by ratings agencies below the four highest rating categories. These companies may also have more limited access to capital and higher funding costs. In addition, development-stage technology markets are generally characterized by abrupt business cycles and intense competition, and the competitive environment can change abruptly due to rapidly evolving technology. Therefore, our portfolio companies may face considerably more risk than companies in other industry sectors. Accordingly, these factors could impair their cash flow or result in other events, such as bankruptcy, which could limit their ability to repay their obligations to us and may materially adversely affect the return on, or the recovery of, our investments in these businesses.
 
Because of rapid technological change, the average selling prices of products and some services provided by development-stage companies in our Target Industries have historically decreased over their productive lives. These decreases could adversely affect their operating results and cash flow, their ability to meet obligations under their debt securities and the value of their equity securities. This could, in turn, materially adversely affect our business, financial condition and results of operations.
 
Any unrealized depreciation we experience on our loan portfolio may be an indication of future realized losses, which could reduce our income available for distribution.
 
As a business development company, we will be required to carry our investments at fair value which shall be the market value of our investments or, if no market value is ascertainable, at the fair value as determined in good


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faith pursuant to procedures approved by our board of directors in accordance with our valuation policy. We are not permitted to maintain a reserve for loan losses. Decreases in the fair values of our investments will be recorded as unrealized depreciation. Any unrealized depreciation in our loan portfolio could be an indication of a portfolio company’s inability to meet its repayment obligations to us with respect to the affected loans. This could result in realized losses in the future and ultimately reduces our income available for distribution in future periods.
 
If the assets securing the loans we make decrease in value, we may not have sufficient collateral to cover losses and may experience losses upon foreclosure.
 
We believe our portfolio companies generally will be able to repay our loans from their available capital, from future capital-raising transactions or from cash flow from operations. However, to mitigate our credit risks, we typically take a security interest in all or a portion of the assets of our portfolio companies, including the equity interests of their subsidiaries. There is a risk that the collateral securing our loans may decrease in value over time, may be difficult to appraise or sell in a timely manner and may fluctuate in value based upon the business and market conditions, including as a result of the inability of the portfolio company to raise additional capital, and, in some circumstances, our lien could be subordinated to claims of other creditors. In addition, deterioration in a portfolio company’s financial condition and prospects, including its inability to raise additional capital, may be accompanied by deterioration in the value of the collateral for the loan. Consequently, although such loan is secured we may not receive principal and interest payments according to the loan’s terms and the value of the collateral may not be sufficient to recover our investment should we be forced to enforce our remedies.
 
In addition, because we intend to invest in development-stage companies in our Target Industries, a substantial portion of the assets securing our investment may be in the form of intellectual property, if any, inventory, equipment, cash and accounts receivables. Intellectual property, if any, which secures a loan could lose value if the company’s rights to the intellectual property are challenged or if the company’s license to the intellectual property is revoked or expires. In addition, in lieu of a security interest in the intellectual property we may sometimes obtain a security interest in all assets of the portfolio company other than intellectual property and also obtain a commitment by the portfolio company not to grant liens to any other creditor on the company’s intellectual property. In these cases, we may have additional difficulty recovering our principal in the event of a foreclosure. Similarly, any equipment securing our loan may not provide us with the anticipated security if there are changes in technology or advances in new equipment that render the particular equipment obsolete or of limited value or if the company fails to adequately maintain or repair the equipment. Any one or more of the preceding factors could materially impair our ability to recover principal in a foreclosure.
 
The lack of liquidity in our investments may adversely affect our business, and if we need to sell any of our investments, we may not be able to do so at a favorable price. As a result, we may suffer losses.
 
We plan to generally invest in loans with terms of up to four years and hold such investments until maturity, unless earlier prepaid, and we do not expect that our related holdings of equity securities will provide us with liquidity opportunities in the near-term. We expect to primarily invest in companies whose securities are not publicly-traded, and whose securities will be subject to legal and other restrictions on resale or will otherwise be less liquid than publicly traded securities. The illiquidity of these investments may make it difficult for us to sell these investments when desired. We may also face other restrictions on our ability to liquidate an investment in a public portfolio company to the extent that we possess material non-public information regarding the portfolio company. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we had previously recorded these investments. As a result, we do not expect to dispose of our investments in the near term. However, we may be required to do so in order to maintain our qualification as a business development company and as a RIC if we do not satisfy one or more of the applicable criteria under the respective regulatory frameworks. Because most of our investments are illiquid, we may be unable to dispose of them, in which case we could fail to qualify as a RIC and/or BDC, or we may not be able to dispose of them at favorable prices, and as a result, we may suffer losses.


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Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in such companies.
 
We plan to invest primarily in loans issued by our portfolio companies. Some of our portfolio companies will be permitted to have other debt that ranks equally with, or senior to, our loans in the portfolio company. By their terms, these debt instruments may provide that the holders thereof are entitled to receive payment of interest or principal on or before the dates on which we are entitled to receive payments in respect of our loans. These debt instruments may prohibit the portfolio companies from paying interest on or repaying our investments in the event of, and during, the continuance of a default under the debt instruments. In addition, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders of debt instruments ranking senior to our investment in that portfolio company would typically be entitled to receive payment in full before we receive any payment in respect of our investment. After repaying senior creditors, a portfolio company may not have any remaining assets to use for repaying its obligation to us. In the case of debt ranking equally with our loans, we would have to share on an equal basis any distributions with other creditors holding such debt in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy.
 
There may be circumstances where our loans could be subordinated to claims of other creditors or we could be subject to lender liability claims.
 
Even though we may structure certain of our investments as senior loans, if one of our portfolio companies were to go bankrupt, depending on the facts and circumstances, including the extent to which we actually provided managerial assistance to that portfolio company, a bankruptcy court might recharacterize our debt investment and subordinate all or a portion of our claim to that of other creditors. We may also be subject to lender liability claims for actions taken by us with respect to a portfolio company’s business, including in rendering significant managerial assistance, or instances where we exercise control over the portfolio company.
 
An investment strategy focused primarily on privately held companies presents certain challenges, including the lack of available information about these companies, a dependence on the talents and efforts of only a few key portfolio company personnel and a greater vulnerability to economic downturns.
 
We plan to invest primarily in privately held companies. Generally, very little public information exists about these companies, and we will be required to rely on the ability of our Advisor to obtain adequate information to evaluate the potential returns from investing in these companies. If we are unable to uncover all material information about these companies, we may not make a fully informed investment decision, and we may lose money on our investments. Also, privately held companies frequently have less diverse product lines and a smaller market presence than larger competitors. They are thus generally more vulnerable to economic downturns and may experience substantial variations in operating results. These factors could affect our investment returns.
 
In addition, our success depends, in large part, upon the abilities of the key management personnel of our portfolio companies, who are responsible for the day-to-day operations of our portfolio companies. Competition for qualified personnel is intense at any stage of a company’s development. The loss of one or more key managers can hinder or delay a company’s implementation of its business plan and harm its financial condition. Our portfolio companies may not be able to attract and retain qualified managers and personnel. Any inability to do so may negatively affect our investment returns.
 
Prepayments of our debt investments by our portfolio companies could adversely impact our results of operations and reduce our return on equity.
 
We will be subject to the risk that the investments we make in our portfolio companies may be repaid prior to maturity. For example, most of our debt investments have, historically, been repaid prior to maturity by our portfolio companies. At the time of a liquidity event, such as a sale of the business, refinancing or public offering, many of our portfolio companies have availed themselves of the opportunity to repay our loans prior to maturity. Our investments generally allow for repayment at any time subject to certain penalties. When this occurs, we will generally reinvest these proceeds in temporary investments, pending their future investment in new portfolio companies. These temporary investments will typically have substantially lower yields than the debt being prepaid,


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and we could experience significant delays in reinvesting these amounts. Any future investment in a new portfolio company may also be at lower yields than the debt that was repaid. As a result, our results of operations could be materially adversely affected if one or more of our portfolio companies elects to prepay amounts owed to us. Additionally, prepayments could negatively impact our return on equity, which could result in a decline in the market price of our common stock.
 
Our business and growth strategy could be adversely affected if government regulations, priorities and resources impacting the industries in which our portfolio companies operate change.
 
Some of our portfolio companies operate in industries that are highly regulated by federal, state and/or local agencies. Changes in existing laws, rules or regulations, or judicial or administrative interpretations thereof, or new laws, rules or regulations could have an adverse impact on the business and industries of our portfolio companies. In addition, changes in government priorities or limitations on government resources could also adversely impact our portfolio companies. We are unable to predict whether any such changes in laws, rules or regulations will occur and, if they do occur, the impact of these changes on our portfolio companies and our investment returns.
 
Our portfolio companies operating in the life science industry are subject to extensive government regulation and certain other risks particular to that industry.
 
As part of our investment strategy, we plan to invest in companies in the life science industry that are subject to extensive regulation by the Food and Drug Administration, or FDA, and to a lesser extent, other federal and state agencies. If any of these portfolio companies fail to comply with applicable regulations, they could be subject to significant penalties and claims that could materially and adversely affect their operations. Portfolio companies that produce medical devices or drugs are subject to the expense, delay and uncertainty of the regulatory approval process for their products and, even if approved, these products may not be accepted in the marketplace. In addition, new laws, regulations or judicial interpretations of existing laws and regulations might adversely affect a portfolio company in this industry. Portfolio companies in the life science industry may also have a limited number of suppliers of necessary components or a limited number of manufacturers for their products, and therefore face a risk of disruption to their manufacturing process if they are unable to find alternative suppliers when needed. Any of these factors could materially and adversely affect the operations of a portfolio company in this industry and, in turn, impair our ability to timely collect principal and interest payments owed to us.
 
If our portfolio companies are unable to commercialize their technologies, products, business concepts or services, the returns on our investments could be adversely affected.
 
The value of our investments in our portfolio companies may decline if they are not able to commercialize their technology, products, business concepts or services. Additionally, although some of our portfolio companies may already have a commercially successful product or product line at the time of our investment, technology-related products and services often have a more limited market or life span than products in other industries. Thus, the ultimate success of these companies often depends on their ability to continually innovate in increasingly competitive markets. If they are unable to do so, our investment returns could be adversely affected and their ability to service their debt obligations to us over the life of the loan could be impaired. Our portfolio companies may be unable to successfully acquire or develop any new technologies and the intellectual property they currently hold may not remain viable. Even if our portfolio companies are able to develop commercially viable products, the market for new products and services is highly competitive and rapidly changing. Neither our portfolio companies nor we will have any control over the pace of technology development. Commercial success is difficult to predict, and the marketing efforts of our portfolio companies may not be successful.
 
If our portfolio companies are unable to protect their intellectual property rights, our business and prospects could be harmed, and if portfolio companies are required to devote significant resources to protecting their intellectual property rights, the value of our investment could be reduced.
 
Our future success and competitive position will depend in part upon the ability of our portfolio companies to obtain, maintain and protect proprietary technology used in their products and services. The intellectual property held by our portfolio companies often represents a substantial portion of the collateral securing our investments


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and/or constitutes a significant portion of the portfolio companies’ value that may be available in a downside scenario to repay our loans. Our portfolio companies will rely, in part, on patent, trade secret and trademark law to protect that technology, but competitors may misappropriate their intellectual property, and disputes as to ownership of intellectual property may arise. Portfolio companies may, from time to time, be required to institute litigation to enforce their patents, copyrights or other intellectual property rights, protect their trade secrets, determine the validity and scope of the proprietary rights of others or defend against claims of infringement. Such litigation could result in substantial costs and diversion of resources. Similarly, if a portfolio company is found to infringe or misappropriate a third party’s patent or other proprietary rights, it could be required to pay damages to the third party, alter its products or processes, obtain a license from the third party and/or cease activities utilizing the proprietary rights, including making or selling products utilizing the proprietary rights. Any of the foregoing events could negatively affect both the portfolio company’s ability to service our debt investment and the value of any related debt and equity securities that we own, as well as any collateral securing our investment.
 
We do not expect to control any of our portfolio companies.
 
We do not expect to control any of our portfolio companies, even though our debt agreements may contain certain restrictive covenants that limit the business and operations of our portfolio companies. We also do not intend to maintain a control position to the extent we own equity interests in any portfolio company. As a result, we will be subject to the risk that a portfolio company in which we invest may make business decisions with which we disagree and the management of such company, as representatives of the holders of their common equity, may take risks or otherwise act in ways that do not serve our interests as debt investors. Due to the lack of liquidity of the investments that we typically hold in our portfolio companies, we may not be able to dispose of our investments in the event we disagree with the actions of a portfolio company and we may therefore, suffer a decrease in the value of our investments.
 
Risks Related to this Offering and our Common Stock
 
Prior to this offering, there has been no public market for our common stock, and we cannot assure you that the market price of shares of our common stock will not decline following the offering.
 
Prior to this offering, there was no public trading market for our common stock, and we cannot assure you that one will develop or be sustained after this offering. If an active trading market does not develop, you may have difficulty selling any common stock that you buy and the value of your shares may be impaired. We also cannot predict the prices at which our common stock will trade. The initial public offering price for our common stock will be determined through our negotiations with the underwriters and may not bear any relationship to the market price at which it will trade after this offering or to any other established criteria of our value. Shares of closed-end management investment companies offered in an initial public offering often trade at a discount to the initial offering price due to sales loads, underwriting discounts and related offering expenses. In addition, shares of closed-end management investment companies have in the past frequently traded at discounts to their net asset values and our stock may also be discounted in the market. This characteristic of closed-end management investment companies is separate and distinct from the risk that our net asset value per share may decline. We cannot predict whether shares of our common stock will trade above, at or below our net asset value. The risk of loss associated with this characteristic of closed-end management investment companies may be greater for investors expecting to sell shares of common stock purchased in this offering soon after the offering. In addition, if our common stock trades below its net asset value, we will generally not be able to sell additional shares of our common stock to the public at its market price without first obtaining the approval of our stockholders (including our unaffiliated stockholders) and our independent directors.
 
Subsequent sales in the public market of substantial amounts of our common stock issued to insiders or others may have an adverse effect on the market price of our common stock.
 
Upon consummation of this offering, we will have 7,478,624 shares of common stock outstanding (or 8,416,124 shares of common stock if the over-allotment option is fully exercised). Of these shares, the 6,250,000 shares sold in this offering will be freely tradeable and approximately 1,228,624 shares of our common stock will be held by our existing stockholders. Approximately 55% of the shares of our common stock issued to the


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selling stockholder in the Share Exchange are included in the offering. We and our executive officers and directors and our other stockholders, including the selling stockholder, will be subject to agreements with the underwriters that restrict our and their ability to transfer our stock for a period of 180 days from the date of this prospectus. Approximately one out of every six publicly issued shares outstanding upon completion of the offering will be subject to such agreements. In the event that either (a) during the last 17 days of the 180-day restricted period, we issue an earnings release or material news or a material event relating to us occurs or (b) prior to the expiration of the 180-day restricted period, we announce that we will release earnings results during the 16-day period beginning on the last day of the 180-day period, the “lock-up” restrictions will continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event. See “Underwriters.” The shares sold by the selling stockholder in this offering will not be subject to this lock-up agreement. After the lock-up agreements expire, an aggregate of 1,228,624 additional shares of our common stock will be eligible for sale in the public market in accordance with Rule 144 under the Securities Act. Sales of substantial amounts of our common stock or the availability of such shares for sale, including by insiders, could adversely affect the prevailing market prices for our common stock. If this occurs and continues, our ability to raise additional capital through the sale of equity securities could be impaired should we desire to do so.
 
Our common stock price may be volatile and may decrease substantially.
 
The trading price of our common stock following this offering may fluctuate substantially. The price of our common stock that will prevail in the market after this offering may be higher or lower than the price you pay and the liquidity of our common stock may be limited, in each case depending on many factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include the following:
 
  •  price and volume fluctuations in the overall stock market or in the market for business development companies from time to time;
 
  •  investor demand for our shares of common stock;
 
  •  significant volatility in the market price and trading volume of securities of registered closed-end management investment companies, business development companies or other financial services companies;
 
  •  our inability to raise capital, borrow money or deploy or invest our capital;
 
  •  fluctuations in interest rates;
 
  •  any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts;
 
  •  operating performance of companies comparable to us;
 
  •  changes in regulatory policies or tax guidelines with respect to RICs, business development companies or SBICs;
 
  •  not electing or losing RIC status;
 
  •  actual or anticipated changes in our earnings or fluctuations in our operating results;
 
  •  changes in the value of our portfolio of investments;
 
  •  general economic conditions, trends and other external factors;
 
  •  departures of key personnel; or
 
  •  loss of a major source of funding.
 
In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. Due to the potential volatility of our stock price, we may therefore be the target of securities litigation in the future. Securities litigation could result in substantial costs and divert management’s attention and resources from our business.


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We may allocate the net proceeds from this offering in ways with which you may not agree.
 
We will have significant flexibility in investing the net proceeds of this offering and may use the net proceeds from this offering in ways with which you may not agree or for purposes other than those contemplated at the time of the offering. We will also pay operating expenses, and may pay other expenses such as due diligence expenses related to potential new investments, from net proceeds. Our ability to achieve our investment objective may be limited to the extent that net proceeds of this offering, pending full investment, are used to pay operating or other expenses.
 
We will initially invest a portion of the net proceeds of this offering in high-quality short-term investments, which will generate lower rates of return than those expected from investments made in accordance with our investment objective.
 
We will initially invest a portion of the net proceeds of this offering in cash, cash equivalents, U.S. government securities and other high-quality short-term investments. These securities may earn yields substantially lower than the income that we anticipate receiving once these proceeds are fully invested in accordance with our investment objective.
 
Investing in shares of our common stock may involve an above average degree of risk.
 
The investments we make in accordance with our investment objective may result in a higher amount of risk, volatility or loss of principal than alternative investment options. Our investments in portfolio companies may be highly speculative and aggressive, and therefore, an investment in our common stock may not be suitable for investors with lower risk tolerance.
 
Investors in this offering will incur immediate dilution upon the closing of this offering.
 
In connection with the Distribution and Share Exchange, we will issue common stock equal to approximately $52.6 million, which represents the net asset value of Compass Horizon as of September 30, 2010, to the Compass Horizon Owners in exchange for their respective interests, as described in the section entitled “The Exchange Transaction.” The Share Exchange, however, will not take place until immediately prior to our election to be treated as a business development company under the 1940 Act.
 
Furthermore, after giving effect to the sale of our common stock in this offering at an assumed initial public offering price of $18.50 per share (the mid-point of the range set forth on the cover of this prospectus), and after deducting estimated underwriting discounts and estimated offering and Share Exchange expenses payable by us, our as-adjusted pro forma net asset value as of September 30, 2010 would have been approximately $134.5 million, or $17.99 per share. This represents an immediate decrease in our net asset value per share of $2.01 to the Compass Horizon Owners and dilution in net asset value per share of $0.51 to new investors who purchase shares in this offering. See “Dilution” for more information.
 
Anti-takeover provisions in our charter documents and other agreements and certain provisions of the Delaware General Corporation Law could deter takeover attempts and have an adverse impact on the price of our common stock.
 
The Delaware General Corporation Law, our certificate of incorporation and our bylaws contain provisions that may have the effect of discouraging a third party from making an acquisition proposal for us. Among other things, our certificate of incorporation and bylaws:
 
  •  provide for a classified board of directors, which may delay the ability of our stockholders to change the membership of a majority of our board of directors;
 
  •  authorize the issuance of “blank check” preferred stock that could be issued by our board of directors to thwart a takeover attempt;
 
  •  do not provide for cumulative voting;


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  •  provide that vacancies on the board of directors, including newly created directorships, may be filled only by a majority vote of directors then in office;
 
  •  limit the calling of special meetings of stockholders;
 
  •  provide that our directors may be removed only for cause;
 
  •  require supermajority voting to effect certain amendments to our certificate of incorporation and our bylaws; and
 
  •  require stockholders to provide advance notice of new business proposals and director nominations under specific procedures.
 
These anti-takeover provisions may inhibit a change in control in circumstances that could give the holders of our common stock the opportunity to realize a premium over the market price of our common stock. See “Description of Capital Stock.” Our Credit Facility also contains a covenant that prohibits us from merging or consolidating with any other person or selling all or substantially all of our assets without the prior written consent of WestLB. If we were to engage in such a transaction without such consent, WestLB could accelerate our repayment obligations under, and/or terminate, our Credit Facility. In addition, the SBA prohibits, without prior SBA approval, a “change of control” of an SBIC. A “change of control” is any event which would result in the transfer of power, direct or indirect, to direct the management and policies of an SBIC, including through ownership. To the extent that we form an SBIC subsidiary, this would prohibit a change of control of us without prior SBA approval.


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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
In addition to factors previously identified elsewhere in this prospectus, including the “Risk Factors” section of this prospectus, the following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance:
 
  •  our future operating results, including the performance of our existing loans and warrants;
 
  •  the introduction, withdrawal, success and timing of business initiatives and strategies;
 
  •  changes in political, economic or industry conditions, the interest rate environment or financial and capital markets, which could result in changes in the value of our assets;
 
  •  the relative and absolute investment performance and operations of our Advisor;
 
  •  the impact of increased competition;
 
  •  the impact of investments we intend to make and future acquisitions and divestitures;
 
  •  the unfavorable resolution of legal proceedings;
 
  •  our business prospects and the prospects of our portfolio companies;
 
  •  the projected performance of other funds managed by our Advisor;
 
  •  the impact, extent and timing of technological changes and the adequacy of intellectual property protection;
 
  •  our regulatory structure and tax status;
 
  •  the adequacy of our cash resources and working capital;
 
  •  the timing of cash flows, if any, from the operations of our portfolio companies;
 
  •  the impact of interest rate volatility on our results, particularly if we use leverage as part of our investment strategy;
 
  •  the ability of our portfolio companies to achieve their objective;
 
  •  our ability to cause a subsidiary to become a licensed SBIC;
 
  •  the impact of legislative and regulatory actions and reforms and regulatory, supervisory or enforcement actions of government agencies relating to us or our Advisor;
 
  •  our contractual arrangements and relationships with third parties;
 
  •  our ability to access capital and any future financings by us;
 
  •  the ability of our Advisor to attract and retain highly talented professionals; and
 
  •  the impact of changes to tax legislation and, generally, our tax position.
 
This prospectus, and other statements that we may make, may contain forward-looking statements with respect to future financial or business performance, strategies or expectations. Forward-looking statements are typically identified by words or phrases such as “trend,” “opportunity,” “pipeline,” “believe,” “comfortable,” “expect,” “anticipate,” “current,” “intention,” “estimate,” “position,” “assume,” “plan,” “potential,” “project,” “outlook,” “continue,” “remain,” “maintain,” “sustain,” “seek,” “achieve” and similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “may” or similar expressions.
 
Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Forward-looking statements speak only as of the date they are made, and we assume no duty to and do not undertake to update forward-looking statements. These forward-looking statements do not meet the safe harbor for forward-looking statements pursuant to Section 27A of the Securities Act. Actual results could differ materially from those anticipated in forward-looking statements and future results could differ materially from historical performance.


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BUSINESS DEVELOPMENT COMPANY
AND REGULATED INVESTMENT COMPANY ELECTIONS
 
In connection with this offering, we will file an election to be regulated as a business development company under the 1940 Act. In addition, we intend to elect to be treated, and intend to qualify, as a RIC under Subchapter M of the Code, commencing with our taxable year ending on December 31, 2010. Our election to be regulated as a business development company and our election to be treated as a RIC will have a significant impact on our future operations. Some of the most important effects on our future operations of our election to be regulated as a business development company and our election to be treated as a RIC are outlined below.
 
Investment Reporting
 
We will report our investments at fair value with changes in value reported through our statement of operations. In accordance with the requirements of Article 6 of Regulation S-X, we will report all of our investments, including debt investments, at fair value. Changes in these values will be reported through our statement of operations under the caption entitled “total net change in unrealized appreciation (depreciation) from investments.” See “Determination of Net Asset Value.”
 
Income Tax Expense
 
We generally will be required to pay income taxes only on the portion of our taxable income we do not distribute to stockholders (actually or constructively). As a RIC, so long as we meet certain minimum distribution, source-of-income and asset diversification requirements, we generally will be required to pay income taxes only on the portion of our taxable income and gains we do not distribute (actually or constructively) and certain built-in gains, if any.
 
Use of Leverage
 
Our ability to use leverage as a means of financing our portfolio of investments will be limited. As a business development company, we will be required to meet a coverage ratio of total assets to total senior securities of at least 200%. For this purpose, senior securities include all borrowings and any preferred stock we may issue in the future. Additionally, our ability to continue to utilize leverage as a means of financing our portfolio of investments will be limited by this asset coverage test. In connection with this offering and our intended election to be regulated as a business development company, we expect to file a request with the SEC for exemptive relief to allow us to exclude any indebtedness guaranteed by the SBA and issued by our SBIC subsidiary from the 200% asset coverage requirements applicable to us. While the SEC has granted exemptive relief in substantially similar circumstances in the past, no assurance can be given that an exemptive order will be granted.
 
Distribution Policy
 
As a RIC, we intend to distribute to our stockholders substantially all of our income, except possibly for certain net long-term capital gains. We may make deemed distributions to our stockholders of some or all of our retained net long-term capital gains. If this happens, you will be treated as if you had received an actual distribution of the capital gains and reinvested the net after-tax proceeds in us. In general, you also would be eligible to claim a tax credit (or, in certain circumstances, a tax refund) equal to your allocable share of the tax we paid on the deemed distribution. See “Distributions” and “Material U.S. Federal Income Tax Considerations.”


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THE EXCHANGE TRANSACTION
 
We were formed in March 2010 to continue and expand the business of Compass Horizon. Compass Horizon is the entity that currently owns all of the portfolio investments that we will own upon the closing of this offering. From commencing operations in March 2008 through the date of this prospectus, all of the outstanding limited liability company interests in Compass Horizon have been owned by the Compass Horizon Owners.
 
Prior to the completion of the offering, based upon our as adjusted net asset value of $70.9 million as of September 30, 2010, Compass Horizon intends to make a cash distribution to CHP of approximately $18.0 million from net income and as a return of capital, which we call the “Pre-IPO Distribution.”
 
After the Pre-IPO Distribution and immediately prior to the completion of the offering, the Compass Owners will exchange their membership interests in Compass Horizon for 2,628,624 shares of our common stock, which we call the “Share Exchange.” Upon completion of the Share Exchange and this offering, Compass Horizon will become our wholly owned subsidiary and we will effectively own all of Compass Horizon’s assets, including all of its investments and its subsidiary.
 
Concurrent with this offering, CHP will offer to sell 1,400,000 shares of our common stock, which it received in the Share Exchange. After the completion of this offering, assuming the sale of 1,400,000 shares of our common stock by the selling stockholder and the issuance of 4,850,000 shares of our common stock by us in this offering, CHP will own 1,131,570 shares of our common stock, or 15.1% of the total outstanding shares of our common stock. Upon completion of the Share Exchange and this offering, HTF-CHF will own 97,054 shares of our common stock, or 1.3% of the total outstanding shares of our common stock.


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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
 
The following unaudited pro forma condensed consolidated financial information sets forth our unaudited pro forma and historical consolidated statements of operations for the nine months ended September 30, 2010 and the year ended December 31, 2009 and the unaudited pro forma and historical consolidated balance sheets at September 30, 2010. Such information is based on the audited and unaudited financial statements of Compass Horizon appearing elsewhere in this prospectus, as adjusted to illustrate the estimated pro forma effects of the pro forma adjustments described below. Compass Horizon is considered to be our predecessor for accounting purposes and its consolidated financial statements are our historical consolidated financial statements.
 
The unaudited pro forma condensed consolidated balance sheet at September 30, 2010, and the unaudited pro forma condensed consolidated statements of operations for the nine months ended September 30, 2010 and the year ended December 31, 2009, give effect to the following:
 
  •  our qualification as a BDC and changes in accounting principles as a result of our election to be treated as a BDC immediately following the completion of this offering, which requires all of our investments to be carried at market value, or for investments with no ascertainable market value, fair value as determined in good faith by our board of directors;
 
  •  our qualification and election to be treated as a RIC, including the income tax consequences of our election, following the completion of this offering;
 
  •  the Pre-IPO Distribution and the Share Exchange;
 
  •  the sale of 6,250,000 shares of common stock in this offering by us and the selling stockholder and the use of proceeds from this offering;
 
  •  the incentive fee payable to the Advisor at the time of the Pre-IPO Distribution and Share Exchange; and
 
  •  the consolidation of our wholly owned special purpose financing subsidiaries, Compass Horizon and Credit I, which will continue to be consolidated with the Company following the completion of this offering.
 
The unaudited pro forma adjustments are based on available information and certain assumptions that we believe are reasonable. Presentation of the unaudited pro forma financial information is prepared in conformity with Article 11 of Regulation S-X.
 
The unaudited pro forma condensed consolidated financial information was prepared on a basis consistent with that used in preparing our audited consolidated financial statements and includes all adjustments, consisting of normal and recurring items, that we consider necessary for a fair presentation of the financial position and results of operations for the unaudited periods.
 
The unaudited pro forma condensed consolidated financial information should be read in conjunction with the sections of this prospectus entitled “The Exchange Transaction,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our historical consolidated financial statements and related notes thereto included elsewhere in this prospectus. The unaudited pro forma condensed consolidated financial information is for informational purposes only and is not intended to represent or be indicative of the consolidated results of operations or financial position that we would have reported had the pro forma adjustments and this offering been completed on the dates indicated and should not be taken as representative of our future consolidated results of operations or financial position.


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Unaudited Pro Forma Condensed Consolidated Balance Sheet
As of September 30, 2010
 
                                         
                      Adjustments
       
                      for this
       
                      Offering and
    Horizon
 
    Compass
                Pre-IPO
    Technology
 
    Horizon Funding
    Adjustments
          Distribution
    Finance
 
    Company LLC —
    for BDC/RIC
    As adjusted for
    and Share
    Corporation
 
ASSETS
  Historical     Elections     RIC/BDC Elections     Exchange     Pro Forma  
 
Cash and cash equivalents
  $ 19,218,658     $     $ 19,218,658       63,614,250 (C)(D)     82,832,908  
Loans receivable
    133,785,603       (347,720 )(A)     133,437,883             133,437,883  
Allowance for loan losses
    (1,185,069 )     1,185,069 (B)                  
                                         
Loans receivable, net
    132,600,534       837,349       133,437,883             133,437,883  
Warrants
    5,217,105             5,217,105             5,217,105  
Other assets
    2,899,249             2,899,249             2,899,249  
                                         
TOTAL ASSETS
  $ 159,935,546     $ 837,349     $ 160,772,895       63,614,250       224,387,145  
                                         
 
LIABILITIES
Borrowings
  $ 88,944,819     $     $ 88,944,819             88,944,819  
Other liabilities
    925,594             925,594             925,594  
                                         
TOTAL LIABILITIES
    89,870,413             89,870,413             89,870,413  
                                         
MEMBERS’ CAPITAL/STOCKHOLDERS EQUITY
                                       
Members’ capital
    68,055,580       1,185,069 (B)     69,240,649       (69,240,649 )(C)(D)      
Accumulated other comprehensive loss —
Unrealized loss on interest rate swaps
    (358,989 )           (358,989 )           (358,989 )
Unrealized gain on investments
    2,368,542       (347,720 )(A)     2,020,822             2,020,822  
Common Stock
                      7,479 (D)     7,479  
Paid-in capital
                      132,847,420 (D)     132,847,420  
                                         
MEMBERS’ CAPITAL/STOCKHOLDERS’ EQUITY
    70,065,133       837,349       70,902,482       63,614,250       134,516,732  
                                         
TOTAL LIABILITIES AND MEMBERS’ CAPITAL/STOCKHOLDERS’ EQUITY
  $ 159,935,546     $ 837,349     $ 160,772,895       63,614,250       224,387,145  
                                         
 
See notes to unaudited pro forma condensed consolidated financial information


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Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the Nine Months Ended September 30, 2010
 
 
                                         
                      Adjustments
       
                      for this
       
                      Offering and
    Horizon
 
    Compass
                Pre-IPO
    Technology
 
    Horizon Funding
    Adjustments
          Distribution
    Finance
 
    Company LLC —
    for BDC/RIC
    As adjusted for
    and Share
    Corporation
 
    Historical     Elections     RIC/BDC Elections     Exchange     Pro Forma  
 
INCOME
                                       
Interest income on loans
  $ 12,852,115     $     $ 12,852,115           $ 12,852,115  
Other income
    398,322             398,322             398,322  
                                         
Total income
    13,250,437             13,250,437             13,250,437  
                                         
Credit for loan losses
    738,965       (738,965 )(B)                  
                                         
Income after credit for loan losses
    13,989,402       (738,965 )     13,250,437             13,250,437  
                                         
EXPENSES
                                       
Interest expense
    3,281,682             3,281,682             3,281,682  
Management fee expense
    1,815,878             1,815,878       330,000 (C)     2,145,878  
Other expenses
    275,557             275,557             275,557  
                                         
Total expenses
    5,373,117             5,373,117       330,000 (C)     5,703,117  
                                         
Income before net realized and unrealized gain on investments
    8,616,285       (738,965 )     7,877,320       (330,000 )(C)     7,547,320  
Net realized loss on investments
    (1,762 )           (1,762 )           (1,762 )
Net unrealized gain on investments
    1,549,053       418,232 (A)     1,967,285             1,967,285  
                                         
NET INCOME
  $ 10,163,576     $ (320,733 )     9,842,843       (330,000 )(C)     9,512,843  
                                         
 
See notes to unaudited pro forma condensed consolidated financial information


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Notes to 2010 Unaudited Pro Forma Condensed Consolidated Financial Information
 
Pro Forma Adjustments:
 
(A) Represents adjustment of our loans to fair value as required for a business development company. For a discussion of our valuation policy following this offering, please see “Determination of Net Asset Value.” For the nine months ended September 30, 2010, the net unrealized gains on the loan portfolio was $418,232.
 
(B) Represents elimination of allowance for loan losses and provision for loan losses. In future periods, following our election to be treated as a business development company, we will no longer record an allowance for loan losses. We will value each individual loan and investment on a quarterly basis at fair value which shall be the market value, or, if no market value is ascertainable, at the fair value as determined in good faith pursuant to procedures approved by our board of directors in accordance with our valuation policy. The following is a summary of the changes in the allowance for loan losses:
 
         
    Nine Months Ended
 
    September 30, 2010  
 
Balance at beginning of period
  $ 1,924,034  
Credit for loan losses
    (738,965 )
Charge offs, net of recoveries
     
         
Balance at end of period
  $ 1,185,069  
         
 
(C) Represents incentive fee due to the Advisor which is earned upon distributions to the Company’s current investors in connection with the Pre-IPO Distribution and Share Exchange.
 
(D) Pre-IPO Distribution, Member Interest Exchange for Common Stock and Offering-Related Adjustments
 
         
Pre-IPO distribution to Members:
  $ 18,000,000  
         
Members Interest exchange for Common Stock:
       
         
Common stock
    2,628,624  
Member interest
  $ 52,572,482  
Par value of common stock issued
  $ 2,629  
Paid-in capital, accumulated other comprehensive loss and unrealized gain on investments
  $ 52,569,853  
         
Represents estimated net proceeds from common stock offering:
       
         
Common stock
    4,850,000  
Offering price
  $ 18.50  
         
Estimated gross proceeds
  $ 89,725,000  
Estimated fees and expenses
  $ (7,780,750 )
         
Net proceeds
  $ 81,944,250  
         
Less: Par value of common stock issued
  $ 4,850  
         
Paid-in capital, accumulated other comprehensive loss and unrealized gain on investments
  $ 81,939,400  


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Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the Year Ended December 31, 2009
 
                                         
                      Adjustments
       
                      for this
       
                      Offering and
    Horizon
 
    Compass
                Pre-IPO
    Technology
 
    Horizon Funding
    Adjustments
          Distribution
    Finance
 
    Company LLC —
    for BDC/RIC
    As adjusted for
    and Share
    Corporation
 
    Historical     Elections     RIC/BDC Elections     Exchange     Pro Forma  
 
INCOME
                                       
Interest income on loans
  $ 14,987,322     $     $ 14,987,322     $   —     $ 14,987,322  
Other income
    338,986             338,986             338,986  
                                         
Total income
    15,326,308             15,326,308             15,326,308  
                                         
Provision for loan losses
    (274,381 )     274,381 (B)                  
                                         
Income after provision for loan losses
    15,051,927       274,381       15,326,308             15,326,308  
                                         
EXPENSES
                                       
Interest expense
    4,244,804             4,244,804             4,244,804  
Management fee expense
    2,202,268             2,202,268             2,202,268  
Other expenses
    321,506             321,506             321,506  
                                         
Total expenses
    6,768,578             6,768,578             6,768,578  
                                         
Income before net realized and unrealized gains (loss) on investments
    8,283,349       274,381       8,557,730             8,557,730  
Net realized gain on investments
    137,696             137,696             137,696  
Net unrealized gain (loss) on investments
    892,130       263,150 (A)     1,155,280             1,155,280  
                                         
NET INCOME
  $ 9,313,175     $ 537,531     $ 9,850,706     $     $ 9,850,706  
                                         
 
See notes to unaudited pro forma condensed consolidated financial information


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Notes to 2009 Unaudited Pro Forma Condensed Consolidated Statement of Operations
 
Pro Forma Adjustments:
 
(A) Represents adjustment of our loans to fair value as required for a business development company. For a discussion of our valuation policy following this offering, please see “Determination of Net Asset Value.” Since our inception and through December 31, 2009, our net unrealized losses totaled $765,952, which is comprised of net unrealized losses of $1,029,102 in 2008 and unrealized gains of $263,150 in 2009.
 
(B) Represents elimination of the provision for loan losses. In future periods, following our election to be treated as a business development company, we will no longer record an allowance for loan losses. We will value each individual loan and investment on a quarterly basis at fair value which shall be the market value, or, if no market value is ascertainable, at the fair value as determined in good faith pursuant to procedures approved by our board of directors in accordance with our valuation policy. The following is a summary of the changes in the allowance for loan losses:
 
         
    Year Ended
 
    December 31, 2009  
 
Balance at beginning of period
  $ 1,649,653  
Provision for loan losses
    274,381  
Charge offs, net of recoveries
     
         
Balance at end of period
  $ 1,924,034  
         


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USE OF PROCEEDS
 
We are offering 4,850,000 shares of our common stock and the selling stockholder is offering 1,400,000 shares (based on the mid-point of the range set forth on the cover of this prospectus) of our common stock through the underwriters. The net proceeds of the offering of shares by us are estimated to be approximately $81.9 million (approximately $98.1 million if the underwriters exercise their over-allotment option to purchase additional shares in full) assuming an initial public offering price of $18.50 per share (based on the mid-point of the range set forth on the cover of this prospectus) after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any of the proceeds from the shares sold by the selling stockholder.
 
We plan to use the net proceeds of this offering for new investments in portfolio companies in accordance with our investment objective and strategies described in this prospectus, for general working capital purposes, and for temporary repayment of debt under our credit facility (which amounts are subject to reborrowing). We will also pay operating expenses, including management and administrative fees, and may pay other expenses such as due diligence expenses of potential new investments, from the net proceeds of this offering. We anticipate that substantially all of the net proceeds of this offering will be used for the above purposes within nine months, depending on the availability of appropriate investment opportunities consistent with our investment objective and market conditions. We may also use a portion of the net proceeds to capitalize an SBIC subsidiary to the extent our Advisor’s application to license such entity as an SBIC is approved. We cannot assure you we will achieve our targeted investment pace.
 
Pending such use, we will invest the remaining net proceeds of this offering primarily in cash, cash equivalents, U.S. Government securities and high-quality debt investments that mature in one year or less from the date of investment. These temporary investments may have lower yields than our other investments and, accordingly, may result in lower distributions, if any, during such period. See “Regulation — Temporary Investments” for additional information about temporary investments we may make while waiting to make longer-term investments in pursuit of our investment objective.


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DISTRIBUTIONS
 
To the extent we have income available, we intend to make quarterly distributions to our stockholders beginning with our first full quarter after the completion of this offering. The timing and amount of our quarterly distributions, if any, will be determined by our board of directors. Any distributions to our stockholders will be declared out of assets legally available for distribution.
 
Our board of directors intends to declare a dividend of approximately $0.33 per share, payable at or near the end of the fourth calendar quarter of 2010. This dividend payment is contingent upon the completion of our initial public offering during the fourth calendar quarter of 2010. The amount of any such dividend will be proportionately reduced to reflect the number of days remaining in the quarter after the completion of this offering. Purchasers in this offering will be entitled to receive this dividend payment. We anticipate that this dividend will be paid from income primarily generated by interest and dividend income earned on our investment portfolio. The specific tax characteristics of the dividend will be reported to stockholders after the end of the calendar year.
 
We intend to elect to be treated, and intend to qualify, as a RIC under Subchapter M of the Code commencing with our taxable year ending on December 31, 2010. To obtain the federal income tax benefits allowable to RICs, we will be required to distribute an amount equal to at least 90% of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any. In order to avoid certain excise taxes imposed on RICs, we currently intend to distribute during each calendar year an amount at least equal to the sum of (1) 98% of our ordinary income (not taking into account any capital gains or losses) for the calendar year, (2) 98% of the amount by which our capital gains exceed our capital losses (adjusted for certain ordinary losses) for the one-year period generally ending on October 31st of the calendar year and (3) certain undistributed amounts from previous years on which we paid no U.S. federal income tax. In addition, although we currently intend to distribute realized net capital gains (i.e., net long-term capital gains in excess of short-term capital losses), if any, at least annually, out of the assets legally available for such distributions, we may in the future decide to retain such capital gains for investment. In such event, the consequences of our retention of net capital gains are as described under “Material U.S. Federal Income Tax Considerations.” We can offer no assurance that we will achieve results that will permit the payment of any cash distributions and, if we issue senior securities, the 1940 Act asset coverage requirements or the terms of the senior securities, may prevent us from making distributions to our stockholders.
 
We intend to maintain an “opt out” dividend reinvestment plan for our common stockholders. As a result, if we declare a cash distribution, each stockholder’s cash distributions will be automatically reinvested in additional shares of our common stock unless the stockholder specifically “opts out” of our dividend reinvestment plan so as to receive cash distributions. Stockholders who receive distributions in the form of shares of common stock will be subject to the same federal income tax consequences as if they received cash distributions. See “Dividend Reinvestment Plan” and “Material U.S. Federal Income Tax Considerations.”


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CAPITALIZATION
 
The following table sets forth our capitalization as of September 30, 2010:
 
  •  for Compass Horizon on an actual basis; and
 
  •  for Horizon Technology Finance Corporation on an as adjusted basis to reflect:
 
  •  completion of the Pre-IPO Distribution;
 
  •  completion of the Share Exchange; and
 
  •  the sale of 6,250,000 shares of our common stock in this offering by us and the selling stockholder at an assumed initial public offering price of $18.50 per share (the mid-point of the range set forth on the cover of this prospectus), after deducting estimated underwriting discounts and commissions and organizational and offering expenses of approximately $7.8 million payable by us, and the use of proceeds from this offering.
 
You should read this table together with “Use of Proceeds” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included in this prospectus.
 
                 
    As of September 30, 2010  
    Compass Horizon
    Horizon Technology
 
    Funding Company LLC     Finance Corporation  
    Actual     As Adjusted  
 
Assets:
               
Cash and cash equivalents
  $ 19,218,658     $ 82,832,908  
                 
Total assets
    159,935,546       224,387,145  
                 
Liabilities:
               
Borrowings
  $ 88,944,819     $ 88,944,819  
Other liabilities
    925,594       925,594  
                 
Total liabilities
  $ 89,870,413     $ 89,870,413  
                 
Members’ capital / Stockholders’ equity:
               
Member’s capital
  $ 68,055,580     $  
Accumulated other comprehensive loss
    (358,989 )     (358,989 )
Unrealized gain on investments
    2,368,542       2,020,822  
Common stock, par value $0.001 per share; 100,000,000 shares authorized, 7,478,624 shares outstanding, as adjusted
          7,479  
Additional paid-in capital
          132,847,420  
                 
Total Member’s capital / Stockholders’ equity
  $ 70,065,133     $ 134,516,732  
                 


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DILUTION
 
If you invest in our common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the as-adjusted pro forma net asset value per share of our common stock immediately after the completion of this offering.
 
Our pro forma net asset value as of September 30, 2010 would have been approximately $52.6 million, or $20.00 per share. We determined our pro forma net asset value per share before this offering by dividing the pro forma net asset value (total assets less total liabilities) as of September 30, 2010, by the pro forma number of shares of common stock outstanding as of September 30, 2010, after giving effect to the Pre-IPO Distribution and the exchange transaction occurring prior to the completion of this offering. See “The Exchange Transaction.”
 
After giving effect to the sale of 6,250,000 shares of our common stock in this offering at an assumed initial public offering price of $18.50 per share (based on the mid-point of the range set forth on the cover of this prospectus) and after deducting the sales load (underwriting discount) and estimated offering expenses payable by us, our pro forma net asset value as of September 30, 2010, would have been approximately $134.5 million, or $17.99 per share, representing an immediate decrease in pro forma net asset value of $2.01 per share to our existing stockholders and an immediate dilution of $0.51 per share to new investors who purchase our common stock in the offering at the initial public offering price. The following table shows this immediate per share dilution:
 
         
Assumed initial public offering price per share
  $ 18.50  
Pro forma net asset value per share before this offering but after giving effect to the Pre-IPO Distribution and The Exchange Transaction
  $ 20.00  
Pro forma net asset value per share after this offering
  $ 17.99  
Dilution per share to new investors
  $ 0.51  


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SELECTED FINANCIAL AND OTHER DATA
 
Compass Horizon is considered to be our predecessor for accounting purposes and its consolidated financial statements are our historical consolidated financial statements. We have derived the selected historical consolidated balance sheet information as of December 31, 2009 and 2008 and the selected historical consolidated statement of operations information for the year ended December 31, 2009 and for the period from March 4, 2008 (inception) through December 31, 2008 from Compass Horizon’s financial statements included elsewhere in this prospectus, which were audited by McGladrey & Pullen LLP, an independent registered public accounting firm. We have derived the selected historical consolidated financial data as of September 30, 2010 and for the nine months ended September 30, 2010 from the unaudited consolidated financial statements of Compass Horizon included elsewhere in this prospectus. The unaudited interim consolidated financial statements include all adjustments, consisting of normal and recurring items, that we consider necessary for a fair presentation of the financial position and results of operations for the unaudited periods. The interim results of operations are not necessarily indicative of operations for a full fiscal year.
 
The financial and other information below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements included elsewhere in this prospectus.
 
                         
    Nine Months
          Period from March 4, 2008
 
    Ended
    Year Ended
    (Inception) Through
 
    September 30, 2010     December 31, 2009     December 31, 2008  
    (unaudited)              
 
Statement of Operations Data:
                       
Interest and other loan income
  $ 13,197,313     $ 15,259,026     $ 6,662,232  
Other interest income
    53,124       67,282       358,820  
(Credit) provision for loan losses
    (738,965 )     274,381       1,649,653  
Total expenses
    5,373,117       6,768,578       4,031,815  
Net realized (loss) gains on warrants
    (1,762 )     137,696       21,571  
Net unrealized gain (loss) on warrants
    1,549,053       892,130       (72,641 )
Net income
  $ 10,163,576     $ 9,313,175     $ 1,288,514  
Other Data:
                       
Dollar-weighted average annualized yield on investment portfolio(1)
    14.3 %     13.9 %     12.7 %
Number of portfolio companies at period end
    34       32       26  
                         
                         
    As of
    As of
    As of
 
    September 30, 2010     December 31, 2009     December 31, 2008  
    (unaudited)              
 
Balance Sheet Data:
                       
Gross loans receivable
  $ 135,847,066     $ 112,571,708     $ 94,023,357  
Cash and cash equivalents
    19,218,658       9,892,048       20,024,408  
Total assets
    159,935,546       124,868,013       115,214,888  
Borrowings
    88,944,819       64,166,412       63,673,016  
Total liabilities
    89,870,413       65,375,344       65,430,080  
Total members’ capital
    70,065,133       59,492,669       49,784,808  
 
(1) Throughout this prospectus, the dollar-weighted average yield on loans is computed as the (a) total interest and other loan income divided by (b) the average gross loans receivable. Income for 2008 was annualized as investing activities commenced in March 2008.


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion should be read in conjunction with our consolidated financial statements and related notes and other financial information appearing elsewhere in this report. In addition to historical information, the following discussion and other parts of this report contain forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated by such forward-looking information due to the factors discussed under “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” appearing elsewhere herein.
 
Overview
 
We are an externally-managed finance company. Our investment objective is to generate current income from the loans we make and capital appreciation from the warrants we receive when making such loans. We make secured loans to development-stage companies in our Target Industries which are backed by established venture capital and private equity firms. Our secured loans consist of term loans, revolving loans or equipment loans. Our loans are secured by all or a portion of the tangible and intangible assets of the borrower. We are managed by Horizon Technology Finance Management LLC, our Advisor. Our Advisor also provides the administrative services necessary for us to operate.
 
We believe our existing loan portfolio has performed well since its inception notwithstanding the economic downturn starting in 2008 and continuing through 2009, and we have no realized losses (charge-offs) in our loan portfolio since we commenced operations in March 2008. As of September 30, 2010, our loan portfolio consisted of 34 loans which totaled $135.8 million, and our members’ capital was $70.1 million.
 
Critical Accounting Policies
 
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. In preparing the consolidated financial statements in accordance with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, as of the date of the balance sheet and income and expenses for the period. Actual results could differ from those estimates. Following the completion of this offering as a consequence of our adopting investment company accounting pursuant to Article 6 of Regulation S-X, we will be required to change some of the accounting principles used to prepare our historical consolidated financial statements discussed in this section. For a more detailed discussion about these principles and the impact that these principals would have on our financial results, see “Unaudited Pro Forma Condensed Consolidated Financial Information” and “Business Development Company and Regulated Investment Company Elections.”
 
We have identified the following items as critical accounting policies.
 
Allowance for Loan Losses
 
The allowance for loan losses represents management’s estimate of probable loan losses inherent in the loan portfolio as of the balance sheet date. The estimation of the allowance is based on a variety of factors, including past loan loss experience, the current credit profile of our borrowers, adverse situations that have occurred that may affect individual borrowers’ ability to repay, the estimated value of underlying collateral and general economic conditions. The loan portfolio is comprised of large balance loans that are evaluated individually for impairment and are risk-rated based upon a borrower’s individual situation, current economic conditions, collateral and industry-specific information that management believes is relevant in determining the potential occurrence of a loss event and in measuring impairment. The allowance for loan losses is sensitive to the risk rating assigned to each of the loans and to corresponding qualitative loss factors that we use to estimate the allowance. The factors are applied to the outstanding loan balances in estimating the allowance for loan losses. If necessary, based on performance factors related to specific loans, a specific allowance for loan losses is established for individual impaired loans. Increases or decreases to the allowance for loan losses are charged or credited to current period earnings through the


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provision (credit) for loan losses. Amounts determined to be uncollectible are charged against the allowance for loan losses, while amounts recovered on previously charged-off accounts increase the allowance for loan losses.
 
A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent.
 
Impaired loans also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. There have been no troubled debt restructurings since our inception.
 
For the three and nine months ended September 30, 2010, the credit for loan losses was $0.3 million and $0.7 million, respectively. For the three and nine months ended September 30, 2009, the provision for loan losses was $0.3 million and $0.6 million, respectively. For the year ended December 31, 2009 and the period ended December 31, 2008 the provision for loan losses was $0.3 million and $1.6 million, respectively. The allowance for loan losses decreased as of September 30, 2010 compared to the allowance as of December 31, 2009 primarily due to improved portfolio asset quality during 2010 across all Credit Ratings within the loan portfolio. The loan portfolio had a weighted average credit rating of 3.1 and 2.9 as of September 30, 2010 and December 31, 2009, respectively. See “Portfolio Asset Quality”. In future periods, following our election to be treated as a business development company, we will no longer record an allowance for loan losses. We will value each individual loan and investment on a quarterly basis at fair value which shall be the market value or, if no market value is ascertainable, at the fair value as determined in good faith by our board of directors in accordance with our valuation policy. Changes in these values will be recorded through our statement of operations. See “Determination of Net Asset Value” and “Unaudited Pro Forma Condensed Consolidated Financial Information.”
 
Warrant Valuation
 
In connection with substantially all of our lending arrangements, we receive warrants to purchase shares of stock from the borrower. Because the warrant agreements contain net exercise or “cashless” exercise provisions, the warrants qualify as derivative instruments. The warrants are recorded as assets at estimated fair value on the grant date using the Black-Scholes valuation model. The warrants are considered loan fees and are also recorded as unearned loan income on the grant date. The unearned income is recognized as interest income over the contractual life of the related loan in accordance with the Company’s income recognition policy. As all the warrants held are deemed to be derivatives, they are measured on a quarterly basis at fair value using the Black-Scholes valuation model. Any adjustment to fair value is recorded through earnings as net unrealized gain or loss. Gains from the disposition of the warrants or stock acquired from the exercise of warrants, are recognized as realized gains.
 
We value the warrant assets incorporating the following material assumptions:
 
  •  Underlying asset value of the issuer is estimated based on information available, including any information regarding the most recent rounds of borrower funding.
 
  •  Volatility, or the amount of uncertainty or risk about the size of the changes in the warrant price, is based on guideline publicly traded companies within indices similar in nature to the underlying client companies issuing the warrant. A total of seven such indices were used. The weighted average volatility assumptions used for the warrant valuation at September 30, 2010, December 31, 2009 and September 30, 2009 were 29%, 29% and 25%, respectively.


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  •  The risk-free interest rates are derived from the U.S. Treasury yield curve. The risk-free interest rates are calculated based on a weighted average of the risk-free interest rates that correspond closest to the expected remaining life of the warrant.
 
  •  Other adjustments, including a marketability discount, are estimated based on management’s judgment about the general industry environment.
 
Income Recognition
 
Interest on loans is accrued and included in income based on contractual rates applied to principal amounts outstanding. Interest income on loans is determined using a method that results in a level rate of return on principal amounts outstanding. When a loan becomes 90 days or more past due, or if we otherwise do not expect to receive interest and principal repayments, the loan is placed on non-accrual status and the recognition of interest income is discontinued. Interest payments received on loans that are on non-accrual status are treated as reductions of principal until the principal is repaid. No loans were on non-accrual status as of September 30, 2010 and December 31, 2009.
 
We receive a variety of fees from borrowers in the ordinary course of conducting our business, including advisory fees, commitment fees, amendment fees, non-utilization fees and prepayment fees (collectively, the “Fees”). In a limited number of cases, we may also receive a non-refundable deposit earned upon the termination of a transaction. Loan origination fees, net of certain direct origination costs, are deferred, and along with unearned income, are amortized as a level yield adjustment over the respective term of the loan. Fees for counterparty loan commitments with multiple loans are allocated to each loan based upon each loan’s relative fair value. When a loan is placed on non-accrual status, the amortization of the related Fee and unearned income is discontinued until the loan is returned to accrual status.
 
Certain loan agreements also require the borrower to make an end-of-term payment that is accrued into income over the life of the loan to the extent such amounts are expected to be collected. We will generally cease accruing the income if there is insufficient value to support the accrual or if we do not expect the borrower to be able to pay all principal and interest due.
 
Portfolio Composition and Investment Activity
 
As of September 30, 2010, December 31, 2009 and December 31, 2008, our loan portfolio consisted of 34, 32 and 26 loans, respectively, which had an aggregate book value of approximately $135.8 million, $112.6 million and $94.0 million, respectively, and our warrant portfolio had an aggregate book value of $5.2 million, $2.5 million and $0.7 million, respectively. During the nine months ended September 30, 2010, we originated approximately $64.6 million of new loans in 12 portfolio companies. We originated approximately $50.0 million of new loans in 18 portfolio companies and $112.2 million of new loans in 38 portfolio companies for the year ended December 31, 2009 and the period from March 4, 2008 (inception) to December 31, 2008, respectively. We reduced the level of new loan originations in early 2009 in reaction to the significant disruption in the financial and credit markets. We had total loan principal repayments of $41.3 million for the nine months ended September 30, 2010, $31.2 million for the year ended December 31, 2009 including five borrowers that prepaid their loan in an aggregate amount of $14.6 million and total loan principal repayments of $18.2 million for the period ended December 31, 2008 including five borrowers that prepaid their loan in an aggregate amount of $14.1 million. Our borrowers typically prepay our loans at a faster rate than is contractually required which is often due to a borrower’s completion of an initial public offering, being acquired or refinancing our loan with another lender.
 
As of September 30, 2010, December 31, 2009 and December 31, 2008, accrued interest receivable was $2.0 million, $1.5 million and $0.5 million, respectively. The increase in 2009 and the first quarter of 2010 was due to a larger loan portfolio relative to 2008 and represents one month of accrued interest income on each of our loans. No loans were on non-accrual status in any period.
 
During the period ended December 31, 2008, we paid total debt issuance costs of $3.4 million. As of September 30, 2010, December 31, 2009 and 2008, the unamortized balance of debt issuance costs was $0.5 million, $1.4 million and $2.5 million, respectively, and the amortization expense relating to debt issuance costs during


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the nine months ended September 30, 2010, the year ended December 31, 2009 and the period ended December 31, 2008 was $0.9 million, $1.1 million and $1.0 million, respectively. These costs relate to our Credit Facility which closed in March 2008 and are amortized into the consolidated statement of operations as interest expense over the term of our Credit Facility.
 
The following table shows our portfolio by asset class as of September 30, 2010, December 31, 2009 and December 31, 2008:
 
                                                                         
    September 30, 2010     December 31, 2009     December 31, 2008  
                % of
                % of
                % of
 
    # of
    Book
    Total
    # of
    Book
    Total
    # of
    Book
    Total
 
    Investments     Value     Portfolio     Investments     Value     Portfolio     Investments     Value     Portfolio  
                      (in thousands)                    
 
Secured term loans
    33     $ 133,222       94.5%       29     $ 105,371       91.6%       21     $ 78,497       82.9%  
Secured revolving loans
                %       2       3,682       3.2%       5       15,526       16.4%  
Equipment loans
    1       2,625       1.8%       1       3,519       3.1%                   0.0%  
Warrants to purchase stock
    45       5,217       3.7%       37       2,458       2.1%       29       694       0.7%  
                                                                         
Total
          $ 141,064       100.0%             $ 115,030       100.0%             $ 94,717       100.0%  
                                                                         
 
The largest loans may vary from year to year as new loans are recorded and repaid. Our five largest loans represented approximately 30%, 28% and 29% of total loans outstanding as of September 30, 2010, December 31, 2009 and December 31, 2008, respectively. No single loan represented more than 10% of our total loans as of September 30, 2010, December 31, 2009 or December 31, 2008.
 
The following table shows our loan portfolio by industry sector as of September 30, 2010, December 31, 2009 and December 31, 2008:
 
                                                 
    September 30, 2010     December 31, 2009     December 31, 2008  
    Loans at
    Percentage
    Loans at
    Percentage
    Loans at
    Percentage of
 
    Book
    of Total
    Book
    of Total
    Book
    Total
 
    Value     Portfolio     Value     Portfolio     Value     Portfolio  
                (in thousands)              
 
Life Science
                                               
Biotechnology
  $ 33,241       24.5%     $ 22,050       19.6%     $ 21,000       22.3 %
Medical Device
    21,430       15.8%       16,195       14.4%       18,523       19.7 %
Technology
                                               
Consumer-related Technologies
    7,667       5.6%       15,371       13.7%       5,750       6.1 %
Networking
    6,625       4.9%       14,737       13.1%       4,856       5.2 %
Software
    11,656       8.6%       13,033       11.6%       15,801       16.8 %
Data Storage
    6,648       4.9%       9,075       8.1%       10,000       10.7 %
Internet and Media
    1,825       1.3%       2,500       2.2%       2,500       2.7 %
Communications
    8,077       5.9%       2,451       2.1%       3,093       3.3 %
Semiconductors
                867       0.7%       1,000       1.0 %
Cleantech
                                               
Energy Efficiency
    17,000       12.5%             —%             %
Healthcare Information and Services
                                               
Diagnostics
    16,678       12.3%       16,293       14.5%       11,500       12.2 %
Other Healthcare Related Services and Technologies
    5,000       3.7%                          
                                                 
Total
  $ 135,847       100.0%     $ 112,572       100.0%     $ 94,023       100.0 %
                                                 
 
Portfolio Asset Quality
 
We use a credit rating system which rates each loan on a scale of 4 to 1, with 4 being the highest credit quality rating and 3 being the rating for a standard level of risk. A rating of 2 or 1 represents a deteriorating credit quality


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and increased risk. See “Business” for more detailed descriptions. The following table shows the classification of our loan portfolio by credit rating as of September 30, 2010, December 31, 2009 and December 31, 2008:
 
                                                 
    September 30, 2010     December 31, 2009     December 31, 2008  
    Loans at
    Percentage
    Loans at
    Percentage
    Loans at
    Percentage
 
    Book
    of Loan
    Book
    of Loan
    Book
    of Loan
 
    Value     Portfolio     Value     Portfolio     Value     Portfolio  
                (in thousands)              
 
Credit Rating
                                               
4
  $ 30,627       22.6%     $ 19,303       17.2%     $ 12,500       13.3%  
3
    89,806       66.1%       64,992       57.7%       58,087       61.8%  
2
    15,414       11.3%       28,277       25.1%       23,436       24.9%  
1
                                   
                                                 
Total
  $ 135,847       100.0%     $ 112,572       100.0%     $ 94,023       100.0%  
                                                 
 
As of September 30, 2010, December 31, 2009 and December 31, 2008, our loan portfolio had a weighted average credit rating of 3.1, 2.9 and 2.9, respectively.
 
Results of Operations for the Three Months Ended September 30, 2010 and 2009
 
Interest and Other Loan Income
 
                 
    For the Three Months
 
    Ended September 30,  
    2010     2009  
    (in thousands)  
 
Interest income on loans
  $ 4,955     $ 3,962  
Other income
    209       204  
                 
Total interest and other loan income
  $ 5,164     $ 4,166  
                 
Other interest income
  $ 25     $ 3  
                 
 
For the three months ended September 30, 2010, interest income on loans and total interest and other loan income increased over the three months ended September 30, 2009, primarily due to the increased average size of the loan portfolio to $137.9 million from $114.1 million. Other income was primarily comprised of loan prepayment fees collected from our portfolio companies. Other interest income was primarily income from interest earned on cash and cash equivalents held in interest bearing accounts.
 
For the three months ended September 30, 2010 and 2009, our dollar-weighted average annualized yield on average loans was approximately 15.0% and 14.6%, respectively. We compute the yield on average loans as (a) total interest and other loan income (as described below) divided by (b) average gross loans receivable. We used month end loan balances during the period to compute average loans receivable.
 
Interest and other loan income, consisting of interest income and fees on loans, can fluctuate significantly upon repayment of large loans. Interest income from the five largest loans accounted for approximately 31% and 28% of total loan interest and fee income for the three months ended September 30, 2010 and 2009, respectively.


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Expenses
 
                 
    For the Three Months
 
    Ended September 30,  
    2010     2009  
    (in thousands)  
 
Management fee expense
  $ 675     $ 574  
Interest expense
    1,189       1,126  
Professional fees
    7       20  
General and administrative
    61       56  
                 
Total expenses
  $ 1,932     $ 1,776  
                 
 
Total expenses for each period consisted principally of management fees and interest expense and, to a lesser degree, professional fees and general and administrative expenses. For the three months ended September 30, 2010, interest expense, which includes the amortization of debt issuance costs, increased when compared to the three months ended September 30, 2009, which is primarily from a higher average outstanding debt balances on the Credit Facility. Management fees are paid monthly in arrears based on the outstanding loan investments. The increase in management fees for the three months ended September 30, 2010 when compared to the three months ended September 30, 2009, is primarily due to an increase in the average loan portfolio in 2010 from 2009 to $137.9 million from $114.1 million.
 
Net Realized and Unrealized (Loss) Gain on Warrants
 
The following is a summary of net realized (loss) gain and net unrealized (loss) gain on warrants for the three months ended September 30, 2010 and 2009:
 
                 
    For the Three Months
 
    Ended September 30,  
    2010     2009  
    (in thousands)  
 
Net realized (loss) gain on warrants
  $     $  
Net unrealized (loss) gain on warrants
  $ 1,711     $ (55 )
 
For the three months ended September 30, 2010 and 2009, net unrealized (loss) gain on warrants is the difference between the net changes in warrant fair values from the prior determination date and the reversal of previously recorded unrealized gain or loss when gains or losses are realized. The increase in net unrealized gain on warrants in 2010 is primarily due to an increase in the enterprise value of a number of private companies for which we hold warrants. In addition, the increased net unrealized gain on warrants in 2010 is due to the increase in the share value of the public company warrants held.


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Results of Operations for the Nine Months Ended September 30, 2010 and 2009
 
Interest and Other Loan Income
 
                 
    For the Nine Months
 
    Ended September 30,  
    2010     2009  
    (in thousands)  
 
Interest income on loans
  $ 12,852     $ 10,853  
Other income
    345       271  
                 
Total interest and other loan income
  $ 13,197     $ 11,124  
                 
Other interest income
  $ 53     $ 47  
                 
 
For the nine months ended September 30, 2010, interest income on loans and total interest and other loan income increased over the nine months ended September 30, 2009, primarily due to the increased average size of the loan portfolio to $123.3 million from $108.2 million. Other income was primarily comprised of loan prepayment fees collected from our portfolio companies. Other interest income was primarily income from interest earned on cash and cash equivalents held in interest bearing accounts.
 
For the nine months ended September 30, 2010 and 2009, our dollar-weighted average annualized yield on average loans was approximately 14.3% and 13.7%, respectively. We compute the yield on average loans as (a) total interest and other loan income (as described below) divided by (b) average gross loans receivable. We used month end loan balances during the period to compute average loans receivable.
 
Interest and other loan income, consisting of interest income and fees on loans, can fluctuate significantly upon repayment of large loans. Interest income from the five largest loans accounted for approximately 19% and 28% of total loan interest and fee income for the nine months ended September 30, 2010 and 2009, respectively.
 
Expenses
 
                 
    For the Nine Months
 
    Ended September 30,  
    2010     2009  
    (in thousands)  
 
Management fee expense
  $ 1,816     $ 1,640  
Interest expense
    3,282       3,205  
Professional fees
    111       127  
General and administrative
    164       134  
                 
Total expenses
  $ 5,373     $ 5,106  
                 
 
Total expenses for each period consisted principally of management fees and interest expense and, to a lesser degree, professional fees and general and administrative expenses. For the nine months ended September 30, 2010, interest expense, which includes the amortization of debt issuance costs, increased when compared to the nine months ended September 30, 2009, this is primarily from a higher average outstanding debt balances on the Credit Facility. Management fees are paid monthly in arrears based on the outstanding loan investments. The increase in management fees for the nine months ended September 30, 2010 when compared to the nine months ended September 30, 2009, is primarily due to an increase in the average loan portfolio in 2010 from 2009 to $123.3 million from $108.2 million.


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Net Realized and Unrealized (Loss) Gain on Warrants
 
The following is a summary of net realized (loss) gain and net unrealized gain on warrants for the nine months ended September 30, 2010 and 2009:
 
                 
    For the Nine Months
    Ended September 30,
    2010   2009
    (in thousands)
 
Net realized (loss) gain on warrants
  $ (2 )   $ 139  
Net unrealized gain on warrants
  $ 1,549     $ 394  
 
For the nine months ended September 30, 2009, net realized gain on warrants resulted from the exercise of warrants in connection with a portfolio company merger transaction. For the nine months ended September 30, 2010 and 2009, net unrealized gain on warrants is the difference between the net changes in warrant fair values from the prior determination date and the reversal of previously recorded unrealized gain or loss when gains or losses are realized. The increase in net unrealized gain on warrants in 2010 is primarily due to an increase in the enterprise value of a number of private companies for which we hold warrants. In addition, the increased net unrealized gain on warrants in 2010 is due to the increase in the share value of the public company warrants held.
 
Results of Operations for the year ended December 31, 2009 and the period from March 4, 2008 (inception) to December 31, 2008
 
Compass Horizon, our predecessor for accounting purposes, was formed as a Delaware limited liability company in January 2008 and had limited operations through March 3, 2008. As a result, there is no period with which to compare our results of operations for the period from January 1, 2009 through March 3, 2009 or for the period from March 4, 2008 through December 31, 2008.
 
Interest and Other Loan Income
 
                 
          March 4
 
    Year Ended
    (Inception) to
 
    December 31,
    December 31,
 
    2009     2008  
    (in thousands)  
 
Interest income on loans
  $ 14,987     $ 6,530  
Other income
    272       132  
                 
Total interest and other loan income
  $ 15,259     $ 6,662  
                 
Other interest income
  $ 67     $ 359  
                 
 
For the year ended December 31, 2009, interest income on loans and total interest and other loan income increased primarily due to (i) the increased average size of the loan portfolio from $63 million to $109 million and (ii) there being a full 12 months of income in 2009 compared to only 10 months in 2008 in light of when we commenced operations. Other income was primarily comprised of loan prepayment fees collected from our portfolio companies. Other interest income was primarily income from interest earned on cash and cash equivalents held in interest bearing accounts. During 2009, we held lower average cash balances than 2008, and the interest bearing accounts had lower interest rates on which to earn income on such balances.
 
For the year ended December 31, 2009 and the ten month period ended December 31, 2008, our dollar-weighted average annualized yield on average loans was approximately 13.9% and 12.7%, respectively. We compute the yield on average loans as (i) total interest and other loan income (as described below) divided by (b) average gross loans receivable. We used month end loan balances during the period to compute average loans


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receivable. Since we commenced operations in March 2008, the results for the period ended December 31, 2008 were annualized.
 
Interest and other loan income, consisting of interest income and fees on loans, can fluctuate significantly upon repayment of large loans. Interest income from the five largest loans accounted for approximately 23% and 21% of total loan interest and fee income for the year ended December 31, 2009 and the period from March 4, 2008 (inception) to December 31, 2008, respectively.
 
Expenses
 
                 
          March 4
 
    Year Ended
    (Inception) to
 
    December 31,
    December 31,
 
    2009     2008  
    (in thousands)  
 
Management fee expense
  $ 2,202     $ 1,073  
Interest expense
    4,245       2,748  
Professional fees
    132       61  
General and administrative
    190       150  
                 
Total expenses
  $ 6,769     $ 4,032  
                 
 
Total expenses for each period consisted principally of management fees and interest expense and, to a lesser degree, professional fees and general and administrative expenses. Interest expense, which includes the amortization of debt issuance costs, increased in 2009 from 2008 primarily from higher average outstanding debt balances on the Credit Facility, partially offset by lower rates charged on the Credit Facility due to lower level of the Credit Facility’s index rate, one-month LIBOR. Management fees are paid monthly in arrears based on the outstanding loan investments. The increase in management fees paid was primarily due to an increase in the average loan portfolio in 2009 from 2008 of $63 million to $109 million and a full 12 months of expense in 2009 compared to only 10 months in 2008. Professional fees and general and administrative expenses include legal, consulting and accounting fees, insurance premiums, and miscellaneous other expenses, which increased because of the longer period in 2009.
 
Net Realized Gains and Net Unrealized Gain (Loss) on Warrants
 
The following is a summary of net realized gains and net unrealized gain (loss) on warrants for the year ended December 31, 2009 and for the period ended December 31, 2008:
 
                 
          March 4
 
    Year Ended
    (Inception) to
 
    December 31,
    December 31,
 
    2009     2008  
    (in thousands)  
 
Net realized gains on warrants
  $ 138     $ 22  
Net unrealized gain (loss) on warrants
  $ 892     $ (73 )
 
For the year ended December 31, 2009 and the period ended December 31, 2008, net realized gains on warrants resulted from the exercise of warrants in each period in connection with portfolio company merger transactions. Net unrealized gain (loss) on warrants is the difference between the net change in warrant fair values from the prior determination date and the reversal of previously recorded unrealized gain or loss when gains or losses are realized.


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Liquidity and Capital Resources
 
To date, our primary sources of capital have been from our Credit Facility with WestLB AG, New York Branch, as more fully described in “Borrowings” below and from the private placement for $50 million of equity capital we completed on March 4, 2008.
 
At September 30, 2010, we had cash and cash equivalents of approximately $19.2 million. As of September 30, 2010, we had available borrowing capacity of approximately $61.0 million ($36.0 million assuming a Credit Facility size of $125 million, the size of the Credit Facility upon the completion of this offering), under the Credit Facility, subject to existing terms and advance rates. We primarily invest available cash in interest bearing money market accounts.
 
For the nine months ended September 30, 2010 and 2009, net cash provided by operating activities totaled approximately $7.8 million and $5.7 million, respectively. The increase in 2010 was primarily due to higher income from operations in 2010. For the year ended December 31, 2009 and for the period ended December 31, 2008, net cash provided by operating activities totaled approximately $8.0 million and $4.1 million, respectively. The increase in 2009 was primarily due to higher income from operations in 2009.
 
For the nine months ended September 30, 2010 and 2009, net cash used in investing activities totaled approximately $23.3 million and $13.0 million, respectively. The increase is primarily due to a higher level of loan funding compared to 2009. Net cash used in investing activities for the year ended December 31, 2009 and for the period ended December 31, 2008, totaled approximately $18.6 million and $94.0 million, respectively. The reduction in cash used in investing activities in 2009 was largely due to the reduced level of new loans funded in 2009 as well as a higher level of scheduled loan repayments and unscheduled loan prepayments in 2009 as the portfolio continued to grow and mature.
 
For the nine months ended September 30, 2010 and 2009, net cash provided by financing activities totaled $24.8 million and $12.8 million, respectively. This increase was due to a higher level of net new borrowings under the Credit Facility to fund new loan investments and to maximize the full availability under the Credit Facility. Net cash provided by financing activities totaled $.5 million and $109.9 million for the year ended December 31, 2009 and for the period ended December 31, 2008, respectively. Higher cash flows in 2008 were primarily due to the initial equity capital contribution to us as well as net new borrowings under the Credit Facility to fund new loan investments. Lower cash provided by financing activities in 2009 reflects the use of loan repayments from existing loans to fund new loans rather than drawing additional amounts under the Credit Facility. Because we believe we had sufficient capital in 2009, we did not raise additional capital during the year.
 
We intend to generate additional cash primarily from additional borrowings under the current Credit Facility as well as from cash flows from operations. Our primary use of available funds will be investments in portfolio companies and cash distributions to holders of our common stock. After we have used our current capital resources, including the net proceeds from this offering, we expect to opportunistically raise additional capital as needed and subject to market conditions to support our future growth through future equity offerings, issuances of senior securities and/or future borrowings, to the extent permitted by the 1940 Act. To the extent we determine to raise additional equity through an offering of our common stock at a price below net asset value, existing investors will experience dilution.
 
In order to satisfy the Code requirements applicable to a RIC, we intend to distribute to our stockholders all or substantially all of our income except for certain net capital gains. In addition, as a business development company, we generally will be required to meet a coverage ratio of 200%. This requirement will limit the amount that we may borrow. Upon the receipt of the net proceeds from this offering, we will be in compliance with the asset coverage ratio under the 1940 Act.
 
If we receive approval to license an SBIC, we will have the ability to issue debentures guaranteed by the SBA at favorable interest rates. Under the Small Business Investment Act and the SBA rules applicable to SBICs, an SBIC can have outstanding at any time debentures guaranteed by the SBA generally in an amount up to twice its regulatory capital, which generally is the amount raised from private investors. The maximum statutory limit on the dollar amount of outstanding debentures guaranteed by the SBA issued by a single SBIC or group of SBICs under


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common control as of December 31, 2009, was $150 million (which amount is subject to increase on an annual basis based on cost of living index increases).
 
Borrowings
 
We, through our wholly owned subsidiary, Credit I, entered into a revolving credit facility (the “Credit Facility”) with WestLB AG, New York Branch as Lender (“WestLB”) effective March 4, 2008. Per this agreement, base rate borrowings bear interest at one-month LIBOR (0.26%, 0.23% and 0.44% as of September 30, 2010, December 31, 2009 and December 31, 2008, respectively) plus 2.50%. On June 25, 2010, we received consent from WestLB to allow for the change of control that will occur upon the consummation of the Share Exchange. The facility size will be $125 million upon the completion of this offering. In general, all other terms and conditions of the Credit Facility will remain the same upon the completion of the offering.
 
We may request advances under the Credit Facility (the “Revolving Period”) through March 4, 2011, unless the Revolving Period is extended upon Credit I’s request and upon mutual agreement of WestLB and Credit I. After the Revolving Period, we may not request new advances and we must repay the outstanding advances under the Credit Facility as of such date at such times and in such amounts as are necessary to maintain compliance with the terms and conditions of the Credit Facility, particularly the condition that the principal balance of the Credit Facility does not exceed seventy-five percent (75%) of the aggregate principal balance of our eligible loans to our portfolio companies. All outstanding advances under the Credit Facility are due and payable on March 4, 2015 (“Maturity Date”), unless such date is extended upon Credit I’s request and upon mutual agreement of WestLB and Credit I.
 
The Credit Facility is collateralized by loans held by Credit I and permits an advance rate of up to 75% of eligible loans. The Credit Facility contains certain customary affirmative and negative covenants, including covenants that restrict certain of our subsidiaries’ ability to make loans to, or investments in, third parties (other than technology loans and warrants or other equity participation rights), pay dividends and distributions, incur additional indebtedness and engage in mergers or consolidations. The Credit Facility also restricts certain of our subsidiaries’ and our Advisor’s ability to create liens on the collateral securing the Credit Facility, permit additional negative pledges on such collateral and change the business currently conducted by them. The Credit Facility contains events of default, including upon the occurrence of a change of control, and contains certain financial covenants that among other things, require Compass Horizon to maintain a minimum net worth, for fiscal year 2010 and after, equal to the minimum net worth amount for 2009 plus 50% of Compass Horizon’s cumulative positive net income for fiscal year 2010 on and after December 31, 2010, and require our Advisor to maintain a minimum net worth, for fiscal year 2010 and after, equal to the greater of (i) $1 million or (ii) the 2009 minimum net worth amount plus 50% of the cumulative positive net income for each fiscal year. The Credit Facility also includes borrower concentration limits which include limitations on the amount of loans to companies in particular industries sectors and also restrict certain terms of the loans.
 
Interest Rate Swaps and Hedging Activities
 
In 2008, we entered into two interest rate swap agreements, which we collectively refer to as the “Swaps,” with WestLB, fixing the rate of $10 million at 3.58% and $15 million at 3.2% on the first advances of a like amount of variable rate Credit Facility borrowings. The interest rate swaps expire in October 2011 and October 2010, respectively. The Swaps are designated as cash flow hedges and are anticipated to be highly effective. These Swaps are derivatives and were designated as hedging instruments at the initiation of the Swaps, and we have applied cash flow hedge accounting.
 
At September 30, 2010 and December 31, 2009, the Swaps have been reflected at fair value as a liability on the consolidated balance sheet and the corresponding unrealized loss on the Swaps is reflected in “accumulated other comprehensive loss,” in members’ capital, totaling $0.4 million and $0.8 million, respectively. No ineffectiveness on the Swaps was recognized during the nine month period ended September 30, 2010 or the year ended December 31, 2009. During the nine months ended September 30, 2010 and year ended December 31, 2009, $0.6 million and $0.8 million, respectively, was reclassified from accumulated other comprehensive loss into interest expense, and at September 30, 2010, $0.3 million is expected to be reclassified in the next twelve months.


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Off-Balance Sheet Arrangements
 
In the normal course of business, we are party to financial instruments with off-balance sheet risk. These consist primarily of unfunded commitments to extend credit, in the form of loans, to our portfolio companies. Unfunded commitments to provide funds to portfolio companies are not reflected on our balance sheet. Our unfunded commitments may be significant from time to time. As of September 30, 2010, we had unfunded commitments of approximately $12.3 million. These commitments will be subject to the same underwriting and ongoing portfolio maintenance as are the on balance sheet financial instruments that we hold. Since these commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. We intend to use primarily cash flows from operations and our Credit Facility to fund these commitments. However, there can be no assurance that we will have sufficient capital available to fund these commitments as they come due.
 
Contractual Obligations
 
In addition to the Credit Facility, we have certain commitments pursuant to our Investment Management Agreement entered into with Horizon Technology Finance Management LLC, our Advisor. We have agreed to pay a fee for investment advisory and management services consisting of two components — a base management fee and an incentive fee. Payments under the Investment Management Agreement are equal to (1) a base management fee equal to a percentage of the value of our average gross assets and (2) a two-part incentive fee. See “Investment Management and Administration Agreements.” We have also entered into a contract with our Advisor to serve as our administrator. Payments under the Administration Agreement are equal to an amount based upon our allocable portion of our Advisor’s overhead in performing its obligation under the agreement, including rent, fees, and other expenses inclusive of our allocable portion of the compensation of our chief financial officer and any administrative staff. See “Administration Agreement.”
 
Quantitative and Qualitative Disclosures about Market Risk
 
We are subject to financial market risks, including changes in interest rates. During the periods covered by our financial statements, the interest rates on the loans within our portfolio were all at fixed rates, or floating rates with a floor, and we expect that our loans in the future will also have primarily fixed interest rates. The initial commitments to lend to our portfolio companies are usually based on a floating LIBOR index and typically have interest rates that are fixed at the time of the loan funding and remain fixed for the term of the loan.
 
Our Credit Facility has a floating interest rate provision based on a LIBOR index which resets daily, and we expect that, other than any SBIC debenture program debt, any other credit facilities into which we enter in the future may have floating interest rate provisions. We have used hedging instruments in the past to protect us against interest rate fluctuations and we may use them in the future. Such instruments may include swaps, futures, options and forward contracts. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to the investments in our portfolio with fixed interest rates.
 
Because we currently fund, and will continue to fund, our investments with borrowings, our net income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest the funds borrowed. Accordingly, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net income. In periods of rising interest rates, our cost of funds would increase, which could reduce our net investment income if there is not a corresponding increase in interest income generated by floating rate assets in our investment portfolio.
 
Income Taxes
 
For the periods presented our predecessor was a limited liability company and, as a result, all items of income and expense were passed through to, and were generally reportable on, the tax returns of the respective members of the limited liability company. Therefore, no federal or state income tax provision has been recorded.


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Recent Accounting Pronouncements
 
On July 1, 2009, the Accounting Standards Codification (“ASC”) became the Financial Accounting Standards Board’s (“FASB”) single source of authoritative U.S. accounting and reporting standards applicable to all public and non-public non-governmental entities, superseding existing authoritative principles and related literature. The adoption of the ASC changed the applicable citations and naming conventions used when referencing generally accepted accounting principles in our financial statements.
 
The FASB issued new guidance on accounting for uncertainty in income taxes. We adopted this new guidance for the year ended December 31, 2009. Management evaluated all tax positions and concluded that there are no uncertain tax positions that require adjustment to the financial statements to comply with the provisions of this guidance.
 
In March 2008, the FASB issued guidance related to disclosures about derivative instruments and hedging activities. This guidance requires enhanced disclosures of an entity’s derivative instruments and hedging activities and their effects on the entity’s financial position, financial performance and cash flows. We adopted this guidance in 2009.
 
In April 2009, the FASB issued guidance which addressed concerns that fair value measurements emphasized the use of an observable market transaction even when that transaction may not have been orderly or the market for that transaction may not have been active. This guidance relates to the following: (a) determining when the volume and level of activity for the asset or liability has significantly decreased; (b) identifying circumstances in which a transaction is not orderly; and (c) understanding the fair value measurement implications of both (a) and (b). We adopted this new guidance in 2009, and the adoption had no impact on our financial statements.
 
In February 2010, the FASB issued guidance which amends the existing guidance related to fair value measurements and disclosures. The amendments will require the following new fair value disclosures:
 
  •  Separate disclosure of the significant transfers in and out of Level 1 and Level 2 fair value measurements, and a description of the reasons for the transfers.
 
  •  In the roll forward of activity for Level 3 fair value measurements (significant unobservable inputs), purchases, sales, issuances, and settlements should be presented separately (on a gross basis rather than as one net number).
 
In addition, the amendments clarify existing disclosure requirements, as follows:
 
  •  Fair value measurements and disclosures should be presented for each class of assets and liabilities within a line item in the balance sheet.
 
  •  Reporting entities should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3.
 
The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures included in the roll forward of activity for Level 3 fair value measurements, for which the effective date is for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. We adopted the applicable provisions of this new guidance for the three months ended March 31, 2010.
 
In June 2009, the FASB issued guidance which modifies certain guidance relating to transfers and servicing of financial assets. This guidance eliminates the concept of qualifying special purpose entities, provides guidance as to when a portion of a transferred financial asset can be evaluated for sale accounting, provides additional guidance with regard to accounting for transfers of financial assets and requires additional disclosures. This guidance is effective for us as of January 1, 2010, with adoption applied prospectively for transfers that occur on and after the effective date. The adoption of this guidance did not have an impact on our financial statements.


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In July 2010, The FASB issued ASU No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. The amendments in this ASU apply to all entities, both public and nonpublic, with financing receivables, excluding short-term trade accounts receivable or receivables measured at fair value or lower of cost or fair value. The amendments in this ASU enhance disclosures about the credit quality of financing receivables and the allowance for credit losses. This ASU amends existing disclosure guidance to require entities to provide a greater level of disaggregated information about the credit quality of its financing receivables and its allowance for credit losses. In addition, this ASU requires entities to disclose credit quality indicators, past due information, and modifications of its financing receivables. For public entities, the disclosures as of the end of are reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. This ASU encourages, but does not require, comparative disclosures for earlier reporting periods that ended before initial adoption. However, entities should provide comparative disclosures for those reporting periods ending after initial adoption. We are currently evaluating the impact of the adoption of this guidance on our financial statement disclosures.


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BUSINESS
 
General
 
We are an externally-managed, non-diversified closed-end management investment company that intends to file an election to be regulated as a business development company under the 1940 Act. In addition, we intend to elect to be treated, and intend to qualify, as a RIC, under Subchapter M of the Code, commencing with our taxable year ending December 31, 2010. We were formed to continue and expand the business of Compass Horizon which was formed in January 2008 and commenced operations in March 2008 and which will become our wholly owned subsidiary in connection with this offering. Our Advisor manages our day-to-day operations and also provides all administrative services necessary for us to operate. We invest in development-stage companies in the technology, life science, healthcare information and services, and cleantech industries, which we refer to as our “Target Industries.” Our investment objective is to generate current income from the loans we make and capital appreciation from the warrants we receive when making such loans. We make secured loans, which we refer to as “Technology Loans,” to development-stage companies backed by established venture capital and private equity firms in our Target Industries, which we refer to as “Technology Lending.” To a limited extent, we also selectively lend to publicly traded companies in our Target Industries.
 
We lend to private companies following or in connection with their receipt of a round of venture capital and private equity financing, primarily providing secured working capital loans, secured revolving loans and secured equipment loans that are secured by all or a portion of the tangible and intangible assets of the applicable portfolio company. We will seek to invest, under normal circumstances, most of the value of our total assets (including the amount of any borrowings for investment purposes) in our Target Industries.
 
Our existing loan portfolio will continue to generate revenue for us. We believe our existing investment portfolio has performed well since its inception notwithstanding the economic downturn starting in 2008 and continuing through 2009. With the improvement in the broader economy in 2010, we continue to experience favorable portfolio quality and outcomes with no realized losses (charge-offs) in our loan portfolio since we commenced operations in March 2008. Our existing portfolio of investments and loan commitments provide the following benefits:
 
  •  Interest income from the portfolio will provide immediate income and cash flow allowing for potential near term dividends to our stockholders;
 
  •  Capital gains from warrants to purchase either common stock or preferred stock received from our existing investments are expected to be realized sooner than if we were beginning our initial investment operations without an existing portfolio of earning assets; and
 
  •  Warrants to purchase either common stock or preferred stock issued to us through the economic downturn have exercise prices at relatively lower valuations due to the depressed equity and debt markets in 2008 and 2009.
 
Our Strategy
 
Our investment objective is to maximize our investment portfolio’s total return by generating current income from the loans we make and capital appreciation from the warrants we receive when making such loans. We believe our Advisor has demonstrated that its expertise in debt product development, transaction sourcing, its knowledge of our Target Industries, and its disciplined underwriting process create value for our investors. We believe that this expertise results in returns that exceed those typically available from more traditional commercial finance products (such as equipment leasing or middle market lending) while mitigating the risks typically associated with investments in development-stage technology companies.
 
To further implement our business strategy, our Advisor will continue to employ the following core strategies:
 
  •  Structured Investments in the Venture Capital and Private Equity Markets.  We make loans to development-stage companies within our Target Industries typically in the form of secured amortizing loans. The secured amortizing debt structure provides a lower risk strategy, as compared to equity investments, to participate in the emerging technology markets, because the debt structures we typically utilize provide collateral against the downside risk of loss, provide return of capital in a much shorter timeframe through


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  current pay interest and amortization of loan principal and have a senior position in the capital structure to equity in the case of insolvency, wind down or bankruptcy. Unlike venture capital and private equity-backed investments, our investment returns and return of our capital do not require equity investment exits such as mergers and acquisitions or initial public offerings. Instead, we receive returns on our loans primarily through regularly scheduled payments of principal and interest and, if necessary, liquidation of the collateral supporting the loan. Only the potential gains from warrants are dependent upon exits.
 
  •  “Enterprise Value” Lending.  We and our Advisor take an enterprise value approach to the loan structuring and underwriting process. “Enterprise value” is the value that a portfolio company’s most recent investors place on the portfolio company or “enterprise.” The value is determined by multiplying (x) the number of shares of common stock of the portfolio company outstanding on the date of calculation, on a fully diluted basis (assuming the conversion of all outstanding convertible securities and the exercise of all outstanding options and warrants), by (y) the price per share paid by the most recent purchasers of equity securities of the portfolio company. We secure a senior or subordinated lien position against the enterprise value of a portfolio company and generally our exposure is less than 25% of the enterprise value and we obtain pricing enhancements in the form of warrants and other “success-based” fees that build long-term asset appreciation in our portfolio. These methods reduce the downside risk of Technology Lending. In instances when we do not obtain a lien on a portfolio company’s intellectual property, we obtain a covenant that such portfolio company will not grant a lien on such intellectual property to anyone else, thus ensuring that we have the right to share in the value of the portfolio company’s intellectual property and enterprise value in a downside scenario. “Enterprise value” lending requires an in-depth understanding of the companies and markets served. We believe that this in-depth understanding of how venture capital and private equity-backed companies in our Target Industries grow in value, finance that growth over time, and various business cycles can be carefully analyzed by Technology Lenders who have substantial experience, relationships and knowledge within the markets they serve. We believe the experience that our Advisor possesses gives us enhanced capabilities in making these qualitative “enterprise value” evaluations, which we believe can produce a high quality Technology Loan portfolio with enhanced returns for our stockholders.
 
  •  Creative Products with Attractive Risk-Adjusted Pricing.  Each of our existing and prospective portfolio companies has its own unique funding needs for the capital provided from the proceeds of our Technology Loans. These funding needs include, but are not limited to, funds for additional development runways, funds to hire or retain sales staff, or funds to invest in research and development in order to reach important technical milestones in advance of raising additional equity. Our loans include current pay interest, commitment fees, pre-payment fees and non-utilization fees. We believe we have developed pricing tools, structuring techniques and valuation metrics that satisfy our portfolio companies’ requirements while mitigating risk and maximizing returns on our investments.
 
  •  Opportunity for Enhanced Returns.  To enhance our loan portfolio returns, in addition to interest and fees, we obtain warrants to purchase the equity of our portfolio companies, as additional consideration for making loans. The warrants we obtain generally include a “cashless exercise” provision to allow us to exercise these rights without requiring us to make any additional cash investment. Obtaining warrants in our portfolio companies has allowed us to participate in the equity appreciation of our portfolio companies which we expect will enable us to generate higher returns for our investors.
 
  •  Direct Origination.  We originate transactions directly with technology, life science, healthcare information and services, and cleantech companies. Since it commenced operations in 2004, our Advisor has directly originated more than 115 transactions resulting in over $700 million of Technology Loans. These transactions were referred to our Advisor from a number of sources, including referrals from, or direct solicitation of, venture capital and private equity firms, portfolio company management teams, legal firms, accounting firms, investment banks and other lenders that represent companies within our Target Industries. Our Advisor has been the sole or lead originator in substantially all transactions in which the funds it managed have invested.
 
  •  Disciplined and Balanced Underwriting and Portfolio Management.  We use a disciplined underwriting process that includes obtaining information validation from multiple sources, extensive knowledge of our


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  Target Industries, comparable industry valuation metrics, and sophisticated financial analysis related to development-stage companies. Our Advisor’s due diligence on investment prospects includes obtaining and evaluating information on the prospective portfolio company’s technology, market opportunity, management team, fund raising history, investor support, valuation considerations, financial condition and projections. We seek to balance our investment portfolio to reduce the risk of down market cycles associated with any particular industry or sector, development-stage or geographic area. Our Advisor employs a “hands on” approach to portfolio management requiring private portfolio companies to provide monthly financial information and to participate in regular updates on performance and future plans.
 
  •  Use of Leverage; SBA Debenture Program.  We believe our existing credit facility provides us with a substantial amount of capital for deployment into new investment opportunities. Since its inception, Compass Horizon has employed leverage to increase its return on equity through the Credit Facility. The Credit Facility, pursuant to which we expect to be able to borrow up to $125 million upon completion of this offering, matures on March 4, 2015. The Credit Facility will begin to amortize on March 4, 2011. In addition, on July 14, 2009, our Advisor received a letter, which we refer to as the “Move Forward Letter,” from the Investment Division of the SBA that invited our Advisor to continue moving forward with the licensing of a small business investment company, or “SBIC.” Although our application to license this entity as a small business investment company with the SBA is subject to SBA approval, we remain cautiously optimistic that our Advisor will complete the licensing process. To the extent that our Advisor receives an SBIC license, we expect to form an SBIC subsidiary which will issue SBA-guaranteed debentures at long-term fixed rates, subject to the required capitalization of the SBIC subsidiary. Under the regulations applicable to SBICs, an SBIC generally may have outstanding debentures guaranteed by the SBA in an aggregate amount of up to twice its regulatory capital. Regulatory capital generally equates to the amount of an SBIC’s equity capital. The SBIC regulations currently limit the amount that the SBIC subsidiary would be permitted to borrow to a maximum of $150 million. This means that the SBIC subsidiary could access the full $150 million maximum available if it were to have $75 million in regulatory capital. However, we would not be required to capitalize our SBIC subsidiary with $75 million and may determine to capitalize it with a lesser amount. In addition, if we are able to obtain financing under the SBIC program, the SBIC subsidiary will be subject to regulation and oversight by the SBA, including requirements with respect to maintaining certain minimum financial ratios and other covenants. In connection with the filing of the SBA license application, we will be applying for exemptive relief from the SEC to permit us to exclude the debt of the SBIC subsidiary guaranteed by the SBA from the consolidated asset coverage ratio, and, if obtained, will enable us to fund more investments with debt capital. However, there can be no assurance that we will be granted an SBIC license or that if granted it will be granted in a timely manner or that we will receive the exemptive relief from the SEC. Based upon an analysis of our Advisor’s loan originations since inception, as further evidenced by the Move Forward Letter, Technology Lending is an appropriate use of the SBA debenture program.
 
  •  Customized Loan Documentation Process.  Our Advisor employs an internally managed documentation process that assures that each loan transaction is documented using our “enterprise value” loan documents specifically tailored to each transaction. Our Advisor uses experienced in-house senior legal counsel to oversee the documentation and negotiation of each of our transactions.
 
  •  Active Portfolio Management.  Because many of our portfolio companies are privately held, development-stage companies in our Target Industries, our Advisor employs a “hands on” approach to its portfolio management processes and procedures. Our Advisor requires the private portfolio companies to provide monthly financial information, and our Advisor participates in quarterly discussions with the management and investors of our portfolio companies. Our Advisor prepares monthly management reporting and internally rates each portfolio company.
 
  •  Portfolio Composition.  Monitoring the composition of the portfolio is an important component of the overall growth and portfolio management strategy. Our Advisor monitors the portfolio regularly to avoid undue focus in any sub-industry, stage of development or geographic area. By regularly monitoring the portfolio for these factors we attempt to reduce the risk of down market cycles associated with any particular industry, development-stage or geographic area.


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Market Opportunity
 
Our Target Industries.  We intend to focus our investments primarily in four key industries of the emerging technology market: technology, life science, healthcare information and services, and cleantech. The technology industry sectors we intend to focus on include communications, networking, wireless communications, data storage, software, cloud computing, semiconductor, internet and media, and consumer-related technologies. Life science sectors we intend to focus on include biotechnology, drug delivery, bioinformatics, and medical devices. Healthcare information and services sectors we intend to focus on include diagnostics, medical record services and software, and other healthcare related services and technologies that improve efficiency and quality of administered healthcare. Cleantech sectors we intend to focus on include alternative energy, water purification, energy efficiency, green building materials, and waste recycling.
 
Technology Lending.  We believe that Technology Lending has the potential to achieve enhanced returns that are attractive notwithstanding the increased level of risk associated with lending to development-stage companies. Potential benefits include:
 
  •  Higher Interest Rates.  Technology Loans typically bear interest at rates that exceed the rates that would be available to portfolio companies if they could borrow in traditional commercial financing transactions. We believe these rates provide a risk-adjusted return to lenders compared with other types of debt investing and provide a significantly less expensive alternative to equity financing for development-stage companies.
 
  •  Loan Support Provided by Cash Proceeds from Equity Capital Provided by Venture Capital and Private Equity Firms.  In many cases, a Technology Lender makes a Technology Loan to a portfolio company in conjunction with, or immediately after, a substantial venture capital or private equity investment in the portfolio company. This equity capital investment supports the loan by initially providing a source of cash to fund the portfolio company’s debt service obligations. In addition, because the loan ranks senior in priority of payment to the equity capital investment, the portfolio company must repay that debt before the equity capital investors realize a return on their investment. If the portfolio company subsequently becomes distressed, its venture capital and private equity investors will likely have an incentive to assist it in avoiding a payment default, which could lead to foreclosure on the secured assets. We believe that the support of venture capital and private equity investors increases the likelihood that a Technology Loan will be repaid.
 
  •  Relatively Rapid Amortization of Loans.  Technology Loans typically require that interest payments begin within one month of closing, and principal payments begin within twelve months of closing, thereby returning capital to the lender and reducing the capital at risk with respect to the investment. Because Technology Loans are typically made at the time of, or soon after, a portfolio company completes a significant venture capital or private equity financing, the portfolio company usually has sufficient funds to begin making scheduled principal and interest payments even if it is not then generating revenue and/or positive cash flow. If a portfolio company is able to increase its “enterprise value” during the term of the loan (which is typically between 24 and 48 months), the lender may also benefit from a reduced loan-to-value ratio, which reduces the risk of the loan.
 
  •  Senior Ranking to Equity and Collateralization.  A Technology Loan is typically secured by some or all of the portfolio company’s assets, thus making the loan senior in priority to the equity invested in the portfolio company. In many cases, if a portfolio company defaults on its loan, the value of this collateral will provide the lender with an opportunity to recover all or a portion of its investment. Because holders of equity interests in a portfolio company will generally lose their investments before the Technology Lender experiences losses, we believe that the likelihood of losing all of our invested capital in a Technology Loan is lower than would be the case with an equity investment.
 
  •  Potential Equity Appreciation Through Warrants.  Technology Lenders are typically granted warrants in portfolio companies as additional consideration for making Technology Loans. The warrants permit the Technology Lender to purchase equity securities of the portfolio companies at the same price paid by the portfolio company’s investors for such preferred stock in the most recent or next equity round of the portfolio company’s financing. Historically, warrants granted to Technology Lenders have generally had a term of ten years and been in dollar amounts equal to between 5% and 20% of the principal loan amount. Warrants


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  provide Technology Lenders with an opportunity to participate in the potential growth in value of the portfolio company, thereby increasing the potential return on investment.
 
We believe that Technology Lending also provides an attractive financing source for portfolio companies, their management teams and their equity capital investors, because of the following:
 
  •  Technology Loans are Typically Less Dilutive than Venture Capital and Private Equity Financing.  Technology Loans allow a company to access the cash necessary to implement its business plan without diluting the existing investors in the company. Typically, the warrants or other equity securities issued as part of a Technology Lending transaction result in only minimal dilution to existing investors as compared to the potential dilution of a new equity round of financing.
 
  •  Technology Loans Extend the Time Period During Which a Portfolio Company Can Operate Before Seeking Additional Equity Financing.  By using a Technology Loan, development-stage companies can postpone the need for their next round of equity financing, thereby extending their cash available to fund operations. This delay can provide portfolio companies with additional time to improve technology, achieve development milestones and, potentially, increase the company’s valuation before seeking more equity investments.
 
  •  Technology Loans Allow Portfolio Companies to Better Match Cash Sources with Uses.  Debt is often used to fund infrastructure costs, including office space and laboratory equipment. The use of debt to fund infrastructure costs allows a portfolio company to spread these costs over time, thereby conserving cash at a stage when its revenues may not be sufficient to cover expenses. Similarly, working capital financing may be used to fund selling and administrative expenses ahead of anticipated corresponding revenue. In both instances, equity capital is preserved for research and development expenses or future expansion.
 
Market Size.  Our Advisor estimates, based upon our 16 years of experience making Technology Loans to companies in our Target Industries, that during such period the ratio of the aggregate principal amount of debt investments made to the aggregate capital invested by venture capital investors has been approximately 10% to 20%. According to Dow Jones VentureSource, $23.3 billion of venture capital equity was invested in companies in our Target Industries during 2009. Accordingly, based on our Advisor’s past experience, we would estimate that the size of the Technology Loan market for 2009 was in the range of approximately $2.0 billion to $4.0 billion. We believe that the market for Technology Loans should grow over the next several years based upon several factors. We believe the level of venture capital investment for 2009 is at a cyclical low, as shown by the $33.5 billion and $31.9 billion of venture capital investment for 2007 and 2008, respectively, as reported by DowJones VentureSource. We believe that the comparable period of 2009 in the venture capital investment cycle is 2003, because 2003 represented the last period of decline in the amount of venture capital investment following the burst of the technology bubble in 2000. Venture capital investment steadily increased from $23.5 billion in 2004 to $33.5 billion in 2007 as, reported by Dow Jones VentureSource, representing a compounded annual growth rate of 9.3% for that period. Our belief that 2009 was a low point in the venture capital investment cycle is further supported by the fact that the amount of venture capital investment in the last three quarters of 2009 increased from a 13 year low of $4.3 billion in the first quarter of 2009 to $6.1 billion in the second quarter of 2009, $5.9 billion in the third quarter of 2009, and $7.0 billion in the fourth quarter of 2009. Dow Jones VentureSource further reported venture capital investments of $7.0 billion in the fourth quarter of 2009 compared to $6.5 billion in the fourth quarter of 2008, representing a 8% increase period to period. That positive trend continued into 2010 with venture capital investments of $4.7 billion and $7.7 billion for the first and second quarters of 2010, respectively, compared to $4.3 billion and $6.1 billion, for the first and second quarters of 2009, respectively, representing comparable period to period increases of 9% and 26%, respectively. The potential for future growth in the market for Technology Loans is also supported by the fact that, according to Dow Jones VentureSource, there was $17 billion of liquidity events related to M&A and IPO activity for companies in our Target Industries in 2009, of which $7.3 billion was generated in the fourth quarter, representing 44% of the total activity for the year. This not only returns capital to investors which can be reinvested in venture capital investments, but also makes venture capital a more attractive investment class to investors, thus attracting additional capital. In addition, nearer term exits for venture capital investors, reinforces Technology Loans as a cheaper financing alternative than venture capital for companies in our Target Industries and their investors, thus driving up demand for Technology Loans.


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Portfolio Company Valuations.  According to Dow Jones VentureSource, from 2007 through 2009 valuations of existing companies in our Target Industries significantly decreased, as they did for most asset classes. We believe this decrease was due to general macroeconomic conditions, including lower demand for products and services, lack of availability of capital and investors’ decreased risk tolerance. We believe the decrease in valuations in our Target Industries caused by macroeconomic factors may present a cyclical opportunity to participate in warrant gains in excess of those which are typically experienced by Technology Lenders. Our future portfolio companies may not only increase in value due to their successful technology development and/or revenue growth, but as macroeconomic conditions improve, valuations may also increase due to the general increase in demand for goods and services, the greater availability of capital and an increase in investor risk tolerance. An example of the positive and negative macroeconomic impact on valuations last occurred in the years between 2001 and 2005. Following the macroeconomic impact of the technology downturn of 2001 and the events of “9/11”, according to Dow Jones VentureSource, median valuations for venture capital backed technology-related financing fell from $25 million at December 2000 to $10 million at January 2003, but by December 2005, median valuations for venture capital backed technology related financings had risen to $15 million.
 
Competitive Strengths
 
We believe that we, together with our Advisor, possess significant competitive strengths, including:
 
Consistently execute commitments and close transactions.  Our Advisor and its senior management and investment professionals have an extensive track record of originating, underwriting and closing Technology Loans. Our Advisor has directly originated, underwritten, and managed more than 115 Technology Loans with an aggregate original principal amount of $700 million since it commenced operations in 2004 to the present. In our experience, prospective portfolio companies prefer lenders that have demonstrated their ability to deliver on their commitments. Our Advisor’s ability to deliver on its commitments has resulted in satisfied portfolio companies, management teams and venture capital and private equity investors and created an extensive base of transaction sources and references for our Advisor.
 
Robust direct origination capabilities.  Our Advisor’s managing directors each have significant experience originating Technology Loans in our Target Industries. This experience has given each managing director a deep knowledge of our Target Industries and, assisted by their long standing working relationships with our Advisor’s senior management and our Advisor’s brand name recognition in our market, has resulted in a steady flow of high quality investment opportunities that are consistent with the strategic vision and expectations of our Advisor’s senior management. The combination of the managing directors’ experience and their close working relationship with our Advisor’s senior management, together with the extensive base of transaction sources and references generated by our Advisor’s active participation in the Technology Lending market, has created an efficient marketing and sales organization.
 
Access to capital.  Since it commenced operations in 2004, our Advisor has always had access to capital which allowed it to consistently offer Technology Loans to companies in our Target Industries, including offering loans through Compass Horizon during the difficult economic markets of 2008 and 2009. Our Advisor’s demonstrated access to capital, including through the Credit Facility, has created awareness among companies in our Target Industries of our Advisor’s consistent ability to make Technology Loans without interruption in all market conditions, thus making our Advisor a trusted source for Technology Loans to companies, their management teams and their venture capital and private equity investors.
 
Highly experienced and cohesive management team.  Our Advisor has had the same senior management team of experienced professionals since its inception, thereby creating awareness among companies in our Target Industries, their management and their investors that prospective portfolio companies of Horizon will receive consistent and predictable service, in terms of available loan products and economic terms, underwriting requirements, loan closing process and portfolio management. This consistency allows companies, their management teams and their investors to predict likely outcomes when expending resources in seeking and obtaining Technology Loans from us. Companies may not have the same level of predictability when dealing with other lenders in the Technology Lending market. Our Advisor is led by five senior managers, including its two co-founders, Robert D. Pomeroy, Jr., our Chief Executive Officer, and Gerald A. Michaud, our President, each of whom


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has more than 23 years of experience in Technology Lending. Christopher M. Mathieu, our SVP and Chief Financial Officer, has more than 16 years of Technology Lending experience, and each of John C. Bombara, our SVP and General Counsel, and Daniel S. Devorsetz, our SVP and Chief Credit Officer, has more than nine years experience in Technology Lending. Our Advisor has an additional eight experienced professionals with marketing, legal, accounting, and portfolio management experience in Technology Lending. The co-founders and some of the team have worked together for over 16 years during which they started, built and managed Technology Lending businesses for GATX Ventures, Inc., Transamerica Technology Finance and Financing for Science International. In addition to originating and managing loans and investments on behalf of Compass Horizon, our Advisor has originated and managed loans and investments on behalf of several other externally managed private funds. Since our Advisor commenced operations in 2004 through December 31, 2009, our Advisor has originated over $700 million of investments to more than 115 companies in our Target Industries. As of the date of this prospectus, only the Compass Horizon fund is actively making new investments.
 
Relationships with venture capital and private equity investors.  Our Advisor’s senior management team and managing directors have developed a comprehensive knowledge of the venture capital and private equity firms and their partners that participate in our Target Industries. Because of our Advisor’s senior management and managing directors’ demonstrated history of delivering loan commitments and value to many of these firms’ portfolio companies, our Advisor has developed strong relationships with many of these firms and their partners. The strength and breadth of our Advisor’s venture capital and private equity relationships would take considerable time and expense to develop. We will rely on these relationships to implement our business plan.
 
Well-known brand name.  Our Advisor has originated over $700 million in Technology Loans to more than 115 companies in our Target Industries under the “Horizon Technology Finance” brand. Each of these companies is backed by one or more venture capital or private equity firms, thus creating a network of Target Industry companies and equity sponsors who know of, and have worked with, “Horizon Technology Finance.” In addition, our Advisor has attended, participated in, or moderated venture lending or alternative financing panel sessions at venture capital, technology, life sciences and other industry related events over the past six years. This pro-active participation in the lending market for our Target Industries has created strong and positive brand name recognition for our Advisor. We believe that the “Horizon Technology Finance” brand is a competent, knowledgeable and active participant in the Technology Lending marketplace and will continue to result in a significant number of referrals and prospective investment opportunities in our Target Industries.
 
Demonstrated track record with strong returns.  Our Advisor’s senior managers collectively have also originated, underwritten, and managed more than 440 Technology Loans with an aggregate commitment of more than $1.0 billion from 1993 to 2003 at other organizations including, GATX Ventures, Inc., Transamerica Technology Finance and Financing for Science International. The success of our Advisor’s track record in both up and down business cycles, as described more fully elsewhere in this prospectus, is a result of our Advisor’s knowledge base and its processes developed from its Technology Lending experience. Our Advisor’s developed knowledge base and processes include its unique investment criteria, its creation of an efficient and successful origination process, its establishment of back office operations, its knowledge of staffing needs, its legal, regulatory and institutional compliance knowledge and processes, its designation of specific roles for its investment team members, and its processes for the underwriting, documenting and monitoring of a portfolio of Technology Loans.
 
Flexibility of capital.  With our Advisor’s experience in structuring and managing Technology Loans, our Advisor has provided, and we expect to provide, loan terms to portfolio companies in our Target Industries that provide more value to a portfolio company than loan terms that would otherwise be available from other commercial lenders or other Technology Loan providers. We may be able to offer flexible terms on interest rates, warrant coverage, repayment schedules, advances based upon development milestones, interest only periods, and deferred principal payments that provide valuable flexibility during times of our portfolio companies’ critical cash needs without significantly increasing capital risk. To the extent that additional risk is taken, we may adjust our returns for such risk by obtaining additional commitment, success and non use fees and additional warrants. We expect that allowing our portfolio companies more flexible loan terms will allow our portfolio companies to be successful, while allowing us to achieve more favorable economic returns than are available in traditional commercial financing transactions.


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Disciplined underwriting and monitoring process with focus on preservation of capital.  Our Advisor’s investment process focuses first on capital preservation. The investment process for each proposed transaction involves conducting in depth due diligence, including meeting with the prospective portfolio company’s senior management team, gaining detailed understanding of the prospective portfolio company’s management team experience, its investors and its investors’ support for the prospective portfolio company, business plans, technology, markets, financial projections, fund raising history and future plans and the potential for warrant gains. The due diligence typically includes the use of independent verification with prospective portfolio company’s customers, investors, strategic partners and market research. The results of our Advisor’s due diligence for each proposed transaction are clearly documented in a comprehensive investment memorandum, which is then submitted to our Advisor’s investment committee. As a result of our focus on capital preservation, the principal amount of our loans is generally less than 25% of the enterprise value of the portfolio company.
 
Diverse investment portfolio.  Portfolio diversity is an important component to achieving successful returns for Technology Loans. Our Advisor intends to monitor our loan portfolio regularly to avoid undue focus in any industry, sector, stage of development or geographic area. By regularly monitoring the portfolio for these factors we will attempt to reduce the risk of down market cycles associated with any particular industry, sector, development-stage or geographic area.
 
Stages of Development of Venture Capital and Private Equity-backed Companies
 
Below is a typical development curve for a company in our Target Industries and the various milestones along the development curve where we believe a Technology Loan may be a preferred financing solution:
 
(CHART)
 
Investment Criteria
 
We have identified several criteria that we believe have proven, and will prove, important in achieving our investment objective with respect to prospective portfolio companies. These criteria provide general guidelines for our investment decisions. However, we caution you that not all of these criteria are met by each portfolio company in which we choose to invest.
 
Portfolio Composition.  We invest in venture capital and private equity-backed development-stage companies in our Target Industries. We have made, and plan to make, investments which will result in a portfolio of investments in companies that are diversified by their stage of development, their Target Industries and sectors of Target


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Industries, and their geographical location, as well as by the venture capital and private equity sponsors that support our portfolio companies.
 
Continuing Support from One or More Venture Capital and Private Equity Investors.  We typically invest in companies in which one or more established venture capital and private equity investors have previously invested and continue to make a contribution to the management of the business. We believe that established venture capital and private equity investors can serve as a committed partner and will assist their portfolio companies and their management teams in creating value.
 
Company Stage of Development.  While we invest in companies at various stages of development, we require that prospective portfolio companies be beyond the seed stage of development and have received at least their first round of venture capital or private equity financing. We expect a prospective portfolio company to demonstrate its ability to advance technology and increase its revenue and operating cash flow over time. The anticipated growth rate of a prospective portfolio company will be a key factor in determining the value that we ascribe to any warrants that we may acquire in connection with making debt investments.
 
Operating Plan.  We generally require that a prospective portfolio company, in addition to having sufficient access to capital to support leverage, demonstrate an operating plan capable of generating cash flows or the ability to raise the additional capital necessary to cover its operating expenses and service its debt. We expect that the enterprise value of a prospective portfolio company should substantially exceed the principal balance of debt borrowed by the company.
 
Liquidation Value of Assets.  The prospective liquidation value of the assets collateralizing our loans is an important factor in our credit analysis. We emphasize both tangible assets, such as accounts receivable, inventory, equipment and real estate, and intangible assets, such as intellectual property, networks and databases and future revenue streams. In some cases, rather than obtaining a lien on intellectual property we may receive a negative pledge covering a company’s intellectual property.
 
Terms.  Although terms vary based on the portfolio company and other conditions, the typical repayment term is between 24 and 48 months. The amortization schedule will vary, but there is typically some form of an interest only period and, in some cases, there is a balloon payment at the end of the term.
 
Warrants and Equity Participation Rights.  We generally receive warrants having terms consistent with the most recent or next round of venture capital and private equity capital financing. We do not view the upside appreciation potential of warrants as a means to mitigate risk, but rather to ensure that the compensation we receive is appropriate for the level of risk being undertaken. We also may seek to receive equity participation rights to invest in a future round of a portfolio company’s equity capital financing through direct capital investments in our portfolio companies. These opportunities to invest are at our option and we are not obligated to make such investments. Other than one investment for $100,000, we have not elected to exercise any equity participation rights.
 
Experienced Management of Portfolio Companies.  We generally require that our portfolio companies have a successful and experienced management team. We also require the portfolio companies to have in place proper incentives to induce management to succeed and to act in concert with our interests as investors.
 
Exit Strategy.  We analyze the potential for that company to increase the liquidity of its equity through a future event that would enable us to realize appreciation in the value of our warrants or other equity interests. Liquidity events typically include an IPO or a sale of the company.
 
Investment Process
 
We believe that our Advisor’s team members are leaders in the Technology Lending industry and that the depth and breadth of experience of our Advisor’s investment professionals exceeds that of many of our competitors. Our Advisor has created an integrated approach to the loan origination, underwriting, approval and documentation process that effectively combines all of the skills of our Advisor’s professionals. This process allows our Advisor to achieve an efficient and timely closing of an investment from the initial contact with a prospective portfolio company through the close of documentation and funding of the investment, while ensuring that our Advisor’s rigorous underwriting standards are consistently maintained. During the investment process, several of our


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Advisor’s investment professionals are involved in the analysis, decision-making and documentation of prospective investments. After closing, our Advisor typically employs a “hands on” portfolio management process, regularly contacting our portfolio companies. Our Advisor also utilizes a proprietary credit rating system designed to effectively and efficiently assist our Advisor’s portfolio managers’ and senior management’s analysis of the credit quality of investments on an individual basis and a portfolio basis and our ability to allocate internal resources accordingly.
 
We believe that the high level of involvement by our Advisor’s staff in the various phases of the investment process allows us to minimize the credit risk while delivering superior service to our portfolio companies.
 
Origination.  Our Advisor’s loan origination process begins with its industry-focused regional managing directors who are responsible for identifying, contacting and screening prospects. The managing directors meet with key decision makers and deal referral sources such as venture capital and private equity firms and management teams and legal firms, accounting firms, investment banks and other lenders to source prospective portfolio companies. We believe our brand name and management team are well known within the Technology Lending community, as well as by many repeat entrepreneurs and board members of prospective portfolio companies. These broad relationships, which reach across the Technology Lending industry, give rise to a significant portion of our Advisor’s deal origination.
 
The responsible managing director of our Advisor obtains review materials from the prospective portfolio company and from those materials, as well as other available information, determines whether it is appropriate for our Advisor to issue a non-binding term sheet. The managing director bases this decision to proceed on his or her experience, the competitive environment and the prospective portfolio company’s needs and also seeks the counsel of our Advisor’s senior management and investment team.
 
Term Sheet.  If the managing director determines, after review and consultation with senior management, that the potential transaction meets our Advisor’s initial credit standards, our Advisor will issue a non-binding term sheet to the prospective portfolio company.
 
The terms of the transaction are tailored to a prospective portfolio company’s specific funding needs while taking into consideration market dynamics, the quality of the management team, the venture capital and private equity investors involved and applicable credit criteria, which may include the prospective portfolio company’s existing cash resources, the development of its technology and the anticipated timing for the next round of equity financing.
 
Underwriting.  Once the term sheet has been negotiated and executed and the prospective portfolio company has remitted a good faith deposit, the managing director will request additional due diligence materials from the prospective portfolio company and arrange for a due diligence visit.
 
Our Advisor typically requests the following information as part of the underwriting process:
 
  •  annual and interim financial information;
 
  •  capitalization tables showing details of equity capital raised and ownership;
 
  •  recent presentations to investors or board members covering the portfolio company’s current status and market opportunity;
 
  •  detailed business plan, including an executive summary and discussion of market opportunity;
 
  •  detailed background on all members of management;
 
  •  articles and papers written about the prospective portfolio company and its market;
 
  •  detailed forecast for the current and subsequent fiscal year including monthly cash forecast;
 
  •  information on competitors and the prospective portfolio company’s competitive advantage;
 
  •  marketing information on the prospective portfolio company’s products, if any;
 
  •  information on the prospective portfolio company’s intellectual property; and


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  •  introduction to the prospective portfolio company’s scientific advisory board and industry thought leaders.
 
Due Diligence.  The due diligence process includes a formal visit to the prospective portfolio company’s location and interviews with the prospective portfolio company’s senior management team including its Chief Executive Officer, Chief Financial Officer, Chief Scientific or Technology Officer, principal marketing or sales professional and other key managers. The process includes contact with key analysts that affect the prospective portfolio company’s business, including analysts that follow the technology market, thought leaders in our Target Industries and important customers or partners, if any. Outside sources of information are reviewed, including industry publications, scientific and market articles, Internet publications, publicly available information on competitors or competing technologies and information known to our Advisor’s investment team from their experience in the technology markets.
 
A key element of the due diligence process is interviewing key existing investors in the prospective portfolio company, who are often also members of the prospective portfolio company’s board of directors. While these board members and/or investors are not independent sources of information, their support for management and willingness to support the prospective portfolio company’s further development are critical elements of our decision making process.
 
Investment Memorandum.  Upon completion of the due diligence process and review and analysis of all of the information provided by the prospective portfolio company and obtained externally, our Advisor’s assigned credit officer prepares an investment memorandum for review and approval.
 
The investment memorandum generally includes:
 
  •  an investment thesis;
 
  •  an overview of the prospective portfolio company and transaction;
 
  •  a discussion of how much of the investment is at risk;
 
  •  an analysis of why the investment is worth the risk;
 
  •  a discussion of risks and mitigants;
 
  •  a loan description;
 
  •  an overview of the prospective portfolio company’s market, competition, products, technology, sales pipeline, management, intellectual property, etc.;
 
  •  a discussion of venture capital and private equity sponsorship;
 
  •  summary financial results;
 
  •  projections and cash forecasts, including company forecasts and potential downside scenario projections; and
 
  •  an exit valuation.
 
The investment memorandum is reviewed by our Advisor’s senior credit officer and submitted to our Advisor’s investment committee for approval.
 
Investment Committee.  Our board of directors delegates authority for all investment decisions to our Advisor’s investment committee. Our Advisor’s investment committee has made investment decisions for Compass Horizon as well as other affiliated funds. The investment committee currently consists of Robert D. Pomeroy, Jr., Gerald A. Michaud, Daniel S. Devorsetz and Kevin T. Walsh.
 
Our Advisor’s investment committee will be responsible for overall credit policy, portfolio management, approval of all investments, portfolio monitoring and reporting and managing of problem accounts. The committee will interact with the entire staff of our Advisor to review potential transactions and deal flow. This interaction of cross-functional members of our Advisor’s staff assures efficient transaction sourcing, negotiating and underwriting throughout the transaction process. Portfolio performance and current market conditions will be reviewed and


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discussed by the investment committee on a regular basis to assure that transaction structures and terms are consistent and current.
 
The portfolio manager responsible for the account will present any proposed transaction to the investment committee at its committee meeting. Other deal team members from our Advisor are encouraged to participate in the committee meeting, bringing market, transaction and competitive information to the decision making process. The investment decision must be approved by a majority of the committee and by both Mr. Pomeroy and Mr. Michaud.
 
Loan Closing and Funding.  Approved investments are documented and closed by our Advisor’s in-house legal and loan administration staff. Loan documentation is based upon standard templates created by our Advisor and is customized for each transaction to reflect the specific deal terms. The transaction documents typically include a loan and security agreement, warrant agreement and applicable perfection documents, including Uniform Commercial Code financing statements, and, as applicable, may also include a landlord agreement, patent and trademark security grants, a subordination agreement and other standard agreements for commercial loans in the Technology Lending industry. Funding requires final approval by our Advisor’s General Counsel, Chief Executive Officer or President, Chief Financial Officer and Chief Credit Officer.
 
Portfolio Management and Reporting.  Our Advisor maintains a “hands on” approach to maintain communication with our portfolio companies. At least quarterly, our Advisor contacts our portfolio companies for operational and financial updates by phone and performs onsite reviews on an annual basis. Our Advisor may contact portfolio companies deemed to have greater credit risk on a monthly basis. Our Advisor requires all private companies to provide financial statements on a monthly basis. For public companies, our Advisor typically relies on publicly reported quarterly financials. Our Advisor also typically receives copies of bank and security statements, as well as any other information required to verify reported financial information. Among other things, this allows our Advisor to identify any unexpected developments in the financial performance or condition of the company.
 
Our Advisor has developed a proprietary credit rating system to analyze the quality of our loans. Using this system, our Advisor analyzes and then rates the credit risk within the portfolio on a monthly basis. Each portfolio company is rated on a 1 through 4 scale, with 3 representing the rating for a standard level of risk. A rating of 4 represents an improved and better credit quality. A rating of 2 or 1 represents a deteriorating credit quality and increasing risk. Newly funded investments are typically assigned a rating of 3, unless extraordinary circumstances require otherwise. These investment ratings are generated internally by our Advisor, and we cannot guarantee that others would assign the same ratings to our portfolio investments or similar portfolio investments.
 
Our Advisor closely monitors portfolio companies rated a 1 or 2 for adverse developments. In addition, our Advisor has regular contact with the management, board of directors and major equity holders of these portfolio companies in order to discuss strategic initiatives to correct the deterioration of the portfolio company (e.g., cost reductions, new equity issuance or strategic sale of the business).


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The table below describes each rating level:
 
     
Rating
   
 
4
  The portfolio company has performed in excess of our expectations at underwriting as demonstrated by exceeding revenue milestones, clinical milestones, or other operating metrics or as a result of raising capital well in excess of our underwriting assumptions. Generally the portfolio company displays one or more of the following: its enterprise value greatly exceeds our loan balance; it has achieved cash flow positive operations or has sufficient cash resources to cover the remaining balance of the loan; there is strong potential for warrant gains from our warrants; and there is a high likelihood that the borrower will receive favorable future financing to support operations. Loans rated 4 are the lowest risk profile in our portfolio and there is no expected risk of principal loss.
3
  The portfolio company has performed to our expectations at underwriting as demonstrated by hitting revenue milestones, clinical milestones, or other operating metrics. It has raised, or is expected to raise, capital consistent with our underwriting assumptions. Generally the portfolio company displays one or more of the following: its enterprise value comfortably exceeds our loan balance; it has sufficient cash resources to operate per its plan; it is expected to raise additional capital as needed; and there continues to be potential for warrant gains from our warrants. All new loans are rated 3 when approved and thereafter 3 rated loans represent a standard risk profile, with no loss currently expected.
2
  The portfolio company has performed below our expectations at underwriting as demonstrated by missing revenue milestones, delayed clinical progress, or otherwise failing to meet projected operating metrics. It may have raised capital in support of the poorer performance but generally on less favorable terms than originally contemplated at the time of underwriting. Generally the portfolio company displays one or more of the following: its enterprise value exceeds our loan balance but at a lower multiple than originally expected; it has sufficient cash to operate per its plan but liquidity may be tight; and it is planning to raise additional capital but there is uncertainty and the potential for warrant gains from our warrants are possible, but unlikely. Loans rated 2 represent an increased level of risk. While no loss is currently anticipated for a 2 rated loan, there is potential for future loss of principal.
1
  The portfolio company has performed well below plan as demonstrated by materially missing revenue milestones, delayed or failed clinical progress, or otherwise failing to meet operating metrics. The portfolio company has not raised sufficient capital to operate effectively or retire its debt obligation to us. Generally the portfolio company displays one or more of the following: its enterprise value may not exceed our loan balance; it has insufficient cash to operate per its plan and liquidity may be tight; and there are uncertain plans to raise additional capital or the portfolio company is being sold under distressed conditions. There is no potential for warrant gains from our warrants. Loans rated 1 are generally put on non-accrual and represent a high degree of risk of loss. The fair value of 1 rated loans is reduced to the amount that is expected to be recovered from liquidation of the collateral.
 
For a discussion of the ratings of our existing portfolio, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Portfolio Composition and Investment Activity.”
 
Managerial Assistance
 
As a business development company, we will offer, through our Advisor, and must provide upon request, managerial assistance to certain of our portfolio companies. This assistance may involve, among other things, monitoring the operations of the portfolio companies, participating in board of directors and management meetings, consulting with and advising officers of portfolio companies and providing other organizational and financial guidance.
 
We may receive fees for these services, though we may reimburse our Advisor for its expenses related to providing such services on our behalf.


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Competition
 
We compete for investments with other business development companies and investment funds, as well as traditional financial services companies such as commercial banks and other financing sources. Some of our competitors are larger and have greater financial, technical, marketing and other resources than we have. For example, some competitors may have a lower cost of funds and access to funding sources that are not available to us. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act will impose on us as a business development company or that the Code will impose on us as a RIC. We believe we compete effectively with these entities primarily on the basis of the experience, industry knowledge and contacts of our Advisor’s investment professionals, its responsiveness and efficient investment analysis and decision-making processes, its creative financing products and highly customized investment terms. We do not intend to compete primarily on the interest rates we offer and believe that some competitors make loans with rates that are comparable or lower than our rates. For additional information concerning the competitive risks see “Risk Factors — Risks Related to Our Business and Structure — We operate in a highly competitive market for investment opportunities, and if we are not able to compete effectively, our business, results of operations and financial condition may be adversely affected and the value of your investment in us could decline.”
 
Portfolio Turnover
 
We do not have a formal portfolio turnover policy and do not intend to adopt one.
 
Employees
 
We do not have any employees. Each of our executive officers described under “Management” below is an employee of our Advisor. The day-to-day investment operations will be managed by our Advisor. As of September 30, 2010, our Advisor had 13 employees, including investment and portfolio management professionals, operations and accounting professionals, legal counsel and administrative staff. In addition, we reimburse our Advisor for our allocable portion of expenses incurred by it in performing its obligations under the administration agreement, including our allocable portion of the cost of our Chief Financial Officer and Chief Compliance Officer and their respective staffs.
 
Properties
 
We do not own any real estate or other physical properties materially important to our operation. Our headquarters and our Advisor’s headquarters are currently located at 76 Batterson Park Road, Farmington, Connecticut 06032.
 
Legal Proceedings
 
Neither we nor our Advisor are currently subject to any material legal proceedings.


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PORTFOLIO COMPANIES
 
All of the investments listed below are currently direct or indirect assets of Compass Horizon and will become assets of the Company following the Share Exchange. Additionally, all of the loans listed below are currently performing and are unimpaired. Other than these investments, our only formal relationships with our portfolio companies are the managerial assistance that we may provide upon request and the board observer or participation rights we may receive in connection with our investment. We do not “control” and are not an “affiliate” of any of our portfolio companies, each as defined in the 1940 Act. In general, under the 1940 Act, we would “control” a portfolio company if we owned more than 25% of its voting securities and would be an “affiliate” of a portfolio company if we owned 5% or more of its voting securities.
 
The following table sets forth certain information for each portfolio company in which we had an investment as of September 30, 2010.
 
                                     
Name and Address of
              Maturity
    Cost of
       
Portfolio Company(1)
 
Target Industry — Sector
 
Type of Investment(2)
  Interest(3)   of Loans     Investment     Fair Value  
 
ACT Biotech, Inc.
717 Market Street, Suite 650
San Francisco, CA 94103
  Life Science — Biotechnology   Term Loan
Term Loan
Preferred Stock Warrants
  12.10%
12.01%
    6/1/13
6/1/13
    $ 1,000,000
1,000,000
23,437
    $ 1,000,000
1,000,000
23,210
 
Advanced BioHealing, Inc.
10933 N. Torrey Pines Rd.,
Suite 200
La Jolla, CA 92037
  Life Science — Biotechnology   Preferred Stock Warrants                 8,887       1,207,863  
Ambit Biosciences, Inc.
4215 Sorrento Valley Blvd.
San Diego, CA 92121
  Life Science — Biotechnology   Term Loan
Preferred Stock Warrants
  12.25%     10/1/13       6,000,000
142,943
      6,000,000
170,655
 
Anesiva, Inc.(4)
650 Gateway Boulevard
South San Francisco, CA 94080
  Life Science — Biotechnology   Common Stock Warrants                 18,233        
Arcot Systems, Inc.
455 West Maude Avenue
Sunnyvale, CA 94085
  Technology — Software   Preferred Stock Warrants                 5,001       132,026  
BioScale, Inc.
75 Sidney Street
Cambridge, MA 02139
  Healthcare Information and
Services — Diagnostics
  Term Loan
Preferred Stock Warrants
  12.00%     8/1/12       2,809,660
12,786
      2,809,660
7,146
 
Calypso Medical
Technologies, Inc.
2101 Fourth Avenue, Suite 500
Seattle, WA 98121
  Life Science — Medical Device   Preferred Stock Warrants                 17,047       89,626  
Cartera Commerce, Inc.
One Cranberry Hill, Suite 403
Lexington, MA 02421
  Technology — Internet and
Media
  Term Loan
Preferred Stock Warrants
  11.75%     6/1/12       1,825,128
16,155
      1,825,128
36,708
 
Clarabridge, Inc.
11400 Commerce Park Drive,
Suite 500
Reston, VA 20191
  Technology — Software   Term Loan
Term Loan
Preferred Stock Warrants
  12.50%
12.50%
    1/1/13
6/1/13
      1,304,352
750,000
27,700
      1,304,352
750,000
23,906
 
Concentric Medical, Inc.
301 East Evelyn Avenue
Mountain View, CA 94041
  Life Science — Medical Device   Term Loan
Preferred Stock Warrants
  12.04%     9/1/13       7,000,000
84,497
      7,000,000
84,703
 
Courion Corporation
1881 Worcester Road
Framingham, MA 01701
  Technology — Software   Term Loan
Preferred Stock Warrants
  11.45%     12/1/11       1,338,879
6,715
      1,338,879
23,242
 
DriveCam, Inc.
8911 Balboa Ave.
San Diego, CA 92123
  Technology — Software   Preferred Stock Warrants                 19,670       7,355  
Enphase Energy, Inc.
201 1st Street, Suite 300
Petaluma, CA 94952
  Technology — Energy Efficiency   Term Loan
Preferred Stock Warrants
  12.60%     10/1/13       7,000,000
122,053
      7,000,000
115,327
 
EnteroMedics, Inc.(4)
2800 Patton Road
Saint Paul, MN 55113
  Life Science — Medical Device   Common Stock Warrants                 346,795       1,224  
Everyday Health, Inc.
45 Main Street
Brooklyn, NY 11201
  Technology — Consumer-related
Technologies
  Preferred Stock Warrants                 68,658       82,377  


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Name and Address of
              Maturity
    Cost of
       
Portfolio Company(1)
 
Target Industry — Sector
 
Type of Investment(2)
  Interest(3)   of Loans     Investment     Fair Value  
 
Genesis Networks, Inc.
One Penn Plaza, Suite 2010
New York, NY 10119
  Technology — Networking   Term Loan
Preferred Stock Warrants
  15.00%     11/1/12       4,000,000
81,670
      3,790,116
1
 
Grab Networks, Inc.
21000 Atlantic Boulevard
Dulles, VA 20166
  Technology — Networking   Preferred Stock Warrants                 73,866       22  
Hatteras Networks, Inc.
523 Davis Drive, Suite 500
Durham, NC 27713
  Technology — Communications   Term Loan
Preferred Stock Warrants
  12.40%     2/1/11       1,410,151
660
      1,410,151
33,861
 
Impinj, Inc.
701 N. 34th Street, Suite 300
Seattle, WA 98103
  Technology — Semiconductor   Preferred Stock Warrants                 7,348        
IntelePeer, Inc.
2855 Campus Drive, Suite 200
San Mateo, CA 94403
  Technology — Networking   Term Loan
Term Loan
Term Loan
Preferred Stock Warrants
  12.43%
12.33%
12.33%
    4/1/12
6/1/12
10/1/12
      610,083
691,729
1,323,040
39,384
      610,083
691,729
1,323,040
49,426
 
iSkoot, Inc.
501 2nd Street, Suite 216
San Francisco, CA 94107
  Technology — Software   Term Loan
Preferred Stock Warrants
  12.75%     5/1/13       4,000,000
59,329
      4,000,000
693
 
Motion Computing, Inc.
8601 RR 2222, Building II
Austin, TX 78730
  Technology — Networking   Preferred Stock Warrants                 7,046       330,910  
Netuitive, Inc.
12700 Sunrise Valley Drive
Reston, VA 20191
  Technology — Software   Term Loan
Preferred Stock Warrants
  12.90%     4/1/11       262,797
27,287
      262,797
16,379
 
Novalar Pharmaceuticals, Inc.
12555 High Bluff Drive
Suite 300
San Diego, CA 92130
  Life Science — Biotechnology   Term Loan
Preferred Stock Warrants
  12.00%     6/1/12       3,653,363
69,249
      3,653,363
 
OpenPeak, Inc.
1750 Clint Moore Road
Boca Raton, FL 33487
  Technology — Communications   Term Loan
Preferred Stock Warrants
  11.86%     12/1/13       6,666,667
89,399
      6,666,667
88,539
 
OraMetrix, Inc.
2350 Campbell Creek Blvd, Suite 400
Richardson, TX 75082
  Life Science — Medical Device   Term Loan
Preferred Stock Warrants
  11.50%     4/1/14       5,000,000
77,773
      5,000,000
77,773
 
Pharmasset, Inc.(4)
303-A College Road East
Princeton, NJ 08540
  Life Science — Biotechnology   Term Loan
Term Loan
Term Loan
Common Stock Warrants
  12.00%
12.00%
12.50%
    8/1/11
1/1/12
10/1/12
      1,223,317
1,790,816
2,746,891
251,247
      1,223,317
1,790,816
2,746,891
792,394
 
PixelOptics, Inc.
5241 Valleypark Drive
Roanoke, VA 24019
  Life Science — Medical Device   Term Loan
Preferred Stock Warrants
  13.00%     1/1/13       4,714,580
61,131
      4,714,580
68,051
 
Plateau Systems, Ltd.
4401 Wilson Boulevard
Suite 400
Arlington, VA 22203
  Technology — Software   Preferred Stock Warrants                 7,348       33,202  
Precision Therapeutics, Inc.
2516 Jane Street
Pittsburgh, PA 15203
  Healthcare Information and
Services — Diagnostics
  Term Loan
Preferred Stock Warrants
  13.00%     3/1/12       3,868,485
52,075
      3,868,485
147,607
 
Radisphere National Radiology Group, Inc.
23625 Commerce Park, Suite 204
Beachwood, OH 44122
  Healthcare Information and
Services — Diagnostics
  Term Loan
Preferred Stock Warrants
  12.75%     1/1/14       10,000,000
180,331
      10,000,000
389,374
 
Revance Therapeutics, Inc.
2400 Bayshore Parkway,
Suite 100
Mountain View, CA 94043
  Life Science — Biotechnology   Term Loan
Term Loan
Preferred Stock Warrants
  10.50%
10.50%
    12/1/11
3/1/13
      1,806,255
3,878,356
223,789
      1,806,255
3,878,356
115,544
 
Satcon Technology Corporation
27 Drydock Avenue
Boston, MA 02210
  Cleantech — Energy Efficiency   Term Loan
Common Stock Warrants
  12.58%
    1/1/14
      10,000,000
285,415
      10,000,000
708,290
 

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Name and Address of
              Maturity
    Cost of
       
Portfolio Company(1)
 
Target Industry — Sector
 
Type of Investment(2)
  Interest(3)   of Loans     Investment     Fair Value  
 
SnagAJob.com, Inc.
4880 Cox Road
Suite 200
Glen Allen, VA 23060
  Technology — Consumer-related
Technologies
  Term Loan
Preferred Stock Warrants
  11.50%     6/1/12       2,553,001
22,618
      2,553,001
37,187
 
Starcite, Inc.
1650 Arch Street
Philadelphia, PA 19103
  Technology — Consumer-related
Technologies
  Term Loan
Preferred Stock Warrants
  12.05%     9/1/12       3,036,398
23,579
      3,036,398
26,562
 
StreamBase Systems, Inc.
181 Spring Street
Lexington, MA 02421
  Technology — Software   Term Loan
Preferred Stock Warrants
  12.51%     11/1/13       4,000,000
67,050
      4,000,000
66,405
 
Tagged, Inc.
840 Battery Street, 2nd Floor
San Francisco, CA 94111
  Technology — Consumer-related
Technologies
  Term Loan
Term Loan
Preferred Stock Warrants
  12.78%
11.46%
    5/1/12
8/1/12
      1,506,697
570,420
16,586
      1,506,697
570,420
18,151
 
Talyst, Inc.
11100 NE 8th Street, Suite 600
Bellevue, WA 98004
  Life Science — Other Healthcare
Services
  Term Loan
Term Loan
Preferred Stock Warrants
  12.10%
12.05%
    12/1/13
12/1/13
      2,500,000
2,500,000
100,488
      2,500,000
2,500,000
98,851
 
Tengion, Inc.
2900 Potshop Lane, Suite 100
East Norriton, PA 19403
  Life Science — Medical Device   Term Loan
Preferred Stock Warrants
  12.26%     9/1/11       3,603,330
15,276
      3,603,330
11
 
Transave, Inc.
11 Deer Park Drive, Suite 117
Monmouth Junction, NJ 08852
  Life Science — Biotechnology   Term Loan
Term Loan
Convertible Note
Convertible Note
Preferred Stock Warrants
  11.75%
11.75%
10.00%
10.00%
    2/29/12
7/1/12
6/30/10
6/30/10
      1,904,033
1,522,455
109,407
105,989
11,974
      1,904,033
1,522,455
109,407
105,989
32,579
 
Tranzyme, Inc.
4819 Emperor Blvd., Suite 400
Durham, NC 27703
  Life Science — Biotechnology   Term Loan
Preferred Stock Warrants
  10.75%     1/1/14       5,000,000
1,196
      5,000,000
1,196
 
Vette Corp.
14 Manchester Square, Suite 210
Portsmouth, NH 03801
  Technology — Data Storage   Term Loan
Preferred Stock Warrants
  11.85%     3/1/12       3,174,838
26,638
      3,174,838
119
 
ViOptix, Inc.
47224 Mission Falls Ct.
Fremont, CA 94539
  Life Science — Medical Device   Term Loan
Preferred Stock Warrants
  13.55%     11/1/11       1,112,439
12,924
      974,603
 
XIOtech, Inc.
6455 Flying Cloud Drive
Eden Prairie, MN 55344
  Technology — Data Storage   Term Loan
Preferred Stock Warrants
  12.50%     8/1/11       3,473,510
22,045
      3,473,510
78,610
 
Xcovery Holding Company LLC
505 S. Flagler Drive, Suite 1330
West Palm Beach, FL 33401
  Life Science — Biotechnology   Term Loan   12.00%     10/1/13       1,500,000       1,500,000  
Xoft, Inc.
345 Potrero Avenue
Sunnyvale, CA 94085
  Life Science — Medical Device   Preferred Stock Warrants                 13,265        
                                     
Total Investments
                      $ 138,695,629     $ 140,716,451  
                                     
 
 
(1) Debt and warrant investments have been pledged as collateral under the Credit Facility.
(2) All investments are less than 5% ownership of the class and ownership of the portfolio company.
(3) All interest is payable in cash due monthly in arrears, unless otherwise indicated and applies only to our debt investments. Amount is the annual interest rate on the debt investment and does not include any additional fees related to the investment such as commitment fees or prepayment fees. The majority of the debt investments are at fixed rates for the term of the loan. For each debt investment we have provided the current interest rate in effect as of September 30, 2010. For variable rate debt investments we have also provided the reference index plus the applicable spread which resets monthly.
(4) Portfolio company is a public company.

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The following table sets forth certain information for each portfolio company in which we had an investment as of December 31, 2009.
 
                                     
Name and Address of
              Maturity
    Cost of
       
Portfolio Company(1)
 
Target Industry — Sector
 
Type of Investment(2)
  Interest(3)   of Loans     Investment     Fair Value  
 
Advanced BioHealing, Inc.
10933 N. Torrey Pines Rd.,
Suite 200
La Jolla, CA 92037
  Life Science — Biotechnology   Preferred Stock Warrants               $ 8,887     $ 41,836  
Ambit Biosciences, Inc.
4215 Sorrento Valley Blvd.
San Diego, CA 92121
  Life Science — Biotechnology   Term Loan
Preferred Stock Warrants
  12.15%     6/1/11       1,271,672
17,403
      1,271,672
54,612
 
Anesiva, Inc.(4)
650 Gateway Boulevard
South San Francisco, CA 94080
  Life Science — Biotechnology   Common Stock Warrants                 18,233        
Arcot Systems, Inc.
455 West Maude Avenue
Sunnyvale, CA 94085
  Technology — Software   Preferred Stock Warrants                 5,001       57,074  
BioScale, Inc.
75 Sidney Street
Cambridge, MA 02139
  Healthcare Information and
Services — Diagnostics
  Term Loan
Preferred Stock Warrants
  12.00%     8/1/12       3,793,151
12,786
      3,527,630
32,956
 
Calypso Medical
Technologies, Inc.
2101 Fourth Avenue, Suite 500
Seattle, WA 98121
  Life Science — Medical Device   Preferred Stock Warrants                 17,047       74,699  
Cartera Commerce, Inc.
One Cranberry Hill, Suite 403
Lexington, MA 02421
  Technology — Internet and
media
  Term Loan
Preferred Stock Warrants
  11.75%     6/1/12       2,500,000
16,155
      2,500,000
34,932
 
Clarabridge, Inc.
11400 Commerce Park Drive,
Suite 500
Reston, VA 20191
  Technology — Software   Term Loan
Term Loan
Preferred Stock Warrants
  12.50%
12.50%
    1/1/13
6/1/13
      1,500,000
750,000
27,700
      1,500,000
750,000
31,439
 
Concentric Medical, Inc.
301 East Evelyn Avenue
Mountain View, CA 94041
  Life Science — Medical Device   Revolving Loan

Preferred Stock Warrants
  10.00%
(Prime + 3.25)%
    7/1/10       3,333,334

9,402
      3,333,334

10,856
 
Courion Corporation
1881 Worcester Road
Framingham, MA 01701
  Technology — Software   Term Loan
Preferred Stock Warrants
  11.45%     12/1/11       2,055,297
6,715
      2,055,297
16,395
 
DriveCam, Inc.
8911 Balboa Ave.
San Diego, CA 92123
  Technology — Software   Preferred Stock Warrants                 19,670       15,208  
EnteroMedics, Inc.(4)
2800 Patton Road
Saint Paul, MN 55113
  Life Science — Medical Device   Common Stock Warrants                 346,795       10,370  
F & S Health Care Services, Inc.
23625 Commerce Park, Suite 204
Beachwood, OH 44122
  Healthcare Information and
Services — Diagnostics
  Term Loan
Preferred Stock Warrants
  11.80%     12/1/12       7,500,000
32,148
      7,500,000
104,848
 
Genesis Networks, Inc.
One Penn Plaza, Suite 2010
New York, NY 10119
  Technology — Networking   Term Loan
Preferred Stock Warrants
  11.80%     8/1/12       4,000,000
53,563
      3,600,000
20
 
Grab Networks, Inc.
21000 Atlantic Boulevard
Dulles, VA 20166
  Technology — Networking   Term Loan
Preferred Stock Warrants
  13.00%     4/1/12       3,655,638
73,866
      3,655,638
83,838
 
Hatteras Networks, Inc.
523 Davis Drive, Suite 500
Durham, NC 27713
  Technology — Communications   Term Loan
Preferred Stock Warrants
  12.40%     2/1/11       2,451,010
660
      2,451,010
35,009
 
Impinj, Inc.
701 N. 34th Street, Suite 300
Seattle, WA 98103
  Technology — Semiconductor   Term Loan

Preferred Stock Warrants
  11.50%
(Prime + 4.25)%
    1/1/11       866,667

7,348
      866,667

34,329
 


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Name and Address of
              Maturity
    Cost of
       
Portfolio Company(1)
 
Target Industry — Sector
 
Type of Investment(2)
  Interest(3)   of Loans     Investment     Fair Value  
 
IntelePeer, Inc.
2855 Campus Drive, Suite 200
San Mateo, CA 94403
  Technology — Networking   Term Loan
Term Loan
Term Loan
Preferred Stock Warrants
  12.43%
12.33%
12.33%
    4/1/12
6/1/12
10/1/12
      857,704
943,224
1,718,073
39,384
      857,704
943,224
1,718,073
52,399
 
iSkoot, Inc.
501 2nd Street, Suite 216
San Francisco, CA 94107
  Technology — Software   Term Loan
Preferred Stock Warrants
  12.75%     5/1/13       4,000,000
59,329
      4,000,000
59,329
 
Motion Computing, Inc.
8601 RR 2222, Building II
Austin, TX 78730
  Technology — Networking   Term Loan
Term Loan
Preferred Stock Warrants
  12.25%
12.25%
    4/1/11
1/1/12
      1,427,626
2,134,388
8,808
      1,427,626
2,134,388
464,748
 
Netuitive, Inc.
12700 Sunrise Valley Drive
Reston, VA 20191
  Technology — Software   Term Loan
Preferred Stock Warrants
  12.90%     4/1/11       573,026
27,287
      573,026
42,675
 
NewRiver, Inc.
200 Brickstone Square, 5th Floor
Andover, MA 01810
  Technology — Software   Term Loan   11.60%     1/1/12       3,410,859       3,410,859  
Novalar Pharmaceuticals, Inc.
12555 High Bluff Drive
Suite 300
San Diego, CA 92130
  Life Science — Biotechnology   Term Loan
Preferred Stock Warrants
  12.00%     6/1/12       4,856,259
69,249
      4,856,259
78,598
 
Pharmasset, Inc.(4)
303-A College Road East
Princeton, NJ 08540
  Life Science — Biotechnology   Term Loan
Term Loan
Term Loan
Common Stock Warrants
  12.00%
12.00%
12.50%
    8/1/11
1/1/12
10/1/12
      2,224,917
2,743,804
3,333,333
251,247
      2,224,917
2,743,804
3,333,333
437,046
 
PixelOptics, Inc.
5241 Valleypark Drive
Roanoke, VA 24019
  Life Science — Medical Device   Term Loan
Preferred Stock Warrants
  13.00%     1/1/13       5,000,000
61,131
      5,000,000
61,131
 
Plateau Systems, Ltd.
4401 Wilson Boulevard
Suite 400
Arlington, VA 22203
  Technology — Software   Term Loan
Preferred Stock Warrants
  12.40%     9/1/10       743,743
7,348
      743,743
34,328
 
Precision Therapeutics, Inc.
2516 Jane Street
Pittsburgh, PA 15203
  Healthcare Information and
Services — Diagnostics
  Term Loan
Preferred Stock Warrants
  13.00%     3/1/12       5,000,000
52,075
      5,000,000
61,132
 
Revance Therapeutics, Inc.
2400 Bayshore Parkway,
Suite 100
Mountain View, CA 94043
  Life Science — Biotechnology   Term Loan
Preferred Stock Warrants
  10.50%     12/1/11       2,780,564
155,399
      2,780,564
49,433
 
SnagAJob.com, Inc.
4880 Cox Road
Suite 200
Glen Allen, VA 23060
  Technology — Consumer-related
technologies
  Term Loan
Preferred Stock Warrants
  11.50%     6/1/12       3,500,000
22,618
      3,500,000
38,448
 
Starcite, Inc.
1650 Arch Street
Philadelphia, PA 19103
  Technology — Consumer-related
technologies
  Term Loan
Preferred Stock Warrants
  12.05%     9/1/12       4,000,000
23,579
      4,000,000
27,463
 
Tagged, Inc.
840 Battery Street, 2nd Floor
San Francisco, CA 94111
  Technology — Consumer-related
technologies
  Term Loan
Term Loan
Preferred Stock Warrants
  12.78%
11.46%
    5/1/12
8/1/12
      2,121,216
750,000
16,586
      2,121,216
750,000
26,776
 
Tengion, Inc.
2900 Potshop Lane, Suite 100
East Norriton, PA 19403
  Life Science — Medical Device   Term Loan
Preferred Stock Warrants
  12.26%     9/1/11       5,772,622
15,276
      5,772,622
50,413
 
Transave, Inc.
11 Deer Park Drive, Suite 117
Monmouth Junction, NJ 08852
  Life Science — Biotechnology   Term Loan
Term Loan
Convertible Note
Preferred Stock Warrants
  11.75%
11.75%
10.00%
    2/29/12
7/1/12
6/30/10
      2,737,903
2,000,000
101,907
11,964
      2,737,903
2,000,000
101,907
44,604
 
Vette Corp.
14 Manchester Square, Suite 210
Portsmouth, NH 03801
  Technology — Data Storage   Term Loan
Preferred Stock Warrants
  11.85%     3/1/12       4,563,684
26,638
      4,563,684
68,658
 

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Name and Address of
              Maturity
    Cost of
       
Portfolio Company(1)
 
Target Industry — Sector
 
Type of Investment(2)
  Interest(3)   of Loans     Investment     Fair Value  
 
ViOptix, Inc.
47224 Mission Falls Ct.
Fremont, CA 94539
  Life Science — Medical Device   Term Loan
Preferred Stock Warrants
  13.55%     11/1/11       1,740,569
12,924
      1,640,137
21,970
 
Everyday Health, Inc.
45 Main Street
Brooklyn, NY 11201
  Technology — Consumer-related
technologies
  Term Loan
Preferred Stock Warrants
  13.00%     5/1/13       5,000,000
68,658
      5,000,000
68,658
 
XIOtech, Inc.
6455 Flying Cloud Drive
Eden Prairie, MN 55344
  Technology — Data Storage   Term Loan
Preferred Stock Warrants
  12.50%     8/1/11       4,510,984
22,045
      4,510,984
80,544
 
Xoft, Inc.
345 Potrero Avenue
Sunnyvale, CA 94085
  Life Science — Medical Device   Revolving Loan

Preferred Stock Warrants
  11.25%
(Prime + 4.25)%
    11/15/10       348,535

13,265
      348,535

50,906
 
                                     
Total Investments
                      $ 114,209,898     $ 114,263,436  
                                     
 
 
(1) Debt and warrant investments have been pledged as collateral under the Credit Facility.
(2) All investments are less than 5% ownership of the class and ownership of the portfolio company.
(3) All interest is payable in cash due monthly in arrears, unless otherwise indicated and applies only to our debt investments. Amount is the annual interest rate on the debt investment and does not include any additional fees related to the investment such as commitment fees or prepayment fees. The majority of the debt investments are at fixed rates for the term of the loan. For each debt investment we have provided the current interest rate in effect as of December 31, 2009. For variable rate debt investments we have also provided the reference index plus the applicable spread which resets monthly.
(4) Portfolio company is a public company.

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SENIOR SECURITIES
 
Information about our senior securities is shown in the following table as of September 30, 2010, December 31, 2009 and December 31, 2008. The information contained in the table for the years ended December 31, 2009 and 2008 has been derived from our financial statements which have been audited by McGladrey & Pullen, LLP and the information contained in the table in respect of September 30, 2010 has been derived from unaudited financial data. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Borrowings” for more detailed information regarding the senior securities.
 
                         
    Total Amount
             
    Outstanding
          Average
 
    Exclusive of
    Asset
    Market
 
    Treasury
    Coverage
    Value
 
Class and Year
  Securities(1)     per Unit(2)     per Unit(3)  
    (dollar amounts
             
    in millions)              
 
Revolving Credit Facility with WestLB AG
                       
2010 (as of September 30, 2010)
  $ 88.9     $ 1,788       N/A  
2009
  $ 64.2     $ 1,927       N/A  
2008
  $ 63.7     $ 1,781       N/A  
 
 
(1) Total amount of senior securities outstanding at the end of the period presented.
(2) Asset coverage per unit is the ratio of our total assets, less all liabilities and indebtedness not represented by senior securities, to the aggregate amount of senior securities representing indebtedness. Asset coverage per unit is expressed in terms of dollar amounts per $1,000 of indebtedness.
(3) Not applicable because senior securities are not registered for public trading.


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MANAGEMENT
 
Our business and affairs will be managed under the direction of our board of directors. Our board of directors currently consists of three members. Prior to the completion of this offering, and as of the date we elect to be regulated as a business development company, we intend to elect additional directors, and following this offering our board of directors will consist of seven members, four of whom are not “interested persons” of our Company or of our Advisor as defined in Section 2(a)(19) of the 1940 Act and are “independent” as determined by our board of directors, consistent with the rules of the NASDAQ Global Market. We refer to these individuals as our “independent directors.” Our board of directors elects our officers, who serve at the discretion of the board of directors.
 
Board of Directors and Executive Officers
 
Under our certificate of incorporation, to be effective prior to the completion of this offering, our directors will be divided into three classes. Each class of directors will hold office for a three-year term. However, the initial members of the three classes will have initial terms of one, two and three years, respectively. At each annual meeting of our stockholders, the successors to the class of directors whose terms expire at such meeting will be elected to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election. This classification of our board of directors may have the effect of delaying or preventing a change in control of our management. Each director will hold office for the term to which he or she is elected and until his or her successor is duly elected and qualifies. Our certificate of incorporation, to be effective prior to the completion of this offering, will permit the board of directors to elect directors to fill vacancies that are created either through an increase in the number of directors or due to the resignation, removal or death of any director.
 
Directors
 
Information regarding our board of directors is set forth below. We have divided the directors into two groups — independent directors and interested directors. Interested directors are “interested persons” of the company as defined in Section 2(a)(19) of the 1940 Act.
 
                             
              Director
    Expiration
 
Interested Directors
  Age    
Position
  Since     of Term  
 
Robert D. Pomeroy, Jr.(1)
    59     Chief Executive Officer and Chairman
of the Board of Directors
    2010       2013  
Gerald A. Michaud(1)
    58     President and Director     2010       2012  
David P. Swanson(2)
    37     Director     2010       2011  
 
 
(1) Interested person of the Company due to his position as an officer of the Company.
(2) Mr. Swanson is an interested person of the Company due to his position as Partner of Compass Group Management LLC, which we refer to as “The Compass Group.”
 
                             
              Director
    Expiration
 
Independent Directors
  Age    
Position
  Since     of Term  
 
James J. Bottiglieri
    54