The first few months of the period witnessed a
continuation of the strong performance of risk assets from the depths of the pandemic lows set in 2020. Sentiment around inflation and
interest rates changed dramatically in the fall of 2021 creating an environment of fixed income volatility that continued through the
end of the fiscal year. The Fund’s allocation to under-followed, unique specialty finance assets such as small business whole loans,
and BDCs contributed positively to performance over the year. Exposure to investment company debt ("ICD") and CEF NAVs detracted
from performance over the period.
The Fund allocated 44% of its portfolio to small
business whole loans originated by Square Capital. This is a unique, high income, short duration asset that we believe adds a strong degree
of diversification to a portfolio of more traditional fixed income assets. Additionally, the Fund had 28% of its assets in ICD, 12% in
SPACs and ~10% in CEFs and business development companies (BDCs).
The graph below illustrates the growth of a hypothetical
$1,000,000 investment assuming the purchase of common shares at the NAV of $25.00 on September 22, 2016 (commencement of operations) and
tracking its progress through June 30, 2022.
1. ORGANIZATION
RiverNorth Specialty Finance Corporation (the
“Fund”) (formerly known as RiverNorth Marketplace Lending Corporation) was organized as a Maryland corporation on June 9,
2015, and is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as a diversified closed-end
management investment company. The investment adviser to the Fund is RiverNorth Capital Management, LLC (the “Adviser”).
The Fund is operated as an interval fund under
Rule 23c-3 of the 1940 Act. As an interval fund, the Fund has adopted a fundamental policy to conduct quarterly repurchase offers for
at least 5% and up to 25% of the outstanding shares at net asset value (“NAV”), subject to certain conditions. The Fund will
not otherwise be required to repurchase or redeem shares at the option of a shareholder. It is possible that a repurchase offer may be
oversubscribed, in which case shareholders may only have a portion of their shares repurchased.
Effective as of June 12, 2019, the Fund listed
its common shares on the NYSE under the ticker symbol “RSF” and has ceased continuously offering shares of its common stock
through Quasar Distributors, LLC or the Fund.
The investment objective of the Fund is to seek
a high level of current income. Under normal market conditions, the Fund seeks to achieve its investment objective by investing in credit
instruments, including a portfolio of securities of specialty finance and other financial companies that the Adviser believes offer attractive
opportunities for income.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting
policies followed by the Fund. These policies are in conformity with generally accepted accounting principles in the United States of
America (“GAAP”). The financial statements are prepared in accordance with GAAP, which requires management to make estimates
and assumptions that affect the reported amounts and disclosures, including the disclosure of contingent assets and liabilities, in the
financial statements during the reporting period. Management believes the estimates and security valuations are appropriate; however,
actual results may differ from those estimates, and the security valuations reflected in the financial statements may differ from the
value the Fund ultimately realizes upon sale of the securities. The Fund is considered an investment company for financial reporting purposes
under GAAP and follows the accounting and reporting guidance applicable to investment companies as codified in Accounting Standards Codification
(“ASC”) 946 – Investment Companies. The financial statements have been prepared as of the close of the NYSE on
June 30, 2022.
As of and during the year ended June 30, 2022,
the Fund did not have a liability for any unrecognized tax benefits. The Fund files U.S. federal, state, and local tax returns as required.
The Fund’s tax returns are subject to examination by the relevant tax authorities until expiration of the applicable statute of
limitations, which is generally three years after the filing of the tax return for federal purposes and four years for most state returns.
Tax returns for open years have incorporated no uncertain tax positions that require a provision for income taxes.
The Fund recognizes interest and penalties, if
any, related to unrecognized tax benefits as income tax expenses on the Statement of Operations. During the year ended June 30, 2022,
the Fund did not incur any interest or penalties.
3. SECURITIES VALUATION AND FAIR VALUE MEASUREMENTS
Fair value is defined as the price that the Fund
might reasonably expect to receive upon selling an investment in a timely transaction to an independent buyer in the principal or most
advantageous market for the investment. U.S. GAAP establishes a three-tier hierarchy to maximize the use of observable market data and
minimize the use of unobservable inputs and to establish classification of fair value measurements for disclosure purposes.
Inputs refer broadly to the assumptions that market
participants would use in pricing the asset or liability, including assumptions about risk, for example, the risk inherent in a particular
valuation technique used to measure fair value including using such a pricing model and/or the risk inherent in the inputs to the valuation
technique. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would
use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity. Unobservable
inputs are inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing
the asset or liability developed based on the best information available in the circumstances.
Various inputs are used in determining the value
of the Fund’s investments. These inputs are summarized in the three broad levels listed below.
The inputs used to measure fair value may fall
into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within
which the fair value measurement falls in its entirety is determined based on the lowest level input that is significant to the fair value
measurement in its entirety.
Small business loans, as an asset class, are not
presently traded on a developed secondary market. Therefore, market quotations are not available. Accordingly, all small business loans
are fair valued as determined in good faith by the Adviser pursuant to policies and procedures approved by the Board of Directors (the
“Board”) and subject to the Board’s oversight. The Fund's holdings in small business loans are fair valued daily by
the Adviser using a discounted cash flow methodology. Discounted cash flow is a valuation technique that provides an estimation of the
fair value of an asset based on expectations about cash flows that a small business loan would generate over time. In general, the primary
inputs of fair value in the small business loan valuation model are expected future default rates, prepayment rates, and the discount
rate applied. A discounted cash flow model begins with an estimation of periodic cash flows expected to be generated over a discrete period
of time (generally the time remaining until maturity of the loan). The estimated cash flows for each interval period (generally monthly)
are then converted to their present value equivalent using a rate of return appropriate for the risk of achieving projected cash flows.
Although not exhaustive, discounted cash flow models factor in borrower level data. Loans made to small businesses may incorporate different
factors.
The Board will initially and periodically review
the methodology used in determining the values of small business loans. The Board will further consider how changes in the markets may
affect the factors utilized in the models and the frequency of reevaluation.
Equity securities, including closed-end funds,
special purpose acquisition companies, business development companies and business development company notes, are generally valued by
using market quotations, but may be valued on the basis of prices furnished by a pricing service when the Adviser believes such prices
more accurately reflect the fair market value of such securities. Securities that are traded on any stock exchange are generally valued
by the pricing service at the last quoted sale price. Lacking a last sale price, an exchange traded security is generally valued by the
pricing service at its mean price. Securities traded in the NASDAQ over-the-counter market are generally valued by the pricing service
at the NASDAQ Official Closing Price.
The following is a summary of the inputs used at June 30, 2022 in valuing
the Fund’s assets and liabilities:
The changes of the fair value of investments for which the Fund has
used Level 3 inputs to determine the fair value are as follows:
The table below provides additional information about the Level 3 Fair
Value Measurements as of June 30, 2022:
For its services under the Investment Advisory
Agreement (“Advisory Agreement”), the Fund pays the Adviser a monthly management fee computed at the annual rate of 1.25%
of the average monthly Managed Assets. “Managed Assets” means the total assets of the Fund, including assets attributable
to leverage, minus liabilities (other than debt representing leverage and any preferred stock that may be outstanding). In addition to
the monthly advisory fee, the Fund pays all other costs and expenses of its operations, including, but not limited to, compensation of
its directors (other than those affiliated with the Adviser), custodial expenses, transfer agency and dividend disbursing expenses, legal
fees, expenses of independent auditors, expenses of repurchasing shares, expenses of any leverage, expenses of preparing, printing and
distributing prospectuses, shareholder reports, notices, proxy statements and reports to governmental agencies, and taxes, if any. In
addition, the Adviser has agreed to waive or reimburse expenses of the Fund (other than brokerage fees and commissions; loan servicing
fees; borrowing costs such as (i) interest and (ii) dividends on securities sold short; taxes; indirect expenses incurred by the underlying
funds in which the Fund may invest; the cost of leverage; and extraordinary expenses) to the extent necessary to limit the Fund’s
total annual operating expenses at 1.95% of the average daily Managed Assets for that period through October 28, 2022. The Adviser may
recover from the Fund expenses reimbursed for three years after the date of the payment or waiver if the Fund’s operating expenses,
including the recovered expenses, falls below the expense cap. For the year ended June 30, 2022, the Adviser recouped $60,308 of previously
reimbursed expenses. These amounts represent expenses previously waived due to the expense cap. In future periods, the Adviser may recoup
fees as follows:
ALPS Fund Services, Inc. (“ALPS”)
provides the Fund with fund administration and fund accounting services. As compensation for its services to the Fund, ALPS receives an
annual fee based on the Fund’s average daily net assets, subject to certain minimums.
State Street Bank & Trust, Co. and Millennium Trust Company serve
as the Fund's custodians.
DST Systems, Inc. (“DST”), the parent
company of ALPS, serves as the Transfer Agent to the Fund. Under the Transfer Agency Agreement, DST is responsible for maintaining all
shareholder records of the Fund. DST is a wholly-owned subsidiary of SS&C Technologies Holdings, Inc. (“SS&C”), a
publicly traded company listed on the NASDAQ Global Select Market.
The Fund pays no salaries or compensation to its
officers or to any interested Director employed by the Adviser, and the Fund has no employees. For their services, the Directors of the
Fund who are not employed by the Adviser, receive an annual retainer in the amount of $16,500, and an additional $1,500 for attending
each quarterly meeting of the Board. In addition, the lead Independent Director receives $250 annually, the Chair of the Audit Committee
receives $500 annually and the Chair of the Nominating and Corporate Governance Committee receives $250 annually. The Directors employed
by the Adviser are also reimbursed for all reasonable out-of-pocket expenses relating to attendance at meetings of the Board.
The Chief Compliance Officer (“CCO”)
of the Fund is an employee of the Adviser. The Fund reimburses the Adviser for certain compliance costs related to the Fund, including
a portion of the CCO's compensation.
In December 2020, the SEC voted to adopt a new
rule providing a framework for fund valuation practices (“Rule 2a-5”). Rule 2a-5 establishes requirements for determining
fair value in good faith for purposes of the 1940 Act. Rule 2a-5 will permit fund boards to designate certain parties to perform fair
value determinations, subject to board oversight and certain other conditions. Rule 2a-5 also defines when market quotations are “readily
available” for purposes of Section 2(a)(41) of the 1940 Act, which requires a fund to fair value a security when market quotations
are not readily available, and the threshold for determining whether a fund must fair value a security. The SEC also adopted new Rule
31a-4 under the 1940 Act, which sets forth the recordkeeping requirements associated with fair value determinations. Finally, the SEC
is rescinding previously issued guidance on related issues, including the role of a board in determining fair value and the accounting
and auditing of fund investments. Rule 2a-5 and Rule 31a-4 became effective on March 8, 2021, with a compliance date of September 8, 2022.
Management is currently assessing the potential impact of the new rules on the Fund's financial statements and does not expect the implementation
to have a material impact on the Fund's financial statements.
On November 11, 2020, the Fund entered into a
prime brokerage agreement for margin financing with Pershing LLC (“Credit Agreement”). The Credit Agreement permits the Fund
to borrow funds that are collateralized by assets held in a special custody account held at State Street Bank pursuant to a Special Custody
and Pledge Agreement. Borrowings under this arrangement bears interest at the overnight bank funding rate plus 75 basis points for an
overnight time.
During the year ended June 30, 2022, the Fund’s
average borrowings and interest rate under the Credit Agreement were $3,671,233 and 0.84%, respectively. There was no outstanding balance
on the credit facility as of June 30, 2022.
It is the Fund’s policy to meet the requirements
of the IRC applicable to regulated investment companies, and to distribute all of its taxable net income to its shareholders. In addition,
the Fund intends to pay distributions as required to avoid imposition of excise tax. Therefore, no federal income tax provision is required.
The tax character of the distributions paid by the Fund during the
fiscal years ended June 30, 2022 and June 30, 2021, was as follows:
At June 30, 2022, the components of distributable earnings on a tax
basis for the Fund was as follows:
Under current law, capital losses maintain their
character as short-term or long-term and are carried forward to the next tax year without expiration. As of the current fiscal year end,
the following amounts are available as carry forwards to the next tax year:
The difference between book and tax basis unrealized appreciation/(depreciation)
for the Fund is primarily attributable to wash sales and preferred securities.
As of June 30, 2022, for federal income tax purposes,
capital loss carryforwards of $13,044,956 were available to offset future realized capital gains, to the extent provided by the Internal
Revenue Code, with no expiration date.
The Fund recognizes the tax benefits of uncertain
tax positions only where the position is “more likely than not” to be sustained assuming examination by tax authorities. Management
has analyzed the Fund’s tax positions, and has concluded that no liability for unrecognized tax benefits should be recorded related
to uncertain tax positions taken on U.S. tax returns and state tax returns filed since inception of the Fund. No income tax returns are
currently under examination. All tax years since commencement of operations remain subject to examination by the tax authorities in the
United States. The Fund is not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax
benefits will change materially in the next 12 months.
Investment transactions for the year ended June 30, 2022, excluding
short-term investments, were as follows:
At June 30, 2022, the Fund had issued and outstanding
1,656,000 shares of Series A Preferred Stock, listed under trading symbol RMPL on the NYSE, with a par value of $0.0001 per share and
a liquidation preference of $25.00 per share plus accrued and unpaid dividends (whether or not declared). The Fund issued 1,440,000 and
216,000 shares of Series A Preferred Stock on October 25, 2017 and October 30, 2017, respectively. The Series A Preferred Stock is entitled
to a dividend at a rate of 5.875% per year based on the $25.00 liquidation preference before the common stock is entitled to receive any
dividends. The Series A Preferred Stock is redeemable at $25.00 per share plus accrued and unpaid dividends (whether or not declared)
exclusively at the Fund’s option commencing on October 31, 2020. Issuance costs related to Series A Preferred Stock of $1,558,000
are deferred and amortized over the period the Series A Preferred Stock is outstanding.
10. INDEMNIFICATIONS
Under the Fund’s organizational documents,
its Officers and Directors are indemnified against certain liabilities arising out of the performance of their duties to the Fund. Additionally,
in the normal course of business, the Fund enters into contracts with service providers that may contain general indemnification clauses.
The Fund’s maximum exposure under those arrangements is unknown, as this would involve future claims that may be made against the
Fund that have not yet occurred.
11. REPURCHASE OFFERS
Shares repurchased through quarterly tender offers during the year
ended June 30, 2022 were as follows:
For information regarding the repurchase offer with a repurchase offer
date of June 7, 2022, see Note 13.
13. CORONAVIRUS (COVID-19) PANDEMIC
Beginning in the first quarter of 2020, financial
markets in the United States and around the world experienced extreme and in many cases unprecedented volatility and severe losses due
to the global pandemic caused by COVID-19, a novel coronavirus. The outbreak was first detected in December 2019 and subsequently spread
globally, and since then, the number of cases has fluctuated and new "variants" have been confirmed around the world. The pandemic
has resulted in a wide range of social and economic disruptions, including closed borders, voluntary or compelled quarantines of large
populations, stressed healthcare systems, reduced or prohibited domestic or international travel, supply chain disruptions, and so-called
“stay-at-home” orders throughout much of the United States and many other countries. The fall-out from these disruptions has
included the rapid closure of businesses deemed “non-essential” by federal, state, or local governments and rapidly increasing
unemployment, as well as greatly reduced liquidity for certain instruments at times. Some sectors of the economy and individual issuers
have experienced particularly large losses. Such disruptions may continue for an extended period of time or reoccur in the future to a
similar or greater extent. In response, the U.S. government and the Federal Reserve have taken extraordinary actions to support the domestic
economy and financial markets, resulting in very low interest rates and in some cases negative yields. Although vaccines for COVID-19
have become widely available, it is unknown how long circumstances related to the pandemic will persist, whether they will reoccur in
the future, whether efforts to support the economy and financial markets will be successful, and what additional implications may follow
from the pandemic. The impact of these events and other epidemics or pandemics in the future could adversely affect Fund performance.
14. SUBSEQUENT EVENTS
On June 6, 2022, the Fund issued a repurchase offer. On July 7, 2022,
192,627 shares were repurchased based on a NAV per share of $18.06 at July 6, 2022.
On July 20, 2022, the Board declared a Series
A preferred stock dividend in the amount of $0.36719 per share, payable on August 15, 2022 to preferred shareholders of record on August
2, 2022 with an ex date of August 1, 2022.
The Fund has performed an evaluation of subsequent
events through the date the financial statements were issued and has determined that no additional items require recognition or disclosure.
Opinion on the Financial Statements
We have audited the accompanying statement of
assets and liabilities of RiverNorth Specialty Finance Corporation (the Fund), including the summary schedule of investments, as of June
30, 2022, the related statements of operations and cash flows for the year then ended, the statements of changes in net assets for each
of the years in the two year period then ended, and the related notes (collectively, the financial statements) and the financial highlights
for each of the years in the five year period then ended. In our opinion, the financial statements and financial highlights present fairly,
in all material respects, the financial position of the Fund as of June 30, 2022, the results of its operations and its cash flows for
the year then ended, the changes in its net assets for each of the years in the two year period then ended, and the financial highlights
for each of the years in the five year period then ended, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial
highlights based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)
(PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the
standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement, whether due to error or fraud. Our audit included performing procedures
to assess the risks of material misstatement of the financial statements and financial highlights, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts
and disclosures in the financial statements and financial highlights. Such procedures also included confirmation of securities owned as
of June 30, 2022, by correspondence with custodians and brokers; when replies were not received from brokers, we performed other auditing
procedures. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements and financial highlights. We believe that our audit provides a reasonable
basis for our opinion.
KPMG LLP
We have served as the Fund's auditor since 2015.
Chicago, Illinois
August 29, 2022
| Annual Report | June 30, 2022 |
37 |
| RiverNorth Specialty Finance Corporation |
|
| Dividend Reinvestment Plan |
June 30, 2022 (Unaudited) |
The Fund has a dividend reinvestment plan, commonly
referred to as an “opt-out” plan, (the “Plan”). Unless the registered owner (“Shareholder”) of shares
of common stock (“Shares”) elects to receive cash by contacting DST Systems, Inc. (the “Plan Administrator”),
all dividends declared on Shares will be automatically reinvested in additional Shares by the Plan Administrator for Shareholders in the
Fund’s Plan. Such reinvested amounts are included in the Fund’s Managed Assets and, therefore, the fees paid under the Management
Fee and will be higher than if such amounts had not been reinvested. Shareholders who elect not to participate in the Plan will receive
all dividends and other distributions in cash paid by check mailed directly to the Shareholder of record (or, if the Shares are held in
street or other nominee name, then to such nominee) by the Plan Administrator as dividend disbursing agent. Participation in the Plan
is completely voluntary and may be terminated or resumed at any time without penalty by notice if received and processed by the Plan Administrator
prior to the dividend record date; otherwise such termination or resumption will be effective with respect to any subsequently declared
dividend or other distribution. Such notice will be effective with respect to a particular dividend or other distribution (together, a
“Dividend”). Some brokers may automatically elect to receive cash on behalf of Shareholders and may re-invest that cash in
additional Shares.
The Plan Administrator will open an account for
each Shareholder under the Plan in the same name in which such Shareholder’s Shares are registered. Whenever the Fund declares a
Distribution payable in cash, non-participants in the Plan will receive cash and participants in the Plan will receive the equivalent
in Shares. The Shares will be acquired by the Plan Administrator for the participants’ accounts, depending upon the circumstances
described below, either (i) through receipt of additional unissued but authorized Shares from the Fund (“Newly Issued Common Shares”)
or (ii) by purchase of outstanding Shares on the open market (“Open-Market Purchases”) on the NYSE or elsewhere. If, on the
payment date for any dividend, the closing market price plus estimated brokerage commissions per share is equal to or greater than the
NAV per share, the Plan Administrator will invest the dividend amount in newly issued shares. The number of newly issued shares to be
credited to each participant’s account will be determined by dividing the dollar amount of the dividend by the Fund’s NAV
per share on the payment date. If, on the payment date for any dividend, the NAV per share is greater than the closing market value plus
estimated brokerage commissions (i.e., the Fund’s shares are trading at a discount), the Plan Administrator will invest the dividend
amount in shares acquired in open-market purchases.
In the event of a market discount on the payment
date for any dividend, the Plan Administrator will have until the last business day before the next date on which the shares trade on
an “ex-dividend” basis or 30 days after the payment date for such dividend, whichever is sooner, to invest the dividend amount
in shares acquired in open-market purchases. If, before the Plan Administrator has completed its open-market purchases, the market price
per share exceeds the NAV per share, the average per share purchase price paid by the Plan Administrator may exceed the NAV of the shares,
resulting in the acquisition of fewer shares than if the dividend had been paid in newly issued shares on the dividend payment date. Because
of the foregoing difficulty with respect to open-market purchases, the Plan provides that if the Plan Administrator is unable to invest
the full dividend amount in open-market purchases during the purchase period or if the market discount shifts to a market premium during
the purchase period, the Plan Administrator may cease making open-market purchases and may invest the uninvested portion of the dividend
amount in newly issued shares at the NAV per share at the close of business on the last purchase date.
| 38 |
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| RiverNorth Specialty Finance Corporation |
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| Dividend Reinvestment Plan |
June 30, 2022 (Unaudited) |
The Plan Administrator maintains all Shareholders’
accounts in the Plan and furnishes written confirmation of all transactions in the accounts, including information needed by Shareholders
for tax records. Shares in the account of each Plan participant will be held by the Plan Administrator on behalf of the Plan participant,
and each Shareholder proxy will include those Shares purchased or received pursuant to the Plan. The Plan Administrator will forward all
proxy solicitation materials to participants and vote proxies for Shares held under the Plan in accordance with the instructions of the
participants.
Beneficial owners of Shares who hold their Shares
in the name of a broker or nominee should contact the broker or nominee to determine whether and how they may participate in the Plan.
In the case of Shareholders such as banks, brokers or nominees which hold shares for others who are the beneficial owners, the Plan Administrator
will administer the Plan on the basis of the number of Shares certified from time to time by the record Shareholder’s name and held
for the account of beneficial owners who participate in the Plan.
There will be no brokerage charges with respect
to Shares issued directly by the Fund. The automatic reinvestment of Dividends will not relieve participants of any federal, state or
local income tax that may be payable (or required to be withheld) on such Dividends. Shareholders who receive distributions in the form
of Shares generally are subject to the same U.S. federal, state and local tax consequences as Shareholders who elect to receive their
distributions in cash and, for this purpose, Shareholders receiving distributions in the form of Shares will generally be treated as receiving
distributions equal to the fair market value of the Shares received through the plan; however, since their cash distributions will be
reinvested, those Shareholders will not receive cash with which to pay any applicable taxes on reinvested distributions. Participants
that request a sale of Shares through the Plan Administrator are subject to brokerage commissions.
The Fund reserves the right to amend or terminate
the Plan. There is no direct service charge to participants with regard to purchases in the Plan; however, the Fund reserves the right
to amend the Plan to include a service charge payable by the participants. All correspondence or questions concerning the Plan should
be directed to the Plan Administrator at (844) 569-4750.
| Annual Report | June 30, 2022 |
39 |
| RiverNorth Specialty Finance Corporation |
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| Summary of Updated Information Regarding the Fund |
June 30, 2022 (Unaudited) |
The following information in this annual report
is a summary of certain information about the Fund and changes since the Fund’s most recent annual report dated June 30, 2021 (the
“prior disclosure date”). This information may not reflect all of the changes that have occurred since you purchased the Fund.
Investment Objective
There have been no changes in the Fund’s investment objectives
since the prior disclosure date that have not been approved by shareholders.
The investment objective of the Fund is to seek a high level of current
income.
Principal Investment Strategies and Policies
Under normal market conditions, the Fund seeks
to achieve its investment objectives by investing, directly or indirectly, in credit instruments, including a portfolio of securities
of specialty finance and other financial companies that RiverNorth Capital Management, LLC (the “Adviser”) believes offer
attractive opportunities for income. These companies may include, but are not limited to, banks, thrifts, finance companies, lending platforms,
business development companies (“BDCs”), real estate investment trusts (“REITs”), special purpose acquisition
companies (“SPACs”), private investment funds (private funds that are exempt from registration under Sections 3(c)(1) and
3(c)(7) of the Investment Company Act of 1940, as amended (the “1940 Act”)), brokerage and advisory firms, insurance companies
and financial holding companies. Together, these types of companies are referred to as “financial institutions.” The Fund’s
investments in hedge funds and private equity funds that are exempt from registration under Sections 3(c)(1) and 3(c)(7) of the 1940 Act
will be limited to no more than 15% of the Fund’s assets. The Fund may also invest in common equity, preferred equity, convertible
securities and warrants of these institutions. “Managed Assets” means the total assets of the Fund, including assets attributable
to leverage, minus liabilities (other than debt representing leverage and any preferred stock that may be outstanding).
The Fund may invest in income-producing securities
of any maturity and credit quality, including below investment grade, and equity securities, including exchange-traded funds and registered
closed-end funds. Below investment grade securities are commonly referred to as “junk” or “high yield” securities
and are considered speculative with respect to the issuer’s capacity to pay interest and repay principal. Such income-producing
securities in which the Fund may invest may include, without limitation, corporate debt securities, U.S. government debt securities, short-term
debt securities, asset backed securities, exchange-traded notes, loans, including secured and unsecured senior loans, Alternative Credit
(as defined below), collateralized loan obligations (“CLOs”) and other structured finance securities, and cash and cash equivalents.
The Fund’s alternative credit investments
may be made through a combination of: (i) investing in loans to small and mid-sized companies (“SMEs”); (ii) investing in
notes or other pass-through obligations issued by an alternative credit platform (or an affiliate) representing the right to receive the
principal and interest payments on an Alternative Credit investment (or fractional portions thereof) originated through the platform (“Pass-Through
Notes”); (iii) purchasing asset-backed securities representing ownership in a pool of Alternative Credit; (iv) investing in private
investment funds that purchase Alternative Credit, (v) acquiring an equity interest in an alternative credit platform (or an affiliate);
and (vi) providing loans, credit lines or other extensions of credit to an alternative credit platform (or an affiliate) (the foregoing
listed investments are collectively referred to herein as the “Alternative Credit Instruments”). Subject to the limitations
in the Fund’s prospectus and SAI, the Fund may invest without limit in any of the foregoing types of Alternative Credit Instruments
and the Fund’s investments in private investment funds will be limited to no more than 10% of the Fund’s Managed Assets. The
Alternative Credit in which the Fund typically invests are newly issued and/or current as to interest and principal payments at the time
of investment. As a fundamental policy (which cannot be changed without the approval of the holders of a majority of the outstanding voting
securities of the Fund), the Fund does not invest in Alternative Credit that are of subprime quality at the time of investment. The Fund
considers an SME loan to be of “subprime quality” if the likelihood of repayment on such loan is determined by the Adviser
based on its due diligence and the credit underwriting policies of the originating platform to be similar to that of consumer loans that
are of subprime quality. The Fund does not currently have any intention invest in Alternative Credit originated from lending platforms
based outside the United States or made to non-U.S. borrowers. However, the Fund may in the future invest in such Alternative Credit and
will provide updated disclosures prior to making such investments. Unless the context suggests otherwise, all references to loans generally
in this disclosure refer to Alternative Credit.
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| RiverNorth Specialty Finance Corporation |
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| Summary of Updated Information Regarding the Fund |
June 30, 2022 (Unaudited) |
Alternative Credit Instruments are generally not
rated by the nationally recognized statistical rating organizations (“NRSROs”). Such unrated instruments, however, are considered
to be comparable in quality to securities falling into any of the ratings categories used by such NRSROs to classify “junk”
bonds. Accordingly, the Fund’s unrated Alternative Credit Instrument investments constitute highly risky and speculative investments
similar to investments in “junk” bonds, notwithstanding that the Fund is not permitted to invest in loans that are of subprime
quality at the time of investment. The Alternative Credit Instruments in which the Fund may invest may have varying degrees of credit
risk. There can be no assurance that payments due on underlying Alternative Credit investments will be made. At any given time, the Fund’s
portfolio may be substantially illiquid and subject to increased credit and default risk. If a borrower is unable to make its payments
on a loan, the Fund may be greatly limited in its ability to recover any outstanding principal and interest under such loan. The Shares
therefore should be purchased only by investors who could afford the loss of the entire amount of their investment.
Percentage limitations described within this report
regarding the Fund’s investment strategies and policies are as of the time of investment by the Fund and may be exceeded on a going-forward
basis as a result of market value fluctuations of the Fund’s portfolio investments.
Specialty Finance Companies.
Specialty finance companies and other financial
companies invest in a wide range of securities and financial instruments, including but not limited to private debt and equity, secured
and unsecured debt, trust preferred securities, subordinated debt, and preferred and common equity as well as other equity-linked securities.
These various securities offer distinct risk/reward features which may be more or less attractive during different points in the market
cycle. Under normal market conditions, the Adviser will invest the Fund’s Managed Assets in specialty finance companies with exposure
to some or all of these kinds of securities.
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Specialty finance companies provide capital or
financing to businesses within specified market segments. These companies are often distinguished by their market specializations which
allow them to focus on the specific financial needs of their clients. Specialty finance companies often engage in asset-based and other
forms of non-traditional financing activities. While they generally compete against traditional financial institutions with broad product
lines and, often, greater financial resources, specialty finance companies seek competitive advantage by focusing their attention on market
niches, which may provide them with deeper knowledge of their target market and its needs. Specialty finance companies include mortgage
specialists to certain consumers, equipment leasing specialists to certain industries and equity or debt-capital providers to certain
small businesses. Specialty finance companies often utilize tax-efficient or other non-traditional structures, such as BDCs and REITs.
Alternative Credit.
The Fund intends to primarily invest in whole loans originated by alternative
credit platforms.
General. Alternative credit is often referred
to as “peer-to-peer” lending, which term originally reflected the initial focus of the industry on individual investors and
consumer loan borrowers. In addition, the alternative credit platforms may retain on their balance sheets a portion of the loan portfolios
they originate. In alternative credit, loans are originated through online platforms that provide a marketplace that matches small- and
mid-sized companies and other borrowers seeking loans with investors willing to provide the funding for such loans. Since its inception,
the industry has grown to include substantial involvement of institutional investors. These borrowers may seek such loans for a variety
of different purposes, ranging, for example, from loans to fund elective medical procedures to loans for franchise financing. The procedures
through which borrowers obtain loans can vary between platforms, and between the types of loans (e.g., consumer versus SME). The Fund
intends to hold its Alternative Credit investments until maturity.
The Alternative Credit in which the Fund typically
invests are newly issued and/or current as to interest and principal payments at the time of investment. A small number of alternative
credit platforms originate a substantial portion of their Alternative Credit investments in the United States. The Adviser intends to
continue to build relationships and enter into agreements with additional platforms. However, if there are not sufficient qualified loan
requests through any platform, the Fund may be unable to deploy its capital in a timely or efficient manner. In such event, the Fund may
be forced to invest in cash, cash equivalents, or other assets that fall within its investment policies that are generally expected to
offer lower returns than the Fund’s target returns from investments in Alternative Credit. The Fund enters into purchase agreements
with platforms, which outline, among other things, the terms of the loan purchase, loan servicing, the rights of the Fund to assign the
loans and the remedies available to the parties. Although the form of these agreements is similar to those typically available to all
investors, institutional investors such as the Fund (unlike individual retail investors) have an opportunity to negotiate some of the
terms of the agreement. In particular, the Fund has greater negotiating power related to termination provisions and custody of the Fund’s
account(s) relative to other investors due to the restrictions placed on the Fund by the 1940 Act, of which the platforms are aware. Pursuant
to such agreements, the platform or a third-party servicer will typically service the loans, collecting payments and distributing them
to the Fund, less any servicing fees, and the servicing entity, unless directed by the Fund, typically will make all decisions regarding
acceleration or enforcement of the loans following any default by a borrower. The Fund seeks to have a backup servicer in case any platform
or third-party servicer ceases or fails to perform the servicing functions, which the Fund expects will mitigate some of the risks associated
with a reliance on platforms or third-party servicers for servicing of the Alternative Credit.
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In the United States, a platform may be subject
to extensive regulation, oversight and examination at both the federal and state level, and across multiple jurisdictions if it operates
its business nationwide. Accordingly, platforms are generally subject to various securities, lending, licensing and consumer protection
laws. In addition, courts have recently considered the regulatory environment applicable to alternative credit platforms and purchasers
of Alternative Credit. In light of recent decisions, if upheld and widely applied, certain alternative credit platforms could be required
to restructure their operations and certain loans previously made by them through funding banks may not be enforceable, whether in whole
or in part, by investors holding such loans or such loans would be subject to diminished returns and/or the platform subject to fines
and penalties. As a result, large amounts of Alternative Credit purchased by the Fund (directly or indirectly) could become unenforceable
or subject to diminished returns, thereby causing losses for Shareholders.
Alternative Credit and Pass-Through Notes.
As noted above, the underlying Alternative Credit origination processes employed by each platform may vary significantly. The principal
amount of each loan is advanced to the borrower by a bank (the “funding bank”). The operator of the platform may purchase
the loan from the funding bank at par using the funds of multiple lenders and then issues to each such lender at par a Pass-Through Note
of the operator (or an affiliate of the operator) representing the right to receive the lender’s proportionate share of all principal
and interest payments received by the operator from the borrower on the loan funded by such lender (net of the platform servicing fees).
As an alternative, certain operators (including most SME lenders) do not engage funding banks but instead extend their loans directly
to the borrowers.
The platform operator typically will service the
loans it originates and will maintain a separate segregated deposit account into which it will deposit all payments received from the
obligors on the loans. Upon identification of the proceeds received with respect to a loan and deduction of applicable fees, the platform
operator forwards the amounts owed to the lenders or the holders of any related Pass-Through Notes, as applicable.
A platform operator is not obligated to make any
payments due on Alternative Credit or Pass-Through Notes (except to the extent that the operator actually receives payments from the borrower
on the related loan). Accordingly, lenders and investors assume all of the credit risk on the loans they fund through a Pass-Through Note
purchased from a platform operator and are not entitled to recover any deficiency of principal or interest from the platform operator
if the underlying borrower defaults on its payments due with respect to a loan. In addition, a platform operator is generally not required
to repurchase Alternative Credit from a lender or purchaser except under very narrow circumstances, such as in cases of verifiable identity
fraud by the borrower. As loan servicer, the platform operator or an affiliated entity typically has the ability to refer any delinquent
Alternative Credit to a collection agency (which may impose additional fees and costs that are often as high, or higher in some cases,
as 35% of any recovered amounts). The Fund itself will not directly enter into any arrangements or contracts with the collection agencies
(and, accordingly, the Fund does not currently anticipate it would have, under current law and existing interpretations, substantial risk
of liability for the actions of such collection agencies). At the same time, the relatively low principal amounts of Alternative Credit
often make it impracticable for the platform operator to commence legal proceedings against defaulting borrowers. Alternative Credit may
be secured (generally in the case of SME loans and real estate-related loans) or unsecured. For example, real estate Alternative Credit
may be secured by a deed of trust, mortgage, security agreement or legal title to real estate. There can be no assurance that any collateral
pledged to secure Alternative Credit can be liquidated quickly or at all or will generate proceeds sufficient to offset any defaults on
such loan.
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Generally, the Alternative Credit in which the
Fund invests will fully amortize and will not be interest-only. However, in some sectors (e.g., real estate-related loans), the loans
may be interest-only with the principal to be paid at the end of the term. An active secondary market for the Alternative Credit does
not currently exist and an active market for the Alternative Credit may not develop in the future. Borrowers of Alternative Credit electronically
execute each of the loan documents prepared in connection with the applicable loan, binding the borrower to the terms of the loan, which
include the provision that the loan may be transferred to another party.
Asset-Backed Securities. The Fund also
may invest in Alternative Credit, through special purpose vehicles (“SPVs”) established solely for the purpose of holding
assets (e.g., commercial loans) and issuing securities (“asset-backed securities”) secured only by such underlying assets
(which practice is known as securitization). The Fund may invest, for example, in an SPV that holds a pool of loans originated by a particular
platform. The SPV may enter into a service agreement with the operator or a related entity to ensure continued collection of payments,
pursuit of delinquent borrowers and general interaction with borrowers in much the same manner as if the securitization had not occurred.
The SPV may issue multiple classes of asset-backed
securities with different levels of seniority. The more senior classes will be entitled to receive payment before the subordinate classes
if the cash flow generated by the underlying assets is not sufficient to allow the SPV to make payments on all of the classes of the asset-backed
securities. Accordingly, the senior classes of asset-backed securities receive higher credit ratings (if rated) whereas the subordinated
classes have higher interest rates. In general, the Fund may invest in both rated senior classes of asset-backed securities as well as
unrated subordinated (residual) classes of asset-backed securities. The subordinated classes of asset-backed securities in which the Fund
may invest are typically considered to be an illiquid and highly speculative investment, as losses on the underlying assets are first
absorbed by the subordinated classes.
The value of asset-backed securities, like that
of traditional fixed-income securities, typically increases when interest rates fall and decreases when interest rates rise. However,
asset-backed securities differ from traditional fixed-income securities because they generally will be subject to prepayment based upon
prepayments received by the SPV on the loan pool. The price paid by the Fund for such securities, the yield the Fund expects to receive
from such securities and the weighted average life of such securities are based on a number of factors, including the anticipated rate
of prepayment of the underlying assets.
Private Investment Funds. The Fund may
invest up to 10% of its Managed Assets in private investment funds that invest in Alternative Credit. Under one such fund structure, the
platform operator may form (i) an investment fund that offers partnership interests or similar securities to investors on a private placement
basis, and (ii) a subsidiary that acts as the investment fund’s general partner and investment manager. The investment fund then
applies its investors’ funds to purchase Alternative Credit originated on the platform (or portions thereof) from the operator.
As an investor in an investment fund, the Fund would hold an indirect interest in a pool of Alternative Credit and would receive distributions
on its interest in accordance with the fund’s governing documents. This structure is intended to create diversification and to reduce
operator credit risk for the investors in the investment fund by enabling them to invest indirectly in Alternative Credit through the
private investment fund rather than directly from the operator of the platform.
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Other Investments in Alternative Credit Instruments.
The Fund may invest in the equity securities and/or debt obligations of platform operators (or their affiliates), which may provide these
platforms and their related entities with the financing needed to support their lending business. An equity interest in a platform or
related entity represents ownership in such company, providing voting rights and entitling the Fund, as a shareholder, to a share in the
company’s success through dividends and/or capital appreciation. A debt investment made by the Fund could take the form of a loan,
convertible note, credit line or other extension of credit made by the Fund to a platform operator. The Fund would be entitled to receive
interest payments on its investment and repayment of the principal at a set maturity date or otherwise in accordance with the governing
documents.
The Fund also may wholly-own or otherwise control
certain pooled investment vehicles which hold Alternative Credit and/or other Alternative Credit Instruments, which pooled investment
vehicle may be formed and managed by the Adviser (a “Subsidiary”). Each Subsidiary may invest in Alternative Credit and other
instruments that the Fund may hold directly. As of the date of this report, the Fund did not own any Subsidiaries.
Business Development Companies.
BDCs are a type of closed-end fund regulated under
the 1940 Act, whose shares are typically listed for trading on a U.S. securities exchange. BDCs typically invest in and lend to small
and medium-sized private and certain public companies that may not have access to public equity markets for capital raising. Oftentimes,
financing a BDC includes an equity-like investment such as warrants or conversion rights, creating an opportunity for the BDC to participate
in capital appreciation in addition to the interest income earned from its debt investments. The interest earned by a BDC flows through
to investors in the form of a dividend, normally without being taxed at the BDC entity level. BDCs invest in such diverse industries as
healthcare, chemical and manufacturing, technology and service companies. BDCs are unique in that at least 70% of their investments must
be made in private and certain public U.S. businesses, and BDCs are required to make available significant managerial assistance to their
portfolio companies. Unlike corporations, BDCs are not taxed on income distributed to their shareholders provided they comply with the
applicable requirements of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). The securities of
BDCs, which are required to distribute substantially all of their income on an annual basis to investors in order to not be subject to
entity level taxation, often offer a yield advantage over securities of other issuers, such as corporations, that are taxed on income
at the entity level and are able to retain all or a portion of their income rather than distributing it to investors. The Fund invests
primarily in BDC shares which are trading in the secondary market on a U.S. securities exchange but may, in certain circumstances, invest
in an initial public offering of BDC shares or invest in certain debt instruments issued by BDCs. The Fund is not limited with respect
to the specific types of BDCs in which it invests. The Fund will indirectly bear its proportionate share of any management and other expenses,
and of any performance based or incentive fees, charged by the BDCs in which it invests, in addition to the expenses paid by the Fund.
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Closed-End Funds.
Closed-end funds are investment companies that
typically issue a fixed number of shares that trade on a securities exchange or over-the-counter. The risks of investment in closed-end
funds typically reflect the risk of the types of securities in which the funds invest. Investments in closed-end funds are subject to
the additional risk that shares of the fund may trade at a premium or discount to their NAV per share. Closed-end funds come in many varieties
and can have different investment objectives, strategies and investment portfolios. They also can be subject to different risks, volatility
and fees and expenses. Although closed-end funds are generally listed and traded on an exchange, the degree of liquidity, or ability to
be bought and sold, will vary significantly from one closed-end fund to another based on various factors including, but not limited to,
demand in the marketplace. The Fund may also invest in shares of closed-end funds that are not listed on an exchange. Such non-listed
closed-end funds are subject to certain restrictions on redemptions and no secondary market exists. As a result, such investments should
be considered illiquid. When the Fund invests in shares of a closed-end fund, shareholders of the Fund bear their proportionate share
of the closed-end fund’s fees and expenses, as well as their share of the Fund’s fees and expenses.
REITs and Other Mortgage-Related Securities.
REITs are financial vehicles that pool investors’
capital to invest primarily in income-producing real estate or real estate-related loans or interests. REIT shares are typically listed
for trading in the secondary market on a U.S. securities exchange. REITs can generally be classified as “Mortgage REITs,”
“Equity REITs” and “Hybrid REITs.” Mortgage REITs, which invest the majority of their assets in real estate mortgages,
derive their income primarily from interest payments. The Fund focuses its Mortgage REIT investments in companies that invest primarily
in U.S. Agency, prime-rated and commercial mortgage securities. U.S. Agency securities include securities issued by the Government National
Mortgage Association, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Equity REITs, which invest
the majority of their assets directly in real property, derive their income primarily from rents, royalties and lease payments. Equity
REITs can also realize capital gains by selling properties that have appreciated in value. Some REITs which are classified as Equity REITs
provide specialized financing solutions to their clients in the form of sale-lease back transactions and triple net lease financing. Hybrid
REITs combine the characteristics of both Equity REITs and Mortgage REITs.
Debt securities issued by REITs are, for the most
part, general and unsecured obligations and are subject generally to risks associated with REITs. Distributions received by the Fund from
REITs may consist of dividends, capital gains and/or return of capital. REITs are not taxed on income distributed to their shareholders
provided they comply with the applicable requirements of the Internal Revenue Code. Similar to BDCs, the securities of REITs, which are
required to distribute substantially all of their income to investors in order to not be subject to entity level taxation, often offer
a yield advantage over securities of other issuers, such as corporations, that are taxed on income at the entity level and are able to
retain all or a portion of their income rather than distributing it to investors. Many of these distributions, however, will not generally
qualify for favorable treatment as qualified dividend income. To the extent, however, the Fund designates dividends it pays to its shareholders
as “section 199A dividends” such shareholder may be eligible for a 20% deduction with respect to such dividends. The amount
of section 199A dividends that the Fund may pay and report to its shareholders is limited to the excess of the ordinary REIT dividends,
other than capital gain dividends and portions of REIT dividends designated as qualified dividend income, that the Fund receives from
REITs for a taxable year over the Fund’s expenses allocable to such dividends.
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The Fund invests primarily in REIT shares which
are trading in the secondary market on a U.S. securities exchange but may, in certain circumstances, invest in an initial public offering
of REIT shares or invest in certain debt instruments issued by REITs. The Fund is not limited with respect to the specific types of REITs
in which it invests. The Fund will indirectly bear its proportionate share of any management and other operating expenses charged by the
REITs in which it invests, in addition to the expenses paid by the Fund.
Other mortgage-related securities in which the
Fund may invest include debt instruments which provide periodic payments consisting of interest and/or principal that are derived from
or related to payments of interest and/or principal on underlying mortgages. Additional payments on mortgage-related securities may be
made out of unscheduled prepayments of principal resulting from the sale of the underlying property or from refinancing or foreclosure,
net of fees or costs that may be incurred.
The Fund may invest in commercial mortgage-related
securities issued by corporations. These are securities that represent an interest in, or are secured by, mortgage loans secured by commercial
property, such as industrial and warehouse properties, office buildings, retail space and shopping malls, multifamily properties and cooperative
apartments, hotels and motels, nursing homes, hospitals and senior living centers. They may pay fixed or adjustable rates of interest.
The commercial mortgage loans that underlie commercial mortgage-related securities have certain distinct risk characteristics. Commercial
mortgage loans generally lack standardized terms, which may complicate their structure. Commercial properties themselves tend to be unique
and difficult to value. Commercial mortgage loans tend to have shorter maturities than residential mortgage loans and may not be fully
amortizing, meaning that they may have a significant principal balance, or “balloon” payment, due on maturity. In addition,
commercial properties, particularly industrial and warehouse properties, are subject to environmental risks and the burdens and costs
of compliance with environmental laws and regulations.
The Fund also may invest in mortgage pass-through
securities, collateralized mortgage obligations (“CMOs”), mortgage dollar rolls, CMO residuals (other than residual interests
in real estate mortgage investment conduits), stripped mortgage-backed securities and other securities that directly or indirectly represent
a participation in, or are secured by and payable from, mortgage loans on real property.
In addition, the Fund may invest in other types
of asset-backed securities that are offered in the marketplace. Other asset-backed securities may be collateralized by the fees earned
by service providers. The value of asset-backed securities may be substantially dependent on the servicing of the underlying asset pools
and are therefore subject to risks associated with the negligence of, or defalcation by, their servicers. In certain circumstances, the
mishandling of related documentation may also affect the rights of the security holders in and to the underlying collateral. The insolvency
of entities that generate receivables or that utilize the underlying assets may result in added costs and delays in addition to losses
associated with a decline in the value of the underlying assets.
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Special Purpose Acquisition Companies (SPACs).
SPACs are collective investment structures that
pool funds in order to seek potential acquisition opportunities. Unless and until an acquisition is completed, a SPAC generally invests
its assets (less an amount to cover expenses) in U.S. government securities, money market fund securities and cash. SPACs and similar
entities may be blank check companies with no operating history or ongoing business other than to seek a potential acquisition. Accordingly,
the value of their securities is particularly dependent on the ability of the entity’s management to identify and complete a profitable
acquisition. Certain SPACs may seek acquisitions only in limited industries or regions, which may increase the volatility of their prices.
If an acquisition that meets the requirements for the SPAC is not completed within a predetermined period of time, the invested funds
are returned to the entity’s shareholders. Investments in SPACs may be illiquid and/or be subject to restrictions on resale. To
the extent the SPAC is invested in cash or similar securities, this may impact a Fund’s ability to meet its investment objective.
Private Investment Funds.
Private Investment Funds may require large minimum
investments and impose stringent investor qualification criteria that are intended to limit their direct investors mainly to institutions
such as endowments and pension funds. By investing in private investment funds, the Fund can offer shareholders access to certain asset
managers that may not be otherwise available to them. The Fund seeks to leverage the relationships of the Adviser to gain access to private
investment funds on terms consistent with those offered to similarly-sized institutional investors. Furthermore, the Fund believes that
investments in private investment funds offer opportunities for moderate income and growth as well as lower correlation to equity markets
but will also be less liquid.
Collateralized Loan Obligations.
CLOs are securitization vehicles that pool a diverse
portfolio of primarily below investment grade U.S. senior secured loans. Such pools of underlying assets are often referred to as a CLO’s
“collateral.” While the vast majority of the portfolio of most CLOs consists of senior secured loans, many CLOs enable the
CLO collateral manager to invest up to 10% of the portfolio in assets that are not first lien senior secured loans, including second lien
loans, unsecured loans, senior secured bonds and senior unsecured bonds.
CLOs are generally required to hold a portfolio
of assets that is highly diversified by underlying borrower and industry, and is subject to a variety of asset concentration limitations.
Most CLOs are revolving structures that generally allow for reinvestment over a specific period of time (typically 3 to 5 years). In cash
flow CLOs, the terms and covenants of the structure are, with certain exceptions, based primarily on the cash flow generated by, and the
par value (as opposed to the market price) of, the collateral. These covenants include collateral coverage tests, interest coverage tests
and collateral quality tests.
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CLOs fund the purchase of a portfolio of primarily
senior secured loans via the issuance of CLO equity and debt in the form of multiple, primarily floating-rate debt, tranches. The CLO
debt tranches typically are rated “AAA” (or its equivalent) at the most senior level down to “BB” or “B”
(or its equivalent), which is below investment grade, at the most junior level by Moody’s Investor Service, Inc., or “Moody’s,”
Standard & Poor’s Rating Group, or “S&P,” and/or Fitch, Inc., or “Fitch.” The CLO equity tranche
is unrated and typically represents approximately 8% to 11% of a CLO’s capital structure. A CLO’s equity tranche represents
the first loss position in the CLO.
Since a CLO’s indenture requires that the
maturity dates of a CLO’s assets (typically 5 to 8 years from the date of issuance of a senior secured loan) be shorter than the
maturity date of the CLO’s liabilities (typically 11 to 12 years from the date of issuance), CLOs generally do not face refinancing
risk on the CLO debt.
Other Financial Companies.
The principal industry groups of financial companies
include banks, savings institutions, brokerage firms, investment management companies, insurance companies, holding companies of the foregoing
and companies that provide related services to such companies. Banks and savings institutions provide services to customers such as demand,
savings and time deposit accounts and a variety of lending and related services. Brokerage firms provide services to customers in connection
with the purchase and sale of securities. Investment management companies provide investment advisory and related services to retail customers,
high net-worth individuals and institutions. Insurance companies provide a wide range of commercial, life, health, disability, personal
property and casualty insurance products and services to businesses, governmental units, associations and individuals.
Equity Securities.
Equity securities may include common stocks that
either are required to and/or customarily distribute a large percentage of their current earnings as dividends. Common stock represents
an equity ownership interest in a company, providing voting rights and entitling the holder to a share of the company’s success
through dividends and/or capital appreciation. In the event of liquidation, common stockholders have rights to a company’s remaining
assets after bond holders, other debt holders and preferred stockholders have been paid in full. Typically, common stockholders are entitled
to one vote per share to elect the company’s board of directors (although the number of votes is not always directly proportional
to the number of shares owned). Common stockholders also receive voting rights regarding other company matters such as mergers and certain
important company policies such as issuing securities to management. Common stocks fluctuate in price in response to many factors, including
historical and prospective earnings of the issuer, the value of its assets, general economic conditions, interest rates, investor perceptions
and market liquidity.
Investment Grade Debt Securities.
Investment grade bonds of varying maturities issued
by governments, corporations and other business entities are fixed or variable rate debt obligations, including bills, notes, debentures,
money market instruments and similar instruments and securities. Bonds generally are used by corporations as well as by governments and
other issuers to borrow money from investors. The issuer pays the investor a fixed or variable rate of interest and normally must repay
the amount borrowed on or before maturity. Certain bonds are “perpetual” in that they have no maturity date.
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Non-Investment Grade Debt Securities.
Fixed income securities of below-investment grade
quality are commonly referred to as “high-yield” or “junk” bonds. Generally, such lower quality debt securities
offer a higher current yield than is offered by higher quality debt securities, but also (i) will likely have some quality and protective
characteristics that, in the judgment of the rating agencies, are outweighed by large uncertainties or major risk exposures to adverse
conditions and (ii) are predominantly speculative with respect to the issuer’s capacity to pay interest and repay principal in accordance
with the terms of the obligation. Below-investment grade debt securities are rated below “Baa” by Moody’s Investors
Services, Inc., below “BBB” by Standard & Poor’s Ratings Group, a division of The McGraw Hill Companies, Inc., comparably
rated by another nationally recognized statistical rating organization or, if unrated, determined to be of comparable quality by the Advisor.
Mortgage-Back Securities.
Mortgage-backed securities represent direct or
indirect participations in, or are secured by and payable from, mortgage loans secured by real property and include single- and multi-class
pass-through securities and collateralized mortgage obligations. U.S. government mortgage-backed securities include mortgage-backed securities
issued or guaranteed as to the payment of principal and interest (but not as to market value) by the Government National Mortgage Association
(also known as Ginnie Mae), the Federal National Mortgage Association (also known as Fannie Mae), the Federal Home Loan Mortgage Corporation
(also known as Freddie Mac) or other government-sponsored enterprises. Other mortgage-backed securities are issued by private issuers.
Private issuers are generally originators of and investors in mortgage loans, including savings associations, mortgage bankers, commercial
banks, investment bankers and special purpose entities. Payments of principal and interest (but not the market value) of such private
mortgage-backed securities may be supported by pools of mortgage loans or other mortgage-backed securities that are guaranteed, directly
or indirectly, by the U.S. government or one of its agencies or instrumentalities, or they may be issued without any government guarantee
of the underlying mortgage assets but with some form of non-government credit enhancement. Non-governmental mortgage-backed securities
may offer higher yields than those issued by government entities, but may also be subject to greater price changes than governmental issues.
Some mortgage-backed securities, such as collateralized
mortgage obligations, make payments of both principal and interest at a variety of intervals; others make semi-annual interest payments
at a predetermined rate and repay principal at maturity (like a typical bond). Stripped mortgage-backed securities are created when the
interest and principal components of a mortgage-backed security are separated and sold as individual securities. In the case of a stripped
mortgage-backed security, the holder of the principal-only, or “PO,” security receives the principal payments made by the
underlying mortgage, while the holder of the interest-only, or “IO,” security receives interest payments from the same underlying
mortgage.
Mortgage-backed securities are based on different types of mortgages
including those on commercial real estate or residential properties. These securities often have stated maturities of up to thirty years
when they are issued, depending upon the length of the mortgages underlying the securities. In practice, however, unscheduled or early
payments of principal and interest on the underlying mortgages may make the securities’ effective maturity shorter than this, and
the prevailing interest rates may be higher or lower than the current yield of the Fund’s portfolio at the time the Fund receives
the prepayments for reinvestment.
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Residential mortgage-backed securities represent direct or indirect
participations in, or are secured by and payable from, pools of assets which include all types of residential mortgage products.
Asset-Backed Securities.
Asset-backed securities represent direct or indirect
participations in, or are secured by and payable from, pools of assets such as, among other things, motor vehicle installment sales contracts,
installment loan contracts, leases of various types of real and personal property, and receivables from revolving credit (credit card)
agreements or a combination of the foregoing. These assets are securitized through the use of trusts and special purpose corporations.
Credit enhancements, such as various forms of cash collateral accounts or letters of credit, may support payments of principal and interest
on asset-backed securities. Although these securities may be supported by letters of credit or other credit enhancements, payment of interest
and principal ultimately depends upon individuals paying the underlying loans or accounts, which payment may be adversely affected by
general downturns in the economy. Asset-backed securities are subject to the same risk of prepayment described above with respect to mortgage-backed
securities. The risk that recovery on repossessed collateral might be unavailable or inadequate to support payments, however, is greater
for asset-backed securities than for mortgage-backed securities.
Other Securities.
New financial products continue to be developed
and the Fund may invest in any products that may be developed to the extent consistent with its investment objectives and the regulatory
and federal tax requirements applicable to investment companies.
Use of Leverage
As of the date of the Fund’s prospectus,
the Fund utilized, and intends to continue to utilize, leverage for investment and other purposes, such as for financing the repurchase
of its Shares or to otherwise provide the Fund with liquidity. Under the 1940 Act, the Fund may utilize leverage through the issuance
of preferred stock in an amount up to 50% of its total assets and/or through borrowings and/or the issuance of notes or debt securities
(collectively, “Borrowings”) in an aggregate amount of up to 33-1/3% of its total assets. The Fund anticipates that its leverage
will vary from time to time, based upon changes in market conditions and variations in the value of the portfolio’s holdings; however,
the Fund’s leverage will not exceed the limitations set forth under the 1940 Act. As a result of the continuous offering of Common
Shares and the quarterly repurchases of common shares pursuant to the Fund’s repurchase policy, the Fund’s leverage ratio
will increase or decrease as a result of the changes in net assets attributable to common shares.
On November 11, 2020, the Fund entered into a
prime brokerage agreement for margin financing with Pershing LLC as lender (the “Credit Agreement”). The Credit Agreement
permits the Fund to borrow funds that are collateralized by assets held in a special custody account held at State Street Bank pursuant
to a Special Custody and Pledge Agreement. Borrowings under this arrangement bears interest at the overnight bank funding rate plus 75
basis points for an overnight time.
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As of June 30, 2022, the Fund did not have an
outstanding balance under the Credit Agreement. The Fund currently utilizes leverage through its outstanding Series A Preferred Stock.
As of July 15, 2022, the Fund had outstanding 1,656,000 shares of Series A Preferred Stock. As of July 15, 2022, the aggregate dollar
amount (i.e., liquidation preference) of the Fund’s outstanding Series A Preferred Stock was $41,400,000, which then represented
approximately 39% of the Fund’s total assets (including assets attributable to the Fund’s leverage).
There is no assurance that the Fund will increase
the amount of its leverage or that, if additional leverage is utilized, it will be successful in enhancing the level of the Fund’s
current distributions. It is also possible that the Fund will be unable to obtain additional leverage. If the Fund is unable to increase
its leverage after the issuance of additional Shares pursuant to the Fund’s prospectus, there could be an adverse impact on the
return to Shareholders.
Under the 1940 Act, the Fund generally is not
permitted to incur Borrowings unless immediately after the Borrowing the value of the Fund’s total assets less liabilities other
than the principal amount represented by Borrowings is at least 300% of such principal amount. Also, under the 1940 Act and as noted above,
the Fund is not permitted to issue preferred stock unless immediately after such issuance the value of the Fund’s asset coverage
is at least 200% of the liquidation value of the outstanding preferred stock (i.e., such liquidation value may not exceed 50% of the Fund’s
asset coverage). Upon the issuance of preferred stock, the Fund intends, to the extent possible, to purchase or redeem its preferred stock
from time to time to the extent necessary in order to maintain coverage of any preferred stock of at least 200%. In addition, as a condition
to obtaining ratings on the preferred stock, the terms of any preferred stock issued are expected to include asset coverage maintenance
provisions which will require the redemption of the preferred stock in the event of non-compliance by the Fund and also may prohibit dividends
and other distributions on the common shares in such circumstances. In order to meet redemption requirements, the Fund may have to liquidate
portfolio securities. Such liquidations and redemptions would cause the Fund to incur related transaction costs and could result in capital
losses to the Fund. Furthermore, the Fund is not permitted to declare any cash dividend or other distribution on its Shares, or repurchase
its Shares, unless, at the time of such declaration or repurchase, the Borrowings have an asset coverage of at least 300% and the preferred
stock has an asset coverage of at least 200% after deducting the amount of such dividend, distribution or purchase price (as the case
may be). Any prohibitions on dividends and other distributions on the Shares could impair the Fund’s ability to qualify as a regulated
investment company under the Internal Revenue Code. The Fund intends, to the extent possible, to prepay all or a portion of the principal
amount of any outstanding Borrowing or purchase or redeem any outstanding shares of preferred stock to the extent necessary in order to
maintain the required asset coverage. Holders of shares of preferred stock, including Series A Preferred Stock (“preferred shareholders”),
voting separately, are entitled to elect two of the Fund’s directors. The remaining directors of the Fund are elected by Shareholders
and preferred shareholders voting together as a single class. In the event the Fund would fail to pay dividends on its preferred stock
for two years, the preferred shareholders would be entitled to elect a majority of the directors of the Fund.
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In addition to the requirements under the 1940
Act, the Fund is subject to various requirements and restrictions under its Series A Preferred Stock. The requirements and restrictions
with respect to the Fund’s preferred stock, including the Series A Preferred Stock, may be more stringent than those imposed by
the 1940 Act, which may include certain restrictions imposed by guidelines of one or more rating agencies which issue ratings for the
Fund’s preferred stock; however, it is not anticipated that they will impede the Adviser from managing the Fund’s portfolio
and repurchase policy in accordance with the Fund’s investment objective and policies. Nonetheless, in order to adhere to such requirements
and restrictions, the Fund may be required to take certain actions, such as reducing its Borrowings and/or redeeming shares of its preferred
stock, including Series A Preferred Stock, with the proceeds from portfolio transactions at what might be an in opportune time in the
market. Such actions could incur transaction costs as well as reduce the net earnings or returns to Shareholders over time. In addition
to other considerations, to the extent that the Fund believes that these requirements and restrictions would impede its ability to meet
its investment objective or its ability to qualify as a regulated investment company, the Fund will not incur additional Borrowings or
issue additional preferred stock.
In general, Borrowings may be at a fixed or floating
rate and are typically based upon short-term rates. The Borrowings in which the Fund may incur from time to time may be secured by mortgaging,
pledging or otherwise subjecting as security the assets of the Fund. Certain types of Borrowings may result in the Fund being subject
to covenants in credit agreements relating to asset coverage and portfolio composition requirements. Generally, covenants to which the
Fund may be subject include affirmative covenants, negative covenants, financial covenants, and investment covenants. An example of an
affirmative covenant would be one that requires the Fund to send its annual audited financial report to the lender. An example of a negative
covenant would be one that prohibits the Fund from making any amendments to its fundamental policies. An example of a financial covenant
is one that would require the Fund to maintain a 3:1 asset coverage ratio. An example of an investment covenant is one that would require
the Fund to limit its investment in a particular asset class. As noted above, the Fund may need to liquidate its investments when it may
not be advantageous to do so in order to satisfy such obligations or to meet any asset coverage and segregation requirements (pursuant
to the 1940 Act or otherwise). As the Fund’s portfolio will be substantially illiquid, any such disposition or liquidation could
result in substantial losses to the Fund. The terms of the Fund’s Borrowings may also contain provisions which limit certain activities
of the Fund, including the payment of dividends to Shareholders in certain circumstances, and the Fund may be required to maintain minimum
average balances with the lender or to pay a commitment or other fee to maintain a line of credit. Any such requirements will increase
the cost of Borrowing over the stated interest rate. In addition, certain types of Borrowings may involve the rehypothecation of the Fund’s
securities. Furthermore, the Fund may be subject to certain restrictions on investments imposed by guidelines of one or more rating agencies,
which may issue ratings for the short-term corporate debt securities issued by the Fund. Any Borrowing will likely be ranked senior or
equal to all other Borrowings of the Fund and the rights of lenders to the Fund to receive interest on and repayment of principal of any
Borrowings will likely be senior to those of the Shareholders. Further, the 1940 Act grants, in certain circumstances, to the lenders
to the Fund certain voting rights in the event of default in the payment of interest on or repayment of principal. In the event that such
provisions would impair the Fund’s status as a regulated investment company under the Code, the Fund, subject to its ability to
liquidate its portfolio, intends to repay the Borrowings.
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The Fund also may borrow money as a temporary
measure for extraordinary or emergency purposes, including the payment of dividends and the settlement of securities transactions which
otherwise might require untimely dispositions of Fund securities.
Due to the Fund’s issuance of Series A Term
Preferred Stock, for tax purposes, the Fund is required to allocate net capital gain and other taxable income, if any, between the Shares
and shares of the Series A Term Preferred Stock in proportion to total dividends paid to each class for the year in which the net capital
gain or other taxable income was realized.
So long as the rate of return, net of applicable
Fund expenses, on the Fund’s portfolio investments purchased with Borrowings or the proceeds from the issuance of preferred stock,
including Series A Term Preferred Stock, exceeds the then-current interest or payment rate and other costs on such Borrowings or preferred
stock, the Fund will generate more return or income than will be needed to pay such interest or dividend payments and other costs. In
this event, the excess will be available to pay higher dividends to Shareholders. If the net rate of return on the Fund’s investments
purchased with Borrowings or the proceeds from the issuance of preferred stock, including Series A Term Preferred Stock, does not exceed
the costs of such Borrowings or preferred stock, the return to Shareholders will be less than if leverage had not been used. In such case,
the Adviser, in its best judgment, nevertheless may determine to maintain the Fund’s leveraged position if it expects that the benefits
to the Shareholders of maintaining the leveraged position will outweigh the current reduced return. Under normal market conditions, the
Fund anticipates that it will be able to invest the proceeds from leverage at a higher rate of return than the costs of leverage, which
would enhance returns to Shareholders. In addition, the cost associated with any issuance and use of leverage is borne by the Shareholders
and results in a reduction of the NAV of the Shares. Such costs may include legal fees, audit fees, structuring fees, commitment fees
and a usage (borrowing) fee.
The use of leverage is a speculative technique
and investors should note that there are special risks and costs associated with the leveraging of the Shares. There can be no assurance
that a leveraging strategy will be successful during any period in which it is employed. When leverage is employed, the NAV and the yield
to Shareholders will be more volatile. Leverage creates a greater risk of loss, as well as potential for more gain, for the Shares that
if leverage is not used. In addition, the Adviser is paid more if the Fund uses leverage, which creates a conflict of interest for the
Adviser.
Effects of Leverage
Assuming the utilization of leverage through a
combination of borrowings and the issuance of preferred stock by the Fund in the aggregate amount of approximately 36.67% of the Fund’s
Managed Assets, at a combined interest or payment rate of 4.77% payable on such leverage, the return generated by the Fund’s portfolio
(net of estimated non-leverage expenses) must exceed 1.75% in order to cover such interest or payment rates and other expenses specifically
related to leverage. These numbers are merely estimates used for illustration. Actual interest or payment rates on the leverage utilized
by the Fund will vary frequently and may be significantly higher or lower than the rate estimated above.
The following table is furnished in response to
requirements of the SEC. It is designed to illustrate the effect of leverage on Share total return, assuming investment portfolio total
returns (comprised of income and changes in the value of securities held in the Fund’s portfolio net of expenses) of -10%, -5%,
0%, 5% and 10%. These assumed investment portfolio returns are hypothetical figures and are not necessarily indicative of the investment
portfolio returns experienced or expected to be experienced by the Fund.
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| Assumed Portfolio Return |
-10.00% |
-5.00% |
0.00% |
5.00% |
10.00% |
| Common Share Total Return |
-18.55% |
-10.66% |
-2.76% |
5.13% |
13.03% |
Share total return is composed of two elements:
the dividends on Shares paid by the Fund (the amount of which is largely determined by the Fund’s net investment income after paying
interest or other payments on its leverage) and gains or losses on the value of the securities the Fund owns. As required by SEC rules,
the table above assumes that the Fund is more likely to suffer capital losses than to enjoy capital appreciation. For example, to assume
a total return of 0%, the Fund must assume that the interest it receives on its investments is entirely offset by losses in the value
of those investments. Figures appearing in the table are hypothetical. Actual returns may be greater or less than those appearing in the
table.
Risk Factors
Investing in the Fund involves certain risks relating
to its structure and investment objective. You should carefully consider these risk factors, together with all of the other information
included in this report, before deciding whether to make an investment in the Fund. An investment in the Fund may not be appropriate for
all investors, and an investment in the Common Shares of the Fund should not be considered a complete investment program.
The risks set forth below are not the only risks
of the Fund, and the Fund may face other risks that have not yet been identified, which are not currently deemed material or which are
not yet predictable. If any of the following risks occur, the Fund’s financial condition and results of operations could be materially
adversely affected. In such case, the Fund’s NAV and the trading price of its securities could decline, and you may lose all or
part of your investment.
Various risk factors included below have been updated since the prior
disclosure date to reflect certain updates.
Investment Strategy Risks:
Asset-Backed
Securities Risks. Asset-backed securities often involve risks that are different from or more acute than risks associated with other
types of debt instruments. For instance, asset-backed securities may be particularly sensitive to changes in prevailing interest rates.
In addition, the underlying assets are subject to prepayments that shorten the securities’ weighted average maturity and may lower
their return. Asset-backed securities are also subject to risks associated with their structure and the nature of the assets underlying
the security and the servicing of those assets. Payment of interest and repayment of principal on asset-backed securities is largely
dependent upon the cash flows generated by the assets backing the securities and, in certain cases, supported by letters of credit, surety
bonds or other credit enhancements. The values of asset-backed securities may be substantially dependent on the servicing of the underlying
asset pools, and are therefore subject to risks associated with the negligence by, or defalcation of, their servicers. Furthermore, debtors
may be entitled to the protection of a number of state and federal consumer credit laws with respect to the assets underlying these securities,
which may give the debtor the right to avoid or reduce payment. In addition, due to their often complicated structures, various asset-backed
securities may be difficult to value and may constitute illiquid investments. If many borrowers on the underlying Alternative Credit
default, losses could exceed the credit enhancement level and result in losses to investors in asset-backed securities.
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An investment in subordinated (residual) classes
of asset-backed securities is typically considered to be an illiquid and highly speculative investment, as losses on the underlying assets
are first absorbed by the subordinated classes. The risks associated with an investment in such subordinated classes of asset-backed securities
include credit risk, regulatory risk pertaining to the Fund’s ability to collect on such securities, platform performance risk and
liquidity risk.
CLO
Risk. The Fund’s investments in CLOs may be riskier than a direct investment in the debt or other securities of the underlying
companies. When investing in CLOs, the Fund may invest in any level of a CLO’s subordination chain, including subordinated (lower-rated)
tranches and residual interests (the lowest tranche). CLOs are typically highly levered and therefore, the junior debt and equity tranches
that the Fund may invest in are subject to a higher risk of total loss and deferral or nonpayment of interest than the more senior tranches
to which they are subordinated. In addition, the Fund will generally have the right to receive payments only from the CLOs, and will
generally not have direct rights against the underlying borrowers or entities that sponsored the CLOs. Furthermore, the investments the
Fund makes in CLOs are at times thinly traded or have only a limited trading market. As a result, investments in such CLOs may be characterized
as illiquid securities.
Closed-End
Investment Companies Risk. The Fund invests in closed-end investment companies, including shares of closed-end funds that are trading
at a discount to NAV or at a premium to NAV. There can be no assurance that the market discount on shares of any closed-end fund purchased
by the Fund will ever decrease.
In fact, it is possible that this market discount
may increase and the Fund may suffer realized or unrealized capital losses due to further decline in the market price of the securities
of such closed-end funds, thereby adversely affecting the NAV of the Fund’s Common Shares. Similarly, there can be no assurance
that any shares of a closed-end fund purchased by the Fund at a premium will continue to trade at a premium or that the premium will not
decrease subsequent to a purchase of such shares by the Fund.
BDCs are a type of closed-end investment company
that generally invest in less mature U.S. private companies or thinly traded U.S. public companies which involve greater risk than well-established
publicly-traded companies. While BDCs are expected to generate income in the form of dividends, certain BDCs during certain periods of
time may not generate such income. The Fund will indirectly bear its proportionate share of any management fees and other operating expenses
incurred by closed-end funds and BDCs in which it invests, and of any performance-based or incentive fees payable by the BDCs in which
it invests, in addition to the expenses paid by the Fund.
Corporate
Debt Risks. Corporate debt securities are long and short-term debt obligations issued by companies (such as publicly issued and privately
placed bonds, notes and commercial paper). The Adviser considers corporate debt securities to be of investment grade quality if they
are rated BBB or higher by S&P Global Ratings Services (“S&P”) or Baa or higher by Moody’s Investor Services,
Inc. (“Moody’s”), or if unrated, determined by the Adviser to be of comparable quality. Investment grade debt securities
generally have adequate to strong protection of principal and interest payments. In the lower end of this category, adverse economic
conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal than in higher
rated categories. The Fund may invest in both secured and unsecured corporate bonds. An unsecured bond may have a lower recovery value
than a secured bond in the event of a default by its issuer.
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Credit and Interest Rate Analysis Risk. The Adviser
is reliant in part on the borrower credit information provided to it or assigned by the platforms when selecting instruments for investment.
To the extent a credit rating is assigned to each borrower by a platform, such rating may not accurately reflect the borrower’s
actual creditworthiness. A platform may be unable, or may not seek, to verify all of the borrower information obtained by it, which it
may use to determine such borrower’s credit rating. Borrower information on which platforms and lenders may rely may be outdated.
In addition, certain information that the Adviser would otherwise seek may not be available, such as financial statements and other financial
information. Furthermore, the Adviser may be unable to perform any independent follow-up verification with respect to a borrower to the
extent the borrower’s name, address and other contact information is required to remain confidential. There is risk that a borrower
may have supplied false or inaccurate information.
Although the Adviser conducts diligence on the
credit scoring methodologies used by platforms from which the Fund purchases instruments, the Fund typically will not have access to all
of the data that platforms utilize to assign credit scores to particular loans purchased directly or indirectly by the Fund, and will
not confirm the truthfulness of such information or otherwise evaluate the basis for the platform’s credit score of those loans.
In addition, the platforms’ credit decisions and scoring models are based on algorithms that could potentially contain programming
or other errors or prove to be ineffective or otherwise flawed. This could adversely affect loan pricing data and approval processes and
could cause loans to be mispriced or misclassified, which could ultimately have a negative impact on the Fund’s performance.
The interest rates on loans established by the
platforms may have not been appropriately set. A failure to set appropriate rates on the loans may adversely impact the ability of the
Fund to receive returns on its instruments that are commensurate with the risks associated with directly or indirectly owning such instruments.
In addition, certain other information used by the platforms and the Adviser in making loan and investment decisions may be deficient
and/or incorrect, which increases the risk of loss on the loan.
Default
Risk. The ability of the Fund to generate income through its investment in loans is dependent upon payments being made by the borrower
underlying such instruments. If a borrower is unable to make its payments on a loan, the Fund may be greatly limited in its ability to
recover any outstanding principal and interest under such loan.
Fixed
Income Securities Risk. The Fund may invest in fixed income securities. Fixed income securities generally represent the obligation
of an issuer to repay to the investor (or lender) the amount borrowed plus interest over a specified time period. Fixed income securities
increase or decrease in value based on changes in interest rates. If rates increase, the value of the fund’s fixed income securities
generally declines. On the other hand, if rates fall, the value of the fixed income securities generally increases. The issuer of a fixed
income security may not be able to make interest and principal payments when due. This risk is increased in the case of issuers of high
yield securities, also known as “junk bonds.” Securities of certain U.S. Government sponsored entities are neither issued
nor guaranteed by the U.S. Government. Fixed income risks include components of the following additional risks:
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Credit
Risk. The issuer of a fixed income security may not be able to make interest and principal payments when due. Generally, the lower
the credit rating of a security, the greater the risk that the issuer will default on its obligation, which could result in a loss to
the Fund. The Fund may invest in securities that are rated in the lowest investment grade category. Issuers of these securities are more
vulnerable to changes in economic conditions than issuers of higher grade securities. As a result of the credit profile of the borrowers
and the interest rates on the Fund’s investment in loans, the delinquency and default experience on the these instruments may be
significantly higher than those experienced by financial products arising from traditional sources of lending. Shareholders are urged
to consider the highly risky nature of the credit quality of the Fund’s investment in loans when analyzing an investment in the
Shares.
High
Yield Securities/Junk Bond Risk. The Fund may invest in high yield securities, also known as “junk bonds.” High yield
securities are not considered to be investment grade. High yield securities may provide greater income and opportunity for gain, but
entail greater risk of loss of principal. High yield securities are predominantly speculative with respect to the issuer’s capacity
to pay interest and repay principal in accordance with the terms of the obligation. The market for high yield securities is generally
less active than the market for higher quality securities. This may limit the ability of the Fund to sell high yield securities at the
price at which it is being valued for purposes of calculating net asset value.
Government
Risk. The U.S. Government’s guarantee of ultimate payment of principal and timely payment of interest on certain U. S. Government
securities owned by the Fund does not imply that the Fund’s shares are guaranteed or that the price of the Fund’s shares
will not fluctuate. In addition, securities issued by Freddie Mac, Fannie Mae and Federal Home Loan Banks are not obligations of, or
insured by, the U.S. Government. If a U.S. Government agency or instrumentality in which the Fund invests defaults and the U.S. Government
does not stand behind the obligation, the Fund’s share price could fall. All U.S. Government obligations are subject to interest
rate risk.
Interest
Rate Risk. The Fund’s share price and total return will vary in response to changes in interest rates. If rates increase, the
value of the Fund’s investments generally will decline, as will the value of a shareholder’s investment in the Fund. Securities
with longer maturities tend to produce higher yields, but are more sensitive to changes in interest rates and are subject to greater
fluctuations in value. A rise in interest rates may negatively impact the Fund’s future income relating to leverage, as the Fund
will be required to earn more income on its investments to recoup any increased costs of leverage.
LIBOR
Risk. The Fund’s investments, interest payment obligations and financing terms may be based on floating rates, such as the
London Interbank Offered Rate (“LIBOR”). In July of 2017, the head of the UK Financial Conduct Authority ("FCA")
announced a desire to phase out the use of LIBOR by the end of 2021. The FCA and ICE Benchmark Administrator have since announced that
most LIBOR settings will no longer be published after December 31, 2021 and a majority of U.S. dollar LIBOR settings will cease publication
after June 30, 2023. The U.S. Federal Reserve, based on the recommendations of the New York Federal Reserve's Alternative Reference Rate
Committee (comprised of major derivative market participants and their regulators), has begun publishing Secured Overnight Financial
Rate Data ("SOFR") that is intended to replace U.S. dollar LIBOR. Proposals for alternative reference rates for other currencies
have also been announced or have already begun publication. Markets are slowly developing in response to these new reference rates. Uncertainty
related to the liquidity impact of the change in rates, and how to appropriately adjust these rates at the time of transition, poses
risks for the Fund. The expected discontinuation of LIBOR could have a significant impact on the financial markets in general and may
also present heightened risk to market participants, including public companies, investment advisers, investment companies, and broker-dealers.
The risks associated with this discontinuation and transition will be exacerbated if the work necessary to effect an orderly transition
to an alternative reference rate is not completed in a timely manner. Accordingly, it is difficult to predict the full impact of the
transition away from LIBOR on the Fund or the Fund’s investments until new reference rates and fallbacks for both legacy and new
instruments and contracts are commercially accepted and market practices become settled.
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The transition process might lead to increased
volatility and illiquidity in markets for instruments whose terms currently include LIBOR. It could also lead to a reduction in the value
of some LIBOR-based investments. Since the usefulness of LIBOR as a benchmark could deteriorate during the transition period, these effects
could occur prior to the completion of the transition. All of the aforementioned may adversely affect the Fund’s performance or
NAV.
Sovereign
Obligation Risk. Investment in sovereign debt obligations involves special risks not present in corporate debt obligations. The issuer
of the sovereign debt or the governmental authorities that control the repayment of the debt may be unable or unwilling to repay principal
or interest when due, and the Fund may have limited recourse in the event of a default. During periods of economic uncertainty, the market
prices of sovereign debt may be more volatile than prices of U.S. debt obligations. In the past, certain emerging markets have encountered
difficulties in servicing their debt obligations, withheld payments of principal and interest, and declared moratoria on the payment
of principal and interest on their sovereign debts.
Fraud
Risk. The Fund is subject to the risk of fraudulent activity associated with the various parties involved in the Fund’s lending,
including the platforms, banks, borrowers and third parties handling borrower and investor information. A platform’s resources,
technologies and fraud prevention tools may be insufficient to accurately detect and prevent fraud. High profile fraudulent activity
or significant increases in fraudulent activity could lead to regulatory intervention, negatively impact operating results, brand and
reputation and lead the defrauded platform to take steps to reduce fraud risk, which could increase costs.
Funding
Bank Risk. Multiple banks may originate loans for lending platforms. If such a bank were to suspend, limit or cease its operations
or a platform’s relationship with a bank were to otherwise terminate, such platform would need to implement a substantially similar
arrangement with another funding bank, obtain additional state licenses or curtail its operations. The Fund is dependent on the continued
success of the platforms that originate the Fund’s investment in loans. If such platforms were unable or impaired in their ability
to operate their lending business, the Adviser may be required to seek alternative sources of investments (e.g., loans originated by
other platforms), which could adversely affect the Fund’s performance and/or prevent the Fund from pursuing its investment objective
and strategies.
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Geographic
Concentration Risk. The Fund is not subject to any geographic restrictions when investing in loans and therefore could be concentrated
in a particular state or region. A geographic concentration of the Fund’s investment in loans may expose the Fund to an increased
risk of loss due to risks associated with certain regions. In the event that a significant portion of the pool of the Fund’s investment
in loans is comprised of loans owed by borrowers resident or operating in certain states, economic conditions, localized weather events,
environmental disasters, natural disasters or other factors affecting these states in particular could adversely impact the delinquency
and default experience of the loans and could impact Fund performance. Further, the concentration of the loans in one or more states
would have a disproportionate effect on the Fund if governmental authorities in any of those states took action against the platforms
lending in such states.
Information Technology Risk. Because the Fund
relies on electronic systems maintained by the custodian and the platforms to maintain records and evidence ownership of such loans and
to service and administer loans (as applicable) it is susceptible to risks associated with such electronic systems. These risks include,
among others: power loss, computer systems failures and Internet, telecommunications or data network failures; operator negligence or
improper operation by, or supervision of, employees; physical and electronic loss of data or security breaches, misappropriation and similar
events; computer viruses; cyber attacks, intentional acts of vandalism and similar events; and hurricanes, fires, floods and other natural
disasters. The Adviser is also reliant on information technology to facilitate the loan acquisition process. Any failure of such technology
could have a material adverse effect on the ability of the Adviser to acquire loans and therefore may impact the performance of the Fund.
Any delays in receiving the data provided by such technology could also impact, among other things, the valuation of the portfolio of
loans.
Investments
in Platforms Risk. The platforms in which the Fund may invest may have a higher risk profile and be more volatile than companies
engaged in lines of business with a longer, established history and such investments should be viewed as longer term investments. The
Fund may invest in listed or unlisted equity securities of platforms or make loans directly to the platforms. Investments in unlisted
equity securities, by their nature, generally involve a higher degree of valuation and performance uncertainties and liquidity risks
than investments in listed equity securities. The success of a platform is dependent upon payments being made by the borrowers of loans
originated by the platform. Any increase in default rates on a platform’s loans could adversely affect the platform’s profitability
and, therefore, the Fund’s investments in the platform.
Illiquidity
Risk. Alternative Credit investments generally have a maturity between six months to five years. Investors acquiring Alternative
Credit investments and other Alternative Credit Instruments directly through platforms and hoping to recoup their entire principal must
generally hold their loans through maturity. Alternative Credit investments and other Alternative Credit Instruments may not be registered
under the Securities Act, and are not listed on any securities exchange. Accordingly, those Alternative Credit Instruments may not be
transferred unless they are first registered under the Securities Act and all applicable state or foreign securities laws or the transfer
qualifies for exemption from such registration. A reliable secondary market has yet to develop, nor may one ever develop, for Alternative
Credit investments and such other Alternative Credit Instruments and, as such, these investments should be considered illiquid. Until
an active secondary market develops, the Fund intends to primarily hold its Alternative Credit investments until maturity. The Fund may
not be able to sell any of its Alternative Credit Instruments even under circumstances when the Adviser believes it would be in the best
interests of the Fund to sell such investments. In such circumstances, the overall returns to the Fund from its Alternative Credit Instruments
may be adversely affected. Moreover, certain Alternative Credit Instruments are subject to certain additional significant restrictions
on transferability. Although the Fund may attempt to increase its liquidity by borrowing from a bank or other institution, its assets
may not readily be accepted as collateral for such borrowing.
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The Fund may also invest without limitation in
securities that, at the time of investment, are illiquid, as determined by using the SEC’s standard applicable to registered investment
companies (i.e., securities that cannot be disposed of by the Fund within seven days in the ordinary course of business at approximately
the amount at which the Fund has valued the securities). The Fund may also invest in restricted securities. Investments in restricted
securities could have the effect of increasing the amount of the Fund’s assets invested in illiquid securities if qualified institutional
buyers are unwilling to purchase these securities.
Illiquid and restricted securities may be difficult
to dispose of at a fair price at the times when the Fund believes it is desirable to do so. The market price of illiquid and restricted
securities generally is more volatile than that of more liquid securities, which may adversely affect the price that the Fund pays for
or recovers upon the sale of such securities. Illiquid and restricted securities may also be more difficult to value, especially in challenging
markets.
Limited
Operating History of Platforms Risk. Many of the platforms, and alternative credit in general, are in the early stages of development
and have a limited operating history. As a result, there is a lack of significant historical data regarding the performance of Alternative
Credit and the long term outlook of the industry is uncertain. In addition, because Alternative Credit investments are originated using
a lending method on a platform that has a limited operating history, borrowers may not view or treat their obligations on such loans
as having the same significance as loans from traditional lending sources, such as bank loans.
Market
Discount. Common stock of closed-end funds frequently trades at a discount from its net asset value. This risk may be greater for
investors selling their shares in a relatively short period of time after completion of the initial offering. The Fund’s Common
Shares may trade at a price that is less than the initial offering price. This risk would also apply to the Fund’s investments
in closed-end funds.
Alternative
Credit and Pass-Through Notes Risk. Alternative Credit Instruments are generally not rated and constitute a highly risky and speculative
investment, similar to an investment in “junk” bonds. There can be no assurance that payments due on underlying Alternative
Credit investments will be made. The Shares therefore should be purchased only by investors who could afford the loss of the entire amount
of their investment.
A substantial portion of the Alternative Credit
in which the Fund may invest will not be secured by any collateral, will not be guaranteed or insured by a third party and will not be
backed by any governmental authority. Accordingly, the platforms and any third-party collection agencies will be limited in their ability
to collect on defaulted Alternative Credit. With respect to Alternative Credit secured by collateral, there can be no assurance that the
liquidation of any such collateral would satisfy a borrower’s obligation in the event of a default under its Alternative Credit.
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Furthermore, Alternative Credit may not contain
any cross-default or similar provisions. To the extent an Alternative Credit investment does not contain a cross-default provision, the
loan will not be placed automatically in default upon that borrower’s default on any of the borrower’s other debt obligations,
unless there are relevant independent grounds for a default on the loan. In addition, the Alternative Credit investment will not be referred
to a third-party collection agency for collection because of a borrower’s default on debt obligations other than the Alternative
Credit investment. If a borrower first defaults on debt obligations other than the Alternative Credit investment, the creditors to such
other debt obligations may seize the borrower’s assets or pursue other legal action against the borrower, which may adversely impact
the ability to recoup any principal and interest payments on the Alternative Credit investment if the borrower subsequently defaults on
the loan. In addition, an operator of a platform is generally not required to repurchase Alternative Credit investments from a lender
except under very narrow circumstances, such as in cases of verifiable identity fraud by the borrower.
Borrowers may seek protection under federal bankruptcy
law or similar laws. If a borrower files for bankruptcy (or becomes the subject of an involuntary petition), a stay will go into effect
that will automatically put any pending collection actions on hold and prevent further collection action absent bankruptcy court approval.
Whether any payment will ultimately be made or received on an Alternative Credit investment after bankruptcy status is declared depends
on the borrower’s particular financial situation and the determination of the court.
As Pass-Through Notes generally are pass-through
obligations of the operators of the lending platforms, and are not direct obligations of the borrowers under the underlying Alternative
Credit investment originated by such platforms, holders of certain Pass-Through Notes are exposed to the credit risk of the operator.
An operator that becomes subject to bankruptcy proceedings may be unable to make full and timely payments on its Pass-Through Notes even
if the borrowers of the underlying Alternative Credit investment timely make all payments due from them. There may be a delay between
the time the Fund commits to purchase a Pass-Through Note and the issuance of such note and, during such delay, the funds committed to
such an investment will not be available for investment in other Alternative Credit Instruments. Because the funds committed to an investment
in Pass-Through Notes do not earn interest until the issuance of the note, the delay in issuance will have the effect of reducing the
effective rate of return on the investment.
Mortgage-Backed
Securities Risks. Mortgage-backed securities represent participation interests in pools of residential mortgage loans purchased from
individual lenders by a federal agency or originated and issued by private lenders. The Fund invests in mortgage-backed securities and
is subject to the following risks.
Credit
and Market Risks of Mortgage-Backed Securities. The mortgage loans or the guarantees underlying mortgage-backed securities may default
or otherwise fail leading to non-payment of interest and principal.
Collateralized
Mortgage Obligations. There are certain risks associated specifically with CMOs. CMOs are debt obligations collateralized by mortgage
loans or mortgage pass-through securities, which utilize estimates of future economic conditions. These estimates may vary from actual
future results, particularly during periods of extreme market volatility. CMOs issued by private entities are not guaranteed by any government
agency; if the collateral securing the CMO, as well as any third party credit support or guarantees, is insufficient to make payment,
the holder could sustain a loss.
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Russia/Ukraine
Market Risk. In February 2022, Russia commenced a military attack on Ukraine. The outbreak of hostilities between the two countries
and the threat of wider-spread hostilities could have a severe adverse effect on the region and global economies, including significant
negative impacts on the markets for certain securities and commodities, such as oil and natural gas. In addition, sanctions imposed on
Russia by the United States and other countries, and any sanctions imposed in the future, could have a significant adverse impact on
the Russian economy and related markets. The price and liquidity of investments may fluctuate widely as a result of the conflict and
related events. How long the armed conflict and related events will last cannot be predicted. These tensions and any related events could
have a significant impact on Fund performance and the value of Fund investments. The inclusion of Russia/Ukraine Market Risk under the
Risk Factors section is a material change since the prior disclosure date.
Pandemic
Risk. Beginning in the first quarter of 2020, financial markets in the United States and around the world experienced extreme and
in many cases unprecedented volatility and severe losses due to the global pandemic caused by COVID-19, a novel coronavirus, and since
then, the number of cases has fluctuated and new “variants” have been confirmed around the world. The pandemic has resulted
in a wide range of social and economic disruptions, including closed borders, voluntary or compelled quarantines of large populations,
stressed healthcare systems, reduced or prohibited domestic or international travel, supply chain disruptions, and so-called “stay-at-home”
orders throughout much of the United States and many other countries. The fall-out from these disruptions has included the rapid closure
of businesses deemed “non-essential” by federal, state, or local governments and rapidly increasing unemployment, as well
as greatly reduced liquidity for certain instruments at times. Some sectors of the economy and individual issuers have experienced particularly
large losses. Such disruptions may continue for an extended period of time or reoccur in the future to a similar or greater extent. In
response, the U.S. government and the Federal Reserve have taken extraordinary actions to support the domestic economy and financial
markets, resulting in very low interest rates and in some cases negative yields. Although vaccines for COVID-19 have become more widely
available, it is unknown how long circumstances related to the pandemic will persist, whether they will reoccur in the future, whether
efforts to support the economy and financial markets will be successful, and what additional implications may follow from the pandemic.
The impact of these events and other epidemics or pandemics in the future could adversely affect Fund performance.
Platform
Concentration Risk. The Fund may invest 25% or more of its Managed Assets in Alternative Credit originated from one or a limited
number of platform(s). A concentration in select platforms may subject the Fund to increased dependency and risks associated with those
platforms than it would otherwise be subject to if it were more broadly diversified across a greater number of platforms. The Fund’s
concentration in certain platforms may expose it to increased risk of default and loss on the Alternative Credit in which it invests
through such platforms if such platforms have, among other characteristics, lower borrower credit criteria or other minimum eligibility
requirements, or have deficient procedures for conducting credit and interest rate analyses as part of their loan origination processes,
relative to other platforms. In addition, the fewer platforms through which the Fund invests, the greater the risks associated with those
platforms changing their arrangements will become.
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Preferred
Stock Risk. Preferred stock is subject to many of the risks associated with debt securities, including interest rate risk. In addition,
preferred stocks may not pay dividends, an issuer may suspend payment of dividends on U.S. preferred stock at any time, and in certain
situations an issuer may call or redeem its preferred stock or convert it to common stock. Declining common stock values may also cause
the value of the Fund’s investments in preferred stock to decline.
Prepayment
Risk. Borrowers may decide to prepay all or a portion of the remaining principal amount due under a borrower loan at any time without
penalty (unless the underlying loan agreements provide for prepayment penalties as may be the case in certain non-consumer Alternative
Credit). In the event of a prepayment of the entire remaining unpaid principal amount of a loan, the Fund will receive such prepayment
amount, but further interest will not accrue on the loan after the principal has been paid in full. If the borrower prepays a portion
of the remaining unpaid principal balance, interest will cease to accrue on such prepaid portion, and the Fund will not receive all of
the interest payments that the Adviser may have originally expected to receive on the loan.
Private
Investment Funds Risk. The Fund, as a direct and indirect holder of securities issued by private investment funds, will bear a pro
rata share of the vehicles’ expenses, including management and performance fees. The performance fees charged by certain private
investment funds may create an incentive for its manager to make investments that are riskier and/or more speculative than those it might
have made in the absence of a performance fee. Furthermore, private investment fund are subject to specific risks, depending on the nature
of the vehicle, and also may employ leverage such that their returns are more than one times that of their benchmark which could amplify
losses suffered by the Fund when compared to unleveraged investments. Shareholders of the private investment fund are not entitled to
the protections of the 1940 Act.
Real
Estate Investment Risk. The Fund invests in Real Estate Companies, such as REITs, which expose investors to the risks of owning real
estate directly, as well as to risks that relate specifically to the way in which Real Estate Companies are organized and operated. Real
estate is highly sensitive to general and local economic conditions and developments and is characterized by intense competition and
periodic overbuilding. Many Real Estate Companies, including REITs, utilize leverage (and some may be highly leveraged), which increases
investment risk and the risk normally associated with debt financing, and could potentially increase the Fund’s losses. Rising
interest rates could result in higher costs of capital for Real Estate Companies, which could negatively affect a Real Estate Company’s
ability to meet its payment obligations or its financing activity and could decrease the market prices for REITs and for properties held
by such REITs. In addition, to the extent a Real Estate Company has its own expenses, the Fund (and indirectly, its shareholders) will
bear its proportionate share of such expenses. Real Estate Companies may be subject to concentration risk, interest rate risk, leverage
risk, illiquidity risk and regulatory risks associated with applicable domestic and foreign laws.
Regulatory
and Other Risks Associated with Platforms and Alternative Credit. The platforms through which Alternative Credit are originated are
subject to various statutes, rules and regulations issued by federal, state and local government authorities. A failure to comply with
the applicable laws, rules and regulations may, among other things, subject the platform or its related entities to certain registration
requirements with government authorities and result in the payment of any penalties and fines; result in the revocation of their licenses;
cause the loan contracts originated by the platform to be voided or otherwise impair the enforcement of such loans; and subject them
to potential civil and criminal liability, class action lawsuits and/or administrative or regulatory enforcement actions. Any of the
foregoing could have a material adverse effect on a platform’s financial condition, results of operations or ability to perform
its obligations with respect to its lending business or could otherwise result in modifications in the platform’s methods of doing
business which could impair the platform’s ability to originate or service Alternative Credit or collect on Alternative Credit.
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Alternative Credit industry participants, including
platforms, may be subject in certain cases to increased risk of litigation alleging violations of federal and state laws and regulations
and consumer law torts, including unfair or deceptive practices. Moreover, Alternative Credit generally are written using standardized
documentation. Thus, many borrowers may be similarly situated in so far as the provisions of their respective contractual obligations
are concerned. Accordingly, allegations of violations of the provisions of applicable federal or state consumer protection laws could
potentially result in a large class of claimants asserting claims against the platforms and other related entities. However, some borrower
agreements contain arbitration provisions that would possibly limit or preclude class action litigation with respect to claims of borrowers.As
noted above, each of the platforms through which the Fund may invest may adhere to a novel or different business model, resulting in uncertainty
as to the regulatory environment applicable to a particular platform and the Fund.
If the platforms’ ability to be the assignee
and beneficiary of a funding bank’s ability to export the interest rates, and related terms and conditions, permitted under the
laws of the state where the bank is located to borrowers in other states was determined to violate applicable lending laws, this could
subject the platforms to the interest rate restrictions, and related terms and conditions, of the lending or usury laws of each of the
states in which it operates. The result would be a complex patchwork of regulatory restrictions that could materially and negatively impact
the platforms’ operations and ability to operate, in which case they may be forced to terminate or significantly alter their business
and activities, resulting in a reduction in the volume of loans available for investment for lenders such as the Fund.
In addition, numerous statutory provisions, including
federal bankruptcy laws and related state laws, may interfere with or affect the ability of a creditor to enforce an Alternative Credit
investment. It is possible that a period of adverse economic conditions resulting in high defaults and delinquencies on Alternative Credit
will increase the potential bankruptcy risk to platforms and its related entities. The regulatory environment applicable to platforms
and their related entities may be subject to periodic changes. Any such changes could have an adverse effect on the platforms’ and
related entities’ costs and ability to operate. The platforms would likely seek to pass through any increase in costs to lenders
such as the Fund. Further, changes in the regulatory application or judicial interpretation of the laws and regulations applicable to
financial institutions generally and alternative credit in particular also could impact the manner in which the alternative credit industry
conducts its business. The regulatory environment in which financial institutions operate has become increasingly complex and robust,
and supervisory efforts to apply relevant laws, regulations and policies have become more intense.
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Risk
of Adverse Market and Economic Conditions. Alternative Credit default rates, and Alternative Credit generally, may be significantly
affected by economic downturns or general economic conditions beyond the control of any borrowers. In particular, default rates on Alternative
Credit may increase due to factors such as prevailing interest rates, the rate of unemployment, the level of consumer confidence, residential
real estate values, the value of the U.S. dollar, energy prices, changes in consumer spending, the number of personal bankruptcies, disruptions
in the credit markets and other factors. A significant downturn in the economy could cause default rates on Alternative Credit to increase.
A substantial increase in default rates, whether due to market and economic conditions or otherwise, could adversely impact the viability
of the overall alternative credit industry.
Risks
of Concentration in the Financials Sector. A fund concentrated in a single industry or group of industries is likely to present more
risks than a fund that is broadly diversified over several industries or groups of industries. Compared to the broad market, an individual
sector may be more strongly affected by changes in the economic climate, broad market shifts, moves in a particular dominant stock or
regulatory changes. Thus, the Fund’s concentration in securities of companies within industries in the financial sector may make
it more susceptible to adverse economic or regulatory occurrences affecting this sector, such as changes in interest rates, loan concentration
and competition.
Risk
of Inadequate Guarantees and/or Collateral of Alternative Credit. To the extent that the obligations under an Alternative Credit
investment are guaranteed by a third-party, there can be no assurance that the guarantor will perform its payment obligations should
the underlying borrower to the loan default on its payments. Similarly, to the extent an Alternative Credit investment is secured, there
can be no assurance as to the amount of any funds that may be realized from recovering and liquidating any collateral or the timing of
such recovery and liquidation and hence there is no assurance that sufficient funds (or, possibly, any funds) will be available to offset
any payment defaults that occur under the Alternative Credit investment. In addition, if it becomes necessary to recover and liquidate
any collateral with respect to a secured Alternative Credit investment, it may be difficult to sell such collateral and there will likely
be associated costs that would reduce the amount of funds otherwise available to offset the payments due under the loan. If a borrower
of a secured Alternative Credit investment enters bankruptcy, an automatic stay of all proceedings against such borrower’s property
will be granted. This stay will prevent any recovery and liquidation of the collateral securing such loan, unless relief from the stay
can be obtained from the bankruptcy court. There is no guarantee that any such relief will be obtained. Significant legal fees and costs
may be incurred in attempting to obtain relief from a bankruptcy stay from the bankruptcy court and, even if such relief is ultimately
granted, it may take several months or more to obtain.
Risk
of Regulation as an Investment Company or an Investment Adviser. If platforms or any related entities are required to register as
investment companies under the 1940 Act or as investment advisers under the Investment Advisers Act of 1940, their ability to conduct
business may be materially adversely affected, which may result in such entities being unable to perform their obligations with respect
to their Alternative Credit investments, including applicable indemnity, guaranty, repurchasing and servicing obligations, and any contracts
entered into by a platform or related entity while in violation of the registration requirements may be voidable.
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Risks
Associated with Recent Events in the Alternative Credit Industry. The alternative credit industry is heavily dependent on investors
for liquidity and at times during the recent past, there has been some decreasing interest from institutional investors in purchasing
Alternative Credit (due both to yield and performance considerations as well as reactions to platform and industry events described below),
causing some platforms to increase rates. In addition, there is concern that a weakening credit cycle could stress servicing of Alternative
Credit and result in significant losses.
In early 2016, concerns were raised pertaining
to certain loan identification practices and other compliance related issues of LendingClub. Those resulted in top management changes
at LendingClub and class action lawsuits being filed against LendingClub after its stock precipitously dropped, and as a result, increased
volatility in the industry and caused some institutional investors to retrench from purchasing Alternative Credit Instruments, either
from LendingClub specifically or in general with respect to any Alternative Credit Instruments. LendingClub entered into a settlement
with the SEC in September 2018 related to these events. While the industry has stabilized after these events, the occurrence of any additional
negative business practices involving an alternative credit platform, or the inability for alternative credit platforms to assure investors
and other market participants of its ability to conduct business practices acceptable to borrowers and investors, may significantly and
adversely impact the platforms and/or the alternative credit industry as a whole and, therefore, the Fund’s investments in Alternative
Credit Instruments.
There has been increased regulatory scrutiny of
the Alternative Credit industry, including in white papers issued by the U.S. Department of the Treasury and the OCC and in state investigations
into Alternative Credit platforms. In addition, an increasing number of lawsuits have been filed in various states alleging that Alternative
Credit platforms are the true lenders and not the funding banks. It is possible that litigation or regulatory actions may challenge funding
banks’ status as a loan’s true lender, and if successful, platform operators or loan purchasers may become subject to state
licensing and other consumer protection laws and requirements. If the platform operators or subsequent assignees of the loans were found
to be the true lender of the loans, the loans could be void or voidable or subject to rescission or reduction of principal or interest
paid or to be paid in whole or in part or subject to damages or penalties.
Servicer
Risk. The Fund expects that all of its direct and indirect investments in loans originated by alternative credit platforms will be
serviced by a platform or a third-party servicer. However, the Fund’s investments could be adversely impacted if a platform that
services the Fund’s investments becomes unable or unwilling to fulfill its obligations to do so. In the event that the servicer
is unable to service the loans, there can be no guarantee that a backup servicer will be able to assume responsibility for servicing
the loans in a timely or cost-effective manner; any resulting disruption or delay could jeopardize payments due to the Fund in respect
of its investments or increase the costs associated with the Fund’s investments. If the servicer becomes subject to a bankruptcy
or similar proceeding, there is some risk that the Fund’s investments could be re-characterized as secured loans from the Fund
to the platform, which could result in uncertainty, costs and delays from having the Fund’s investment deemed part of the bankruptcy
estate of the platform, rather than an asset owned outright by the Fund. To the extent the servicer becomes subject to a bankruptcy or
similar proceeding, there is a risk that substantial losses will be incurred by the Fund.
Small
and Mid-Capitalization Investing Risk. The Fund may gain exposure to the securities of small capitalization companies, mid-capitalization
companies and recently organized companies. For example, the Fund may invest in securities of alternative credit platforms or may gain
exposure to other small capitalization, mid-capitalization and recently organized companies through investments in the borrowings of
such companies facilitated through an alternative credit platform. Historically, such investments, and particularly investments in smaller
capitalization companies, have been more volatile in price than those of larger capitalized, more established companies.
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SME
Loans Risk. The businesses of SME loan borrowers may not have steady earnings growth, may be operated by less experienced individuals,
may have limited resources and may be more vulnerable to adverse general market or economic developments, among other concerns, which
may adversely affect the ability of such borrowers to make principal and interest payments on the SME loans. Certain SMEs may be unable
to effectively access public equity or debt markets. The average interest rate charged to, or required of, such obligors generally is
higher than that charged by commercial banks and other institutions providing traditional sources of credit or that set by the debt market.
These traditional sources of credit typically impose more stringent credit requirements than the loans provided by certain platforms
through which the Fund may make its investments.
Specialty
Finance and Other Financial Companies Risk. The profitability of specialty finance and other financial companies is largely dependent
upon the availability and cost of capital funds, and may fluctuate significantly in response to changes in interest rates, as well as
changes in general economic conditions. Any impediments to a specialty finance or other financial company’s access to capital markets,
such as those caused by general economic conditions or a negative perception in the capital markets of the company’s financial
condition or prospects, could adversely affect such company’s business. From time to time, severe competition may also affect the
profitability of specialty finance and other financial companies.
Specialty finance and other financial companies
are subject to rapid business changes, significant competition, value fluctuations due to the concentration of loans in particular industries
significantly affected by economic conditions (such as real estate or energy) and volatile performance based upon the availability and
cost of capital and prevailing interest rates. In addition, credit and other losses resulting from the financial difficulties of borrowers
or other third parties potentially may have an adverse effect on companies in these industries. Credit losses or mergers, acquisitions,
or bankruptcies of financial firms could make it difficult for specialty finance and other financial companies to obtain financing on
favorable terms or at all, which would seriously affect the profitability of such firms. Furthermore, accounting rule changes, including
with respect to the standards regarding the valuation of assets, consolidation in the financial industry and additional volatility in
the stock market have the potential to significantly impact specialty finance companies as well.
Specialty finance and other financial companies
in general are subject to extensive governmental regulation, which may change frequently. Regulatory changes could cause business disruptions
or result in significant loss of revenue to companies in which the Fund invests, and there can be no assurance as to the actual impact
that these laws and their regulations will have on the financial markets and the Fund’s investments in specialty finance and other
financial companies. Specialty finance and other financial companies in a given country may be subject to greater governmental regulation
than many other industries, and changes in governmental policies and the need for regulatory approval may have a material effect on the
services offered by companies in the financial services industry. Governmental regulation may limit both the financial commitments banks
can make, including the amounts and types of loans, and the interest rates and fees they can charge. In addition, governmental regulation
in certain foreign countries may impose interest rate controls, credit controls and price controls.
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Under current regulations of the SEC, the Fund
may not invest more than 5% of its total assets in the securities of any company that derives more than 15% of its gross revenues from
securities brokerage, underwriting or investment management activities. In addition, the Fund may not acquire more than 5% of the outstanding
equity securities, or more than 10% of the outstanding principal amount of debt securities, of any such company. This may limit the Fund’s
ability to invest in certain specialty finance and other financial companies.
Banks may invest and operate in an especially
highly regulated environment and are subject to extensive supervision by numerous federal and state regulatory agencies including, but
not limited to, the Federal Reserve Board, the Federal Deposit Insurance Corporation and state banking authorities. Changes in regulations
and governmental policies and accounting principles could adversely affect the business and operations of banks in which the Fund invests.
Savings institutions frequently have a large proportion
of their assets in the form of loans and securities secured by residential real estate. As a result, the financial condition and results
of operations of such savings institutions would likely be affected by the conditions in the residential real estate markets in the areas
in which these savings institutions do business.
Leasing companies can be negatively impacted by changes in tax laws
which affect the types of transactions in which such companies engage.
The performance of the Fund’s investments
in insurance companies will be subject to risk from several additional factors. The earnings of insurance companies will be affected by,
in addition to general economic conditions, pricing (including severe pricing competition from time to time), claims activity and marketing
competition. Insurance companies are subject to extensive governmental regulation, including the imposition of maximum rate levels, which
may not be adequate for some lines of business. Proposed or potential anti-trust or tax law changes also may affect adversely insurance
companies’ policy sales, tax obligations and profitability.
SPAC
Risks. SPACs are collective investment structures that pool funds in order to seek potential acquisition opportunities. Unless and
until an acquisition is completed, a SPAC generally invests its assets (less an amount to cover expenses) in U.S. government securities,
money market fund securities and cash. SPACs and similar entities may be blank check companies with no operating history or ongoing business
other than to seek a potential acquisition. Accordingly, the value of their securities is particularly dependent on the ability of the
entity’s management to identify and complete a profitable acquisition. Certain SPACs may seek acquisitions only in limited industries
or regions, which may increase the volatility of their prices. If an acquisition that meets the requirements for the SPAC is not completed
within a predetermined period of time, the invested funds are returned to the entity’s shareholders. Investments in SPACs may be
illiquid and/or be subject to restrictions on resale. To the extent the SPAC is invested in cash or similar securities, this may impact
a Fund’s ability to meet its investment objective.
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The officers and directors of a SPAC may operate
multiple SPACs and could have conflicts of interest in determining to which SPAC a particular business opportunity should be presented.
In such circumstances, there can be no assurance that a given business opportunity would be presented to the SPAC in which the Fund holds
an investment.
Investing in any investment company security involves
risk, including the risk that you may receive little or no return on your investment or even that you may lose part or all of your investment.
You should carefully consider these risks and uncertainties as well as the other information described in this Prospectus (as incorporated
by reference) and in any applicable prospectus supplement before you decide whether to invest in the Fund. In addition, the SAI contains
further information regarding the risks associated with an investment in the Fund. The risks in these documents are not the only risks
that the Fund may face, and the Fund may face other risks that we have not yet identified, which we do not currently deem material or
which are not yet predictable. If any of these risks occur, the Fund’s business, financial condition and results of operations could
be materially adversely affected. In such case, the Fund’s NAV and the trading price of its securities could decline, and you may
lose all or part of your investment.
Student
Loans Risk. In general, the repayment ability of borrowers of student loans, as well as the rate of prepayments on student loans,
may be influenced by a variety of economic, social, competitive and other factors, including changes in interest rates, the availability
of alternative financings, regulatory changes affecting the student loan market and the general economy. For instance, certain student
loans may be made to individuals who generally have higher debt burdens than other individual borrowers (such as students of post-secondary
programs). The effect of the foregoing factors is impossible to predict.
Valuation
Risk. Many of the Fund’s investments may be difficult to value. Where market quotations are not readily available or deemed
unreliable, the Fund will value such investments in accordance with fair value procedures adopted by the Board of Directors. Valuation
of illiquid investments may require more research than for more liquid investments. In addition, elements of judgment may play a greater
role in valuation in such cases than for investments with a more active secondary market because there is less reliable objective data
available. An instrument that is fair valued may be valued at a price higher or lower than the value determined by other funds using
their own fair valuation procedures. Prices obtained by the Fund upon the sale of such investments may not equal the value at which the
Fund carried the investment on its books, which would adversely affect the NAV of the Fund.
Tax
Risk. The treatment of Alternative Credit and other Alternative Credit Instruments for tax purposes is uncertain. In addition, changes
in tax laws or regulations, or interpretations thereof, in the future could adversely affect the Fund, including its ability to qualify
as a regulated investment company, or the participants in the alternative credit industry. Investors should consult their tax advisors
as to the potential tax treatment of Shareholders.
The Fund intends to elect to be treated as a regulated
investment company for federal income tax purposes. In order to qualify for such treatment, the Fund will need to meet certain organization,
income, diversification and distribution tests. The Fund has adopted policies and guidelines that are designed to enable the Fund to meet
these tests, which will be tested for compliance on a regular basis for the purposes of being treated as a regulated investment company
for federal income tax purposes. However, some issues related to qualification as a regulated investment company are open to interpretation.
For example, the Fund intends to primarily invest in whole loans originated by alternative credit platforms. The Fund has taken the position
that the issuer of such loans will be the identified borrowers in the loan documentation. The IRS, however, could disagree and successfully
assert that the alternative credit platforms should be viewed as the issuer of the loans. If the IRS prevailed, the Fund would need to
determine whether treating the alternative credit platforms as the issuer would cause the Fund to fail the regulated investment company
diversification tests. If, for any taxable year, the Fund did not qualify as a regulated investment company for U.S. federal income tax
purposes, it would be treated as a U.S. corporation subject to U.S. federal income tax at the Fund level, and possibly state and local
income tax, and distributions to shareholders would not be deductible by the Fund in computing its taxable income.
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| Summary of Updated Information Regarding the Fund |
June 30, 2022 (Unaudited) |
Structural and Market-Related Risks:
Anti-Takeover
Provisions. Maryland law and the Fund’s Charter and Bylaws include provisions that could limit the ability of other entities
or persons to acquire control of the Fund or to convert the Fund to open-end status, including the adoption of a staggered Board of Directors
and the supermajority voting requirements. These provisions could deprive the shareholders of opportunities to sell their Common Shares
at a premium over the then current market price of the Common Shares or at NAV.
Controlling
Shareholder Risk. The Shares may be held by a Shareholder, such as a RiverNorth Fund, or a group of Shareholders that may own a significant
percentage of the Fund for an indefinite period of time. As long as a RiverNorth Fund holds a substantial amount of the Fund’s
Shares, it may be able to exercise a controlling influence in matters submitted to a vote of Shareholders. The ability to exercise a
controlling influence over the Fund may result in conflicts of interest because, among other things, the Adviser is the investment adviser
of the Fund and each of the RiverNorth Funds. Cybersecurity Risk. A cybersecurity breach may disrupt the business operations of the Fund
or its service providers. A breach may allow an unauthorized party to gain access to Fund assets, customer data, or proprietary information,
or cause the Fund and/or its service providers to suffer data corruption or lose operational functionality.
Distribution Policy Risks. The Fund currently
intends to make distributions to common shareholders on a monthly basis in an amount equal to 10% annually of the Fund’s NAV per
Common Share. These fixed distributions are not related to the amount of the Fund’s net investment income or net realized capital
gains. If, for any monthly distribution, net investment income and net realized capital gains were less than the amount of the distribution,
the difference would be distributed from the Fund’s assets. The Fund’s distribution rate is not a prediction of what the Fund’s
actual total returns will be over any specific future period.
A portion or all of any distribution of the Fund
may consist of a return of capital. A return of capital represents the return of a shareholder’s original investment in the Common
Shares and should not be confused with a dividend from profits and earnings. Such distributions are generally not treated as taxable income
for the investor. Instead, shareholders will experience a reduction in the basis of their Common Shares, which may increase the taxable
capital gain, or reduce capital loss, realized upon the sale of such Common Shares. Upon a sale of their Common Shares, shareholders generally
will recognize capital gain or loss measured by the difference between the sale proceeds received by the shareholder and the shareholder’s
federal income tax basis in the Common Shares sold, as adjusted to reflect return of capital. It is possible that a return of capital
could cause a shareholder to pay a tax on capital gains with respect to Common Shares that are sold for an amount less than the price
originally paid for them. Shareholders are advised to consult with their own tax advisers with respect to the tax consequences of their
investment in the Fund. The Fund’s distribution policy may result in the Fund making a significant distribution in December of each
year in order to maintain the Fund’s status as a regulated investment company. Depending upon the income of the Fund, such a year-end
distribution may be taxed as ordinary income to investors.
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Inflation/Deflation
Risk. Inflation risk is the risk that the value of assets or income from investments will be worth less in the future as inflation
decreases the value of money. As inflation increases, the real value of Shares and distributions can decline. Deflation risk is the risk
that prices throughout the economy decline over time – the opposite of inflation. Deflation may have an adverse effect on the creditworthiness
of issuers and may make issuer defaults more likely, which may result in a decline in the value of the Fund’s portfolio.
Leverage
Risks. Leverage is a speculative technique that exposes the Fund to greater risk and increased costs than if it were not implemented.
Increases and decreases in the value of the Fund’s portfolio will be magnified when the Fund uses leverage. As a result, leverage
may cause greater changes in the Fund’s net asset value. The leverage costs may be greater than the Fund’s return on the
underlying investments made from the proceeds of leverage. The Fund’s leveraging strategy may not be successful.
Liquidity
Risks. Although the Shares are listed on the NYSE, there might be no or limited trading volume in the Fund’s Shares. Moreover,
there can be no assurance that the Fund will continue to meet the listing eligibility requirements of a national securities exchange.
Accordingly, investors may be unable to sell all or part of their Shares in a particular timeframe. Shares in the Fund are therefore
suitable only for investors that can bear the risks associated with the limited liquidity of Shares and should be viewed as a long-term
investment. In addition, although the Fund conducts quarterly repurchase offers of its Shares, there is no guarantee that all tendered
Shares will be accepted for repurchase or that Shareholders will be able to sell all of the Shares they desire in a quarterly repurchase
offer. In certain instances, repurchase offers may be suspended or postponed.
Unlike open-end funds (commonly known as mutual
funds) which generally permit redemptions on a daily basis, Shares will not be redeemable at an investor’s option (other than pursuant
to the Fund’s repurchase policy, as defined below). The NAV of the Shares may be volatile. As the Shares are not traded, investors
may not be able to dispose of their investment in the Fund no matter how poorly the Fund performs. The Fund is designed for long-term
investors and not as a trading vehicle. Moreover, the Shares will not be eligible for “short sale” transactions or other directional
hedging products.
Management
Risk and Reliance on Key Personnel. The Adviser will apply investment techniques and risk analyses in making investment decisions
for the Fund, but there can be no guarantee that these will produce the desired results. The Adviser’s judgments about the attractiveness,
value and potential appreciation of an alternative credit platform or individual security in which the Fund invests may prove to be incorrect.
In addition, the implementation of the Fund’s investment strategies depends upon the continued contributions of certain key employees
of the Adviser, some of whom have unique talents and experience and would be difficult to replace.
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Potential
Conflicts of Interest. The Adviser manages and/or advises other investment funds or accounts with the same or similar investment
objectives and strategies as the Fund, and as a result, may face conflicts of interest regarding the implementation of the Fund’s
strategy and allocation between funds and accounts. This may limit the Fund’s ability to take full advantage of the investment
opportunity or affect the market price of the investment. The Adviser may also have incentives to favor one account over another due
to different fees paid to such accounts. While the Adviser has adopted policies and procedures that address these potential conflicts
of interest, there is no guarantee that the policies will be successful in mitigating the conflicts of interest that arise. In addition,
the Fund’s use of leverage will increase the amount of fees paid to the Adviser, creating a financial incentive for the Adviser
to leverage the Fund.
Regulation
as Lender Risk. The loan industry is highly regulated and loans made through lending platforms are subject to extensive and complex
rules and regulations issued by various federal, state and local government authorities. One or more regulatory authorities may assert
that the Fund, when acting as a lender under the platforms, is required to comply with certain laws or regulations which govern the consumer
or commercial (as applicable) loan industry. If the Fund were required to comply with additional laws or regulations, it would likely
result in increased costs for the Fund and may have an adverse effect on its results or operations or its ability to invest in Alternative
Credit and certain Alternative Credit Instruments. In addition, although in most cases the Fund is not currently required to hold a license
in connection with the acquisition and ownership of Alternative Credit, certain states require (and other states could in the future
take a similar position) that lenders under alternative credit platforms or holders of Alternative Credit investments be licensed. Such
a licensing requirement could subject the Fund to a greater level of regulatory oversight by state governments as well as result in additional
costs for the Fund. If required but unable to obtain such licenses, the Fund may be forced to cease investing in loans issued to borrowers
in the states in which licensing may be required. To the extent required or determined to be necessary or advisable, the Fund intends
to obtain such licenses in order to pursue its investment strategy.
Repurchase
Policy Risks. Repurchases of Shares will reduce the amount of outstanding Shares and, thus, the Fund’s net assets. To the extent
that additional Shares are not sold, a reduction in the Fund’s net assets may increase the Fund’s expense ratio (subject
to the Adviser’s reimbursement of expenses) and limit the investment opportunities of the Fund.
If a repurchase offer is oversubscribed by Shareholders,
the Fund will repurchase only a pro rata portion of the Shares tendered by each Shareholder. In addition, because of the potential for
such proration, Shareholders may tender more Shares than they may wish to have repurchased in order to ensure the repurchase of a specific
number of their Shares, increasing the likelihood that other Shareholders may be unable to liquidate all or a given percentage of their
investment in the Fund. To the extent Shareholders have the ability to sell their Shares to the Fund pursuant to a repurchase offer, the
price at which a Shareholder may sell Shares, which will be the NAV per Share most recently determined as of the last day of the offer,
may be lower than the price that such Shareholder paid for its Shares.
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The Fund may find it necessary to hold a portion
of its net assets in cash or other liquid assets, sell a portion of its portfolio investments or borrow money in order to finance any
repurchases of its Shares. The Fund may accumulate cash by holding back (i.e., not reinvesting or distributing to Shareholders) payments
received in connection with the Fund’s investments, which could potentially limit the ability of the Fund to generate income. The
Fund also may be required to sell its more liquid, higher quality portfolio investments to purchase Shares that are tendered, which may
increase risks for remaining Shareholders and increase Fund expenses. Although most, if not all, of the Fund’s investments are expected
to be illiquid and the secondary market for such investments is likely to be limited, the Fund believes it would be able to find willing
purchasers of its investments if such sales were ever necessary to supplement such cash generated by payments received in connection with
the Fund’s investments. However, the Fund may be required to sell such investments during times and at prices when it otherwise
would not, which may cause the Fund to lose money. The Fund may also borrow money in order to meet its repurchase obligations. There can
be no assurance that the Fund will be able to obtain financing for its repurchase offers. If the Fund borrows to finance repurchases,
interest on any such borrowings will negatively affect Shareholders who do not tender their Shares in a repurchase offer by increasing
the Fund’s expenses (subject to the Adviser’s reimbursement of expenses) and reducing any net investment income. The purchase
of Shares by the Fund in a repurchase offer may limit the Fund’s ability to participate in new investment opportunities.
In the event a Shareholder chooses to participate
in a repurchase offer, the Shareholder will be required to provide the Fund with notice of intent to participate prior to knowing what
the repurchase price will be on the repurchase date. Although the Shareholder may have the ability to withdraw a repurchase request prior
to the repurchase date, to the extent the Shareholder seeks to sell Shares to the Fund as part of a repurchase offer, the Shareholder
will be required to do so without knowledge of what the repurchase price of the Shares will be on the repurchase date. It is possible
that general economic and market conditions could cause a decline in the NAV per Share prior to the repurchase date.
Risks
Associated with Additional Offerings. There are risks associated with offerings of additional common or preferred shares of the Fund.
The voting power of current shareholders will be diluted to the extent that current shareholders do not purchase shares in any future
offerings of shares or do not purchase sufficient shares to maintain their percentage interest. In addition, the sale of shares in an
offering may have an adverse effect on prices in the secondary market for the Fund’s shares by increasing the number of shares
available, which may put downward pressure on the market price of the Fund’s Shares. These sales also might make it more difficult
for the Fund to sell additional equity securities in the future at a time and price the Fund deems appropriate.
Secondary
Market for the Common Shares. The issuance of shares of the Fund through the Fund’s dividend reinvestment plan (“Plan“)
may have an adverse effect on the secondary market for the Fund’s shares. The increase in the number of outstanding shares resulting
from the issuances pursuant to the Plan and the discount to the market price at which such shares may be issued, may put downward pressure
on the market price for the shares. When the shares are trading at a premium, the Fund may also issue shares that may be sold through
private transactions effected on the NYSE or through broker-dealers. The increase in the number of outstanding shares resulting from
these offerings may put downward pressure on the market price for such shares.
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Other Investment-Related Risks:
Equity
Securities Risks. Equity securities are subject to general movements in the stock market, and a significant drop in the stock market
may depress the price of securities to which the Fund may have exposure. Equity securities typically have greater price volatility than
fixed-income securities. The market price of equity securities owned by the Fund may go down, sometimes rapidly or unpredictably. Equity
securities may decline in value due to factors affecting equity securities markets generally, particular industries represented by those
markets, or factors directly related to a specific company, such as decisions made by its management.
Exchange-Traded
Note Risks. The Fund may invest in ETNs, which are notes representing unsecured debt of the issuer. ETNs are typically linked to
the performance of an index plus a specified rate of interest that could be earned on cash collateral. The value of an ETN may be influenced
by time to maturity, level of supply and demand for the ETN, volatility and lack of liquidity in underlying markets, changes in the applicable
interest rates, changes in the issuer’s credit rating and economic, legal, political or geographic events that affect the referenced
index. ETNs typically mature 30 years from the date of issue. There may be restrictions on the Fund’s right to liquidate its investment
in an ETN prior to maturity (for example, the Fund may only be able to offer its ETN for repurchase by the issuer on a weekly basis),
and there may be limited availability of a secondary market.
Investment
Company Risks. The Fund will incur higher and additional expenses when it invests in other investment companies such as ETFs. There
is also the risk that the Fund may suffer losses due to the investment practices or operations of such other investment companies. To
the extent that the Fund invests in one or more investment companies that concentrate in a particular industry, the Fund would be vulnerable
to factors affecting that industry and the performance of such investment companies, and that of the Fund, may be more volatile than
investment companies that do not concentrate in a particular industry. The investment companies in which the Fund invests are not subject
to the Fund’s investment policies and restrictions.
The ETFs (and other index funds) in which the
Fund may invest may not be able to replicate exactly the performance of the indices they track due to transactions costs and other expenses
of the ETFs. ETFs may not be able to match or outperform their benchmarks. The Fund may be restricted by provisions of the 1940 Act that
generally limit the amount the Fund and its affiliates can invest in any one investment company to 3% of such company’s outstanding
voting stock. However, pursuant to exemptive orders issued by the SEC to various ETF fund sponsors, the Fund is permitted to invest in
certain ETFs in excess of the limits set forth in the 1940 Act subject to the terms and conditions set forth in such exemptive orders.
Portfolio Manager Information
There have been no changes in the Fund’s portfolio managers or
background since the prior disclosure date.
Fund Organizational Structure
Since the prior disclosure date, there have been no changes in the
Fund’s charter or by-laws that would delay or prevent a change of control of the Fund that have not been approved by shareholders.
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| Directors & Officers |
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The following table provides information regarding each Director who
is not an “interested person” of the Fund, as defined in the 1940 Act.
INDEPENDENT DIRECTORS
| Name, Address1 and Year of Birth |
Position(s) Held with the Fund |
Term of Office and Length of Time Served |
Principal Occupation(s) During Past 5 Years |
Number of Funds in Fund Complex Overseen by Director2 |
Other Directorships Held by the Director During the Past 5 Years |
John K. Carter
(1961) |
Director |
Current term expires in 2024. Has served since 2015. |
Founder, Special Counsel, Law Office of John K. Carter, P.A. (a general practice and corporate law firm) (2015 to present); Managing Partner, Global Recruiters of St. Petersburg (a financial services consulting and recruiting firm) (2012 to present). |
11 |
Carillon Mutual Funds (14 funds) (2016 to present); RiverNorth/DoubleLine Strategic Opportunity Fund, Inc. (1 fund) (2016 to present); RiverNorth Funds (3 funds) (2013 to present); RiverNorth Opportunities Fund, Inc. (1 fund)(2013 to present); RiverNorth Opportunistic Municipal Income Fund, Inc. (1 fund) (2018 to present); RiverNorth Managed Duration Municipal Income Fund, Inc. (2019 to present)(1 fund); RiverNorth Flexible Municipal Income Fund, Inc. (2020 to present)(1 Fund); RiverNorth Flexible Municipal Income Fund II, Inc. (1 fund)(2021 to present); RiverNorth Managed Duration Municipal Income Fund II, Inc. (1 fund)(2022 to present). |
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| Directors & Officers |
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INDEPENDENT DIRECTORS
| Name, Address1 and Year of Birth |
Position(s) Held with the Fund |
Term of Office and Length of Time Served |
Principal Occupation(s) During Past 5 Years |
Number of Funds in Fund Complex Overseen by Director2 |
Other Directorships Held by the Director During the Past 5 Years |
J. Wayne Hutchens
(1944) |
Director |
Current term expires in 2022. Has served since 2019. |
Currently retired; Trustee of the Denver Museum of Nature and Science (2000 to 2020); Director of AMG National Trust Bank (June 2012 to present); Trustee of Children’s Hospital Colorado (May 2012 to 2020). |
11 |
ALPS Series Trust (11 funds) (2012 to present); RiverNorth/DoubleLine Strategic Opportunity Fund, Inc. (1 fund) (2018 to present); RiverNorth Funds (3 funds) (2013 to present); RiverNorth Opportunities Fund, Inc. (1 fund)(2013 to present); RiverNorth Opportunistic Municipal Income Fund, Inc. (1 fund) (2018 to present); RiverNorth Managed Duration Municipal Income Fund, Inc. (2019 to present)(1 fund); RiverNorth Flexible Municipal Income Fund, Inc. (2020 to present)(1 Fund); RiverNorth Flexible Municipal Income Fund II, Inc. (1 fund)(2021 to present); RiverNorth Managed Duration Municipal Income Fund II, Inc. (1 fund) (2022 to present). |
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| Directors & Officers |
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INDEPENDENT DIRECTORS
| Name, Address1 and Year of Birth |
Position(s) Held with the Fund |
Term of Office and Length of Time Served |
Principal Occupation(s) During Past 5 Years |
Number of Funds in Fund Complex Overseen by Director2 |
Other Directorships Held by the Director During the Past 5 Years |
John S. Oakes
(1943) |
Director |
Current term expires in 2024. Has served since 2015. |
Currently retired; Principal, Financial Search and Consulting (a recruiting and consulting firm) 2013 to 2017). |
11 |
RiverNorth/DoubleLine Strategic Opportunity Fund, Inc. (1 fund) (2016 to present); RiverNorth Funds (3 funds) (2013 to present); RiverNorth Opportunities Fund, Inc. (1 fund)(2013 to present); RiverNorth Opportunistic Municipal Income Fund, Inc. (1 fund) (2018 to present); RiverNorth Managed Duration Municipal Income Fund, Inc. (2019 to present)(1 fund); RiverNorth Flexible Municipal Income Fund, Inc. (2020 to present)(1 Fund); RiverNorth Flexible Municipal Income Fund II, Inc. (1 fund)(2021 to present); RiverNorth Managed Duration Municipal Income Fund II, Inc. (1 fund)(2022 to present). |
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| Directors & Officers |
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INDEPENDENT DIRECTORS
| Name, Address1 and Year of Birth |
Position(s) Held with the Fund |
Term of Office and Length of Time Served |
Principal Occupation(s) During Past 5 Years |
Number of Funds in Fund Complex Overseen by Director2 |
Other Directorships Held by the Director During the Past 5 Years |
David M. Swanson
(1957) |
Director |
Current term expires in 2022. Has served since 2018. |
Founder & Managing Partner, SwanDog Strategic Marketing (2006 to present). |
11 |
RiverNorth/DoubleLine Strategic Opportunity Fund, Inc. (1 fund) (2018 to present); RiverNorth Funds (3 funds) (2013 to present); RiverNorth Opportunities Fund, Inc. (1 fund)(2013 to present); RiverNorth Opportunistic Municipal Income Fund, Inc. (1 fund) (2018 to present); RiverNorth Managed Duration Municipal Income Fund, Inc. (2019 to present)(1 fund); RiverNorth Flexible Municipal Income Fund, Inc. (2020 to present)(1 Fund); RiverNorth Flexible Municipal Income Fund II, Inc. (1 fund)(2021 to present); RiverNorth Managed Duration Municipal Income Fund II, Inc. (1 fund)(2022 to present); ALPS Variable Investment Trust (7 funds) (2006 to present). |
| 1 | The mailing address of each Director is 360 South Rosemary Avenue, Suite 1420, West Palm Beach, FL 33401. |
| 2 | The Fund Complex consists of the RiverNorth Core Opportunity Fund, the RiverNorth/DoubleLine Strategic
Income Fund, and the RiverNorth/Oaktree High Income Fund, each a series of the RiverNorth Funds, RiverNorth Opportunities Fund, Inc.,
RiverNorth DoubleLine Strategic Opportunity Fund, Inc., RiverNorth Opportunistic Municipal Income Fund, Inc., RiverNorth Flexible Municipal
Income Fund, Inc., RiverNorth Flexible Municipal Income Fund II, Inc., RiverNorth Managed Duration Municipal Income Fund, Inc., RiverNorth
Managed Duration Municipal Income Fund II, Inc. and RiverNorth Specialty Finance Corporation. |
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| Directors & Officers |
June 30, 2022 (Unaudited) |
The following table provides information regarding each Director who
is an “interested person” of the Fund, as defined in the 1940 Act, and each officer of the Fund.
INTERESTED DIRECTORS AND OFFICERS
| Name, Address1 and Year of Birth |
Position(s) Held with Registrant |
Term of Office and Length of Time Served |
Principal Occupation(s) During Past 5 Years |
Number of Funds in Fund Complex Overseen by Director2 |
Other Directorships Held by the Director During the Past 5 Years |
Patrick W. Galley3
(1975) |
Interested Director, Chairman and President |
Current term expires in 2023. Has served since 2015. |
Chief Investment Officer, RiverNorth Capital Management, LLC (2004 to present); Board of Managers of RiverNorth Capital Management, LLC and RiverNorth Securities, LLC (since 2010) and Board of Directors RiverNorth Holdings, Co. (since 2010). |
11 |
RiverNorth/DoubleLine Strategic Opportunity Fund, Inc. (1 fund) (2016 to present); RiverNorth Funds (3 funds) (2013 to present); RiverNorth Opportunities Fund, Inc. (1 fund)(2013 to present); RiverNorth Opportunistic Municipal Income Fund, Inc. (1 fund) (2018 to present); RiverNorth Managed Duration Municipal Income Fund, Inc. (2019 to present)(1 fund); RiverNorth Flexible Municipal Income Fund, Inc. (2020 to present)(1 Fund); RiverNorth Flexible Municipal Income Fund II, Inc. (1 fund)(2021 to present); RiverNorth Managed Duration Municipal Income Fund II, Inc. (1 fund)(2022 to present). |
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| Directors & Officers |
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INTERESTED DIRECTORS AND OFFICERS
| Name, Address1 and Year of Birth |
Position(s) Held with Registrant |
Term of Office and Length of Time Served |
Principal Occupation(s) During Past 5 Years |
Number of Funds in Fund Complex Overseen by Director2 |
Other
Directorships Held by the Director During the Past 5 Years |
Jerry R. Raio
(1964)4 |
Interested Director |
Current term expires in 2023. Has served since 2018. |
President, Arbor Lane Advisors, Inc. (Since 2018); Advisory Board Member of each of FLX Distribution, (2020 to present); Qudos Technologies (2019 to present); Quantify Crypto (2021 to present); Head of Capital Markets, ClickIPO (2018-2019); Managing Director, Head of Retail Origination, Wells Fargo Securities, LLC (2005 to 2018). |
8 |
RiverNorth/DoubleLine Strategic Opportunity Fund, Inc. (1 fund) (2018 to present); RiverNorth Opportunities Fund, Inc. (1 fund)(2013 to present); RiverNorth Opportunistic Municipal Income Fund, Inc. (1 fund) (2018 to present); RiverNorth Managed Duration Municipal Income Fund, Inc. (2019 to present)(1 fund); RiverNorth Flexible Municipal Income Fund, Inc. (2020 to present)(1 Fund); RiverNorth Flexible Municipal Income Fund II, Inc. (1 fund)(2021 to present); RiverNorth Managed Duration Municipal Income Fund II, Inc. (1 fund)(2022 to present). |
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| Directors & Officers |
June 30, 2022 (Unaudited) |
INTERESTED DIRECTORS AND OFFICERS
| Name, Address1 and Year of Birth |
Position(s) Held with Registrant |
Term of Office and Length of Time Served |
Principal Occupation(s) During Past 5 Years |
Number of Funds in Fund Complex Overseen by Director2 |
Other Directorships Held by the Director During the Past 5 Years |
Jonathan M. Mohrhardt
(1974) |
Treasurer and Chief Financial Officer |
Indefinite. Has served since inception. |
Chief Compliance Officer, RiverNorth Capital Management, LLC (2009 to 2012); Chief Operating Officer, RiverNorth Capital Management, LLC (2011 to present) and President, Chief Executive Officer and Chief Compliance Officer, RiverNorth Securities, LLC (2010 to 2012). |
N/A |
N/A |
Marcus L. Collins
(1968) |
Chief Compliance Officer; Secretary |
Indefinite. Has served since inception. |
General Counsel, RiverNorth Capital Management, LLC (2012 to present); Chief Compliance Officer, RiverNorth Capital Management, LLC (2012 to present). |
N/A |
N/A |
| 1 | The mailing address of each Director and officer, unless otherwise noted, is 360 South Rosemary Avenue, Suite 1420, West Palm Beach,
FL 33401. |
| 2. | The Fund Complex consists of the RiverNorth Core Opportunity Fund, the RiverNorth/DoubleLine Strategic
Income Fund, and the RiverNorth/Oaktree High Income Fund, each a series of the RiverNorth Funds, RiverNorth Opportunities Fund, Inc.,
RiverNorth DoubleLine Strategic Opportunity Fund, Inc., RiverNorth Opportunistic Municipal Income Fund, Inc., RiverNorth Flexible Municipal
Income Fund, Inc., RiverNorth Flexible Municipal Income Fund II, Inc., RiverNorth Managed Duration Municipal Income Fund, Inc., RiverNorth
Managed Duration Municipal Income Fund II, Inc. and RiverNorth Specialty Finance Corporation. |
| 3. | Patrick W. Galley is considered an “Interested” Director as defined in the Investment Company
Act of 1940, as amended, because he is an officer of the Fund and Chief Executive Officer and Chief Investment Officer of the Fund’s
investment adviser. |
| 4. | Jerry Raio is considered
an “Interested” Director as defined in the Investment Company Act of 1940, as
amended, because of his current position as a director of FLX Distribution, which the Adviser
is an investor in and Mr. Galley is a Director of; and because of his prior position as Managing
Director – Head of Retail Origination at Wells Fargo, which had previously served as
a broker and principal underwriter for certain funds advised by the Adviser. |
| 82 |
(888) 848-7569 | www.rivernorth.com |
| RiverNorth Specialty Finance Corporation |
|
| Directors & Officers |
June 30, 2022 (Unaudited) |
The Statement of Additional Information includes additional information
about the Fund’s Directors and is available, without charge, upon request by calling (toll-free) 1-888-848-7569.
| Annual Report | June 30, 2022 |
83 |
| RiverNorth Specialty Finance Corporation |
|
| Additional Information |
June 30, 2022 (Unaudited) |
PROXY VOTING GUIDELINES
A description of the policies and procedures that
the Fund used to determine how to vote proxies relating to portfolio securities and information regarding how the Fund voted proxies during
the most recent 12-month period ended June 30, are available without charge upon request by (1) calling the Fund at (888) 848-7569 and
(2) from Form N-PX filed by the Fund with Securities and Exchange Commission (“SEC”) on the SEC’s website at www.sec.gov.
PORTFOLIO HOLDINGS DISCLOSURE POLICY
The Fund files a complete schedule of investments
with the SEC for the first and third quarter of the fiscal year on Part F of Form N-PORT. The Fund’s first and third fiscal quarters
end on September 30 and March 31. The Form N-PORT filing must be filed within 60 days of the end of the quarter. The Fund's Form N-PORT
are available on the SEC's website at www.sec.gov. You may also obtain copies by calling the Fund at 1-888-848-7569.
UNAUDITED TAX INFORMATION
The RiverNorth Closed End Funds designated the following for federal
income tax purposes for the year ended June 30, 2022:
| Foreign Taxes Paid |
Foreign Source Income |
| $0 |
$0 |
| |
Tax-Exempt Percentage |
| RiverNorth Doubleline Strategic Opportunity |
0.00% |
| RiverNorth Opportunistic Municipal Fund |
96.47% |
| RiverNorth Managed Duration Municipal Income |
96.48% |
| RiverNorth Flexible Municipal Income Fund |
96.49% |
| RiverNorth Flexible Municipal Income II Fund |
95.52% |
| RiverNorth Managed Duration Municipal Income II |
97.64% |
| RiverNorth Specialty Finance Corp |
0.00% |
Of the distributions paid by the Funds from ordinary
income for the calendar year ended December 31, 2021, the following percentages met the requirements to be treated as qualifying for the
corporate dividends received deduction and qualified dividend income:
| |
Dividend Received Deduction |
Qualified Dividend Income |
| RiverNorth Specialty Finance Corp. |
5.94% |
6.03% |
In early 2021, if applicable, shareholders of
record received this information for the distributions paid to them by the Funds during the calendar year 2020 via Form 1099. The Funds
will notify shareholders in early 2023 of amounts paid to them by the Funds, if any, during the calendar year 2022.
| 84 |
(888) 848-7569 | www.rivernorth.com |
| RiverNorth Specialty Finance Corporation |
|
| Additional Information |
June 30, 2022 (Unaudited) |
Pursuant to Section 852(b)(3) of the Internal Revenue Code, RiverNorth
Opportunistic Municipal Income Fund designated $8,787,915 as long-term capital gain dividends.
Pursuant to Section 852(b)(3) of the Internal Revenue Code, RiverNorth
Managed Duration Municipal Income Fund designated $5,491,671 as long-term capital gain dividends.
Pursuant to Section 852(b)(3) of the Internal Revenue Code, RiverNorth
Flexible Municipal Income Fund designated $5,861,372 as long-term capital gain dividends.
| Annual Report | June 30, 2022 |
85 |
Board of Directors
Patrick W. Galley, CFA, Chairman
John
K. Carter
John S. Oakes
J. Wayne Hutchens
David M. Swanson
Jerry R. Raio
Investment Adviser
RiverNorth Capital Management, LLC
Fund Administrator
ALPS Fund Services, Inc.
Transfer Agent and
Dividend Disbursing Agent
DST Systems, Inc.
Custodians
State Street Bank and Trust Company
Millennium Trust Company
Independent Registered
Public Accounting Firm
KPMG LLP
RiverNorth Capital
Management, LLC
360 South Rosemary Avenue, Suite 1420
West Palm Beach, FL 33401
Secondary market support provided to the Fund by ALPS Fund Services,
Inc.’s
affiliate ALPS Distributors, Inc., a FINRA member.
This report is provided for the general
information of the shareholders of the
RiverNorth Specialty Finance Corporation. This report is
not intended for distribution to prospective
investors in the Fund,
unless preceded or accompanied
by an effective prospectus.