DIVIDEND REINVESTMENT AND DIRECT STOCK PURCHASE PLAN
Details of the Plan are set forth below in question and answer format. Further questions and correspondence should be directed to either CYS
Investments, Inc. or the plan administrator through one of the methods identified below:
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CYS Investments, Inc.
500 Totten Pond Road, 6th Floor
Waltham, Massachusetts 02451
(617) 639-0440
www.cysinv.com
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Computershare Trust Company, N.A.
P.O. Box
505000
Louisville, KY 40233-5000
(800) 622-6757 (U.S. and
Canada)
(781) 575-4735 (Outside U.S. and Canada)
www.computershare.com/investor
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Purpose
1.
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What is the purpose of the Plan?
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The purpose of the dividend reinvestment component of
the Plan is to provide our stockholders with a simple and convenient method of investing cash dividends and distributions in additional shares of our common stock. Participants in the Plan may have cash dividends and distributions automatically
reinvested without charges for recordkeeping, and may take advantage of the custodial and reporting services provided by Computershare Trust Company, N.A. (the Plan Administrator or Computershare), at no additional cost (see
Questions 9-11). Except when the context suggests otherwise, throughout this prospectus we refer to dividends and distributions collectively as dividends. The optional cash purchase component of the Plan permits current stockholders and
new investors to purchase shares of our common stock on a monthly basis in amounts, subject to certain exceptions, ranging from $50 to $10,000 or, with our prior approval, in excess of $10,000 (see Questions 12-19). The Plan is intended to benefit
long-term investors who want to increase their investment in our common stock over time.
2.
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What are the advantages of participating in the Plan?
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The Plan provides participants with the opportunity to purchase additional shares of common stock, if desired, by automatically reinvesting all or a portion of their cash dividends on our common stock in the Plan.
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The Plan provides participants with the opportunity to purchase additional shares of common stock by investing additional cash on a monthly basis from $50 to $10,000, or, with our prior approval, in excess of $10,000,
with or without enrolling in the dividend reinvestment portion of the Plan.
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There are no transaction or processing fees, expenses or service charges on shares of common stock purchased under the Plan with reinvested dividends. Participants will, however, pay a transaction and processing fee on
optional cash purchases (see Question 4).
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Funds invested in the Plan are fully invested through the purchase of fractional shares, as well as whole shares, and proportionate cash dividends on fractional shares are used to purchase additional shares.
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There is a share safekeeping service that allows participants to deposit common stock certificates with the Plan Administrator and have their share ownership maintained on the Plan Administrators
records as part of the Plan account. There is no charge for this service.
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Participants will receive statements containing year-to-date information on all Plan transactions in their account within a reasonable time after a transaction occurs, designed to simplify their record keeping.
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3.
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What are the disadvantages of participating in the Plan?
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For federal income tax purposes, participants generally will be treated as having received dividend income on the dividend payment date; such dividend generally will give rise to a tax liability even though no cash was
actually paid. See the section entitled Material U.S. Federal Income Tax Considerations in the accompanying prospectus.
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No interest will be paid by us or the Plan Administrator on dividends held pending reinvestment or on optional cash purchase payments held pending investment (see Question 18).
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Participants bear the risk of loss and the benefits of gain from market price changes for all of their shares of common stock. NEITHER WE NOR THE PLAN ADMINISTRATOR CAN GUARANTEE THAT SHARES OF COMMON STOCK PURCHASED
UNDER THE PLAN WILL, AT ANY PARTICULAR TIME, BE WORTH MORE OR LESS THAN THEIR PURCHASE PRICE.
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The price of our shares of common stock may fluctuate in the interim between your investment decision and the time of the actual purchase and may decline between the time you decide to sell and the time at which your
shares of common stock are actually sold.
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We may, in our sole discretion and without prior notice to participants, change our determination as to whether shares of our common stock will be purchased by the Plan Administrator directly from us or through open
market purchases. This determination will be made by us based upon general market conditions, the relationship between purchase price and book value per share, regulatory requirements and other factors.
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4.
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Is there a cost to participate in the Plan?
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We will pay all administrative costs
associated with the reinvestment of dividends under the Plan. There are no transaction or processing fees, expenses or service charges under the Plan in connection with such purchases;
however
, if you enroll in the plan through a broker, bank
or other nominee, they may charge you a fee for participating on your behalf. If the Plan purchases shares with reinvested dividends in open market transactions instead of directly from us, we will pay any brokerage fees or commissions on such
purchases.
For the optional cash purchase part of the Plan, the Plan Administrator will charge participants a processing fee of $0.05 per
share in connection with any optional cash purchases completed through open market transactions under the Plan. The processing fee includes any brokerage commissions the Plan Administrator is required to pay. In addition, the Plan Administrator will
charge participants a $5.00 transaction fee for optional cash purchases paid for by check or one-time online ACH, and a $2.50 transaction fee for each optional cash purchase paid for by recurring debit from a U.S. bank account.
Administration
5.
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What does the Plan Administrator do?
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The Plan Administrator administers the Plan for
participants, keeps records, sends statement of accounts to participants, and performs other duties relating to the Plan, including the safekeeping of the shares purchased for each participant. The Plan Administrator also acts as the dividend
disbursing agent, transfer agent and registrar for our common stock.
S-7
6.
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Who is eligible to participate?
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You may participate in the Plan if: (a) you are a
registered holder; that is, your shares are registered in your name on our stock transfer books, (b) you are a beneficial owner; that is, your shares are registered in a name other than your name (for example, in the
name of a broker, bank or other nominee) (see Question 8), or (c) you are a new investor.
If you live outside the United
States, you should first determine if there are any laws or governmental regulations that would prohibit your participation in the Plan, or affect the terms of the Plan. We have the right to terminate participation of any stockholder if we deem it
advisable under any foreign laws or regulations. Tax consequences of Plan participation may vary under foreign laws or regulations, and you should determine the tax treatment of Plan features before you decide to invest through the Plan.
The Plan is intended for the benefit of our investors and not for persons or entities who engage in transactions that cause or are designed to
cause aberrations in the price or trading volume of our common stock. Notwithstanding anything in the Plan to the contrary, we reserve the right to exclude from participation in the Plan at any time any persons or entities, as determined in our sole
discretion.
7.
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How do I enroll in the Plan?
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The Plan is an opt-in plan. If you are a
registered holder of our common stock, you may join the Plan by completing and signing an enrollment form and returning it to the Plan Administrator or by going online to the Plan Administrators website, www.computershare.com/investor. If you
are enrolling for dividend reinvestment, the enrollment form must be received by the Plan Administrator prior to the dividend record date in order to take effect as of the related dividend payment date. A dividend record date is, with respect to any
dividend declared by our Board of Directors, the date set by our Board of Directors for determining stockholders of record entitled to receive the dividend.
If you are a beneficial holder of our common stock, you should follow the procedure described in the answer to Question 8.
If you are a new investor, that is, you do not currently own shares of our common stock, you may join the Plan in either of the following ways:
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(a)
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Going to the Plan Administrators website at www.computershare.com/investor, and following the instructions provided for opening a Plan account online. You will be asked to complete an Online Initial Enrollment
Form and to submit an initial optional cash purchase between $250 and $10,000. To make an initial optional cash purchase you may authorize a one-time online bank debit from your U.S. bank account or you may authorize a minimum of five consecutive
monthly automatic deductions of at least $50 each from your U.S. bank account.
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(b)
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Completing and signing an Initial Enrollment Form and submitting an initial investment in the amount between $250 and $10,000. To make an initial optional cash purchase in this manner, you may enclose a check, payable
in U.S. funds and drawn against a U.S. bank, to ComputershareCYS Investments, Inc. or you may complete the enclosed direct debit authorization form and authorize a minimum of five consecutive monthly automatic deductions of at
least $50 each from your U.S. bank account by following the instructions provided.
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If you are enrolling by making an
optional cash purchase of less than $10,000, the enrollment form and investment funds must be received by the Plan Administrator at least two business days before the date such funds are to be invested for a particular month (see Question 12).
Enrollment forms may be obtained at any time by telephonic, Internet or written request to the Plan Administrator.
8.
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How do I enroll in the Plan if I am a beneficial owner?
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If you are a beneficial owner,
that is your shares are held on the books of the Plan Administrator in the name of a broker, bank or other nominee (a Nominee), your dividends will be reinvested automatically by the
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Nominee in additional shares under the Plan only if your Nominee provides such a service and you elect to participate in the Plan. Many Nominees do not provide such a service and routinely
request dividends to be paid in cash on all shares registered in their names. Therefore, if your shares are held for your account by a Nominee and you would like to participate in the Plan, then, in addition to enrolling in the Plan as provided in
Question 7, you must either make appropriate arrangements for your Nominee to participate on your behalf, or you must become a stockholder of record by having a part or all of your shares transferred to your own name. If your shares are held in the
name of a Nominee, you should contact the Nominee for details.
Reinvestment of Dividends under the Plan
9.
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How does reinvestment of dividends under the Plan work?
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As a participant, when our
Board of Directors declares a dividend, on the distribution date for such dividend you will have credited to your Plan account the number of whole and fractional shares (computed up to six decimal places) that could be obtained with the cash,
net of any applicable withholding taxes, that would have been paid to you if you were not a participant. We will determine in our sole discretion in accordance with applicable law whether such shares will be acquired by the Plan Administrator for
participants either (i) directly from the Company through the issuance of shares of common stock or (ii) through open market transactions. The purchase price of shares purchased directly from us will be the volume weighted average price,
rounded to four decimal places, of our common stock as quoted on the New York Stock Exchange only, obtained by Bloomberg, LP for the trading hours from 9:30 a.m. to 4:00 p.m., Eastern Time, on the date the shares are purchased. If shares are
purchased in the open market the Plan Administrator may combine Plan participant purchase requests with other purchase requests received from other Plan participants and will generally batch purchase types (dividend and optional cash investments)
for separate execution by the Plan Administrators broker. The Plan Administrator may also direct its broker to execute each purchase type in several batches throughout a trading day. Depending on the number of shares being purchased and
current trading volume in the shares, the Plan Administrators broker may execute purchases for any batch or batches in multiple transactions and over more than one day. If different purchase types are batched, the price per share of the common
stock purchased for each participants account, whether purchased with reinvested dividends, with initial cash investments, or with optional cash, shall be the weighted average price of the specific batch for such shares purchased by the Plan
Administrators broker on that particular investment date. The Plan Administrator may make open market purchases on any securities exchange where the shares of our common stock are traded, in the over-the-counter market or in privately
negotiated transactions with third persons, and may be on such terms as to price, delivery and otherwise as we may determine. In the months in which dividends are paid, dividends will be invested beginning on the dividend payment date. If the shares
of our common stock are to be newly issued shares, such shares will be issued or delivered on the dividend payment date. If our shares of common stock are to be purchased by the Plan Administrator in the open market, the Plan Administrator will make
every effort to invest any dividends it receives promptly beginning on each dividend payment date, and in no event later than 30 days from such date, except where reinvestment of such funds at a later date is necessary or advisable under any
applicable securities laws.
10.
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What if a stockholder would rather receive cash instead of reinvesting their dividends?
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If you would rather receive a cash dividend, you should not enroll in the Plan or, if you are enrolled in the Plan, you must notify the Plan
Administrator through the Internet, by telephone or in writing that you would like to terminate your participation in the Plan. You may terminate your participation in the Plan at any time. The procedure for terminating participation in the Plan is
explained in the answer to Question 29.
11.
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What if a stockholder wishes to receive cash as a dividend on only some of his or her shares?
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If participants wish to receive dividends in cash on some of their shares, and have the remaining dividends reinvested, the Plan Administrator
must be notified to that effect. This may be done by completing and
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submitting an enrollment form and choosing the Partial Dividends Paid In Cash option, by calling the Plan Administrator or by accessing your Plan account at the Plan
Administrators website,
www.computershare.com/investor
. A partial participant will receive dividends in cash only with respect to the number of whole shares that have been specified. On any other shares registered in the
participants name or other shares credited to their Plan account on the books of the Plan Administrator, the corresponding dividends will be reinvested.
Purchase of Shares under the Plan
12.
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How can I make an optional cash purchase?
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Participants may make optional cash purchases
of $50 to $10,000 or, with our prior approval, in excess of $10,000 in any month. (See Question 13 for a description of the process for making optional cash purchases in excess of $10,000 in any month.)
Participants may make payment for an optional cash purchase of $50 to $10,000 in one of the three following ways:
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(a)
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By Check
. Participants can send a check in the amount of such Participants optional cash purchase payable to ComputershareCYS Investments, Inc., in U.S. dollars drawn on a U.S.
bank.
Cash, travelers checks, money orders or third party checks are not acceptable
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Checks should be mailed to the Plan Administrator pursuant to the Plan enrollment form (for new participants) or the tear-off portion of the
account statement (for current participants). Checks must be received by the Plan Administrator at least two business days before a Purchase Date (we describe a Purchase Date more fully in the answer to Questions 14 and 15 below) in order to be
invested on that date. When investing by check, participants do not need to invest the same amount each time they choose to purchase shares in the Plan. Participants are under no obligation to make investments in any month or otherwise participate
in the Plan on an ongoing basis.
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(b)
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By One-Time Online Bank Debit
. A registered holder of our common stock can make an optional cash purchase of $50 to $10,000 online by logging on to
www.computershare.com/investor,
selecting
Investor Centre, and following the online instructions. Registered holders should refer to the online confirmation for their bank account debit date and Purchase Date. When making an optional cash purchase by one-time online bank debit,
registered holders do not need to invest the same amount each time and are under no obligation to make investments in any month or otherwise participate in the plan on an ongoing basis.
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(c)
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By Recurring Automatic Debits from a U.S. Bank Account.
A registered holder may authorize the Plan Administrator to make optional cash purchases of $50 to $10,000 by recurring
monthly purchase of a specified dollar amount paid for by automatic withdrawal from the registered holders U.S. bank account. Participants can authorize the Plan Administrator to make the recurring withdrawals by completing and delivering to
the Plan Administrator a Direct Debit Authorization Form or by following instructions on the Plan Administrators website,
www.computershare.com/investor
. Under this process, a participants funds will be withdrawn from such
participants bank account, via electronic funds transfer, on the 20th day of each month (or the next business day if the 20th day is not a business day). Requests will be processed and will become effective as promptly as practicable; however,
registered holders should allow four to six weeks for the first purchase to be initiated when using this form of payment. Automatic deductions will continue at the level set until a registered holder changes his or her instructions by notifying the
Plan Administrator. To terminate monthly purchases by automatic withdrawal, written, signed instructions must be sent to the Plan Administrator. Alternatively, you can terminate monthly deductions through
www.computershare.com/investor
. It is
the responsibility of the registered holder to notify the Plan Administrator if any direct debit information changes.
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13.
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How do I make optional cash purchases in excess of $10,000?
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Participants may make
optional cash purchases in excess of $10,000 in any month with our prior approval, by the following process:
Request for Waiver
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Cash purchases of more than $10,000 in any month may be made only pursuant to our acceptance of a request to make such a purchase. If participants wish to make an optional cash purchase in excess of $10,000 (or other maximum amount established by
us) for any month, participants must obtain our prior written approval with a form, or a Request for Waiver, and a copy of such written approval must accompany any such optional cash purchase. We have sole discretion to grant any
approval for optional cash purchases in excess of the allowable maximum amount. Unless the participant has complied with these procedures, any amount submitted for investment over $10,000 will be returned without interest.
Participants may make a Request for Waiver by contacting us at (617) 639-0440. Completed Request for Waiver forms should be submitted to
us via facsimile at (617) 507-6439 no later than three business days prior to the applicable Pricing Period (defined below). We will notify the participant as to whether the Request for Waiver has been granted or denied, either in whole or in
part, within one business day of the receipt of the request. If the Request for Waiver is granted in part, we will advise the participant of the maximum amount that will be accepted in connection with the purchase. If the request is approved, the
Plan Administrator must receive the funds for the purchase prior to or on the applicable date specified by the Plan Administrator for the relevant Pricing Period (which typically will be one business day prior to the applicable Pricing Period). If a
response is not received in connection with the Request for Waiver, the participant should assume that the request has been denied. We may alter, amend, supplement or waive, in our sole discretion, the time periods and/or other parameters relating
to optional cash purchases in excess of $10,000 made by one or more participants in the Plan or new investors, at any time and from time to time, prior to the granting of any Request for Waiver. For more information regarding a particular Pricing
Period (including applicable Pricing Period start dates), please contact us at (617) 639-0440.
Participants may make payment for an
optional cash purchase in excess of $10,000 in accordance with the instructions contained in the Request for Waiver.
14.
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At what price will shares be purchased under the Plan?
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Purchase Price of Shares for
Optional Cash Purchases from $50 to $10,000
. The purchase price of shares purchased directly from us will be the volume weighted average price, rounded to four decimal places, of our common stock as quoted on the New York Stock Exchange only,
obtained by Bloomberg, LP for the trading hours from 9:30 a.m. to 4:00 p.m., Eastern time, on the date the shares are purchased. If shares are purchased in the open market the Plan Administrator may combine Plan participant purchase requests with
other purchase requests received from other Plan participants and will generally batch purchase types (dividend and optional cash investments) for separate execution by the Plan Administrators broker. The Plan Administrator may also direct its
broker to execute each purchase type in several batches throughout a trading day. Depending on the number of shares being purchased and current trading volume in the shares, the Plan Administrators broker may execute purchases for any batch or
batches in multiple transactions and over more than one day. If different purchase types are batched, the price per share of the common stock purchased for each participants account, whether purchased with reinvested dividends, with initial
cash investments, or with optional cash, shall be the weighted average price of the specific batch for such shares purchased by the Plan Administrators broker on that particular investment date.
Purchase Price of Shares for Optional Cash Purchases in Excess of $10,000
. Shares purchased pursuant to an approved Request for Waiver
will be purchased directly from us as described herein. If we grant the request to purchase shares pursuant to a Request for Waiver, there will be a Pricing Period, which will generally consist of one to 12 consecutive separate days as
determined by us in our sole discretion during which our common stock is traded on the New York Stock Exchange following our grant of the Request for Waiver. If we grant your request to purchase shares pursuant to a Request for Waiver, the dates of
the
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Pricing Period will be set forth in the approved Request for Waiver. Each of these separate days will be a Purchase Date, and an equal proportion of your optional cash purchase will
be invested on each trading day during such Pricing Period, subject to the qualifications listed below. The purchase price for shares acquired on a particular Purchase Date will be equal to 100% (subject to change as provided below) of the volume
weighted average price, rounded to four decimal places, of our common stock as quoted on the New York Stock Exchange only, obtained from Bloomberg, LP for the trading hours from 9:30 a.m. to 4:00 p.m., Eastern time, for that Purchase Date.
The Plan Administrator will apply all optional cash purchases made pursuant to a Request for Waiver for which good funds are received on or before the first business day before the Pricing Period to the purchase of shares of our common stock on each
Purchase Date of the applicable Pricing Period. The Purchase Price may be subject to a Threshold Price and may be reduced by the Waiver Discount, each as more fully described below.
Threshold Price
. We may establish for a Pricing Period a minimum price, or the Threshold Price, applicable to optional cash
purchases made pursuant to a Request for Waiver. At least three business days prior to the first day of the applicable Pricing Period, we will determine whether to establish a Threshold Price, and if the Threshold Price is established, its amount,
and will so notify the Plan Administrator. This determination will be made by us in our discretion after a review of current market conditions, the level of participation in the Plan, and our current and projected capital needs. If established for
any Pricing Period, the Threshold Price will be stated as a dollar amount that the volume weighted average price, rounded to four decimal places, of our common stock as quoted on the New York Stock Exchange, obtained from Bloomberg, LP for the
trading hours from 9:30 a.m. to 4:00 p.m., Eastern Time, for each trading day of such Pricing Period (not adjusted for discounts, if any) must equal or exceed for any optional cash purchase in excess of $10,000 to be completed. Except as provided
below, we will exclude from the Pricing Period any trading day that the unsolicited volume weighted average price is less than the Threshold Price. We also will exclude from the Pricing Period and from the determination of the purchase price any day
in which no shares of common stock are quoted on the New York Stock Exchange. For example, if the Threshold Price is not met for two of the trading days in a 10 day Pricing Period, then we will return 20% of the funds you submitted in connection
with your Request for Waiver unless we have activated the extension feature for the Pricing Period which is described below. See Question 16 for more information relating to the return of unsubscribed funds.
Pricing Period Extension Feature
. We may elect to activate for any particular Pricing Period a pricing period extension feature which
will provide that the initial Pricing Period will be extended by the number of days that the Threshold Price is not satisfied, or on which no shares of our common stock are quoted on the New York Stock Exchange, subject to a maximum of five trading
days. If we elect to activate the pricing period extension feature and the Threshold Price is satisfied for any additional day that has been added to the initial Pricing Period, that day will be included as one of the trading days for the Pricing
Period in lieu of the day on which the Threshold Price was not met or trades of our common stock were not reported. For example, if the determined Pricing Period is 10 days, and the Threshold Price is not satisfied for three out of those
10 days in the initial Pricing Period, and we had previously announced at the time of the Request for Waiver acceptance that the pricing period extension feature was activated, then the Pricing Period will automatically be extended, and if the
Threshold Price is satisfied on the next three trading days (or a subset thereof), then those three days (or a subset thereof) will become Purchase Days in lieu of the three days on which the Threshold Price was not met. As a result, because there
were 10 trading days during the initial and extended Pricing Period on which the Threshold Price was satisfied, all of the optional cash purchase will be invested.
Waiver Discount
. Each month, at least three business days prior to the first day of the applicable Pricing Period, and at the same time
the Threshold Price is determined, if any, we may establish a discount from the market price applicable to optional cash purchases made pursuant to a Request for Waiver. This discount (or the Waiver Discount) may be between 0% and 5% of the purchase
price, and may vary each month and for each Pricing Period. The Waiver Discount will be established at our sole discretion after a review of current market conditions, the level of participation in the Plan, the attractiveness of obtaining such
additional funds through the sale of common stock as compared to other sources of funds and current and projected capital
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needs. Under no circumstances will the price of the shares of common stock purchased from the Company pursuant to the Plan be at a price less than 95% (taking into account as part of the Waiver
Discount any brokerage fees or commissions paid by us on your behalf in connection with the purchase) of the fair market value as determined by the Company of the common stock on the New York Stock Exchange on the closing date, or the Minimum
Purchase Price. If the methods by which the Plan Administrator calculates the purchase price for any shares of common stock to be purchased pursuant to the Plan would result in a price lower than the Minimum Purchase Price, the purchase price
for those shares shall be the Minimum Purchase Price. You may obtain the Waiver Discount applicable to the next month by contacting us via email at IR@cys.com. Setting a Waiver Discount for a particular month shall not affect the setting of a Waiver
Discount for any subsequent month. The Waiver Discounts will apply only to optional cash purchases of more than $10,000 (or other applicable maximum monthly amount). The Waiver Discounts will apply to the entire optional cash purchase and not just
the portion of the optional cash purchase that exceeds $10,000.
15.
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When will shares of our common stock be purchased under the Plan?
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Initial and
Optional Cash Purchases up to $10,000
. For common stock acquired directly from us, the purchase date will generally be on the 25th calendar day of each month, or the next trading day if the 25th day is not a trading day. For common stock
acquired in open market transactions, purchases will begin on the 25th calendar day of each month, or the next trading day if the 25th day is not a trading day, and will be completed no later than 30 days following such date, except where investment
of such funds at a later date is necessary or advisable under any applicable securities laws. The Plan Administrator will commingle all funds received from participants. Once a participant has placed an order, he or she may not request a cash refund
or otherwise change the order. No interest will be paid on funds pending investment held by the Plan Administrator.
Optional Cash
Purchases in Excess of $10,000
. If we grant the request to purchase shares pursuant to a Request for Waiver, there will be a Pricing Period, which will generally consist of one to 12 consecutive separate days as determined by us in
our sole discretion during which our common stock is traded on the New York Stock Exchange following our grant of the Request for Waiver. If we grant your request to purchase shares pursuant to a Request for Waiver, the dates of the Pricing Period
will be set forth in the approved Request for Waiver. Each of these separate days will be a Purchase Date. See Question 14 for additional information regarding the specific dates in the Pricing Period when shares will be purchased under
the Plan.
16.
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What happens with dishonored payments or unsubscribed funds?
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Dishonored
Payments
. If any check, draft or electronic funds transfer that is tendered or ordered by a participant as payment to the Plan Administrator to purchase common stock is dishonored, refused or returned, such participant agrees that the purchased
shares when credited to the participants account may be sold, on the Plan Administrators order, without the participants consent or approval, to satisfy the amount owing on the purchase. The amount owing will include
the purchase price paid, any purchase and sale transaction fees, any brokerage commissions and the Plan Administrators returned check or failed electronic payment fee of $35.00. If the sale proceeds of purchased shares are insufficient to
satisfy the amount owing, such participant authorizes the Plan Administrator to sell additional shares then credited to the participants account as necessary to cover the amount owing, without the participants further consent or
authorization. The Plan Administrator may sell shares to cover an amount owing as a result of the participants order in any manner consistent with applicable securities laws. Any sale for that purpose on a national securities market will be
considered to be commercially reasonable. A participant grants the Plan Administrator a security interest in all shares credited to such participants account, including securities subsequently acquired and held or tendered for deposit, for
purposes of securing any amount owing as described in this paragraph.
Return of Unsubscribed Funds
. We will return a portion of
each optional cash purchase in excess of $10,000 for each trading day of a Pricing Period or extended Pricing Period, if applicable, for which the Threshold
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Price is not met or for each day in which no shares of common stock are traded on the New York Stock Exchange. We refer to this portion of the optimal cash purchase as unsubscribed
funds. Any unsubscribed funds will be returned within five business days after the last day of the Pricing Period, or if applicable, the extended Pricing Period, without interest. The amount returned will be based on the number of days during
which the Threshold Price was not met compared to the number of days in the Pricing Period or extended Pricing Period. For example, the returned amount in a 10 day Pricing Period will equal one-tenth (1/10) of the total amount of such optional
cash purchase (not just the amount exceeding $10,000) for each trading day that the Threshold Price is not met or for each trading day in which sales are not reported.
The establishment of the Threshold Price and the possible return of a portion
of the investment applies only to optional cash purchases in excess of $10,000
. Setting a Threshold Price for a Pricing Period will not affect the setting of a Threshold Price for any other Pricing Period. We may waive our right to set a
Threshold Price for any particular Pricing Period. Neither we nor the Plan Administrator is required to give you notice of the Threshold Price for any Pricing Period.
17.
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What is the source of shares purchased under the Plan?
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All optional cash purchases of
$50 to $10,000 will be used to purchase, in our sole discretion, either newly issued shares directly from us or shares on the open market. Open market purchases may be made on any securities exchange where the shares of our common stock are traded,
in the over-the-counter market or in privately negotiated transactions with third persons, and may be on such terms as to price, delivery and otherwise as we may determine. All optional cash purchases in excess of $10,000 will be used to purchase
newly issued shares directly from us.
18.
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Will I earn interest on funds in my Plan account prior to investment or return to me?
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No. Interest will not be paid on funds deposited by you in your Plan account pending investment or return to you.
19.
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Are funds held in my Plan account insured?
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No. Funds held in your Plan account pending
investment or return are not treated as a bank deposit or account and are not insured by the FDIC or any other governmental agency or instrumentality.
Reports to Participants
20.
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What accounts are maintained for participants and what reports on these accounts do participants receive?
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The Plan Administrator will maintain a separate Plan account for each participant. All shares issued to participants under the Plan will be
credited to their Plan account. The Plan Administrator will mail to each participant a statement confirming the issuance of shares within five days after the allocation of shares is made. The statement will show the amount of the dividend, the price
at which shares were credited, the number of full and fractional shares credited, the number of shares previously credited and the cumulative total of shares credited. For market order sales the time of sale will be provided. In addition,
participants will receive copies of our annual and quarterly reports to stockholders, proxy statements and dividend income information for tax purposes. Under relevant IRS regulations, the Plan Administrator will report the cost basis of the common
stock purchased pursuant to the Plan to both participants in the Plan and the IRS. Participants may also view year-to-date transaction activity in their Plan account under the Plan for the current year, as well as activity in prior years, by
accessing their Plan account at
www.computershare.com/investor
.
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Voting of Shares
21.
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How will a participants shares be voted at meetings of stockholders?
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Participants
will receive a proxy card covering the total number of shares held, including shares credited to their Plan account. If a proxy card is returned properly signed, but without indicating instructions as to the manner in which shares are to be voted
with respect to any item thereon, the corresponding shares will be voted in accordance with the recommendation of our board of directors. If the proxy card is not returned, or it is unexecuted or improperly executed, the corresponding shares will
not be voted unless the participant or their duly appointed representative votes in person at the meeting.
Certificates for Shares/Safekeeping
22.
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Will certificates be issued for shares issued under the Plan?
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No. Certificates for
shares issued under the Plan will not be furnished unless the participant requests certificates through the Internet, by telephone or in writing for a specified number of shares credited to their Plan account. All written requests for certificates
should be directed to the Plan Administrator, allowing two weeks for processing. The issuance of certificates for shares credited to a Plan account will not terminate participation in the Plan. No certificate for a fractional share will be issued.
If the participant terminates participation in the Plan (see Question 29), the Plan Administrator will sell for the account any fractional share and send a check for the proceeds, valued at the then current market price for our common stock, less a
service charge of $15.00, any applicable processing fees and any other costs of sale.
23.
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In whose name will certificates be registered when issued?
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The Plan account will be
maintained in the name in which the share certificates were registered at the time you became a participant. Certificates for whole shares issued at your request from your Plan account will be similarly registered.
24.
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Can stock certificates be deposited into a stockholders Plan account for safekeeping?
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Yes. A participant can deposit certificate(s) for shares of our common stock into their Plan account. To deposit shares, send the
certificate(s) to the Plan Administrator, at the address provided on page 2 of this prospectus, by registered or certified mail, with return receipt requested, or some other form of traceable mail, and properly insured. Do not sign the
certificate(s) or complete the assignment section. When submitting certificate(s) for deposit into the Plan account, be sure to include a written request to have the certificate(s) deposited. Shares that are deposited will be credited in book-entry
form to the Plan account. The advantages of holding shares in book-entry form include protection against certificate loss, theft and damage.
25.
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How do I sell or transfer shares in my account?
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Participants may sell or transfer
shares in their account by contacting the Plan Administrator. Shares may be sold through a limit order, market order or a batch order, depending on how the sale request is submitted.
Market Order
. A market order is a request to sell shares promptly at the current market price. Market order sales are only available at
www.computershare.com/investor
through Investor Centre or by calling the Plan Administrator directly at 800-622-6757 (within the United States and Canada) or 781-575-4735 (outside the United States and Canada). Market order sale requests
received at
www.computershare.com/investor
through Investor Centre or by telephone will be placed promptly upon receipt during market hours (normally 9:30 a.m. to 4:00 p.m. Eastern Time). Any orders received after 4:00 p.m. Eastern
Time will be placed promptly on the next day the market is open. The Plan Administrator will use commercially reasonable efforts to honor requests by Participants to cancel market orders placed outside of market hours.
S-15
Depending on the number of shares being sold and current trading volume in the shares, a market order may only be partially filled or not filled at all on the trading day in which it is placed,
in which case the order, or remainder of the order, as applicable, will be cancelled at the end of such day. To determine if shares were sold, Participants should check their account online at www.computershare.com/investor or contact the Plan
Administrator directly at 800-622-6757. If the market order sale was not filled and the Participant still wants the shares sold, the Participant will need to re-enter the sale request. The price shall be the market price of the sale obtained by the
Plan Administrators broker, less a service charge of $25.00 and applicable processing fees, currently $0.12 per share.
Batch
Order
. A batch order is an accumulation of all sales requests for a security submitted together as a collective request. Batch orders are submitted on each market day, assuming there are sale requests to be processed. Sale instructions for batch
orders received by the Plan Administrator will be processed no later than five business days after the date on which the order is received (except where deferral is required under applicable federal or state laws or regulations), assuming the
applicable market is open for trading and sufficient market liquidity exists. Batch order sales are available by calling the Plan Administrator directly at 800-622-6757 (within the United States and Canada) or 781-575-4735 (outside the United States
and Canada) or in writing. All sales requests received in writing will be submitted as batch order sales. The Plan Administrator will cause a Participants shares to be sold on the open market within five business days of receipt of a request.
To maximize cost savings for batch order sale requests, the Plan Administrator will seek to sell shares in round lot transactions. For this purpose the Plan Administrator may combine each selling participants shares with those of other selling
participants. In every case of a batch order sale, the price to each selling program participant shall be the weighted average sale price obtained by the Plan Administrators broker for each aggregate order placed by the Plan Administrator and
executed by the broker, less a service charge of $15.00 and applicable processing fees, currently $0.12 per share. Proceeds are normally paid by check, which are distributed within 24 hours after a Participants sale transaction has settled.
Day Limit Order
: A day limit order is an order to sell shares when and if the stock reaches a specific price on a specific day. The
order is automatically cancelled if the price is not met by the end of that trading day (or, for orders placed outside of market hours, the next trading day). Depending on the number of shares being sold and current trading volume in the shares,
such an order may only be partially filled, in which case the remainder of the order will be cancelled. The order may be cancelled by the applicable stock exchange; by the Plan Administrator at its sole discretion; or, if the Plan
Administrators broker has not filled the order, at your request made online at www.computershare.com/investor or by calling the Plan Administrator directly at 800-622-6757 (within the United States and Canada) or 781-575-4735 (outside the
United States and Canada). There is a service charge of $25.00 and a processing fee of $0.12 per share sold for a day limit order sale.
Good-Til-Cancelled (GTC) limit order
: A GTC limit order is an order to sell shares when and if the stock reaches a specific
price at any time while the order remains open (generally up to 30 days). Depending on the number of shares being sold and current trading volume in the shares, sales may be executed in multiple transactions and over more than one day. If shares
trade on more than one day, a separate fee will be charged for each day. The order (or any unexecuted portion thereof) is automatically cancelled if the price is not met by the end of the order period. The order may be cancelled by the applicable
stock exchange; by the Plan Administrator at its sole discretion; or, if the Plan Administrators broker has not filled the order, at your request made online at
www.computershare.com/investor
or by calling the Plan Administrator
directly at 800-622-6757 (within the United States and Canada) or 781-575-4735 (outside the United States and Canada). There is a service charge of $25.00 and a processing fee of $0.12 per share sold for a GTC limit order sale.
General
: All sales requests processed over the telephone by a customer service representative entail an additional fee of $15.00. All
per share fees include any brokerage commissions the Plan Administrator is required to pay. Any fractional share will be rounded up to a whole share for purposes of calculating the per
S-16
share fee. Fees are deducted from the proceeds derived from the sale. All sale instructions are final when the Plan Administrator receives them. Your sale instructions cannot be stopped or
cancelled.
The Plan Administrator may, for various reasons, require a transaction request to be submitted in writing. Participants should
contact the Plan Administrator to determine if their particular request, including any sales request, must be submitted in writing. The Plan Administrator reserves the right to decline to process a sale if it determines, in its sole discretion, that
supporting legal documentation is required. In addition, no one will have any authority or power to direct the time or price at which shares for the Plan are sold and no one, other than the Plan Administrator, will select the broker(s) or dealer(s)
through or from whom sales are to be made.
Participants should be aware that the price of the Companys common stock may rise or fall
during the period between a request for sale, its receipt by the Plan Administrator and the ultimate sale on the open market. Instructions sent to the Plan Administrator to sell shares are binding and may not be rescinded. If a participant prefers
to have complete control as to the exact timing and sales prices, participants can request to transfer the shares to a broker.
26.
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How do I transfer shares to another person?
|
You may transfer ownership of some or all
of your Plan shares to another person, whether by gift, private sale, or otherwise. To do so, please visit the Computershare Transfer Wizard at www.computershare.com/transferwizard. The Transfer Wizard will guide you through the transfer process,
assist you in completing the transfer form, and identify other necessary documentation you may need to provide. Transfers may be made in book-entry or certificated form.
You may request a copy of a Transfer of Ownership Form by contacting the Plan Administrator at
800-622-6757
(within the United States and Canada) or 781-575-4735 (outside the United States and Canada) or by downloading the forms from the Plan Administrators website at
www.computershare/investor
.
Dividends and Stock Splits
27.
|
What happens if we issue a stock dividend or declare a stock split?
|
Any stock dividends
or split shares we distribute on shares of our common stock with respect to both certificated and book-entry (whole and fractional) shares will be credited automatically to the participants Plan account in book-entry form.
DESCRIPTION OF DEBT SECURITIES
General
The debt securities offered by
this prospectus will be our direct unsecured general obligations. This prospectus describes certain general terms of the debt securities offered through this prospectus. In the following discussion, we refer to any of our direct unsecured general
obligations as the Debt Securities. When we offer to sell a particular series of Debt Securities, we will describe the specific terms of that series in a prospectus supplement or any free writing prospectus. The Debt Securities will be issued under
an open-ended Indenture (for Debt Securities) between us and a trustee to be selected by us at or about the time we offer our Debt Securities. The open-ended Indenture (for Debt Securities) is incorporated by reference into the registration
statement of which this prospectus is a part and is filed as an exhibit to the registration statement. In this prospectus we refer to the Indenture (for Debt Securities) as the Debt Securities Indenture. We refer to the trustee under any Debt
Securities Indenture as the Debt Securities Trustee.
The prospectus supplement or any free writing prospectus applicable to a particular
series of Debt Securities may state that a particular series of Debt Securities will be our subordinated obligations. The form of Debt Securities Indenture referred to above includes optional provisions (designated by brackets
([ ])) that we would expect to appear in a separate indenture for subordinated debt securities in the event we issue subordinated debt securities. In the following discussion, we refer to any of our subordinated
obligations as the Subordinated Debt Securities. Unless the applicable prospectus supplement or any free writing prospectus provides otherwise, we will use a separate Debt Securities Indenture for any Subordinated Debt Securities that we
may issue. Our Debt Securities Indenture will be qualified under the Trust Indenture Act of 1939, as amended, or the Trust Indenture Act, and you should refer to the Trust Indenture Act for the provisions that apply to the Debt Securities.
We have summarized selected provisions of the Debt Securities Indenture below. Each Debt Securities Indenture will be independent of any other
Debt Securities Indenture unless otherwise stated in a prospectus supplement or any free writing prospectus. The summary that follows is not complete and the summary is qualified in its entirety by reference to the provisions of the applicable Debt
Securities Indenture. You should consult the applicable Debt Securities, Debt Securities Indenture, any supplemental indentures, officers certificates and other related documents for more complete information on the Debt Securities. These
documents appear as exhibits to, or are incorporated by reference into, the registration statement of which this prospectus is a part, or will appear as exhibits to other documents that we will file with the SEC, which will be incorporated by
reference into this prospectus. In the summary below, we have included references to applicable section numbers of the Debt Securities Indenture so that you can easily locate these provisions.
Ranking
Our Debt Securities that are not
designated Subordinated Debt Securities will be effectively subordinated to all secured indebtedness that we have outstanding from time to time to the extent of the value of the collateral securing such secured indebtedness. Our Debt Securities that
are designated Subordinated Debt Securities will be subordinate to all outstanding secured indebtedness as well as Debt Securities that are not designated Subordinated Debt Securities. As of May 22, 2017, we had approximately $9.4 billion in
secured, senior unsecured or subordinated indebtedness outstanding pursuant to repurchase agreements. The Debt Securities Indenture does not limit the amount of secured indebtedness that we may issue or incur. For a more detailed description
regarding our risk exposure on our repurchase agreements, see Managements Discussion and Analysis of Financial Condition and Results of OperationLiquidity and Capital Resources in our Annual Report on Form 10-K for the fiscal
year ended December 31, 2016 filed on February 17, 2017 and incorporated herein by reference.
Our ability to meet our financial
obligations with respect to any future Debt Securities, and cash needs generally, is dependent on our operating cash flow, our ability to access various sources of short- and long-term
13
liquidity, including our repurchase agreements, and the capital markets. Holders of our Debt Securities will effectively have a junior position to claims of our creditors, including trade
creditors, debt holders, secured creditors, taxing authorities and guarantee holders.
Provisions of a Particular Series
The Debt Securities may from time to time be issued in one or more series. You should consult the prospectus supplement or free writing
prospectus relating to any particular series of Debt Securities for the following information:
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the title of the Debt Securities;
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any limit on the aggregate principal amount of the Debt Securities of the series of which they are a part;
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the date(s), or method for determining the date(s), on which the principal of the Debt Securities will be payable;
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the rate, including the method of determination, if applicable, at which the Debt Securities will bear interest, if any, and:
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the date from which the interest will accrue;
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the dates on which we will pay interest;
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our ability to defer interest payments and any related restrictions during any interest deferral period; and
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the record date for any interest payable on any interest payment date;
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the principal of, premium, if any, and interest on the Debt Securities will be payable;
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you may register transfer of the Debt Securities;
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you may exchange the Debt Securities; and
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you may serve notices and demands upon us regarding the Debt Securities;
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the security registrar for the Debt Securities and whether the principal of the Debt Securities is payable without presentment or surrender of them;
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the terms and conditions upon which we may elect to redeem any Debt Securities, including any replacement capital or similar covenants limiting our ability to redeem any Subordinated Debt Securities;
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the denominations in which we may issue Debt Securities, if other than $1,000 and integral multiples of $1,000;
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the terms and conditions upon which the Debt Securities must be redeemed or purchased due to our obligations pursuant to any sinking fund or other mandatory redemption or tender provisions, or at the holders
option, including any applicable exceptions to notice requirements;
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the currency, if other than United States currency, in which payments on the Debt Securities will be payable;
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the terms according to which elections can be made by us or the holder regarding payments on the Debt Securities in currency other than the currency in which the Debt Securities are stated to be payable;
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if payments are to be made on the Debt Securities in securities or other property, the type and amount of the securities and other property or the method by which the amount shall be determined;
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14
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the manner in which we will determine any amounts payable on the Debt Securities that are to be determined with reference to an index or other fact or event ascertainable outside of the applicable indenture;
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if other than the entire principal amount, the portion of the principal amount of the Debt Securities payable upon declaration of acceleration of their maturity;
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any addition to the events of default applicable to any Debt Securities and any addition to our covenants for the benefit of the holders of the Debt Securities;
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the terms applicable to any rights to convert Debt Securities into or exchange them for other of our securities or those of any other entity;
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whether we are issuing Debt Securities as global securities, and if so:
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any limitations on transfer or exchange rights or the right to obtain the registration of transfer;
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any limitations on the right to obtain definitive certificates of the Debt Securities; and
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any other matters incidental to the Debt Securities;
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whether we are issuing the Debt Securities as bearer certificates;
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any limitations on transfer or exchange of Debt Securities or the right to obtain registration of their transfer, and the terms and amount of any service charge required for registration of transfer or exchange;
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any exceptions to the provisions governing payments due on legal holidays, or any variations in the definition of business day with respect to the Debt Securities;
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any collateral security, assurance, guarantee or other credit enhancement applicable to the Debt Securities;
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any other terms of the Debt Securities not in conflict with the provisions of the applicable Debt Securities Indenture; and
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the material federal income tax consequences applicable to the Debt Securities.
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For more
information, see Section 301 of the applicable Debt Securities Indenture.
Debt Securities may be sold at a substantial discount
below their principal amount. You should consult the applicable prospectus supplement or free writing prospectus for a description of certain material federal income tax considerations that may apply to Debt Securities sold at an original issue
discount or denominated in a currency other than U.S. dollars.
Unless the applicable prospectus supplement or free writing prospectus
states otherwise, the covenants contained in the applicable indenture will not afford holders of Debt Securities protection in the event we have a change in control or are involved in a highly-leveraged transaction.
Subordination
The applicable prospectus
supplement or free writing prospectus may provide that a series of Debt Securities will be Subordinated Debt Securities, subordinate and junior in right of payment to all of our Senior Indebtedness, as defined below. If so, we will issue these
securities under a separate Debt Securities Indenture for Subordinated Debt Securities. For more information, see Article XV of the form of Debt Securities Indenture.
15
Unless the applicable prospectus supplement or free writing prospectus states otherwise, no
payment of principal of, including redemption and sinking fund payments, or any premium or interest on, the Subordinated Debt Securities may be made if:
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there occur certain acts of bankruptcy, insolvency, liquidation, dissolution or other winding up of our company;
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any Senior Indebtedness is not paid when due;
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any applicable grace period with respect to other defaults with respect to any Senior Indebtedness has ended, the default has not been cured or waived and the maturity of such Senior Indebtedness has been accelerated
because of the default; or
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the maturity of the Subordinated Debt Securities of any series has been accelerated because of a default and Senior Indebtedness is then outstanding.
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Upon any distribution of our assets to creditors upon any dissolution, winding-up, liquidation or reorganization, whether voluntary or
involuntary or in bankruptcy, insolvency, receivership or other proceedings, all principal of, and any premium and interest due or to become due on, all outstanding Senior Indebtedness must be paid in full before the holders of the Subordinated Debt
Securities are entitled to payment. For more information, see Section 1502 of the applicable Debt Securities Indenture. The rights of the holders of the Subordinated Debt Securities will be subrogated to the rights of the holders of Senior
Indebtedness to receive payments or distributions applicable to Senior Indebtedness until all amounts owing on the Subordinated Debt Securities are paid in full. For more information, see Section 1504 of the applicable Debt Securities
Indenture.
Unless the applicable prospectus supplement or free writing prospectus states otherwise, the term Senior
Indebtedness means all obligations (other than non-recourse obligations and the indebtedness issued under the Subordinated Debt Securities Indenture) of, or guaranteed or assumed by, us:
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for borrowed money (including both senior and subordinated indebtedness for borrowed money, but excluding the Subordinated Debt Securities);
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for the payment of money relating to any lease that is capitalized on our consolidated balance sheet in accordance with generally accepted accounting principles; or
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indebtedness evidenced by bonds, debentures, notes or other similar instruments.
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In the case
of any such indebtedness or obligations, Senior Indebtedness includes amendments, renewals, extensions, modifications and refundings, whether existing as of the date of the Subordinated Debt Securities Indenture or subsequently incurred by us.
The Subordinated Debt Securities Indenture does not limit the aggregate amount of Senior Indebtedness we may issue.
Form, Exchange and Transfer
Unless the
applicable prospectus supplement or free writing prospectus states otherwise, we will issue Debt Securities only in fully registered form without coupons and in denominations of $1,000 and integral multiples of that amount. For more information, see
Sections 201 and 302 of the applicable Debt Securities Indenture.
Holders may present Debt Securities for exchange or for registration of
transfer, duly endorsed or accompanied by a duly executed instrument of transfer, at the office of the security registrar or at the office of any transfer agent we may designate. Exchanges and transfers are subject to the terms of the applicable
indenture and applicable limitations for global securities. We may designate ourselves the security registrar.
16
No charge will be made for any registration of transfer or exchange of Debt Securities, but we
may require payment of a sum sufficient to cover any tax or other governmental charge that the holder must pay in connection with the transaction. Any transfer or exchange will become effective upon the security registrar or transfer agent, as the
case may be, being satisfied with the documents of title and identity of the person making the request. For more information, see Section 305 of the applicable Debt Securities Indenture.
The applicable prospectus supplement or free writing prospectus will state the name of any transfer agent, in addition to the security
registrar initially designated by us, for any Debt Securities. We may at any time designate additional transfer agents or withdraw the designation of any transfer agent or make a change in the office through which any transfer agent acts. We must,
however, maintain a transfer agent in each place of payment for the Debt Securities of each series. For more information, see Section 602 of the applicable Debt Securities Indenture.
We will not be required to:
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issue, register the transfer of, or exchange any Debt Securities or any tranche of any Debt Securities during a period beginning at the opening of business 15 days before the day of mailing of a notice of redemption of
any Debt Securities called for redemption and ending at the close of business on the day of mailing; or
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register the transfer of, or exchange any, Debt Securities selected for redemption except the unredeemed portion of any Debt Securities being partially redeemed.
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For more information, see Section 305 of the applicable Debt Securities Indenture.
Payment and Paying Agents
Unless the
applicable prospectus supplement or free writing prospectus states otherwise, we will pay interest on a Debt Security on any interest payment date to the person in whose name the Debt Security is registered at the close of business on the regular
record date for the interest payment. For more information, see Section 307 of the applicable Debt Securities Indenture.
Unless the
applicable prospectus supplement or free writing prospectus provides otherwise, we will pay principal and any premium and interest on Debt Securities at the office of the paying agent whom we will designate for this purpose. Unless the applicable
prospectus supplement or free writing prospectus states otherwise, the corporate trust office of the Debt Securities Trustee in New York City will be designated as our sole paying agent for payments with respect to Debt Securities of each series.
Any other paying agents initially designated by us for the Debt Securities of a particular series will be named in the applicable prospectus supplement or free writing prospectus. We may at any time add or delete paying agents or change the office
through which any paying agent acts. We must, however, maintain a paying agent in each place of payment for the Debt Securities of a particular series. For more information, see Section 602 of the applicable Debt Securities Indenture.
All money we pay to a paying agent for the payment of the principal and any premium or interest on any Debt Security that remains unclaimed at
the end of two years after payment is due will be repaid to us. After that date, the holder of that Debt Security shall be deemed an unsecured general creditor and may look only to us for these payments. For more information, see Section 603 of
the applicable Debt Securities Indenture.
Redemption
You should consult the applicable prospectus supplement or free writing prospectus for any terms regarding optional or mandatory redemption of
Debt Securities. Except for any provisions in the applicable prospectus supplement or free writing prospectus regarding Debt Securities redeemable at the holders option, Debt
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Securities may be redeemed only upon notice by mail not less than 30 nor more than 60 days prior to the redemption date. Further, if less than all of the Debt Securities of a series, or any
tranche of a series, is to be redeemed, the Debt Securities to be redeemed will be selected by the method provided for the particular series. In the absence of a selection provision, the Debt Securities Trustee will select a fair and appropriate
method of selection. For more information, see Sections 403 and 404 of the applicable Debt Securities Indenture.
A notice of redemption
we provide may state:
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that redemption is conditioned upon receipt by the paying agent on or before the redemption date of money sufficient to pay the principal of and any premium and interest on the Debt Securities; and
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that if the money has not been received, the notice will be ineffective and we will not be required to redeem the Debt Securities.
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For more information, see Section 404 of the applicable Debt Securities Indenture.
Consolidation, Merger and Sale of Assets
We may not consolidate with or merge into any other person, nor may we transfer or lease substantially all of our assets and property to any
other person, unless:
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the corporation formed by the consolidation or into which we are merged, or the person that acquires by conveyance or transfer, or that leases, substantially all of our property and assets:
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is organized and validly existing under the laws of any domestic jurisdiction; and
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expressly assumes by supplemental indenture our obligations on the Debt Securities and under the applicable indentures;
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immediately after giving effect to the transaction, no event of default, and no event that would become an event of default, has occurred and is continuing; and
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we have delivered to the Debt Securities Trustee an officers certificate and opinion of counsel as provided in the applicable indentures.
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For more information, see Section 1101 of the applicable Debt Securities Indenture.
Events of Default
Unless the applicable
prospectus supplement or free writing prospectus states otherwise, event of default under the applicable indenture with respect to Debt Securities of any series means any of the following:
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failure to pay any interest due on any Debt Security of that series within 30 days after it becomes due;
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failure to pay principal or premium, if any, when due on any Debt Security of that series;
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failure to make any required sinking fund payment on any Debt Securities of that series;
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breach of or failure to perform any other covenant or warranty in the applicable indenture with respect to Debt Securities of that series for 60 days (subject to extension under certain circumstances for another 120
days) after we receive notice from the Debt Securities Trustee, or we and the Debt Securities Trustee receive notice from the holders of at least 33% in principal amount of the Debt Securities of that series outstanding under the applicable
indenture according to the provisions of the applicable indenture;
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certain events of bankruptcy, insolvency or reorganization; and
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any other event of default set forth in the applicable prospectus supplement or free writing prospectus.
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For more information, see Section 801 of the applicable Debt Securities Indenture.
An event of default with respect to a particular series of Debt Securities does not necessarily constitute an event of default with respect to
the Debt Securities of any other series issued under the applicable indenture.
If an event of default with respect to a particular series
of Debt Securities occurs and is continuing, either the Debt Securities Trustee or the holders of at least 33% in principal amount of the outstanding Debt Securities of that series may declare the principal amount of all of the Debt Securities of
that series to be due and payable immediately. If the Debt Securities of that series are discount securities or similar Debt Securities, only the portion of the principal amount as specified in the applicable prospectus supplement or free writing
prospectus may be immediately due and payable. If an event of default occurs and is continuing with respect to all series of Debt Securities issued under a Debt Securities Indenture, including all events of default relating to bankruptcy, insolvency
or reorganization, the Debt Securities Trustee or the holders of at least 33% in principal amount of the outstanding Debt Securities of all series issued under that Debt Securities Indenture, considered together, may declare an acceleration of the
principal amount of all series of Debt Securities issued under that Debt Securities Indenture. There is no automatic acceleration, even in the event of our bankruptcy or insolvency.
The applicable prospectus supplement or free writing prospectus may provide, with respect to a series of Debt Securities to which a credit
enhancement is applicable, that the provider of the credit enhancement may, if a default has occurred and is continuing with respect to the series, have all or any part of the rights with respect to remedies that would otherwise have been
exercisable by the holder of that series.
At any time after a declaration of acceleration with respect to the Debt Securities of a
particular series, and before a judgment or decree for payment of the money due has been obtained, the event of default giving rise to the declaration of acceleration will, without further action, be deemed to have been waived, and the declaration
and its consequences will be deemed to have been rescinded and annulled, if:
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we have paid or deposited with the Debt Securities Trustee a sum sufficient to pay:
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all overdue interest on all Debt Securities of the particular series;
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the principal of and any premium on any Debt Securities of that series that have become due otherwise than by the declaration of acceleration and any interest at the rate prescribed in the Debt Securities;
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interest upon overdue interest at the rate prescribed in the Debt Securities, to the extent payment is lawful; and
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all amounts due to the Debt Securities Trustee under the applicable indenture; and
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any other event of default with respect to the Debt Securities of the particular series, other than the failure to pay the principal of the Debt Securities of that series that has become due solely by the declaration of
acceleration, has been cured or waived as provided in the applicable indenture.
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For more information, see Section 802 of the
applicable Debt Securities Indenture.
The applicable Debt Securities Indenture includes provisions as to the duties of the Debt
Securities Trustee in case an event of default occurs and is continuing. Consistent with these provisions, the Debt Securities Trustee will be under no obligation to exercise any of its rights or powers at the request or direction of any of the
holders unless those holders have offered to the Debt Securities Trustee reasonable indemnity against the costs, expenses and liabilities that may be incurred by it in compliance with such request or direction. For more information, see
Section 903 of the applicable Debt Securities Indenture. Subject to these provisions for indemnification, the holders of a majority in principal amount of the outstanding Debt Securities of any series may direct the time, method and place of
conducting any proceeding for any remedy available to the Debt Securities Trustee, or exercising any trust or power conferred on the Debt Securities Trustee, with respect to the Debt Securities of that series. For more information, see
Section 812 of the applicable Debt Securities Indenture.
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No holder of Debt Securities may institute any proceeding regarding the applicable indenture, or
for the appointment of a receiver or a trustee, or for any other remedy under the applicable indenture unless:
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the holder has previously given to the Debt Securities Trustee written notice of a continuing event of default of that particular series;
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the holders of a majority in principal amount of the outstanding Debt Securities of all series with respect to which an event of default is continuing have made a written request to the Debt Securities Trustee, and have
offered reasonable indemnity to the Debt Securities Trustee, to institute the proceeding as trustee; and
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the Debt Securities Trustee has failed to institute the proceeding, and has not received from the holders of a majority in principal amount of the outstanding Debt Securities of that series a direction inconsistent with
the request, within 60 days after notice, request and offer of reasonable indemnity.
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For more information, see Section 807 of the
applicable Debt Securities Indenture.
The preceding limitations do not apply, however, to a suit instituted by a holder of a Debt
Security for the enforcement of payment of the principal of or any premium or interest on the Debt Securities on or after the applicable due date stated in the Debt Securities. For more information, see Section 808 of the applicable Debt
Securities Indenture.
We must furnish annually to the Debt Securities Trustee a statement by an appropriate officer as to that
officers knowledge of our compliance with all conditions and covenants under each of the indentures for Debt Securities. Our compliance is to be determined without regard to any grace period or notice requirement under the respective
indenture. For more information, see Section 606 of the applicable Debt Securities Indenture.
Modification and Waiver
We and the Debt Securities Trustee, without the consent of the holders of the Debt Securities, may enter into one or more supplemental
indentures for any of the following purposes:
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to evidence the assumption by any permitted successor of our covenants in the applicable indenture and the Debt Securities;
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to add one or more covenants or other provisions for the benefit of the holders of outstanding Debt Securities or to surrender any right or power conferred upon us by the applicable indenture;
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to add any additional events of default;
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to change or eliminate any provision of the applicable indenture or add any new provision to it, but if this action would adversely affect the interests of the holders of any particular series of Debt Securities in any
material respect, the action will not become effective with respect to that series while any Debt Securities of that series remain outstanding under the applicable indenture;
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to provide collateral security for the Debt Securities;
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to establish the form or terms of Debt Securities according to the provisions of the applicable indenture;
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to evidence the acceptance of appointment of a successor Debt Securities Trustee under the applicable indenture with respect to one or more series of the Debt Securities and to add to or change any of the provisions of
the applicable indenture as necessary to provide for trust administration under the applicable indenture by more than one trustee;
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to provide for the procedures required to permit the use of a non-certificated system of registration for any series of Debt Securities;
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to change any place where:
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the principal of and any premium and interest on any Debt Securities are payable;
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any Debt Securities may be surrendered for registration of transfer or exchange; or
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notices and demands to or upon us regarding Debt Securities and the applicable indentures may be served; or
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to cure any ambiguity or inconsistency, but only by means of changes or additions that will not adversely affect the interests of the holders of Debt Securities of any series in any material respect.
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For more information, see Section 1201 of the applicable Debt Securities Indenture.
The holders of at least a majority in aggregate principal amount of the outstanding Debt Securities of any series may waive:
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compliance by us with certain provisions of the applicable indenture (see Section 607 of the applicable Debt Securities Indenture); and
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any past default under the applicable indenture, except a default in the payment of principal, premium or interest and certain covenants and provisions of the applicable indenture that cannot be modified or amended
without consent of the holder of each outstanding Debt Security of the series affected (see Section 813 of the applicable Debt Securities Indenture).
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The Trust Indenture Act of 1939 may be amended after the date of the applicable indenture to require changes to the indenture. In this event,
the indenture will be deemed to have been amended so as to effect the changes, and we and the Debt Securities Trustee may, without the consent of any holders, enter into one or more supplemental indentures to evidence or effect the amendment. For
more information, see Section 1201 of the applicable Debt Securities Indenture.
Except as provided in this section, the consent of
the holders of a majority in aggregate principal amount of the outstanding Debt Securities issued pursuant to a Debt Securities Indenture, considered as one class, is required to change in any manner the applicable indenture pursuant to one or more
supplemental indentures. If less than all of the series of Debt Securities outstanding under a Debt Securities Indenture are directly affected by a proposed supplemental indenture, however, only the consent of the holders of a majority in aggregate
principal amount of the outstanding Debt Securities of all series directly affected, considered as one class, will be required. Furthermore, if the Debt Securities of any series have been issued in more than one tranche and if the proposed
supplemental indenture directly affects the rights of the holders of one or more, but not all, tranches, only the consent of the holders of a majority in aggregate principal amount of the outstanding Debt Securities of all tranches directly
affected, considered as one class, will be required. In addition, an amendment or modification:
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may not, without the consent of the holder of each outstanding Debt Security affected:
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change the maturity of the principal of, or any installment of principal of or interest on, any Debt Securities;
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reduce the principal amount or the rate of interest, or the amount of any installment of interest, or change the method of calculating the rate of interest;
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reduce any premium payable upon the redemption of the Debt Securities;
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reduce the amount of the principal of any Debt Security originally issued at a discount from the stated principal amount that would be due and payable upon a declaration of acceleration of maturity;
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change the currency or other property in which a Debt Security or premium or interest on a Debt Security is payable; or
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impair the right to institute suit for the enforcement of any payment on or after the stated maturity, or in the case of redemption, on or after the redemption date, of any Debt Securities;
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may not reduce the percentage of principal amount requirement for consent of the holders for any supplemental indenture, or for any waiver of compliance with any provision of or any default under the applicable
indenture, or reduce the requirements for quorum or voting, without the consent of the holder of each outstanding Debt Security of each series or tranche affected; and
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may not modify provisions of the applicable indenture relating to supplemental indentures, waivers of certain covenants and waivers of past defaults with respect to the Debt Securities of any series, or any tranche of a
series, without the consent of the holder of each outstanding Debt Security affected.
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A supplemental indenture will be
deemed not to affect the rights under the applicable indenture of the holders of any series or tranche of the Debt Securities if the supplemental indenture:
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changes or eliminates any covenant or other provision of the applicable indenture expressly included solely for the benefit of one or more other particular series of Debt Securities or tranches thereof; or
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modifies the rights of the holders of Debt Securities of any other series or tranches with respect to any covenant or other provision.
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For more information, see Section 1202 of the applicable Debt Securities Indenture.
If we solicit from holders of the Debt Securities any type of action, we may at our option by board resolution fix in advance a record date
for the determination of the holders entitled to vote on the action. We shall have no obligation, however, to do so. If we fix a record date, the action may be taken before or after the record date, but only the holders of record at the close of
business on the record date shall be deemed to be holders for the purposes of determining whether holders of the requisite proportion of the outstanding Debt Securities have authorized the action. For that purpose, the outstanding Debt Securities
shall be computed as of the record date. Any holder action shall bind every future holder of the same security and the holder of every security issued upon the registration of transfer of or in exchange for or in lieu of the security in respect of
anything done or permitted by the Debt Securities Trustee or us in reliance on that action, whether or not notation of the action is made upon the security. For more information, see Section 104 of the applicable Debt Securities Indenture.
Defeasance
Unless the applicable
prospectus supplement or free writing prospectus provides otherwise, any Debt Security, or portion of the principal amount of a Debt Security, will be deemed to have been paid for purposes of the applicable indenture, and, at our election, our
entire indebtedness in respect of the Debt Security, or portion thereof, will be deemed to have been satisfied and discharged, if we have irrevocably deposited with the Debt Securities Trustee or any paying agent other than us, in trust money,
certain eligible obligations, as defined in the applicable indenture, or a combination of the two, sufficient to pay principal of and any premium and interest due and to become due on the Debt Security or portion thereof. For more information, see
Section 701 of the applicable Debt Securities Indenture. For this purpose, unless the applicable prospectus supplement or free writing prospectus provides otherwise, eligible obligations include direct obligations of, or obligations
unconditionally guaranteed by, the United States, entitled to the benefit of full faith and credit of the United States, and certificates, depositary receipts or other instruments that evidence a direct ownership interest in those obligations or in
any specific interest or principal payments due in respect of those obligations.
Resignation, Removal of Debt Securities Trustee; Appointment of
Successor
The Debt Securities Trustee may resign at any time by giving written notice to us or may be removed at any time by an action
of the holders of a majority in principal amount of outstanding Debt Securities delivered to the Debt Securities Trustee and us. No resignation or removal of the Debt Securities Trustee and no appointment of a successor trustee will become effective
until a successor trustee accepts appointment in accordance with the requirements of the applicable indenture. So long as no event of default or event that would become an event of
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default has occurred and is continuing, and except with respect to a Debt Securities Trustee appointed by an action of the holders, if we have delivered to the Debt Securities Trustee a
resolution of our board of directors appointing a successor trustee and the successor trustee has accepted the appointment in accordance with the terms of the applicable indenture, the Debt Securities Trustee will be deemed to have resigned and the
successor trustee will be deemed to have been appointed as trustee in accordance with the applicable indenture. For more information, see Section 910 of the applicable Debt Securities Indenture.
Notices
We will give notices to holders
of Debt Securities by mail to their addresses as they appear in the Debt Security Register. For more information, see Section 106 of the applicable Debt Securities Indenture.
Title
The Debt Securities Trustee and
its agents, and we and our agents, may treat the person in whose name a Debt Security is registered as the absolute owner of that Debt Security, whether or not that Debt Security may be overdue, for the purpose of making payment and for all other
purposes. For more information, see Section 308 of the applicable Debt Securities Indenture.
Governing Law
The Debt Securities Indentures and the Debt Securities, including any Subordinated Debt Securities Indentures and Subordinated Debt Securities,
will be governed by, and construed in accordance with, the law of the State of New York. For more information, see Section 112 of the applicable Debt Securities Indenture.
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GLOBAL SECURITIES
We may issue some or all of our securities of any series as global securities. We will register each global security in the name of a
depositary identified in the applicable prospectus supplement. The global securities will be deposited with a depositary or nominee or custodian for the depositary and will bear a legend regarding restrictions on exchanges and registration of
transfer as discussed below and any other matters to be provided pursuant to the indenture.
As long as the depositary or its nominee is
the registered holder of a global security, that person will be considered the sole owner and holder of the global security and the securities represented by it for all purposes under the securities and the indenture. Except in limited
circumstances, owners of a beneficial interest in a global security:
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will not be entitled to have the global security or any securities represented by it registered in their names;
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will not receive or be entitled to receive physical delivery of certificated securities in exchange for the global security; and
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will not be considered to be the owners or holders of the global security or any securities represented by it for any purposes under the securities or the indenture.
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We will make all payments of principal and any premium and interest on a global security to the depositary or its nominee as the holder of the
global security. The laws of some jurisdictions require that certain purchasers of securities take physical delivery of securities in definitive form. These laws may impair the ability to transfer beneficial interests in a global security.
Ownership of beneficial interests in a global security will be limited to institutions having accounts with the depositary or its nominee,
called participants for purposes of this discussion, and to persons that hold beneficial interests through participants. When a global security is issued, the depositary will credit on its book-entry, registration and transfer system the
principal amounts of securities represented by the global security to the accounts of its participants. Ownership of beneficial interests in a global security will be shown only on, and the transfer of those ownership interests will be effected only
through, records maintained by:
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the depositary, with respect to participants interests; or
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any participant, with respect to interests of persons held by the participants on their behalf.
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Payments by participants to owners of beneficial interests held through the participants will be the responsibility of the participants. The
depositary may from time to time adopt various policies and procedures governing payments, transfers, exchanges and other matters relating to beneficial interests in a global security. None of the following will have any responsibility or liability
for any aspect of the depositarys or any participants records relating to, or for payments made on account of, beneficial interests in a global security, or for maintaining, supervising or reviewing any records relating to those
beneficial interests:
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the trustee under any indenture; or
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any agent of any of the above.
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CERTAIN PROVISIONS OF MARYLAND LAW AND OF OUR CHARTER AND BYLAWS
The following is a summary of the material provisions of Maryland law applicable to us and of our charter and bylaws and does not
purport to be complete and is subject to and qualified by reference to Maryland law and our charter and bylaws. See Where You Can Find More Information and Incorporation of Certain Information by Reference for information on
how to find copies of our charter and bylaws.
General
The Maryland General Corporation Law, or MGCL, and our charter and bylaws contain provisions that could make it more difficult for a potential
acquiror to acquire us by means of a tender offer, proxy contest or otherwise. These provisions are expected to discourage certain coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of us to
negotiate first with our board of directors. We believe that the benefits of these provisions outweigh the potential disadvantages of discouraging any such acquisition proposals because, among other things, the negotiation of such proposals may
improve their terms.
Number of Directors; Vacancies; Removal
Our charter provides that the number of directors will be set only by the board of directors in accordance with our bylaws. Our bylaws provide
that a majority of our entire board of directors may at any time increase or decrease the number of directors. However, unless our bylaws are amended, the number of directors may never be less than five nor more than eleven. We have elected to be
subject to the provision of Subtitle 8 of Title 3 of the MGCL regarding the filling of vacancies on the board of directors. Accordingly, except as may be provided by the board of directors in setting the terms of any class or series of stock, any
and all vacancies on the board of directors may be filled only by the affirmative vote of a majority of the remaining directors in office, even if the remaining directors do not constitute a quorum, and any director elected to fill a vacancy will
serve for the remainder of the full term of the directorship in which the vacancy occurred and until a successor is duly elected and qualifies. Subject to the rights of the holders of preferred stock, if any, our charter provides that a director may
be removed only for cause, as defined in our charter, and then only by the affirmative vote of at least two-thirds of the votes entitled to be cast in the election of directors.
Action by Stockholders
Under the MGCL,
stockholder action can be taken only at an annual or special meeting of stockholders or by unanimous written consent in lieu of a meeting (unless the charter provides for a lesser percentage, which our charter does not). These provisions, combined
with the requirements of our bylaws regarding the calling of a stockholder-requested special meeting of stockholders discussed below, may have the effect of delaying consideration of a stockholder proposal until the next annual meeting.
Advance Notice Provisions for Stockholder Nominations and Stockholder Proposals
Our bylaws provide that with respect to an annual meeting of stockholders, nominations of individuals for election to the board of directors
and the proposal of business to be considered by stockholders may be made only (i) pursuant to our notice of the meeting, (ii) by or at the direction of the board of directors or (iii) by a stockholder who was a stockholder of record
both at the time of giving of notice by such stockholder as provided for in our bylaws and at the time of the annual meeting and who is entitled to vote at the meeting and who has complied with the advance notice provisions of the bylaws. With
respect to special meetings of stockholders, only the business specified in our notice of the meeting may be brought before the meeting.
Nominations of individuals for election to the board of directors at a special meeting may be made only (i) pursuant to our notice of the
meeting, (ii) by or at the direction of the board of directors or (iii) provided that
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the board of directors has determined that directors will be elected at the meeting, by a stockholder who was a stockholder of record both at the time of giving of notice by such stockholder as
provided for in our bylaws and at the time of the special meeting and who is entitled to vote at the meeting and who has complied with the advance notice provisions of the bylaws.
The purpose of requiring stockholders to give us advance notice of nominations and other business is to afford our board of directors a
meaningful opportunity to consider the qualifications of the proposed nominees and the advisability of any other proposed business and, to the extent deemed necessary or desirable by our board of directors, to inform stockholders and make
recommendations about such qualifications or business, as well as to provide a more orderly procedure for conducting meetings of stockholders. Although our bylaws do not give our board of directors any power to disapprove stockholder nominations for
the election of directors or proposals recommending certain action, they may have the effect of precluding a contest for the election of directors or the consideration of stockholder proposals if proper procedures are not followed and of
discouraging or deterring a third party from conducting a solicitation of proxies to elect its own slate of directors or to approve its own proposal without regard to whether consideration of such nominees or proposals might be harmful or beneficial
to us and our stockholders.
Calling of Special Meetings of Stockholders
Our bylaws provide that special meetings of stockholders may be called by our board of directors and certain of our officers. Additionally, our
bylaws provide that, subject to the satisfaction of certain procedural and informational requirements by the stockholders requesting the meeting, a special meeting of stockholders shall be called by the secretary of the corporation upon the written
request of stockholders entitled to cast not less than a majority of all the votes entitled to be cast at such meeting.
Approval of Extraordinary
Corporate Action; Amendment of Charter and Bylaws
Under Maryland law, a Maryland corporation generally cannot dissolve, amend its
charter, merge, sell all or substantially all of its assets, engage in a share exchange or engage in similar transactions outside the ordinary course of business, unless advised by its board of directors and approved by the affirmative vote of
stockholders entitled to cast at least two-thirds of the votes entitled to be cast on the matter. However, a Maryland corporation may provide in its charter for approval of these matters by a lesser percentage, but not less than a majority of all of
the votes entitled to be cast on the matter. Our charter, with certain exceptions, generally provides for approval of charter amendments and extraordinary transactions that have been declared advisable by our board of directors and approved by the
affirmative vote of stockholders entitled to cast a majority of the votes entitled to be cast on the matter. Our bylaws provide that the board of directors will have the exclusive power to adopt, alter or repeal any provision of our bylaws and to
make new bylaws.
No Appraisal Rights
As permitted by the MGCL, our charter provides that stockholders will not be entitled to exercise appraisal rights (unless our board of
directors, upon the affirmative vote of a majority of the board, determines that appraisal rights apply, with respect to all or any classes or series of stock, to one or more transactions occurring after the date of the boards determination in
connection with which holders of the shares would otherwise be entitled to exercise appraisal rights).
Maryland Control Share Acquisition Act
The Maryland Control Share Acquisition Act provides that control shares of a Maryland corporation acquired in a control share
acquisition have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter, excluding shares owned by the acquiror, by officers or by directors who are employees of the corporation.
Control shares are voting shares of stock which, if aggregated
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with all other shares of stock owned by the acquiror or in respect of which the acquiror is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy),
would entitle the acquiror to exercise voting power in electing directors within one of the following ranges of voting power:
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one-tenth or more but less than one-third;
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one-third or more but less than a majority; or
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a majority or more of all voting power.
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Control shares do not include shares the acquiring
person is then entitled to vote as a result of having previously obtained stockholder approval. A control share acquisition means the acquisition of control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon satisfaction of certain conditions (including an undertaking to
pay expenses), may compel our board of directors to call a special meeting of stockholders to be held within 50 days of demand to consider the voting rights of the shares. If no request for a meeting is made, the corporation may itself present the
question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person does not deliver an
acquiring person statement as required by the Maryland Control Share Acquisition Act, then, subject to certain conditions and limitations, we may redeem for fair value any or all of the control shares, except those for which voting rights have
previously been approved. Fair value is determined, without regard to the absence of voting rights for the control shares, as of the date of the last control share acquisition by the acquiror or of any meeting of stockholders at which the voting
rights of the shares are considered and not approved. If voting rights for control shares are approved at a stockholders meeting and the acquiror becomes entitled to vote a majority of the shares entitled to vote, all other stockholders may
exercise appraisal rights. This means that a stockholder would be able to force us to redeem such stockholders shares for fair value. Under Maryland law, the fair value of the shares as determined for purposes of such appraisal rights may not
be less than the highest price per share paid by the acquiror in the control share acquisition.
The Maryland Control Share Acquisition
Act does not apply (a) to shares acquired in a merger, consolidation or share exchange if we are a party to the transaction or (b) to acquisitions approved or exempted by our charter or bylaws.
Our bylaws contain a provision exempting from the Maryland Control Share Acquisition Act any and all acquisitions by any person of our shares
of stock. We cannot assure you that such provision will not be amended or repealed, in whole or in part, at any time in the future. We will, however, amend our bylaws to be subject to the Maryland Control Share Acquisition Act only if the board of
directors determines that it would be in our best interests.
Maryland Business Combination Act
The Maryland Business Combination Act prohibits certain business combinations between a Maryland corporation and interested
stockholders or an affiliate of an interested stockholder. Among other things, the law prohibits, for a period of five years after the most recent date on which the interested stockholder becomes an interested stockholder, a corporation from
engaging in any business combination with any interested stockholder. These business combinations include mergers, consolidations, share exchanges or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of
equity securities or certain other transactions. An interested stockholder is defined as:
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any person who, directly or indirectly, beneficially owns 10% or more of the voting power of the corporations shares; or
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an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then
outstanding voting stock of the corporation.
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A person is not an interested stockholder under the Maryland Business
Combination Act if the board of directors approved in advance the transaction by which the person otherwise would have become an interested stockholder. However, in approving a transaction, the board of directors may provide that its approval is
subject to compliance, at or after the time of approval, with any terms and conditions determined by the board.
After the five-year
prohibition, any business combination between the corporation and an interested stockholder generally must be recommended by the board of directors of the corporation and approved by the affirmative vote of at least:
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80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation; and
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two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected
or held by an affiliate or associate of the interested stockholder.
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These supermajority vote requirements do not apply if
the corporations common stockholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares.
The Maryland Business Combination Act permits various exemptions from its provisions, including business combinations that are exempted by the
board of directors before the time that the interested stockholder becomes an interested stockholder. Our board of directors has adopted a resolution that provides that any business combination between us and any other person is exempted from the
provisions of the Maryland Business Combination Act, provided that the business combination is first approved by the board of directors. However, this resolution may be altered or repealed in whole or in part at any time by our board of directors.
If this resolution is repealed, or the board of directors does not otherwise approve a business combination, the statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer.
Subtitle 8
Subtitle 8 of Title 3 of the
MGCL permits a Maryland corporation with a class of equity securities registered under the Exchange Act and at least three independent directors to elect to be subject, by provision in its charter or bylaws or a resolution of its board of directors
and notwithstanding any contrary provision in the charter or bylaws, to any or all of five provisions:
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a two-thirds vote requirement for removing a director;
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a requirement that the number of directors be fixed only by vote of the directors;
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a requirement that a vacancy on the board be filled only by the remaining directors and for the remainder of the full term of the class of directors in which the vacancy occurred; and
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a majority requirement for the calling of a special stockholder-requested meeting of stockholders.
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We have elected to be subject to the provisions regarding the filling of board vacancies. Through provisions in our charter and bylaws
unrelated to Subtitle 8, we already (a) require a two-thirds vote for the removal of any director from the board, (b) vest in the board the exclusive power to fix the number of directorships and
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(c) require, unless called by our chairman of the board, our president, our chief executive officer or the board, the request of holders of a majority of outstanding shares to compel the
calling of a special meeting of stockholders.
Limitation on Liability of Directors and Officers; Indemnification and Advance of Expenses
Maryland law permits a Maryland corporation to include in its charter a provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages, except for liability resulting from:
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actual receipt of an improper benefit or profit in money, property or services; or
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active and deliberate dishonesty that is established by a final judgment and is material to the cause of action.
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Our charter contains such a provision that eliminates directors and officers liability to the maximum extent permitted by Maryland
law.
Our charter also authorizes our company, to the maximum extent permitted by Maryland law, to obligate our company to indemnify any
present or former director or officer or any individual who, while a director or officer of our company and at the request of our company, serves or has served another corporation, real estate investment trust, partnership, joint venture, trust,
employee benefit plan or other enterprise as a director, officer, partner or trustee, from and against any claim or liability to which that individual may become subject or which that individual may incur by reason of his or her service in any such
capacity and to pay or reimburse his or her reasonable expenses in advance of final disposition of a proceeding.
Our bylaws obligate us,
to the maximum extent permitted by Maryland law, to indemnify any present or former director or officer or any individual who, while a director or officer of our company and at the request of our company, serves or has served another corporation,
real estate investment trust, partnership, joint venture, trust, employee benefit plan or other enterprise as a director, officer, partner or trustee and who is made, or threatened to be made, a party to the proceeding by reason of his or her
service in that capacity and to pay or reimburse his or her reasonable expenses in advance of final disposition of a proceeding. Our charter and bylaws also permit our company to indemnify and advance expenses to any individual who served a
predecessor of our company in any of the capacities described above and any employee or agent of our company or a predecessor of our company.
We have entered into indemnification agreements with each of our directors and executive officers. The indemnification agreements require,
among other things, that we indemnify our directors and certain officers to the fullest extent permitted by law and advance to our directors and certain officers all related expenses, subject to reimbursement if it is subsequently determined that
indemnification is not permitted.
Maryland law requires a corporation (unless its charter provides otherwise, which our charter does not)
to indemnify a director or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he or she is made, or threatened to be made, a party by reason of his or her service in such capacity. Maryland law
permits a corporation to indemnify its present and former directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be
made, or are threatened to be made, a party by reason of their service in those or other capacities unless it is established that:
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the act or omission of the director or officer was material to the matter giving rise to the proceeding and (i) was committed in bad faith or (ii) was the result of active and deliberate dishonesty;
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the director or officer actually received an improper personal benefit in money, property or services; or
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in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful.
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However, under Maryland law, a Maryland corporation may not indemnify for an adverse judgment in
a suit by or in the right of the corporation or for a judgment of liability on the basis that personal benefit was improperly received unless in either case a court orders indemnification and then only for expenses. In addition, Maryland law permits
a corporation to advance reasonable expenses to a director or officer upon the corporations receipt of:
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a written affirmation by the director or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification by the corporation; and
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a written undertaking by him or her or on his or her behalf to repay the amount paid or reimbursed by the corporation if it is ultimately determined that the standard of conduct was not met.
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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
This section summarizes the material U.S. federal income tax considerations that you, as a holder of securities, may consider relevant in
connection with the purchase, ownership and disposition of our securities. Vinson & Elkins LLP has acted as our tax counsel, has reviewed this summary, and is of the opinion that the discussion contained herein is accurate in all material
respects. Because this section is a summary, it does not address all aspects of taxation that may be relevant to particular holders in light of their personal investment or tax circumstances, or to certain types of holders that are subject to
special treatment under the U.S. federal income tax laws, such as:
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tax-exempt organizations (except to the limited extent discussed in Taxation of Tax-Exempt Holders below);
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financial institutions or broker-dealers;
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non-U.S. individuals, and non-U.S. corporations (except to the limited extent discussed in Taxation of Non-U.S. Holders below);
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persons who mark-to-market our securities;
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subchapter S corporations;
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U.S. holders (as defined below) whose functional currency is not the U.S. dollar;
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regulated investment companies and REITs;
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trusts and estates (except to the extent discussed herein);
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persons who receive our securities through the exercise of employee stock options or otherwise as compensation;
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persons holding our securities as part of a straddle, hedge, conversion transaction, synthetic security or other integrated investment;
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persons subject to the alternative minimum tax provisions of the Code;
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persons holding our securities through a partnership or similar pass-through entity; and
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persons holding a 10% or more (by vote or value) beneficial interest in our stock.
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This
summary assumes that our securities are held as capital assets for U.S. federal income tax purposes, which generally means property held for investment.
The statements in this section are not intended to be, and should not be construed as, tax advice. The statements in this section are based on
the Internal Revenue Code, current, temporary and proposed U.S. Treasury regulations, the legislative history of the Internal Revenue Code, current administrative interpretations and practices of the IRS, and court decisions. The reference to IRS
interpretations and practices includes the IRS practices and policies endorsed in private letter rulings, which are not binding on the IRS except with respect to the taxpayer that receives the ruling. In each case, these sources are relied upon as
they exist on the date of this discussion. Future legislation, U.S. Treasury regulations, administrative interpretations and court decisions could change current law or adversely affect existing interpretations of current law on which the
information in this section is based. Any such change could apply retroactively. We have not received any rulings from the IRS concerning our qualification as a REIT. Accordingly, even if there is no change in the applicable law, no assurance can be
provided that the statements made in the following discussion, which do not bind the IRS or the courts, will not be challenged by the IRS or will be sustained by a court if so challenged.
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WE URGE YOU TO CONSULT YOUR TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO YOU OF THE
PURCHASE, OWNERSHIP AND SALE OF OUR SECURITIES AND OF OUR ELECTION TO BE TAXED AS A REIT. SPECIFICALLY, YOU SHOULD CONSULT YOUR TAX ADVISOR REGARDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE AND
ELECTION, AND REGARDING POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
Taxation of Our Company
We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code commencing with our taxable year ended on
December 31, 2006. We believe that we were organized and have operated and will continue to operate in such a manner as to qualify for taxation as a REIT under the U.S. federal income tax laws, but no assurances can be given that we will
operate in a manner so as to remain qualified as a REIT. This section discusses the laws governing the U.S. federal income tax treatment of a REIT and its securityholders. These laws are highly technical and complex.
In the opinion of Vinson & Elkins LLP, we qualified to be taxed as a REIT for our taxable years ended December 31, 2006 through
December 31, 2016, and our organization and current and proposed method of operation will enable us to continue to meet the requirements for qualification and taxation as a REIT for our taxable years ending December 31, 2016 and subsequent
taxable years. Investors should be aware that Vinson & Elkins LLPs opinion is based upon customary assumptions, is conditioned upon certain representations made by us as to factual matters, including representations regarding the
nature of our assets and the conduct of our business, and is not binding upon the IRS or any court and speaks as of the date issued. In addition, Vinson & Elkins LLPs opinion is based on existing U.S. federal income tax law governing
qualification as a REIT, which is subject to change either prospectively or retroactively. Moreover, our qualification and taxation as a REIT depend upon our ability to meet on a continuing basis, through actual annual operating results, certain
qualification tests set forth in the federal tax laws. Those qualification tests involve, among others, the percentage of income that we earn from specified sources, the percentage of our assets that falls within specified categories, the diversity
of our stock ownership, and the percentage of our earnings that we distribute. Vinson & Elkins LLP will not review our compliance with those tests on a continuing basis. Accordingly, no assurance can be given that our actual results of
operations for any particular taxable year will satisfy such requirements. Vinson & Elkins LLPs opinion does not foreclose the possibility that we may have to use one or more REIT savings provisions discussed below, which could
require us to pay an excise or penalty tax (which could be material) in order for us to maintain our REIT qualification. For a discussion of the tax consequences of our failure to qualify as a REIT, see Failure to Qualify.
If we qualify as a REIT, we generally will not be subject to federal income tax on taxable income that we currently distribute to our
stockholders, but taxable income generated by any domestic taxable REIT subsidiaries, or TRSs, will be subject to regular corporate income tax. The benefit of REIT tax treatment is that it avoids the double taxation, or taxation at both the
corporate and stockholder levels, that generally results from owning stock in a corporation. However, we will be subject to U.S. federal tax in the following circumstances:
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We will pay U.S. federal income tax on taxable income, including net capital gain, that we do not distribute to stockholders during, or within a specified time period after, the calendar year in which the income is
earned.
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We may be subject to the alternative minimum tax on any items of tax preference, including any deductions of net operating losses, that we do not distribute or allocate to stockholders.
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We will pay income tax at the highest corporate rate on:
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net income from the sale or other disposition of property acquired through foreclosure, or foreclosure property, that we hold primarily for sale to customers in the ordinary course of business, and
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other non-qualifying income from foreclosure property.
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We will pay a 100% tax on our net income earned from prohibited transactions involving sales or other dispositions of property other than foreclosure property, that we hold primarily for sale to customers in the
ordinary course of business.
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If we fail to satisfy the 75% gross income test or the 95% gross income test, as described below under Gross Income Tests, but nonetheless continue to qualify as a REIT because we meet other
requirements, we will be subject to a 100% tax on:
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the greater of the amount by which we fail the 75% gross income test or the 95% gross income test, multiplied, in either case, by
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a fraction intended to reflect our profitability.
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If we fail to satisfy the asset tests (other than a de minimis failure of the 5% asset test or the 10% vote or value test, as described below under Asset Tests), as long as the failure was due to
reasonable cause and not to willful neglect, we dispose of the assets or otherwise comply with such asset tests within six months after the last day of the quarter in which we identify such failure and we file a schedule with the IRS describing the
assets that caused such failure, we will pay a tax equal to the greater of $50,000 or 35% of the net income from the nonqualifying assets during the period in which we failed to satisfy such asset tests.
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If we fail to satisfy one or more requirements for REIT qualification, other than the gross income tests or the asset tests, as long as such failure was due to reasonable cause and not to willful neglect, we will be
required to pay a penalty of $50,000 for each such failure.
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We may be required to pay monetary penalties to the IRS in certain circumstances, including if we fail to meet recordkeeping requirements intended to monitor our compliance with rules relating to the composition of a
REITs stockholders, as described below in Requirements for Qualification.
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If we fail to distribute during a calendar year at least the sum of: (i) 85% of our REIT ordinary income for the year, (ii) 95% of our REIT capital gain net income for the year and (iii) any undistributed
taxable income required to be distributed from earlier periods, we will pay a 4% nondeductible excise tax on the excess of the required distribution over the amount we actually distributed, plus any retained amounts on which income tax has been paid
at the corporate level.
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We may elect to retain and pay income tax on our net long term capital gain. In that case, a U.S. stockholder would be taxed on its proportionate share of our undistributed long term capital gain (to the extent that we
make a timely designation of such gain to the stockholder) and would receive a credit or refund for its proportionate share of the tax we paid.
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We will be subject to a 100% excise tax on transactions between us and a TRS that are not conducted on an arms-length basis.
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If we acquire any asset from a C corporation, or a corporation that generally is subject to full corporate-level tax, in a merger or other transaction in which we acquire a basis in the asset that is determined by
reference either to the C corporations basis in the asset or to another asset, we will pay tax at the highest regular corporate rate applicable if we recognize gain on the sale or disposition of the asset during the 5-year period after we
acquire the asset. The amount of gain on which we will pay tax is the lesser of:
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the amount of gain that we recognize at the time of the sale or disposition, and
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the amount of gain that we would have recognized if we had sold the asset at the time we acquired it, assuming that the C corporation will not elect in lieu of this treatment to pay an immediate tax when the asset is
acquired.
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Although we do not expect to own an equity interest in a taxable mortgage pool, if we were to own such an
interest we would be subject to tax on a portion of any excess inclusion income equal to the
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percentage of our stock that is held in record name by disqualified organizations. A disqualified organization includes (i) the United States; (ii) any state or
political subdivision of the United states; (iii) any foreign government; (iv) any international organization; (v) any agency or instrumentality of any of the foregoing; (vi) any other tax-exempt organization (other than a
farmers cooperative described in section 521 of the Internal Revenue Code) that is exempt from income taxation and is not subject to taxation under the unrelated business taxable income provisions of the Internal Revenue Code; and
(vii) any rural electrical or telephone cooperative. We do not currently intend to engage in financing activities that may result in treatment of us or a portion of our assets as a taxable mortgage pool. For a discussion of excess
inclusion income, see Requirements for QualificationCLOs and Structured NotesTaxable Mortgage Pools.
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We may be required to pay monetary penalties to the IRS in certain circumstances, including if we fail to meet record-keeping requirements intended to monitor our compliance with rules relating to the composition of a
REITs stockholders, as described below in Recordkeeping Requirements.
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In addition, notwithstanding
our qualification as a REIT, we may also have to pay certain state and local income taxes, because not all states and localities treat REITs in the same manner that they are treated for federal income tax purposes. Moreover, as further described
below, any domestic TRS in which we own an interest will be subject to federal, state and local corporate income tax on its taxable income. We could also be subject to tax in situations and on transactions not presently contemplated.
Requirements for Qualification
A REIT is
a corporation, trust, or association that meets each of the following requirements:
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It is managed by one or more trustees or directors.
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Its beneficial ownership is evidenced by transferable shares or by transferable certificates of beneficial interest.
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3.
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It would be taxable as a domestic corporation, but for the REIT provisions of the federal income tax laws.
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It is neither a financial institution nor an insurance company subject to special provisions of the federal income tax laws.
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5.
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At least 100 persons are beneficial owners of its shares or ownership certificates.
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Not more than 50% in value of its outstanding shares or ownership certificates is owned, directly or indirectly, by five or fewer individuals, which the federal income tax laws define to include certain entities, during
the last half of any taxable year.
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It elects to be taxed as a REIT, or has made such election for a previous taxable year, and satisfies all relevant filing and other administrative requirements established by the IRS that must be met to elect and
maintain REIT qualification.
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8.
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It meets certain other qualification tests, described below, regarding the nature of its income and assets.
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9.
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It has no earnings and profits from any non-REIT taxable year at the close of any taxable year.
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We must meet requirements 1 through 4, 7 and 8 during our entire taxable year , meet requirement 9 at the close of each taxable year and meet
requirement 5 during at least 335 days of a taxable year of twelve months, or during a proportionate part of a taxable year of less than twelve months. Requirements 5 and 6 applied to us beginning with our 2007 taxable year. If we comply with all
the requirements for ascertaining the ownership of our outstanding stock in a taxable year and have no reason to know that we violated requirement 6, we will be deemed to have satisfied requirement 6 for that taxable year. For purposes of
determining share ownership under requirement 6, an individual generally includes a supplemental unemployment compensation benefits plan, a
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private foundation, or a portion of a trust permanently set aside or used exclusively for charitable purposes. An individual, generally does not include a trust that is a qualified
employee pension or profit sharing trust under the U.S. federal income tax laws, however, and beneficiaries of such a trust will be treated as holding our stock in proportion to their actuarial interests in the trust for purposes of requirement 6.
We believe that we have issued capital stock with sufficient diversity of ownership to allow us to satisfy requirements 5 and 6. In
addition, our charter restricts the ownership and transfer of our stock so that we should continue to satisfy these requirements. The provisions of our charter restricting the ownership and transfer of the capital stock are described in
Description of Common StockRestrictions on Ownership and Transfer. These restrictions, however, may not ensure that we will, in all cases, be able to satisfy such stock ownership requirements. If we fail to satisfy these stock
ownership requirements, our qualification as a REIT may terminate.
To monitor compliance with the share ownership requirements, we
generally are required to maintain records regarding the actual ownership of our shares. To do so, we must demand written statements each year from the record holders of significant percentages of our stock pursuant to which the record holders must
disclose the actual owners of the shares (i.e., the persons required to include our dividends in their gross income). We must maintain a list of those persons failing or refusing to comply with this demand as part of our records. We could be subject
to monetary penalties if we fail to comply with these record-keeping requirements. If you fail or refuse to comply with the demands, you will be required by U.S. Treasury regulations to submit a statement with your tax return disclosing your actual
ownership of our shares and other information. In addition, we must satisfy all relevant filing and other administrative requirements that must be met to elect and maintain REIT qualification and use a calendar year for federal income tax purposes.
We intend to continue to comply with these requirements.
Qualified REIT Subsidiaries
A corporation that is a qualified REIT subsidiary is not treated as a corporation separate from its parent REIT. A qualified
REIT subsidiary is disregarded for U.S. federal income tax purposes, and all assets, liabilities, and items of income, deduction, and credit of a qualified REIT subsidiary are treated as assets, liabilities, and items of income, deduction, and
credit of the REIT. A qualified REIT subsidiary is a corporation, other than a TRS, all of the capital stock of which is owned, directly or indirectly, by the REIT. Thus, in applying the requirements described herein, any qualified REIT subsidiary
that we own will be ignored, and all assets, liabilities, and items of income, deduction, and credit of such subsidiary will be treated as our assets, liabilities, and items of income, deduction, and credit for all purposes of the Internal Revenue
Code, including the REIT qualification tests.
Other Disregarded Entities and Partnerships
An unincorporated domestic entity, such as a partnership or limited liability company, that has a single owner generally is not treated as an
entity separate from its parent for U.S. federal income tax purposes. An unincorporated domestic entity with two or more owners generally is treated as a partnership for U.S. federal income tax purposes. In the case of a REIT that is a partner in a
partnership that has other partners, the REIT is treated as owning its proportionate share of the assets of the partnership and as earning its allocable share of the gross income of the partnership for purposes of the applicable REIT qualification
tests. For purposes of the 10% value test (see Asset Tests), our proportionate share is based on our proportionate interest in the equity interests and certain debt securities issued by the partnership. For all of the other asset
and income tests, our proportionate share is based on our proportionate interest in the capital interests in the partnership. Our proportionate share of the assets, liabilities, and items of income of any partnership, joint venture, or limited
liability company that is treated as a partnership for U.S. federal income tax purposes in which we acquire an interest, directly or indirectly, will be treated as our assets and gross income for purposes of applying the various REIT qualification
requirements.
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In the event that a disregarded subsidiary of ours ceases to be wholly-ownedfor example, if
any equity interest in the subsidiary is acquired by a person other than us or another disregarded subsidiary of oursthe subsidiarys separate existence would no longer be disregarded for federal income tax purposes. Instead, the
subsidiary would have multiple owners and would be treated as either a partnership or a taxable corporation. Such an event could, depending on the circumstances, adversely affect our ability to satisfy the various asset and gross income requirements
applicable to REITs, including the requirement that REITs generally may not own, directly or indirectly, more than 10% of the securities of another corporation. See Asset Tests and Gross Income Tests.
Taxable REIT Subsidiaries
A REIT
is permitted to own up to 100% of the stock of one or more taxable REIT subsidiaries. A TRS is a fully taxable corporation that may earn income that would not be qualifying income if earned directly by the parent REIT. The subsidiary and
the REIT must jointly elect to treat the subsidiary as a TRS. A corporation with respect to which a TRS directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a TRS. However, an entity
will not qualify as a TRS if it directly or indirectly operates or manages a lodging or health care facility or, generally, provides to another person, under a franchise, license or otherwise, rights to any brand name under which any lodging
facility or health care facility is operated. We generally may not own more than 10%, as measured by voting power or value, of the securities of a corporation that is not a qualified REIT subsidiary unless we and such corporation elect to treat such
corporation as a TRS. Overall, no more than 25% (20% for taxable years beginning after December 31, 2017) of the value of a REITs assets may consist of stock or securities of one or more TRSs.
The separate existence of a TRS or other taxable corporation, unlike a disregarded subsidiary as discussed above, is not ignored for U.S.
federal income tax purposes. Accordingly, a domestic TRS would generally be subject to corporate income tax on its earnings, which may reduce the cash flow generated by us and our subsidiaries in the aggregate and our ability to make distributions
to our stockholders.
A REIT is not treated as holding the assets of a TRS or other taxable subsidiary corporation or as receiving any
income that the subsidiary earns. Rather, the stock issued by the subsidiary is an asset in the hands of the REIT, and the REIT generally recognizes as income the dividends, if any, that it receives from the subsidiary. This treatment can affect the
gross income and asset test calculations that apply to the REIT, as described below. Because a parent REIT does not include the assets and income of such subsidiary corporations in determining the parents compliance with the REIT requirements,
such entities may be used by the parent REIT to undertake indirectly activities that the REIT rules might otherwise preclude it from doing directly or through pass-through subsidiaries or render commercially unfeasible (for example, activities that
give rise to certain categories of income such as nonqualifying hedging income or inventory sales).
Certain restrictions imposed on TRSs
are intended to ensure that such entities will be subject to appropriate levels of U.S. federal income taxation. First, a TRS may not deduct interest payments made in any year to an affiliated REIT to the extent that such payments exceed, generally,
50% of the TRSs adjusted taxable income for that year (although the TRS may carry forward to, and deduct in, a succeeding year the disallowed interest amount if the 50% test is satisfied in that year). In addition, if amounts are paid to a
REIT or deducted by a TRS due to transactions between a REIT, its tenants and/or a TRS, that exceed the amount that would be paid to or deducted by a party in an arms-length transaction, the REIT generally will be subject to an excise tax
equal to 100% of such excess.
We currently do not have any TRSs. We may form or invest in domestic or foreign TRSs in the future. To the
extent that any TRSs pay any taxes, they will have less cash available for distribution to us. If dividends are paid by domestic TRSs to us, then the dividends we designate and pay to our stockholders who are taxed at individual rates, up to the
amount of dividends that we receive from such entities, generally will be eligible to be taxed at the reduced 20% maximum federal rate applicable to qualified dividend income. See Taxation of U.S. HoldersTaxation of U.S. Holders on
Distributions on Capital Stock.
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CLOs and Structured Notes
Pursuant to our then existing investment strategy, we have owned subordinated tranches of collateralized loan obligations, or CLOs, and
structured notes. We do not currently own any subordinated tranches of CLOs or structured notes. The CLO entities in which we have invested are treated as corporations for U.S. federal income tax purposes and the structured notes are treated for
U.S. federal income tax purposes as equity of a corporation. The CLO and structured notes issuers are organized in foreign countries. There is a specific exemption from federal income tax for non-U.S. corporations that restrict their activities in
the United States to trading in stock and securities (or any activity closely related thereto) for their own account whether such trading (or such other activity) is conducted by the corporation or its employees or through a resident broker,
commission agent, custodian or other agent. Notwithstanding these rules, any gain recognized by a foreign corporation with respect to United States real property, such as foreclosed United States real property, is subject to United States tax as if
the foreign corporation were a United States taxpayer.
We expect that the CLO and structured note issuers in which we have invested will
either rely on the exemption described above or otherwise operate in a manner so that they will not be subject to U.S. federal income tax on their net income at the entity level. Therefore, despite their status as corporations for U.S. federal
income tax purposes, they generally will not be subject to corporate income tax on their earnings. Certain U.S. stockholders of such a non-U.S. corporation are required, however, to include in their income currently their proportionate share of the
earnings of such a corporation, whether or not such earnings are distributed. We have included in income, on a current basis, our proportionate share of the earnings of the CLO and structured note issuers in which we have invested.
Taxable Mortgage Pools
. An entity, or a portion of an entity, may be classified as a taxable mortgage pool under the Internal Revenue
Code if:
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substantially all of its assets consist of debt obligations or interests in debt obligations;
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more than 50% of those debt obligations are real estate mortgage loans or interests in real estate mortgage loans as of specified testing dates;
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the entity has issued debt obligations that have two or more maturities; and
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the payments required to be made by the entity on its debt obligations bear a relationship to the payments to be received by the entity on the debt obligations that it holds as assets.
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Under U.S. Treasury regulations, if less than 80% of the assets of an entity (or a portion of an entity) consist of debt obligations, these
debt obligations are not considered to comprise substantially all of its assets, and therefore the entity would not be treated as a taxable mortgage pool.
A taxable mortgage pool generally is treated as a corporation for U.S. federal income tax purposes; it cannot be included in any consolidated
U.S. federal corporate income tax return. However, if a REIT is a taxable mortgage pool, or if a REIT owns a qualified REIT subsidiary that is a taxable mortgage pool, then a portion of the REITs income will be treated as excess
inclusion income and a portion of the dividends the REIT pays to its stockholders will be considered to be excess inclusion income. A stockholders share of excess inclusion income (i) would not be allowed to be offset by any losses
otherwise available to the stockholder, (ii) would be subject to tax as unrelated business taxable income, or UBTI, in the hands of most types of stockholders that are otherwise generally exempt from U.S. federal income tax, and
(iii) would result in the application of U.S. federal income tax withholding at the maximum rate (30%), without reduction under any otherwise applicable income tax treaty, to the extent allocable to most types of foreign stockholders. IRS
guidance indicates that a REITs excess inclusion income will be allocated among its stockholders in proportion to its dividends paid. However, the manner in which excess inclusion income would be allocated to dividends attributable to a tax
year that are not paid until a subsequent tax year or to dividends attributable to a portion of a tax year when no excess inclusion income-generating assets were held or how such income is to be reported to stockholders is not clear
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under current law. Although the law is unclear, the IRS has taken the position that a REIT is taxable at the highest corporate tax rate on the portion of any excess inclusion income that it
derives from an equity interest in a taxable mortgage pool equal to the percentage of its stock that is held in record name by disqualified organizations (as defined above under Taxation of Our Company). To the extent
that capital stock owned by disqualified organizations is held by a broker or other nominee, the broker/dealer or other nominees would be liable for a tax at the highest corporate tax rate on the portion of our excess inclusion income
allocable to the capital stock held by the broker/dealer or other nominee on behalf of the disqualified organizations. A regulated investment company or other pass-through entity owning our capital stock will be subject to tax at the
highest corporate tax rate on any excess inclusion income allocated to its record name owners that are disqualified organizations.
If we own less than 100% of the ownership interests in a subsidiary that is a TMP, the foregoing rules would not apply. Rather, the subsidiary
would be treated as a corporation for U.S. federal income tax purposes, and would be subject to federal corporate income tax. In addition, this characterization would alter our REIT income and asset test calculations and could adversely affect our
compliance with those requirements.
We do not currently intend to engage in financing activities that may result in treatment of us or a
portion of our assets as a taxable mortgage pool.
Gross Income Tests
We must satisfy two gross income tests annually to maintain our qualification as a REIT. First, at least 75% of our gross income for each
taxable year must consist of defined types of income that we derive, directly or indirectly, from investments relating to real property or mortgage loans on real property or qualified temporary investment income. Qualifying income for purposes of
the 75% gross income test generally includes:
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rents from real property;
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interest on debt secured by a mortgage on real property or on interests in real property;
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dividends or other distributions on, and gain from the sale of, shares in other REITs;
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gain from the sale of real estate assets (effective for taxable years beginning after December 31, 2015, excluding gain from the sale of a debt instrument issued by a publicly offered REIT, i.e., a REIT
which is required to file annual and periodic reports with the SEC under the Securities Exchange Act of 1934, to the extent not secured by real property or an interest in real property) not held for sale to customers;
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income and gain derived from foreclosure property (as described below);
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amounts, such as commitment fees, received in consideration for entering into an agreement to make a loan secured by real property, unless such amounts are determined by income and profits;
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income derived from a real estate mortgage investment conduit (REMIC) in proportion to the real estate assets held by the REMIC, unless at least 95% of the REMICs assets are real estate assets, in
which case all of the income derived from the REMIC; and
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income derived from the temporary investment of new capital that is attributable to the issuance of our stock or a public offering of our debt with a maturity date of at least five years and that we receive during the
one-year period beginning on the date on which we received such new capital.
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Second, in general, at least 95% of our gross
income for each taxable year must consist of income that is qualifying income for purposes of the 75% gross income test (except for income derived from the temporary investment of new capital), other types of interest and dividends, gain from the
sale or disposition of stock or securities or any combination of these. However, effective for taxable years beginning after December 31, 2015, for purposes of the 95% gross income test, gain from the sale of real estate assets
includes gain from the sale of
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a debt instrument issued by a publicly offered REIT even if not secured by a real property or an interest in real property. Gross income from our sale of property that we hold
primarily for sale to customers in the ordinary course of business is excluded from both the numerator and the denominator in both income tests. Income and gain from hedging transactions, as defined in Hedging
Transactions, will be excluded from both the numerator and the denominator for purposes of both the 75% and 95% gross income tests. In addition, certain foreign currency gains will be excluded from gross income for purposes of one or both of
the gross income tests. See Foreign Currency Gain. We monitor the amount of our non-qualifying income and seek to manage our investment portfolio to comply at all times with the gross income tests. The following paragraphs discuss
the specific application of the gross income tests to us.
Dividends
Our share of any dividends received from any corporation (including dividends from a TRS, but excluding any REIT) in which we own an equity
interest will qualify for purposes of the 95% gross income test but not for purposes of the 75% gross income test. Our share of any dividends received from any other REIT in which we own an equity interest, if any, will be qualifying income for
purposes of both gross income tests. We have included in our income, even without the receipt of actual distributions, earnings from our investment in the subordinated tranches of CLOs and structured notes issued by foreign corporations. We intend
to treat certain of these income inclusions as qualifying income for purposes of the 95% gross income test but not the 75% gross income test. The provisions that set forth what income is qualifying income for purposes of the 95% gross income test
provide that gross income derived from dividends, interest and certain other enumerated classes of passive income qualify for purposes of the 95% gross income test. Income inclusions from equity investments in foreign corporations are technically
neither actual dividends nor any of the other enumerated categories of income specified in the 95% gross income test for federal income tax purposes. However, the IRS has issued private letter rulings to other REITs holding that income inclusions
from equity investments in foreign corporations would be treated as qualifying income for purposes of the 95% gross income test. A private letter ruling may be relied upon only by the taxpayer to whom it is issued, and the IRS may revoke a private
letter ruling. Based on those private letter rulings and advice of counsel, we intend to treat such income inclusions from equity investments in foreign corporations as qualifying income for purposes of the 95% gross income test. Nevertheless, no
assurance can be provided that the IRS will not successfully challenge our treatment of such income for purposes of the 95% gross income test. In the event that such income was determined not to qualify for the 95% gross income test, we would be
subject to a penalty tax with respect to such income to the extent it and our other nonqualifying income exceeds 5% of our gross income or we could fail to qualify as a REIT. See Failure to Satisfy Gross Income Tests and
Failure to Qualify.
Interest
The term interest, as defined for purposes of both gross income tests, generally excludes any amount that is based in whole or in
part on the income or profits of any person. However, interest generally includes the following:
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an amount that is based on a fixed percentage or percentages of receipts or sales; and
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an amount that is based on the income or profits of a debtor, as long as the debtor derives substantially all of its income from the real property securing the debt from leasing substantially all of its interest in the
property, and only to the extent that the amounts received by the debtor would be qualifying rents from real property if received directly by a REIT.
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Interest on debt secured by a mortgage on real property or on interests in real property, including, for this purpose, market discount,
original issue discount, discount points, prepayment penalties, loan assumption fees, and late payment charges that are not compensation for services, generally is qualifying income for purposes of the 75% gross income test. Interest income
generally constitutes qualifying mortgage interest for purposes of the 75% gross income test to the extent that the obligation upon which such interest is paid is secured by a mortgage
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on real property (and, for taxable years beginning after December 31, 2015, a mortgage on an interest in real property). In general under applicable Treasury Regulations, if a loan is
secured by real property and other property and the highest principal amount of a loan outstanding during a taxable year exceeds the fair market value of the real property securing the loan as of the date the REIT agreed to originate or acquire the
loan, a portion of the interest income from such loan will not be qualifying income for purposes of the 75% gross income test, but will be qualifying income for purposes of the 95% gross income test. The portion of the interest income that will not
be qualifying income for purposes of the 75% gross income test will be equal to the portion of the principal amount of the loan that is not secured by real propertythat is, the amount by which the loan exceeds the value of the real estate that
is security for the loan. Additionally, a portion of the loan will likely be a nonqualifying asset for purposes of the 75% asset test. The nonqualifying portion of such loan would be subject to, among other requirements, the 10% value test. See
Asset Tests below. For taxable years beginning after December 31, 2015, in the case of mortgage loans secured by both real property and personal property, if the fair market value of such personal property does not exceed 15%
of the total fair market value of all such property securing the loan, then the personal property securing the loan will be treated as real property for purposes of determining whether the mortgage loan is a qualifying asset for the 75% asset test
and the related interest income qualifies for purposes of the 75% gross income test.
We intend to continue to invest in Agency RMBS that
are pass-through certificates. We may also invest in CMOs collateralized by Agency RMBS. As of March 31, 2017, we had not invested in any CMOs. Other than income from derivative instruments, as described below, we expect that all of the income
on our Agency RMBS will be qualifying income for purposes of the 95% gross income test. We expect that Agency RMBS that are pass-through certificates will be treated as interests in a grantor trust for U.S. federal income tax purposes. Consequently,
we would be treated as owning an undivided beneficial ownership interest in the mortgage loans held by the grantor trust. The interest on such mortgage loans would be qualifying income for purposes of the 75% gross income test to the extent that the
obligation is secured by real property, as discussed above. Although the IRS has ruled generally that the interest income from Agency RMBS is qualifying income for purposes of the 75% gross income test, it is not clear how this guidance would apply
to secondary market purchases of Agency RMBS at a time when the loan-to-value ratio of one or more of the mortgage loans backing the Agency RMBS is greater than 100%. We expect that substantially all of our income from Agency RMBS will be qualifying
income for the 75% gross income test. We expect that the CMOs will be treated as interests in REMICs for federal income tax purposes. Income derived from REMIC interests will generally be treated as qualifying income for purposes of the 75% gross
income test. If less than 95% of the assets of the REMIC are real estate assets, however, then only a proportionate part of our interest in the REMIC and income derived from the interest will qualify for purposes of the 75% gross income test.
Although the law is not clear, the IRS may take the position that this test is measured on a quarterly basis. In addition, some REMIC securitizations include imbedded interest rate swap or cap contracts or other derivative instruments that
potentially could produce non-qualifying income for the holders of the related REMIC securities.
We have purchased, and may purchase in
the future, Agency RMBS through forward settling transactions and may recognize income or gains on the disposition of contracts for forward settling transactions through dollar roll transactions or otherwise. The law is unclear with respect to the
qualification of gains from dispositions of contracts for forward settling transactions as gains from the sale of real property (including interests in real property and interests in mortgages on real property) or other qualifying income for
purposes of the 75% gross income test. Until we receive a favorable private letter ruling from the IRS or we receive an opinion of counsel to the effect that income and gain from the disposition of contracts for forward settling transactions should
be treated as qualifying income for purposes of the 75% gross income test, we will limit our gains from dispositions of contracts for forward settling transactions and any non-qualifying income to no more than 25% of our gross income for each
calendar year. Accordingly, our ability to dispose of contracts for forward settling transactions through dollar roll transactions or otherwise, could be limited. Moreover, even if we are advised by counsel that income and gains from dispositions of
contracts for forward settling transactions should be treated as qualifying income, it is possible that the IRS could successfully take the position that such income is not qualifying income. In the event that such income were determined not to be
qualifying for the 75% gross income test, we could be
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subject to a penalty tax or we could fail to qualify as a REIT if such income and any non-qualifying income exceeds 25% of our gross income. See Failure to Qualify.
Hedging Transactions
From time to
time, we may enter into hedging transactions with respect to one or more of our assets or liabilities. Our hedging activities may include entering into interest rate swaps, caps, and floors, options to purchase these items, and futures and forward
contracts. Income and gain from hedging transactions will be excluded from gross income for purposes of both the 75% and 95% gross income tests. A hedging transaction includes any transaction entered into in the normal course
of our trade or business primarily to manage the risk of interest rate, price changes, or currency fluctuations with respect to borrowings made or to be made, or ordinary obligations incurred or to be incurred, to acquire or carry real estate assets
or primarily to manage risk of currency fluctuations with respect to any item of income or gain that is qualifying income for purposes of the 75% or 95% gross income test (or any property which generates such income or gain). We are required to
clearly identify any such hedging transaction before the close of the day on which it was acquired, originated, or entered into and satisfy other identification requirements. Effective for taxable years beginning after December 31, 2015, if we
have entered into a qualifying hedging transaction described above (an Original Hedge), and a portion of the hedged indebtedness is extinguished or the related property is disposed of and in connection with such extinguishment or
disposition we enter into a new clearly identified hedging transaction that would counteract the Original Hedge (a Counteracting Hedge), income from the Original Hedge and income from the Counteracting Hedge (including gain from the
disposition of the Original Hedge and the Counteracting Hedge) will not be treated as gross income for purposes of the 95% and 75% gross income tests. To the extent that we hedge for other purposes, or to the extent that a portion of our Agency RMBS
and CMOs are not secured by real estate assets (as described below under Asset Tests) or in other situations, the income from those transactions will likely be treated as nonqualifying income for purposes of both gross
income tests. We intend to structure any hedging transactions in a manner that does not jeopardize our qualification as a REIT. We may conduct some or all of our hedging activities (including hedging activities relating to currency risk) through a
TRS or other corporate entity, the income from which may be subject to federal income tax, rather than by participating in the arrangements directly or through pass-through subsidiaries.
Fee Income
Fee income generally
will be qualifying income for purposes of both the 75% and 95% gross income tests if it is received in consideration for entering into an agreement to make a loan secured by real property and the fees are not determined by income and profits. Other
fees, such as fees received for servicing or originating loans, generally are not qualifying income for purposes of either gross income test. Any fees earned by a TRS will not be included for purposes of the gross income tests.
Foreign Currency Gain
Certain
foreign currency gains will be excluded from gross income for purposes of one or both of the gross income tests. Real estate foreign exchange gain will be excluded from gross income for purposes of the 75% and 95% gross income tests.
Real estate foreign exchange gain generally includes foreign currency gain attributable to any item of income or gain that is qualifying income for purposes of the 75% gross income test, foreign currency gain attributable to the acquisition or
ownership of (or becoming or being the obligor under) obligations secured by mortgages on real property or on interest in real property and certain foreign currency gain attributable to certain qualified business units of a REIT.
Passive foreign exchange gain will be excluded from gross income for purposes of the 95% gross income test. Passive foreign exchange gain generally includes real estate foreign exchange gain as described above, and also includes foreign
currency gain attributable to any item of income or gain that is qualifying income for purposes of the 95% gross income test and foreign currency gain attributable to the acquisition or ownership of (or becoming or being the obligor under)
obligations. These exclusions for real estate foreign exchange gain and passive foreign exchange gain do not
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apply to foreign currency gain derived from dealing, or engaging in substantial and regular trading, in securities. Such gain is treated as nonqualifying income for purposes of both the 75% and
95% gross income tests.
Rents from Real Property
We do not currently own and do not intend to acquire any real property, but we may acquire real property or an interest therein in the future.
To the extent that we acquire real property or an interest therein, rents we receive will qualify as rents from real property in satisfying the gross income requirements for a REIT described above only if the following conditions are
met:
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First
, the amount of rent must not be based in whole or in part on the income or profits of any person. An amount received or accrued generally will not be excluded, however, from rents from real property solely
by reason of being based on fixed percentages of receipts or sales.
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Second
, rents we receive from a related party tenant will not qualify as rents from real property in satisfying the gross income tests unless the tenant is a TRS, and either (i) at least
90% of the property is leased to unrelated tenants, the rent paid by the TRS is substantially comparable to the rent paid by the unrelated tenants for comparable space and the rent is not attributable to an increase in rent due to a modification of
a lease with a controlled TRS (i.e., a TRS in which we own directly or indirectly more than 50% of the voting power or value of the stock) or (ii) the TRS leases a qualified lodging facility or qualified health care property and
engages an eligible independent contractor to operate such facility or property on its behalf. A tenant is a related party tenant if the REIT, or an actual or constructive owner of 10% or more of the REIT, actually or constructively owns
10% or more of the tenant.
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Third
, if rent attributable to personal property, leased in connection with a lease of real property, is greater than 15% of the total rent received under the lease, then the portion of rent attributable
to the personal property will not qualify as rents from real property.
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Fourth
, we generally must not operate or manage our real property or furnish or render services to our tenants, other than through an independent contractor who is adequately compensated and from whom
we do not derive revenue. We may, however, provide services directly to tenants if the services are usually or customarily rendered in connection with the rental of space for occupancy only and are not considered to be provided for the
tenants convenience. In addition, we may provide a minimal amount of non-customary services (valued at not less than 150% of our direct cost of performing such services) to the tenants of a property, other than through an
independent contractor, as long as our income from the services does not exceed 1% of our income from the related property. Furthermore, we may own up to 100% of the stock of a TRS, which may provide customary and non-customary services to tenants
without tainting our rental income from the related properties.
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Prohibited Transactions
A REIT will incur a 100% tax on the net income (including foreign currency gain) derived from any sale or other disposition of property, other
than foreclosure property, that the REIT holds primarily for sale to customers in the ordinary course of a trade or business. Any such income will be excluded from the application of the 75% and 95% gross income tests. Whether a REIT holds an asset
primarily for sale to customers in the ordinary course of a trade or business depends on the facts and circumstances in effect from time to time, including those related to a particular asset. We believe that none of our assets will be
held primarily for sale to customers and that a sale of any of our assets will not be in the ordinary course of our business. No assurance, however, can be given that the IRS will not successfully assert a contrary position, in which case we would
be subject to the prohibited transaction tax on the gain from the sale of those assets. To the extent we intend to dispose of an asset that may be treated as held primarily for sale to customers in the ordinary course of a trade or
business, we may contribute the asset to a TRS prior to the disposition.
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Foreclosure Property
We will be subject to tax at the maximum corporate rate on any income (including foreign currency gain) from foreclosure property, other than
income that otherwise would be qualifying income for purposes of the 75% gross income test, less expenses directly connected with the production of that income. Gross income from foreclosure property will qualify, however, under the 75% and 95%
gross income tests. Foreclosure property is any real property, including interests in real property, and any personal property incident to such real property:
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that is acquired by a REIT as the result of the REIT having bid on such property at foreclosure, or having otherwise reduced such property to ownership or possession by agreement or process of law, after there was a
default or default was imminent on a lease of such property or on indebtedness that such property secured;
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for which the related loan or lease was acquired by the REIT at a time when the default was not imminent or anticipated; and
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for which the REIT makes a proper election to treat the property as foreclosure property.
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REIT will not be considered, however, to have foreclosed on a property where the REIT takes control of the property as a mortgagee-in-possession and cannot receive any profit or sustain any loss except as a creditor of the mortgagor. Property
generally ceases to be foreclosure property at the end of the third taxable year following the taxable year in which the REIT acquired the property, or longer if an extension is granted by the Secretary of the U.S. Treasury. This grace period
terminates and foreclosure property ceases to be foreclosure property on the first day:
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on which a lease is entered into for the property that, by its terms, will give rise to income that does not qualify for purposes of the 75% gross income test, disregarding income from foreclosure property, or any
amount is received or accrued, directly or indirectly, pursuant to a lease entered into on or after such day that will give rise to income that does not qualify for purposes of the 75% gross income test, disregarding income from foreclosure
property;
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on which any construction takes place on the property, other than completion of a building or any other improvement, where more than 10% of the construction was completed before default became imminent; or
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which is more than 90 days after the day on which the REIT acquired the property and the property is used in a trade or business that is conducted by the REIT, other than through an independent contractor from whom the
REIT itself does not derive or receive any income, or, effective for taxable years beginning after December 31, 2015, a TRS.
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Failure to Satisfy Gross Income Tests
If we fail to satisfy one or both of the gross income tests for any taxable year, we nevertheless may qualify as a REIT for that year if we
qualify for relief under certain provisions of the federal income tax laws. Those relief provisions generally will be available if:
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our failure to meet those tests is due to reasonable cause and not to willful neglect; and
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following such failure for any taxable year, a schedule of the sources of our income is filed with the IRS in accordance with regulations prescribed by the Secretary of the U.S. Treasury.
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We cannot with certainty predict whether any failure to meet these tests will qualify for the relief provisions. If the IRS were to determine
that we failed the 95% gross income test because income inclusions with respect to our investment in the subordinated tranches of CLOs and structured notes issued by foreign corporations are not qualifying income, it is possible that the IRS would
not consider our position taken with respect to such income, and accordingly our failure to satisfy the 95% gross income test, to be due to reasonable cause and not due to
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willful neglect. If the IRS were to determine that we failed the 75% gross income test because income and gains from dispositions of contracts for forward settling transactions are not qualifying
income, it is possible that the IRS would not consider our position taken with respect to such income, and accordingly our failure to satisfy the 75% gross income test, to be due to reasonable cause and not due to willful neglect. If the IRS were to
successfully assert these positions, we would fail to qualify as a REIT. See Failure to Qualify. Accordingly, it is not possible to state whether we would be entitled to the benefit of these relief provisions with regard to this
issue or in any other circumstances. If these relief provisions are inapplicable to a particular set of circumstances involving us, we will not qualify as a REIT. As discussed above in Taxation of Our Company, even if the relief
provisions apply, we would incur a 100% tax on the gross income attributable to the greater of the amount by which we fail the 75% gross income test or the 95% gross income test, multiplied, in either case, by a fraction intended to reflect our
profitability.
Asset Tests
To
qualify as a REIT, we also must satisfy the following asset tests at the end of each quarter of each taxable year.
First
, at least
75% of the value of our total assets must consist of:
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cash or cash items, including certain receivables and money market funds;
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interests in real property, including leaseholds and options to acquire real property and leaseholds;
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interests in mortgage loans secured by real property;
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stock (or transferable certificates of beneficial interest) in other REITs;
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investments in stock or debt instruments during the one-year period following our receipt of new capital that we raise through equity offerings or public offerings of debt with at least a five-year term; and
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regular or residual interests in a REMIC. However, if less than 95% of the assets of a REMIC consist of assets that are qualifying real estate-related assets under the U.S. federal income tax laws, determined as if we
held such assets, we will be treated as holding directly our proportionate share of the assets of such REMIC; and
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effective for taxable years beginning after December 31, 2015:
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personal property leased in connection with real property to the extent that rents attributable to such personal property are treated as rents from real property, and
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debt instruments issued by publicly offered REITs.
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Second
, of our
investments not included in the 75% asset class, the value of our interest in any one issuers securities (other than any TRS we may own) may not exceed 5% of the value of our total assets (the 5% asset test).
Third
, of our investments not included in the 75% asset class, we may not own more than 10% of the voting power or value of any one
issuers outstanding securities (other than any TRS we may own) (the 10% vote or value test).
Fourth
, no
more than 25% (20% for taxable years beginning after December 31, 2017) of the value of our total assets may consist of the securities of one or more TRSs.
Fifth
, no more than 25% of the value of our total assets may consist of the securities of TRSs and other non-TRS taxable subsidiaries
and other assets that are not qualifying assets for purposes of the 75% asset test (the 25% securities test).
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Finally, effective for taxable years beginning after December 31, 2015, not more than 25% of
the value of our total assets may be represented by debt instruments issued by publicly offered REITs to the extent not secured by real property or interests in real property.
For purposes of the 5% asset test or the 10% vote or value test and the 25% securities test, the term securities does not include
stock in another REIT, equity or debt securities of a qualified REIT subsidiary, mortgage loans or mortgage-backed securities that constitute real estate assets, or equity interests in a partnership. For purposes of the 10% value test, the term
securities does not include:
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straight debt securities, which is defined as a written unconditional promise to pay on demand or on a specified date a sum certain in money if (i) the debt is not convertible, directly or indirectly,
into stock, and (ii) the interest rate and interest payment dates are not contingent on profits, the borrowers discretion, or similar factors. Straight debt securities do not include any securities issued by a partnership or a
corporation in which we or any controlled TRS (i.e., a TRS in which we own directly or indirectly more than 50% of the voting power or value of the stock) hold non-straight debt securities that have an aggregate value of more
than 1% of the issuers outstanding securities. However, straight debt securities include debt subject to the following contingencies:
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a contingency relating to the time of payment of interest or principal, as long as either (i) there is no change to the effective yield of the debt obligation, other than a change to the annual yield that does not
exceed the greater of 0.25% or 5% of the annual yield, or (ii) neither the aggregate issue price nor the aggregate face amount of the issuers debt obligations held by us exceeds $1 million and no more than twelve months of unaccrued
interest on the debt obligations can be required to be prepaid; and
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a contingency relating to the time or amount of payment upon a default or prepayment of a debt obligation, as long as the contingency is consistent with customary commercial practice;
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any loan to an individual or an estate;
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any section 467 rental agreement, other than an agreement with a related party tenant;
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any obligation to pay rents from real property;
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certain securities issued by governmental entities that are not dependent in whole or in part on the profits of (or payments made by) a non-governmental entity;
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any security (including debt securities) issued by another REIT;
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any debt instrument of an entity treated as a partnership for U.S. federal income tax purposes in which we are a partner to the extent of our proportionate interest in the equity and certain debt securities issued by
that partnership; or
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any debt instrument of an entity treated as a partnership for U.S. federal income tax purposes not described in the preceding bullet points if at least 75% of the partnerships gross income, excluding income from
prohibited transactions, is qualifying income for purposes of the 75% gross income test described above in Gross Income Tests.
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We believe that our investments in Agency RMBS will be qualifying assets for purposes of the 75% asset test because they are real estate
assets or government securities. With respect to Agency RMBS that are pass-through certificates, we believe that the Agency RMBS will be treated as interests in a grantor trust and that Agency RMBS that are CMOs will be treated as regular interests
in a REMIC for U.S. federal income tax purposes. In the case of Agency RMBS treated as interests in a grantor trust, we are treated as owning an undivided beneficial ownership interest in the mortgage loans held by the grantor trust. Such mortgage
loans will generally qualify as real estate assets to the extent that they are secured by real property.
IRS Revenue Procedure 2014-51
provides a safe harbor under which the IRS has stated that it will not challenge a REITs treatment of a loan as being, in part, a qualifying real estate asset in an amount equal to the
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lesser of: (i) the fair market value of the loan on the relevant quarterly REIT asset testing date; or (ii) the greater of (A) the fair market value of the real property securing
the loan on the relevant quarterly REIT asset testing date or (B) the fair market value of the real property securing the loan determined as of the date the REIT committed to originate or acquire the loan. It is unclear how the safe harbor in
Revenue Procedure 2014-51 is affected by the recent legislative changes regarding the treatment of loans secured by both real property and personal property where the fair market value of the personal property does not exceed 15% of the sum of the
fair market values of the real property and the personal property securing the loan.
Additionally, although the IRS has ruled generally
that Agency RMBS that are pass-through certificates are real estate assets for purposes of the 75% asset test, it is not clear how this guidance would apply to secondary market purchases of Agency RMBS that are pass-through certificates at a time
when a portion of one or more mortgage loans backing the Agency RMBS is not treated as real estate assets as a result of the loans not being treated as fully secured by real property. In the case of Agency RMBS that are CMOs, which will be treated
as regular interests in a REMIC, such interests generally will qualify as real estate assets. If less than 95% of the assets of the REMIC are real estate assets, however, then only a proportionate part of our interest in the REMIC interests will
qualify as real estate assets. To the extent any Agency RMBS are not treated as real estate assets, we expect such Agency RMBS will be treated as government securities because they are issued or guaranteed as to principal or interest by the United
States or by a person controlled or supervised by and acting as an instrumentality of the government of the United States pursuant to authority granted by the Congress of the United States. Investments in subordinated tranches of CLOs and structured
notes are not qualifying assets for purposes of the 75% asset test. We do not currently hold any subordinated tranches of CLOs or structured notes.
We have entered and intend to continue to enter into sale and repurchase agreements under which we nominally sold certain of our Agency RMBS
to a counterparty and simultaneously entered into an agreement to repurchase the sold assets in exchange for a purchase price that reflects a financing charge. Based on positions the IRS has taken in analogous situations, we believe that these
transactions will be treated as secured debt and that we will be treated for REIT asset and gross income test purposes as the owner of the Agency RMBS that are the subject of such agreements notwithstanding that any such agreements may transfer
record ownership of the assets to the counterparty during the term of the agreement. It is possible, however, that the IRS could assert that we did not own the Agency RMBS during the term of the sale and repurchase agreement, in which case we could
fail to qualify as a REIT.
We have purchased, and may purchase in the future, Agency RMBS through forward settling transactions. The law
is unclear with respect to the qualification of contracts for forward settling transactions as real estate assets or Government securities for purposes of the 75% asset test. Until we receive a favorable private letter ruling from the IRS or we
receive an opinion of counsel to the effect that contracts for forward settling transactions should be treated as qualifying assets for purposes of the 75% asset test, we will limit our investments in contracts for forward settling transactions and
any non-qualifying assets to no more than 25% of our assets. Accordingly, our ability to purchase Agency RMBS through contracts for forward settling transactions could be limited. Moreover, even if we are advised by counsel that assets contracts for
forward settling transactions should be treated as qualifying assets, it is possible that the IRS could successfully take the position that such assets are not qualifying assets. In the event that such assets were determined not to be qualifying for
the 75% asset test, we could be subject to a penalty tax or we could fail to qualify as a REIT at the end of any calendar quarter and will limit our investments in contracts for forward settling transactions with a single counterparty to no more
than 5% of our assets at the end of any calendar quarter. See Failure to Qualify.
We monitor the status of our assets
for purposes of the various asset tests and seek to manage our portfolio to comply at all times with such tests. No assurance, however, can be given that we will continue to be successful in this effort. In this regard, to determine our compliance
with these requirements, we will have to value our investment in our assets to ensure compliance with the asset tests. Although we seek to be prudent in making these estimates, no assurances can be given that the IRS might not disagree with these
determinations and assert
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that a different value is applicable, in which case we might not satisfy the 75% asset test and the other asset tests and, thus, would fail to qualify as a REIT.
If we fail to satisfy the asset tests at the end of a calendar quarter, we will not lose our REIT qualification so long as:
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we satisfied the asset tests at the end of the preceding calendar quarter; and
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the discrepancy between the value of our assets and the asset test requirements arose from changes in the market values of our assets and was not wholly or partly caused by the acquisition of one or more non-qualifying
assets.
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If we did not satisfy the condition described in the second item, above, we still could avoid disqualification by
eliminating any discrepancy within 30 days after the close of the calendar quarter in which it arose.
In the event that we violate the 5%
asset test or the 10% vote or value test described above at the end of any calendar quarter, we will not lose our REIT qualification if (i) the failure is de minimis (up to the lesser of 1% of our assets or $10 million) and (ii) we dispose
of assets or otherwise comply with the asset tests within six months after the last day of the quarter in which we identified such failure. In the event of a more than de minimis failure of any of the asset tests, as long as the failure was due to
reasonable cause and not to willful neglect, we will not lose our REIT qualification if we (i) dispose of assets or otherwise comply with the asset tests within six months after the last day of the quarter in which we identified such failure,
(ii) file a schedule with the IRS describing the assets that caused such failure in accordance with regulations promulgated by the Secretary of the U.S. Treasury and (iii) pay a tax equal to the greater of $50,000 or the highest corporate
income tax rate (currently 35%) on the net income from the nonqualifying assets during the period in which we failed to satisfy the asset tests. If the IRS were to determine that we failed the 5% asset test or 75% asset test because contracts for
forward settling transactions are not qualifying assets, it is possible that the IRS would not consider our position taken with respect to such assets, and accordingly our failure to satisfy the 5% asset test or 75% asset test, to be due to
reasonable cause and not due to willful neglect. If the IRS were to successfully assert these positions, we would fail to qualify as a REIT. See Failure to Qualify. Accordingly, it is not possible to state whether we would be
entitled to the benefit of these relief provisions with regard to this issue or in any other circumstances. If these relief provisions are inapplicable to a particular set of circumstances involving us, we will not qualify as a REIT.
We believe that the Agency RMBS, CMOs and other investments that we will hold will satisfy the foregoing asset test requirements. We will
monitor the status of our assets and our future acquisition of assets to ensure that we continue to comply with those requirements, but we cannot assure you that we will be successful in this effort. No independent appraisals have been or will be
obtained to support our estimates of and conclusions as to the value of our assets and securities, or in many cases, the real estate collateral for the mortgage loans that support our Agency RMBS. Moreover, the values of some assets may not be
susceptible to a precise determination. As a result, no assurance can be given that the IRS will not contend that our ownership of securities and other assets violates one or more of the asset tests applicable to REITs.
Distribution Requirements
Each taxable
year, we must distribute dividends, other than capital gain dividends and deemed distributions of retained capital gain, to our stockholders in an aggregate amount at least equal to:
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90% of our REIT taxable income, computed without regard to the dividends paid deduction and our net capital gain, and
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90% of our after-tax net income, if any, from foreclosure property, minus
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the sum of certain items of non-cash income.
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We must pay such distributions in the taxable year to which they relate, or in the following
taxable year if either (i) we declare the distribution before we timely file our U.S. federal income tax return for the year and pay the distribution on or before the first regular dividend payment date after such declaration or (ii) we
declare the distribution in October, November or December of the taxable year, payable to stockholders of record on a specified day in any such month, and we actually pay the dividend before the end of January of the following year. The
distributions under clause (i) are taxable to the stockholders in the year in which paid, and the distributions in clause (ii) are treated as paid on December 31 of the prior taxable year. In both instances, these distributions relate
to our prior taxable year for purposes of the 90% distribution requirement.
We will pay U.S. federal income tax on taxable income,
including net capital gain, that we do not distribute to stockholders. Furthermore, if we fail to distribute during a calendar year, or by the end of January following the calendar year in the case of distributions with declaration and record dates
falling in the last three months of the calendar year, at least the sum of:
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85% of our REIT ordinary income for such year,
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95% of our REIT capital gain income for such year, and
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any undistributed taxable income from prior periods,
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we will incur a 4% nondeductible excise tax on the
excess of such required distribution over the amounts we actually distribute.
We may elect to retain and pay income tax on the net long
term capital gain we recognize in a taxable year. If we so elect, we will be treated as having distributed any such retained amount for purposes of the REIT distribution requirements and the 4% nondeductible excise tax described above. We intend to
continue to make timely distributions in the future sufficient to satisfy the annual distribution requirements and to avoid corporate income tax and the 4% nondeductible excise tax.
It is possible that, from time to time, we may experience timing differences between the actual receipt of cash, and actual payment of
deductible expenses and the inclusion of that income and deduction of such expenses in arriving at our REIT taxable income. Possible examples of those timing differences include the following:
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Because we may deduct capital losses only to the extent of our capital gains, we may have taxable income that exceeds our economic income.
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We will recognize taxable income in advance of the related cash flow if any of our Agency RMBS are deemed to have original issue discount. We generally must accrue original issue discount based on a constant yield
method that takes into account projected prepayments but that defers taking into account credit losses until they are actually incurred.
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We may acquire investments that will be treated as having market discount for U.S. federal income tax purposes, because the investments will be debt instruments that we acquire for an amount less than their
principal amount. Under the federal income tax rules applicable to market discount and our elections under those rules, we are required to recognize market discount as ordinary income as it accrues on a constant yield basis. The recognition of
market discount results in an acceleration of the recognition of taxable income to periods prior to the receipt of the related economic income. Further, to the extent that such an investment does not fully amortize according to its terms, we may
never receive the economic income attributable to previously recognized market discount.
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We may recognize phantom taxable income from our investments in the subordinated tranches of CLOs and structured notes.
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Although several types of non-cash income are excluded in determining the annual distribution requirement, we will incur corporate income tax
and the 4% nondeductible excise tax with respect to those non-cash income
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items if we do not distribute those items on a current basis. As a result of the foregoing, we may have less cash than is necessary to distribute all of our taxable income and thereby avoid
corporate income tax and the excise tax imposed on certain undistributed income. In such a situation, we may need to borrow funds, sell assets or make taxable dividends of our capital stock or debt securities.
We may satisfy the REIT annual distribution requirement by making taxable distributions of our stock. The IRS has issued private letter
rulings to other REITs indicating that it will treat distributions that are paid partly in cash and partly in stock as dividends that would satisfy the REIT annual distribution requirements and qualify for the dividends paid deduction for U.S.
federal income tax purposes. Those rulings may be relied upon only by taxpayers whom they were issued, but we could request a similar ruling from the IRS. In addition, the IRS previously issued a revenue procedure authorizing publicly traded REITs
to make elective cash/stock dividends, but that revenue procedure has expired. Accordingly, it is unclear whether and to what extent we will be able to pay taxable dividends payable in cash and stock. We currently do not intend to pay taxable
dividends payable in cash and stock.
In general, in order for distributions to be counted towards our distribution requirement and to
give rise to a tax deduction by us, they must not be preferential dividends. A dividend is not a preferential dividend if it is pro rata among all outstanding shares of stock within a particular class and is in accordance with the
preferences among different classes of stock as set forth in the organizational documents. However, for the taxable year that began on January 1, 2015 and all future taxable years, so long as we continue to be a publicly offered
REIT, the preferential dividend rule will not apply to us.
Under certain circumstances, we may be able to correct a failure to meet
the distribution requirement for a year by paying deficiency dividends to our stockholders in a later year. We may include such deficiency dividends in our deduction for dividends paid for the earlier year. Although we may be able to
avoid income tax on amounts distributed as deficiency dividends, we will be required to pay interest and a penalty to the IRS based upon the amount of any deduction we take for deficiency dividends.
Recordkeeping Requirements
We must
maintain certain records in order to qualify as a REIT. In addition, to avoid a monetary penalty, we must request on an annual basis information from our stockholders designed to disclose the actual ownership of our outstanding stock. We intend to
continue to comply with these requirements.
Failure to Qualify
If we fail to satisfy one or more requirements for REIT qualification, other than the gross income tests and the asset tests, we could avoid
disqualification if our failure is due to reasonable cause and not to willful neglect and we pay a penalty of $50,000 for each such failure. In addition, there are relief provisions for a failure of the gross income tests and asset tests, as
described in Gross Income Tests and Asset Tests.
If we fail to qualify as a REIT in any taxable year,
and no relief provision applies, we would be subject to federal income tax and any applicable alternative minimum tax on our taxable income at regular corporate rates. In calculating our taxable income in a year in which we fail to qualify as a
REIT, we would not be able to deduct amounts paid out to stockholders. In fact, we would not be required to distribute any amounts to stockholders in that year. In such event, to the extent of our current and accumulated earnings and profits, all
distributions to stockholders would be taxable as ordinary income. Subject to certain limitations of the U.S. federal income tax laws, corporate stockholders might be eligible for the dividends received deduction and stockholders taxed at individual
rates might be eligible for the reduced U.S. federal income tax rate of 20% on such dividends. Unless we qualified for relief under specific statutory provisions, we also would be disqualified from taxation as a REIT for the four taxable years
following the year during which we ceased to qualify as a REIT. We cannot predict whether in all circumstances we would qualify for such statutory relief.
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Taxation of U.S. Holders
The term U.S. holder means a holder of our capital stock that, for U.S. federal income tax purposes, is:
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a citizen or resident of the United States;
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a corporation (including an entity treated as a corporation for U.S. federal income tax purposes) created or organized under the laws of the United States, any of its states or the District of Columbia;
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an estate whose income is subject to U.S. federal income taxation regardless of its source; or
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any trust if (i) a U.S. court is able to exercise primary supervision over the administration of such trust and one or more U.S. persons have the authority to control all substantial decisions of the trust or
(ii) it has a valid election in place to be treated as a U.S. person.
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If a partnership, entity or arrangement treated
as a partnership for U.S. federal income tax purposes holds our capital stock, the U.S. federal income tax treatment of a partner in the partnership will generally depend on the status of the partner, the activities of the partnership and upon
certain determinations made at the partner and/or partnership level. If you are a partner in a partnership holding our capital stock, you are urged to consult your tax advisor regarding the consequences of the purchase, ownership and disposition of
our capital stock by the partnership.
Taxation of U.S. Holders on Distributions on Capital Stock
As long as we qualify as a REIT, a taxable U.S. holder must generally take into account as ordinary income distributions made out of our
current or accumulated earnings and profits that we do not designate as capital gain dividends or retained long term capital gain. For purposes of determining whether a distribution is made out of our current or accumulated earnings and profits, our
earnings and profits will be allocated first to our preferred stock dividends, if any, and then to our common stock dividends. A corporate U.S. holder will not qualify for the dividends received deduction generally available to corporations. In
addition, dividends paid to a U.S. holder generally will not qualify for the 20% tax rate for qualified dividend income.
The
maximum tax rate for qualified dividend income received by taxpayers taxed at individual rates is currently 20%. Qualified dividend income generally includes dividends paid to U.S. holders taxed at individual rates by domestic C corporations and
certain qualified foreign corporations. Because we are not generally subject to federal income tax on the portion of our REIT taxable income distributed to our stockholders (see Taxation of Our Company above), our dividends
generally will not be eligible for the 20% rate on qualified dividend income. As a result, our ordinary REIT dividends will be taxed at the higher tax rate applicable to ordinary income. Currently, the highest marginal individual income tax rate on
ordinary income is 39.6%. However, the 20% tax rate for qualified dividend income will apply to our ordinary REIT dividends (i) attributable to dividends received by us from certain non-REIT corporations (e.g., dividends from any domestic
TRSs), (ii) to the extent attributable to income upon which we have paid corporate income tax (e.g., to the extent that we distribute less than 100% of our taxable income) and (iii) attributable to income in the prior taxable year from the
sales of built-in gain property acquired by the REIT from C corporations in carryover basis transactions (less the amount of corporate tax on such income). In general, to qualify for the reduced tax rate on qualified dividend income, a
U.S. holder must hold our capital stock for more than 60 days during the 121-day period beginning on the date that is 60 days before the date on which our capital stock becomes ex-dividend.
A U.S. holder generally will take into account distributions that we designate as capital gain dividends as long term capital gain without
regard to the period for which the U.S. holder has held our capital stock. A corporate U.S. holder may, however, be required to treat up to 20% of certain capital gain dividends as ordinary income.
We may elect to retain and pay income tax on the net long-term capital gain that we recognize in a taxable year. In that case, to the extent
we designate such amount on a timely notice to such stockholder, a U.S. holder
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would be taxed on its proportionate share of our undistributed long-term capital gain. The U.S. holder would receive a credit or refund for its proportionate share of the tax we paid. The U.S.
holder would increase the basis in its stock by the amount of its proportionate share of our undistributed long-term capital gain, minus its share of the tax we paid.
A U.S. holder will not incur tax on a distribution in excess of our current and accumulated earnings and profits if the distribution does not
exceed the adjusted basis of the U.S. holders capital stock. Instead, the distribution will reduce the adjusted basis of such capital stock. A U.S. holder will recognize a distribution in excess of both our current and accumulated earnings and
profits and the U.S. holders adjusted basis in his or her capital stock as long term capital gain, or short term capital gain if the shares of capital stock have been held for one year or less, assuming the shares of capital stock are a
capital asset in the hands of the U.S. holder. In addition, if we declare a distribution in October, November or December of any year that is payable to a U.S. holder of record on a specified date in any such month, such distribution shall be
treated as both paid by us and received by the U.S. holder on December 31 of such year, provided that we actually pay the distribution during January of the following calendar year, as described in Distribution Requirements.
Stockholders may not include in their individual income tax returns any of our net operating losses or capital losses. Instead, these
losses are generally carried over by us for potential offset against our future income.
Taxable distributions from us and gain from the
disposition of our capital stock will not be treated as passive activity income and, therefore, stockholders generally will not be able to apply any passive activity losses, such as losses from certain types of limited partnerships in
which the stockholder is a limited partner, against such income. In addition, taxable distributions from us and gain from the disposition of our capital stock generally will be treated as investment income for purposes of the investment interest
limitations. We will notify stockholders after the close of our taxable year as to the portions of the distributions attributable to that year that constitute ordinary income, return of capital and capital gain.
Certain U.S. holders who are individuals, estates or trusts and whose income exceeds certain thresholds will be required to pay a 3.8%
Medicare tax. The Medicare tax will apply to, among other things, dividends and other income derived from certain trades or business and net gains from the sale or other disposition of property, such as our capital stock, subject to certain
exceptions. Our dividends and any gain from the disposition of our capital stock generally will be the type of gain that is subject to the Medicare tax.
We may recognize taxable income in excess of our economic income, known as phantom income, in the first years that we hold certain
investments, and experience an offsetting excess of economic income over our taxable income in later years. As a result, U.S. holders at times may be required to pay federal income tax on distributions that economically represent a return of capital
rather than a dividend. These distributions would be offset in later years by distributions representing economic income that would be treated as returns of capital for federal income tax purposes. Taking into account the time value of money, this
acceleration of federal income tax liabilities may reduce a U.S. holders after-tax return on his or her investment to an amount less than the after-tax return on an investment with an identical before-tax rate of return that did not generate
phantom income. For example, if an investor with a 30% tax rate purchases a taxable bond with an annual interest rate of 10% on its face value, the investors before-tax return on the investment would be 10% and the investors after-tax
return would be 7%. However, if the same investor purchased our capital stock at a time when the before-tax rate of return was 10%, the investors after-tax rate of return on such stock might be somewhat less than 7% as a result of our phantom
income. In general, as the ratio of our phantom income to our total income increases, the after-tax rate of return received by a taxable stockholder will decrease. We will consider the potential effects of phantom income on our taxable stockholders
in managing our investments.
If excess inclusion income from a taxable mortgage pool is allocated to any U.S. holder, that income will be
taxable in the hands of the U.S. holder and would not be offset by any net operating losses of the U.S. holder that would otherwise be available. See Requirements for QualificationTaxable Mortgage Pools. As required
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by IRS guidance, we intend to notify our stockholders if a portion of a dividend paid by us is attributable to excess inclusion income.
Taxation of U.S. Holders on the Disposition of Capital Stock
In general, a U.S. holder who is not a dealer in securities must generally treat any gain or loss realized upon a taxable disposition of our
capital stock as long term capital gain or loss if the U.S. holder has held such capital stock for more than one year and otherwise as short term capital gain or loss. In general, a U.S. holder will realize gain or loss in an amount equal to the
difference between the sum of the fair market value of any property and the amount of cash received in such disposition and the U.S. holders adjusted tax basis. A holders adjusted tax basis generally will equal the U.S. holders
acquisition cost, increased by the excess of net capital gains deemed distributed to the U.S. holder less tax deemed paid by it and reduced by any returns of capital. However, a U.S. holder must treat any loss upon a sale or exchange of capital
stock held by such holder for six months or less as a long term capital loss to the extent of capital gain dividends and any other actual or deemed distributions from us that such U.S. holder treats as long term capital gain. All or a portion of any
loss that a U.S. holder realizes upon a taxable disposition of the capital stock may be disallowed if the U.S. holder purchases our stock or substantially identical capital stock within 30 days before or after the disposition.
Conversion of Preferred Stock
Except as provided below, (i) a U.S. holder generally will not recognize gain or loss upon the conversion of preferred stock into our
common stock, and (ii) a U.S. holders basis and holding period in our common stock received upon conversion generally will be the same as those of the converted preferred stock (but the basis will be reduced by the portion of adjusted tax
basis allocated to any fractional share exchanged for cash). Any of our shares of common stock received in a conversion that are attributable to accumulated and unpaid dividends on the converted preferred stock will be treated as a distribution that
is potentially taxable as a dividend. Cash received upon conversion in lieu of a fractional share generally will be treated as a payment in a taxable exchange for such fractional share, and gain or loss will be recognized on the receipt of cash in
an amount equal to the difference between the amount of cash received and the adjusted tax basis allocable to the fractional share deemed exchanged. This gain or loss will be long-term capital gain or loss if the U.S. holder has held our preferred
shares for more than one year at the time of conversion. U.S. holders are urged to consult with their tax advisors regarding the U.S. federal income tax consequences of any transaction by which such holder exchanges stock received on a conversion of
preferred stock for cash or other property.
Redemption of Preferred Stock
In general, a redemption of any preferred stock will be treated under Section 302 of the Internal Revenue Code as a distribution that is
taxable at ordinary income tax rates as a dividend (to the extent of our current or accumulated earnings and profits), unless the redemption satisfies certain tests set forth in Section 302(b) of the Internal Revenue Code enabling the
redemption to be treated as a sale of the preferred stock (in which case the redemption will be treated in the same manner as a sale described in Taxation of U.S. Holders on the Disposition of Capital Stock above). The redemption
will satisfy such tests and be treated as a sale of the preferred stock if the redemption:
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is substantially disproportionate with respect to the U.S. holders interest in our stock;
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results in a complete termination of the U.S. holders interest in all classes of our stock; or
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is not essentially equivalent to a dividend with respect to the U.S. holder, all within the meaning of Section 302(b) of the Internal Revenue Code.
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In determining whether any of these tests have been met, stock considered to be owned by the U.S. holder by reason of certain constructive
ownership rules set forth in the Internal Revenue Code, as well as stock actually
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owned, generally must be taken into account. Because the determination as to whether any of the three alternative tests of Section 302(b) of the Internal Revenue Code described above will be
satisfied with respect to any particular U.S. holder of the preferred stock depends upon the facts and circumstances at the time that the determination must be made, prospective investors are advised to consult their own tax advisors to determine
such tax treatment.
If a redemption of preferred stock does not meet any of the three tests described above, the redemption proceeds will
be treated as a distribution, as described in Taxation of U.S. Holders on Distributions on Capital Stock above. In that case, a U.S. holders adjusted tax basis in the redeemed preferred stock will be transferred to such U.S.
holders remaining stock holdings in our company. If the U.S. holder does not retain any of our stock, such basis could be transferred to a related person that holds our stock or it may be lost.
Under proposed Treasury regulations, if any portion of the amount received by a U.S. holder on a redemption of any class of our preferred
stock is treated as a distribution with respect to our stock but not as a taxable dividend, then such portion will be allocated to all stock of the redeemed class held by the redeemed holder just before the redemption on a pro-rata, share-by-share,
basis. The amount applied to each share will first reduce the redeemed holders basis in that share and any excess after the basis is reduced to zero will result in taxable gain. If the redeemed holder has different bases in its shares, then
the amount allocated could reduce some of the basis in certain shares while reducing all the basis and giving rise to taxable gain in others. Thus the redeemed holder could have gain even if such holders basis in all its shares of the redeemed
class exceeded such portion.
The proposed Treasury regulations permit the transfer of basis in the redeemed preferred stock to the
redeemed holders remaining, unredeemed shares of preferred stock of the same class (if any), but not to any other class of stock held (directly or indirectly) by the redeemed holder. Instead, any unrecovered basis in the redeemed shares of
preferred stock would be treated as a deferred loss to be recognized when certain conditions are satisfied. The proposed Treasury regulations would be effective for transactions that occur after the date the regulations are published as final
Treasury regulations. There can, however, be no assurance as to whether, when and in what particular form such proposed Treasury regulations will ultimately be finalized.
Capital Gains and Losses
A
taxpayer generally must hold a capital asset for more than one year for gain or loss derived from its sale or exchange to be treated as long term capital gain or loss. The highest marginal individual income tax rate currently is 39.6%. The maximum
tax rate on long term capital gain applicable to U.S. holders taxed at individual rates is 20% for sales and exchanges of assets held for more than one year. The maximum tax rate on long term capital gain from the sale or exchange of section
1250 property, or depreciable real property, is 25%, which applies to the extent that such gain would have been treated as ordinary income if the property were section 1245 property. With respect to distributions that we designate
as capital gain dividends and any retained capital gain that we are deemed to distribute, we will designate whether such a distribution is taxable to U.S. holders taxed at individual rates at a 20% or 25% rate. Thus, the tax rate differential
between capital gain and ordinary income for those taxpayers may be significant. In addition, the characterization of income as capital gain or ordinary income may affect the deductibility of capital losses. A non-corporate taxpayer may deduct
capital losses not offset by capital gains against its ordinary income only up to a maximum annual amount of $3,000 ($1,500 for married couples filing separately). A non-corporate taxpayer may carry forward unused capital losses indefinitely. A
corporate taxpayer must pay tax on its net capital gain at ordinary corporate rates. A corporate taxpayer may deduct capital losses only to the extent of capital gains, with unused losses being carried back three years and forward five years.
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Information Reporting Requirements and Backup Withholding
We will report to U.S. holders and to the IRS the amount of distributions we pay during each calendar year, and the amount of tax we withhold,
if any. Under the backup withholding rules, a U.S. holder may be subject to backup withholding at a rate of 28% with respect to distributions unless such holder:
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is a corporation or comes within certain other exempt categories and, when required, demonstrates this fact; or
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provides a taxpayer identification number, certifies as to no loss of exemption from backup withholding, and otherwise complies with the applicable requirements of the backup withholding rules.
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A U.S. holder who does not provide us with its correct taxpayer identification number also may be subject to penalties imposed by the IRS. Any
amount paid as backup withholding will be creditable against the U.S. holders income tax liability. U.S. holders that hold their capital stock through foreign accounts or intermediaries will be subject to U.S. withholding tax at a rate of 30%
on dividends paid and will be subject to withholding on proceeds of sale of our capital stock paid after December 31, 2018 if certain disclosure requirements related to U.S. accounts are not satisfied. In addition, we may be required to
withhold a portion of capital gain distributions to any U.S. holders who fail to certify their non-foreign status to us.
Taxation of Tax-Exempt
Stockholders
Tax-exempt entities, including qualified employee pension and profit sharing trusts and individual retirement
accounts, generally are exempt from U.S. federal income taxation. They are subject, however, to taxation on their UBTI. While many investments in real estate generate UBTI, the IRS has issued a ruling that dividend distributions from a REIT to an
exempt employee pension trust do not constitute UBTI so long as the exempt employee pension trust does not otherwise use the shares of the REIT in an unrelated trade or business of the pension trust. Based on that ruling, amounts that we distribute
to tax-exempt stockholders generally should not constitute UBTI so long as our stock is not otherwise used in an unrelated trade or business. However, if a tax-exempt stockholder were to finance its investment in our capital stock with debt, a
portion of the income that it receives from us would constitute UBTI pursuant to the debt-financed property rules. Moreover, social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts and qualified
group legal services plans that are exempt from taxation under special provisions of the U.S. federal income tax laws are subject to different UBTI rules, which generally will require them to characterize distributions that they receive from us as
UBTI. Furthermore, a tax-exempt stockholders share of any excess inclusion income that we recognize would be subject to tax as UBTI. Finally, in certain circumstances, a qualified employee pension or profit sharing trust that owns more than
10% of our stock must treat a percentage of the dividends that it receives from us as UBTI. Such percentage is equal to the gross income we derive from an unrelated trade or business, determined as if we were a pension trust, divided by our total
gross income for the year in which we pay the dividends. That rule applies to a pension trust holding more than 10% of our stock only if:
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the percentage of our dividends that the tax-exempt trust must treat as UBTI is at least 5%;
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we qualify as a REIT by reason of the modification of the rule requiring that no more than 50% of our stock be owned by five or fewer individuals that allows the beneficiaries of the pension trust to be treated as
holding our stock in proportion to their actuarial interests in the pension trust; and
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one pension trust owns more than 25% of the value of our stock; or
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a group of pension trusts individually holding more than 10% of the value of our stock collectively owns more than 50% of the value of our stock.
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Taxation of Non-U.S. Holders
The term non-U.S. holder means a holder of our capital stock that is not a U.S. holder or a partnership (or entity treated
as a partnership for federal income tax purposes). The rules governing U.S. federal income taxation of nonresident alien individuals, foreign corporations, foreign partnerships and other foreign holders are complex. This section is only a summary of
such rules.
We urge non-U.S. holders to consult their tax advisors to determine the impact of federal, state and local income tax laws on ownership of our capital stock, including any reporting requirements.
A non-U.S. holder that receives a distribution that is not attributable to gain from our sale or exchange of a United States real
property interest, (USRPI) as defined below, and that we do not designate as a capital gain dividend or retained capital gain will recognize ordinary income to the extent that we pay the distribution out of our current or
accumulated earnings and profits. A withholding tax equal to 30% of the gross amount of the distribution ordinarily will apply unless an applicable tax treaty reduces or eliminates the tax. However, if a distribution is treated as effectively
connected with the non-U.S. holders conduct of a U.S. trade or business, the non-U.S. holder generally will be subject to federal income tax on the distribution at graduated rates, in the same manner as U.S. holders are taxed on distributions
and also may be subject to the 30% branch profits tax in the case of a corporate non-U.S. holder. In general, non-U.S. holders will not be considered to be engaged in a U.S. trade or business solely as a result of their ownership of our stock. It is
expected that the applicable withholding agent will withhold U.S. income tax at the rate of 30% on the gross amount of any distribution that we do not designate as a capital gain distribution or retained capital gain and is paid to a non-U.S. holder
unless either:
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a lower treaty rate applies and the non-U.S. holder files with the applicable withholding agent an IRS Form W-8BEN or IRS Form W-8BEN-E evidencing eligibility for that reduced rate, or
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the non-U.S. holder files with the applicable withholding ag ent an IRS Form W-8ECI claiming that the distribution is effectively connected income.
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However, reduced treaty rates are not available to the extent that the income allocated to the non-U.S. stockholder is excess inclusion
income.
A non-U.S. holder will not incur U.S. tax on a distribution on the capital stock in excess of our current and accumulated
earnings and profits if the excess portion of the distribution does not exceed the adjusted basis of its capital stock. Instead, the excess portion of the distribution will reduce the adjusted basis of that capital stock. A non-U.S. holder will be
subject to tax on a distribution that exceeds both our current and accumulated earnings and profits and the adjusted basis of the capital stock, if the non-U.S. holder otherwise would be subject to tax on gain from the sale or disposition of its
capital stock, as described below. Because we generally cannot determine at the time we make a distribution whether the distribution will exceed our current and accumulated earnings and profits, it is expected that the applicable withholding agent
normally will withhold tax on the entire amount of any distribution at the same rate as it would withhold on a dividend. However, by filing a tax return, a non-U.S. holder may obtain a refund of amounts that the applicable withholding agent withheld
if we later determine that a distribution in fact exceeded our current and accumulated earnings and profits.
Non-U.S. holders are subject
to U.S. withholding tax at a rate of 30% on our distributions paid and will be subject to withholding on gain from the sale of our capital stock paid after December 31, 2018, if certain disclosure requirements related to U.S. ownership are not
satisfied. If payment of withholding taxes is required, non-U.S. holders that are otherwise eligible for an exemption from, or reduction of, U.S. withholding taxes with respect to such dividends and proceeds will be required to seek a refund from
the IRS to obtain the benefit or such exemption or reduction. We will not pay any additional amounts in respect of any amounts withheld.
For any year in which we qualify as a REIT, a non-U.S. holder may incur tax on distributions that are attributable to gain from our sale or
exchange of USRPI under the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA). The term USRPI includes certain interests in real property and shares in corporations at
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least 50% of whose assets consist of interests in real property. The term USRPI generally does not include mortgage loans or mortgage-backed securities such as Agency RMBS or CMOs. As a result,
we do not anticipate that we will generate material amounts of gain that would be subject to FIRPTA. Under the FIRPTA rules, a non-U.S. holder is taxed on distributions attributable to gain from sales of USRPIs as if the gain were effectively
connected with a U.S. business of the non-U.S. holder. A non-U.S. holder thus would be taxed on such a distribution at the normal capital gain rates applicable to U.S. holders, subject to applicable alternative minimum tax and a special alternative
minimum tax in the case of a nonresident alien individual. A non-U.S. corporate holder not entitled to treaty relief or exemption also may be subject to the 30% branch profits tax on such a distribution. Unless a non-U.S. holder qualifies for the
exception described in the next paragraph, the applicable withholding agent must withhold 35% of any such distribution that we could designate as a capital gain dividend. A non-U.S. holder may receive a credit against such holders tax
liability for the amount withheld.
However, subject to the discussion below regarding distributions to qualified shareholders
and qualified foreign pension funds, under FIRPTA, if the applicable class of our stock is regularly traded on an established securities market in the United States, capital gain distributions on our capital stock that are attributable
to our sale of real property will be treated as ordinary dividends rather than as gain from the sale of a USPRI, as long as (i) the applicable class of our capital stock is regularly traded on an established securities market in the
United States and (ii) the non-U.S. holder does not own more than 10% of the applicable class of our capital stock during the one-year period preceding the distribution date. As a result, non-U.S. holders generally would be subject to
withholding tax on such capital gain distributions in the same manner as they are subject to withholding tax on ordinary dividends. We believe our common stock currently is treated as regularly traded on an established securities market. If the
applicable class of our capital stock is not regularly traded on an established securities market in the United States or the non-U.S. holder owned more than 10% of the applicable class of our capital stock any time during the one-year period prior
to the distribution, capital gain distributions that are attributable to our sale of real property would be subject to tax under FIRPTA. Moreover, if a non-U.S. holder disposes of our capital stock during the 30-day period preceding a dividend
payment, and such non-U.S. holder (or a person related to such non-U.S. holder) acquires or enters into a contract or option to acquire our capital stock within 61 days of the 1st day of the 30 day period described above, and any portion of such
dividend payment would, but for the disposition, be treated as a USRPI capital gain to such non-U.S. holder, then such non-U.S. holder shall be treated as having USRPI capital gain in an amount that, but for the disposition, would have been treated
as USRPI capital gain.
Qualified Shareholders.
Subject to the exception discussed below, any distribution on or after
December 18, 2015 to a qualified shareholder who holds our stock directly or indirectly (through one or more partnerships) will not be subject to U.S. tax as income effectively connected with a U.S. trade or business and thus will
not be subject to special withholding rules under FIRPTA. While a qualified shareholder will not be subject to FIRPTA withholding on REIT distributions, certain investors of a qualified shareholder (i.e., non-U.S. persons who
hold interests in the qualified shareholder (other than interests solely as a creditor), and hold more than 10% of REIT stock (whether or not by reason of the investors ownership in the qualified shareholder)) may be
subject to FIRPTA withholding.
A qualified shareholder is a foreign person that (i) either is eligible for the benefits
of a comprehensive income tax treaty which includes an exchange of information program and whose principal class of interests is listed and regularly traded on one or more recognized stock exchanges (as defined in such comprehensive income tax
treaty), or is a foreign partnership that is created or organized under foreign law as a limited partnership in a jurisdiction that has an agreement for the exchange of information with respect to taxes with the U.S. and has a class of limited
partnership units representing greater than 50% of the value of all the partnership units that is regularly traded on the NYSE or NASDAQ markets, (ii) is a qualified collective investment vehicle (defined below), and (iii) maintains
records on the identity of each person who, at any time during the foreign persons taxable year, is the direct owner of 5% or more of the class of interests or units (as applicable) described in (i), above.
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A qualified collective investment vehicle is a foreign person that (i) would be eligible for
a reduced rate of withholding under the comprehensive income tax treaty described above, even if such entity holds more than 10% of the stock of such REIT, (ii) is publicly traded, is treated as a partnership under the Code, is a withholding
foreign partnership, and would be treated as a U.S. real property holding corporation if it were a domestic corporation, or (iii) is designated as such by the Secretary of the Treasury and is either (a) fiscally transparent within the
meaning of section 894 of the Code, or (b) required to include dividends in its gross income, but is entitled to a deduction for distributions to its investors.
Qualified Foreign Pension Funds
. Any distribution on or after December 18, 2015 to a qualified foreign pension fund or
an entity all of the interests of which are held by a qualified foreign pension fund who holds our stock directly or indirectly (through one or more partnerships) will not be subject to U.S. tax as income effectively connected with a
U.S. trade or business and thus will not be subject to the withholding rules under FIRPTA.
A qualified foreign pension fund is any trust,
corporation, or other organization or arrangement (A) which is created or organized under the law of a country other than the U.S., (B) which is established to provide retirement or pension benefits to participants or beneficiaries that
are current or former employees (or persons designated by such employees) of one or more employers in consideration for services rendered, (C) which does not have a single participant or beneficiary with a right to more than 5% of its assets or
income, (D) which is subject to government regulation and provides annual information reporting about its beneficiaries to the relevant tax authorities in the country in which it is established or operates, and (E) with respect to which,
under the laws of the country in which it is established or operates, (i) contributions to such organization or arrangement that would otherwise be subject to tax under such laws are deductible or excluded from the gross income of such entity
or taxed at a reduced rate, or (ii) taxation of any investment income of such organization or arrangement is deferred or such income is taxed at a reduced rate.
The provisions of the PATH Act (as defined below) relating to qualified shareholders and qualified foreign pension funds are complex.
Stockholders should consult their tax advisors with respect to the impact of the PATH Act on them.
Dispositions
A non-U.S. stockholder generally will not incur tax under FIRPTA with respect to gain realized upon a disposition of our stock as long as we
are not a United States real property holding corporation during a specified testing period. If at least 50% of a REITs assets are USRPIs, then the REIT will be a United States real property holding corporation. We do not believe that we are a
United States real property holding corporation based on our asset mix and investment strategy. In the unlikely event that at least 50% of the assets we hold were determined to be USRPIs, gains from the sale of our capital stock by a non-U.S. holder
could be subject to a FIRPTA tax. However, even if that event were to occur, a non-U.S. holder generally would not incur tax under FIRPTA on gain from the sale of our capital stock if we were a domestically controlled qualified investment
entity. A domestically controlled qualified investment entity includes a REIT in which, at all times during a specified testing period, less than 50% in value of its shares are held directly or indirectly by non-U.S. holders. We believe that
we are, and we expect to continue to be, a domestically controlled qualified investment entity, and that a sale of our capital stock should not be subject to taxation under FIRPTA. No assurance can be given, however, that we will remain a
domestically controlled qualified investment entity.
If the applicable class of our capital stock is regularly traded on an established
securities market, an additional exception to the tax under FIRPTA will be available, even if we do not qualify as a domestically controlled qualified investment entity at the time the non-U.S. holder sells our capital stock. Under that exception,
the gain from such a sale by such a non-U.S. holder will not be subject to tax under FIRPTA if:
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the applicable class of our capital stock is considered regularly traded under applicable U.S. Treasury regulations on an established securities market, such as the New York Stock Exchange; and
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the non-U.S. holder owned, actually or constructively, 5% (10% on or after December 18, 2015) or less of the applicable class of our capital stock at all times during a specified testing period.
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As noted above, we believe that our common stock is currently treated as being regularly traded on an established securities market.
On or after December 18, 2015, a sale of our shares by:
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a qualified shareholder or
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a qualified foreign pension fund
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who holds our shares directly or indirectly (through one or more
partnerships) will not be subject to U.S. federal income taxation under FIRPTA. While a qualified shareholder will not be subject to FIRPTA withholding upon sale of our shares, certain investors of a qualified shareholder
(i.e., non-U.S. persons who hold interests in the qualified shareholder (other than interests solely as a creditor), and hold more than 10% of REIT stock (whether or not by reason of the investors ownership in the qualified
shareholder)) may be subject to FIRPTA withholding.
If the gain on the sale of our capital stock were taxed under FIRPTA, a
non-U.S. holder would be taxed on that gain in the same manner as U.S. holders, subject to applicable alternative minimum tax and a special alternative minimum tax in the case of nonresident alien individuals, and, if the applicable class of our
stock were not regularly traded on an established securities market, the purchaser of shares of our stock also may be required to withhold 10% (15% as applied to dispositions occurring on or after February 16, 2016) of the purchase price and
remit this amount to the IRS on behalf of the selling non-U.S. stockholder. Furthermore, a non-U.S. holder generally will incur tax on gain not subject to FIRPTA if:
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the gain is effectively connected with the non-U.S. holders U.S. trade or business, in which case the non-U.S. holder will be subject to the same treatment as U.S. holders with respect to such gain, or
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the non-U.S. holder is a nonresident alien individual who was present in the United States for 183 days or more during the taxable year and has a tax home in the United States, in which case the non-U.S.
holder will incur a 30% tax on his or her net capital gains.
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Shares Held Offshore
Backup withholding will generally not apply to payments of dividends made by us or our paying agents, in their capacities as such, to a
non-U.S. holder provided that the non-U.S. holder furnishes to the applicable withholding agent the required certification as to its non-U.S. status, such as providing a valid IRS
Form W-8BEN
or W-8ECI,
or certain other requirements are met. Notwithstanding the foregoing, backup withholding may apply if the applicable withholding agent has actual knowledge, or reason to know, that the holder is a U.S. person that is not an exempt recipient.
Payments of the net proceeds from a disposition or a redemption effected outside the United States by a non-U.S. holder made by or through a foreign office of a broker generally will not be subject to information reporting or backup withholding.
However, information reporting (but not backup withholding) generally will apply to such a payment if the broker has certain connections with the U.S. unless the broker has documentary evidence in its records that the beneficial owner is a non-U.S.
holder and specified conditions are met or an exemption is otherwise established. Payment of the net proceeds from a disposition by a non-U.S. holder made by or through the U.S. office of a broker is generally subject to information reporting and
backup withholding unless the non-U.S. holder certifies under penalties of perjury that it is not a U.S. person and satisfies certain other requirements, or otherwise establishes an exemption from information reporting and backup withholding.
Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be refunded or credited against the
stockholders U.S. federal income tax liability if certain required information
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is timely furnished to the IRS. Stockholders are urged consult their tax advisors regarding application of backup withholding to them and the availability of, and procedure for obtaining an
exemption from, backup withholding.
Legislative or Other Actions Affecting REITs
Several REIT rules were amended under the Protecting Americans from Tax Hikes Act of 2015, which we refer to as the PATH Act, which was enacted
on December 18, 2015. These rules were enacted with varying effective dates, some of which are retroactive. Investors should consult with their tax advisors regarding the effect of the PATH Act in their particular circumstances.
The present U.S. federal income tax treatment of REITs may be modified, possibly with retroactive effect, by legislative, judicial or
administrative action at any time, which could affect the U.S. federal income tax treatment of an investment in us. The REIT rules are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Treasury
Department, which may result in statutory changes as well as revisions to regulations and interpretations. Changes to the U.S. federal tax laws and interpretations thereof could adversely affect an investment in our securities. According to publicly
released statements, a top legislative priority of the new Congress and administration may be to enact significant reform of the Internal Revenue Code, including significant changes to taxation of business entities and the deductibility of interest
expense and capital investment. There is a substantial lack of clarity around the likelihood, timing and details of any such tax reform and the impact of any potential tax reform on us or an investment in our securities.
Any such changes to the tax laws or interpretations thereof, with or without retroactive application, could materially and adversely affect
our securityholders or us. We cannot predict how changes in the tax laws might affect our securityholders or us. New legislation, U.S. Treasury Regulations, administrative interpretations or court decisions could significantly and negatively affect
our ability to continue to qualify as a REIT, or the U.S. federal income tax consequences to our securityholders and us of such qualification, or could have other adverse consequences, including with respect to ownership of our securities. For
example, lower revised tax rates for corporations, or for individuals, trusts and estates, might cause current or potential securityholders to perceive investments in REITs to be relatively less attractive than is the case under current law.
Investors are urged to consult their tax advisors with respect to the status of legislative, regulatory, or administrative developments and proposals and their potential effect on an investment in our securities.
State, Local and Foreign Taxes
We and/or
our securityholders may be subject to taxation by various states, localities or foreign jurisdictions, including those in which we or a securityholder transacts business, owns property or resides. The state, local and foreign tax treatment may
differ from the federal income tax treatment described above. Any foreign taxes incurred by us would not pass through to our securityholders against their U.S. federal income tax liability. Consequently, prospective securityholders are urged to
consult their tax advisors regarding the application and effect of state, local and foreign income and other tax laws upon an investment in our securities.
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PLAN OF DISTRIBUTION
We may sell the securities offered by this prospectus from time to time in one or more transactions, including without limitation:
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through underwriters or dealers;
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directly to purchasers;
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in at the market offerings, within the meaning of Rule 415(a)(4) of the Securities Act to or through a market maker or into an existing trading market on an exchange or otherwise;
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through a combination of any of these methods; or
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through any other method permitted by applicable law and described in a prospectus supplement.
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The prospectus supplement with respect to any offering of securities will include the following information:
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the terms of the offering;
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the names of any underwriters or agents;
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the name or names of any managing underwriter or underwriters;
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the purchase price or initial public offering price of the securities;
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the net proceeds from the sale of the securities;
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any delayed delivery arrangements;
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any underwriting discounts, commissions and other items constituting underwriters compensation;
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any discounts or concessions allowed, reallowed or paid to dealers;
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any commissions paid to agents; and
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any securities exchange on which the securities may be listed.
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Sale through Underwriters or Dealers
If underwriters are used in the sale, the underwriters may resell the securities from time to time in one or more transactions,
including negotiated transactions, at a fixed public offering price or at varying prices determined at the time of sale. Underwriters may offer securities to the public either through underwriting syndicates represented by one or more managing
underwriters or directly by one or more firms acting as underwriters. Unless we inform you otherwise in the applicable prospectus supplement, the obligations of the underwriters to purchase the securities will be subject to certain conditions, and
the underwriters will be obligated to purchase all of the offered securities if they purchase any of them. The underwriters may change from time to time any initial public offering price and any discounts or concessions allowed or reallowed or paid
to dealers.
We will describe the name or names of any underwriters, dealers or agents and the purchase price of the securities in a
prospectus supplement relating to the securities.
In connection with the sale of the securities, underwriters may receive compensation
from us or from purchasers of the securities, for whom they may act as agents, in the form of discounts, concessions or commissions. Underwriters may sell the securities to or through dealers, and these dealers may receive
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compensation in the form of discounts, concessions or commissions from the underwriters and/or commissions from the purchasers for whom they may act as agents, which is not expected to exceed
that customary in the types of transactions involved. Underwriters, dealers and agents that participate in the distribution of the securities may be deemed to be underwriters, and any discounts or commissions they receive from us, and any profit on
the resale of the securities they realize, may be deemed to be underwriting discounts and commissions under the Securities Act. The prospectus supplement will identify any underwriter or agent and will describe any compensation they receive from us.
Underwriters could make sales in privately negotiated transactions and/or any other method permitted by law, including sales deemed to be
an at-the-market offering, sales made directly on the NYSE, the existing trading market for our common stock, Series A Preferred and Series B Preferred, or sales made to or through a market maker other than on an exchange. The name of
any such underwriter or agent involved in the offer and sale of our securities, the amounts underwritten, and the nature of its obligations to take our securities will be described in the applicable prospectus supplement.
Unless otherwise specified in the prospectus supplement, each series of the securities will be a new issue with no established trading market,
other than our common stock, Series A Preferred and Series B Preferred, which are currently listed on the NYSE. We currently intend to list any shares of common stock sold pursuant to this prospectus on the NYSE. We may elect to list any new series
of preferred stock on an exchange, but are not obligated to do so. It is possible that one or more underwriters may make a market in a series of the securities, but underwriters will not be obligated to do so and may discontinue any market making at
any time without notice. Therefore, we can give no assurance about the liquidity of or the trading market for any of the securities.
Under agreements we may enter into, we may indemnify underwriters, dealers, and agents who participate in the distribution of the securities
against certain liabilities, including liabilities under the Securities Act, or contribute with respect to payments that the underwriters, dealers or agents may be required to make. Unless otherwise set forth in the accompanying prospectus
supplement, the obligations of any underwriters to purchase any of the securities will be subject to certain conditions precedent.
In
compliance with the guidelines of the Financial Industry Regulatory Authority, Inc., or FINRA, the maximum aggregate discounts, commissions, agency fees or other items constituting underwriting compensation to be received by any FINRA member or
independent broker-dealer will not exceed 8% of the aggregate offering price of the securities offered pursuant to this prospectus and any applicable prospectus supplement.
To facilitate the offering of securities, certain persons participating in the offering may engage in transactions that stabilize, maintain or
otherwise affect the price of the securities. This may include over-allotments or short sales of the securities, which involve the sale by persons participating in the offering of more securities than we sold to them. In these circumstances, these
persons would cover such over-allotments or short positions by making purchases in the open market or by exercising their over-allotment option, if any. In addition, these persons may stabilize or maintain the price of the securities by bidding for
or purchasing securities in the open market or by imposing penalty bids, whereby selling concessions allowed to dealers participating in the offering may be reclaimed if securities sold by them are repurchased in connection with stabilization
transactions. The effect of these transactions may be to stabilize or maintain the market price of the securities at a level above that which might otherwise prevail in the open market. These transactions may be discontinued at any time.
From time to time, we or our affiliates may engage in transactions with these underwriters, dealers and agents in the ordinary course of
business. Underwriters have from time to time in the past provided, and may from time to time in the future provide, investment banking services to us for which they have in the past received, and may in the future receive, customary fees.
If indicated in the prospectus supplement, we may authorize underwriters or other persons acting as our agents to solicit offers by
institutions to purchase securities from us pursuant to contracts providing for payment
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and delivery on a future date. Institutions with which we may make these delayed delivery contracts include commercial and savings banks, insurance companies, pension funds, investment companies,
educational and charitable institutions and others. The obligations of any purchaser under any such delayed delivery contract will be subject to the condition that the purchase of the securities shall not at the time of delivery be prohibited under
the laws of the jurisdiction to which the purchaser is subject. The underwriters and other agents will not have any responsibility with regard to the validity or performance of these delayed delivery contracts.
Direct Sales and Sales through Agents
We
may sell the securities directly. In this case, no underwriters or agents would be involved. We may also sell the securities through agents designated by us from time to time. In the applicable prospectus supplement, we will name any agent involved
in the offer or sale of the offered securities, and we will describe any commissions payable to the agent. Unless we inform you otherwise in the applicable prospectus supplement, any agent will agree to use its reasonable best efforts to solicit
purchases for the period of its appointment.
We may sell the securities directly to institutional investors or others who may be deemed
to be underwriters within the meaning of the Securities Act with respect to any sale of those securities. We will describe the terms of any sales of these securities in the applicable prospectus supplement.
Remarketing Arrangements
Securities may
also be offered and sold, if so indicated in the applicable prospectus supplement, in connection with a remarketing upon their purchase, in accordance with a redemption or repayment pursuant to their terms, or otherwise, by one or more remarketing
firms, acting as principals for their own accounts or as agents for us. Any remarketing firm will be identified and the terms of its agreements, if any, with us and its compensation will be described in the applicable prospectus supplement.
Delayed Delivery Contracts
If we so
indicate in the applicable prospectus supplement, we may authorize agents, underwriters or dealers to solicit offers from certain types of institutions to purchase securities from us at the public offering price under delayed delivery contracts.
These contracts would provide for payment and delivery on a specified date in the future. The contracts would be subject only to those conditions described in the applicable prospectus supplement. The applicable prospectus supplement will describe
the commission payable for solicitation of those contracts.
General Information
We may have agreements with the underwriters, dealers, agents and remarketing firms to indemnify them against certain civil liabilities,
including liabilities under the Securities Act, or to contribute with respect to payments that the underwriters, dealers, agents or remarketing firms may be required to make. Underwriters, dealers, agents and remarketing firms may be customers of,
engage in transactions with or perform services for us in the ordinary course of their businesses.
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LEGAL MATTERS
Certain legal matters will be passed upon for us by Vinson & Elkins L.L.P., and, with respect to matters of Maryland law, by Venable
LLP.
EXPERTS
The financial statements incorporated in this Prospectus by reference from CYS Investments, Inc.s Annual Report on Form 10-K and the
effectiveness of CYS Investments, Inc.s internal control over financial reporting have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their reports, which are incorporated herein
by reference. Such financial statements have been so incorporated in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We are required to file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and
copy any documents filed by us at the SECs public reference room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at (800) SEC-0330 for further information about the public reference room. Our filings with the SEC are
also available to the public through the SECs Internet site at
www.sec.gov
. In addition, because some of our securities are listed on the New York Stock Exchange, you can read our SEC filings at the offices of the New York Stock
Exchange, 20 Broad Street, New York, New York 10005. We have filed with the SEC a registration statement on Form S-3 relating to the securities covered by this prospectus. This prospectus is part of the registration statement and does not contain
all the information in the registration statement. Wherever a reference is made in this prospectus to a contract or other documents of ours, the reference is only a summary and you should refer to the exhibits that are a part of the registration
statement for a copy of the contract or other document. You may review a copy of the registration statement at the SECs public reference room in Washington, D.C., as well as through the SECs Internet site.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
This prospectus is part of a registration statement that we have filed with the SEC. The SEC allows us to incorporate by reference
the information that we file with them, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to be part of this prospectus from the date we file
that document. Any reports filed by us with the SEC after the date of this prospectus and before the date that the offering of the securities by means of this prospectus is terminated will automatically update and, where applicable, supersede any
information contained in this prospectus or incorporated by reference in this prospectus. We incorporate by reference into this prospectus the following documents or information filed with the SEC (other than, in each case, documents or information
deemed to have been furnished and not filed in accordance with SEC rules):
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our Annual Report on Form 10-K for the year ended December 31, 2016;
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the information specifically incorporated by reference into our Annual Report on Form 10-K for the year ended December 31, 2016 from our definitive proxy statement on Schedule 14A filed with the SEC on
March 31, 2017;
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our Quarterly Report on Form 10-Q for the quarter ended March 31, 2017;
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our Current Reports on Form 8-K filed with the SEC on February 15, 2017 (excluding Items 2.02 and 9.01) and May 16, 2017;
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the description of our common stock included in our Registration Statement on Form 8-A/A dated June 4, 2009;
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the description of our Series A Cumulative Redeemable Preferred Stock included in our Registration Statement on Form 8-A dated August 2, 2012;
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the description of our Series B Cumulative Redeemable Preferred Stock included in our Registration Statement on Form 8-A dated April 29, 2013; and
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all documents filed by us under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act on or after the date of this prospectus and before the termination of this offering.
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We will provide without charge to each person, including any beneficial owner, to whom this prospectus is delivered, upon his or her
written or oral request, a copy of any or all documents referred to above that have been or may be incorporated by reference into this prospectus, excluding exhibits to those documents unless they are specifically incorporated by reference into
those documents. You may request those documents from us by contacting: Chief Operating Officer, CYS Investments, Inc., 500 Totten Pond Road, 6th Floor, Waltham, Massachusetts 02451, Telephone: (617) 639-0440. We also maintain an Internet site
at
www.cysinv.com
at which there is additional information about our business, but the contents of that site are not incorporated by reference into, and are not otherwise a part of, this prospectus.
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