Al Christy 

In May 2011, The Financial Industry Regulatory Authority (FINRA) issued an investor alert on stock-based loan programs, noting that they can have potential risk concerns. We at Equities First agree with FINRA on the importance of our clients being aware of the details of our stock lending process and the potential consequences. Unlike some of our competitors, Equities First is dedicated to providing an in-depth loan agreement, and reviewing it with borrowers so that they are aware of what can happen during the process.

Below are some questions FINRA recommended investors ask, as well as our answers.

1. What happens to my stock once I pledge it as collateral?

Once an investor pledges his or her collateral, the assets are transferred to one of Equities First's global custodial accounts. For the loan term period, Equities First owns the collateral and has the authority to trade the stock, which in turn enables Equities First to offer lower-than-market interest rates and higher LTV ratios to its clients. At the end of the term, Equities First returns the equivalent number of shares to the investor.

During the loan term, Equities First provides statements every quarter that summarize the interest charge and any dividends to which the shares are entitled. The investor has the additional option to request the current valuation of his or her pledged agreement at any time during the loan term. For more information regarding how Equities First holds and returns stock that has been loaned, please see Jeff Smith's blog here, Managing Director at Equities First. (include hyperlink to "How Equities First holds and returns stock to borrowers" blog. )

Many of our clients choose a stock-based loan over other financing options due to the tax advantages. However, each loan situation is unique, and we recommend that all our clients speak with their tax advisors regarding any tax consequences.

2. What benefit does the promoter receive for recommending the program?

Most clients come to Equities First through a financial intermediary, either a financial advisor, attorney, or broker. If a broker refers Equities First to a prospective client, they are eligible for financial compensation. In our ten-year history, we have not mass advertised and instead relied on such brokers to promote our program. As you will see in the "Results" page of our website, available here, many of our clients have become repeat users.

Equities First is referred both by brokers and individuals who have completed transactions with us.

3. Does the lender have audited financials?

FINRA recommended potential investors to ask this question in order to assess the potential strength of the lender, and determine if it was capable of returning the pledged collateral back to the investor. As with any private company, audited financial statements are unavailable to the public, primarily for competitive reasons. However, here are some facts I can share with you:

1) In Equities First's ten-year history, we have always funded on time and returned the pledged collateral to the investor.

2) Equities First has completed over 600 successful loans in both the United States and international markets.

3) The completed transactions had loan amounts that ranged from $100,000 to $10,000,000.

Jeff Smith 

When a borrower sends Equities First the background information on a security he or she would like to use as collateral, we typically execute a quick turnaround and funding. Virtually all types of securities can be used as collateral, and there is no minimum per share price requirement for the stock.

Within 24 business hours of sending the information, Equities First determines the capability of executing the loan and calculates a proposed loan-to-value (LTV) ratio and fixed interest rate. Equities First can offer the borrower up to 80% of the value of their stock, and a low fixed interest rate, usually between 2% and 5%. By comparison, a typical margin loan offers only up to 50% of the stock's value and higher interest rates, usually 5%-8%.

After reviewing and signing the loan and pledge agreements, the borrower sends his or her securities to one of Equities First's global custodial accounts. Once one of these large banks receive the stock, the borrower is funded within five to seven business days. The use of funds is completely at the discretion of the borrower.

During the loan term, Equities First has a buy/sell relationship with the securities using unique algorithms that trade the securities during the life of the loan. Equities First also has an evolving position where our firm will buy on lows, and we are always ready to return the asset at maturity.

Equities First provides statements every quarter that summarize the interest charge and any dividends to which the shares are entitled. The borrower has the additional option to request the current valuation of his or her pledged agreement at any time during the loan term. During this time period, the borrower makes quarterly fixed interest-only payments.

The stock-based loan is 100% non-recourse. In comparison, a margin loan is full recourse. For example, if the security decreases in value to a certain extent in a margin account, the borrower has to deposit additional money or securities. Since a margin loan is full recourse, the borrower may face fees and penalties if he or she does not deposit the additional funds. With a stock-based loan, the borrower may walk away from the loan with no penalties and no negative credit reporting. If the borrower wishes to ensure the return of the shares, Equities First works with the borrower to tender additional shares or cash.

At the end of the loan term, the borrower repays the loan in full and Equities First returns the same amount of identical collateral. In addition, all stock appreciation over the term is returned to the borrower. The entire process typically takes three years.

Bottom line: Equities First provides better rates, greater flexibility, and a faster transaction when the borrower needs it.

Jeff Smith 

Given today's global market, international exchanges are more accessible to investors than ever before. Since 2010, Equities First has tripled its international loan transactions using non-U.S. securities as collateral. In fact, over 60% of our transactions are made with shares that trade outside of the United States, on exchanges in Hong Kong, Singapore, Australia, the United Kingdom, Canada and Mexico. Most shares traded on non-U.S. stock exchanges are eligible for securities-based loans. With Equities First, international clients are given accessibility to worldwide markets.

Since over 60% of our business is non-U.S., we have deep knowledge of international securities regulations and expertise working globally. Our investment banking partners include some of the top global financial institutions. Working with them enables us to have greater worldwide reach to better serve our international clients.

Our clients come to us from around the globe because of the many advantages they see in obtaining a securities-based loan from EFH. A securities-based loan uses one's stock as collateral for a secured loan. The collateral can be any type of security, whether stocks, bonds or mutual funds. Equities First offers a different type of securities-based loan: a non-purpose loan. A non-purpose loan is a more flexible alternative for individuals who do not want to sell their securities to obtain liquidity.

This type of loan allows greater freedom and the utmost flexibility. With this type of non-purpose loan is also non-recourse. Thus, the borrower is not held liable in the event of a default. The lender cannot seize non-pledged assets or properties, and the borrower has the option to walk away from the loan with no penalties. With a non-purpose loan, there is no limitation on the borrower's use of proceeds, whether it is for expanding a business, paying a mortgage, or personal use.

Our international clients receive the same advantages and quality service for their loans as our U.S. clients. With an EFH loan, borrowers can receive up to 80% loan to value and lower-than-market fixed interest rates. There is no price requirement and virtually all types of securities are accepted. Prior to the inception of a transaction, an individual or institution receives an extensive loan/pledge agreement, which clearly outlines the EFH process. Once an individual presents securities and accepts the terms offered, he can get funded within ten business days. A loan term is typically three years. At the end of the loan term, once the loan is repaid in full, EFH returns the identical amount of pledged collateral..

Al Christy 

As you know, it wasn’t too long ago that homes provided many with a deep and seemingly endless pool of loan collateral. Depressed real estate values combined with tight lending standards have taken this option off the table for many homeowners. However, those same consumers are discovering an alternative: securities-based loans.

Securities-based loans make use of stocks, bonds or exchange traded funds as collateral. The most common form of a securities-based loan is a margin loan, which typically allows you to borrow up to 50 percent of the value of stocks in your account, and a higher percentage for less volatile assets such as Treasury or municipal bonds.

We at Equities First Holdings offer another type of securities-based loan, called a non-purpose loan, which follows similar collateral rules but carries better rates and terms than a margin loan. While many people are familiar with margin as a way to finance stock purchases with borrowed funds, the loan proceeds from those arranged by Equities First Holdings can be used for virtually any purpose.

Loans provided by Equities First Holdings provide an excellent alternative for people who don’t want to liquidate securities to raise money they need by providing flexible access to the power of a portfolio. And the use of the proceeds is entirely up to the borrower. Securities-based loans can be used as a short-term financing bridge while a consumer waits for a house to sell, to fund nursing home expenses, or even for emergency situations such as repairing a roof. Proceeds can be used to fund the expansion of a business, for home construction or refinancing a commercial mortgage.

Two heart-wrenching stories, illustrate the broad uses for the proceeds from loans arranged through Equities First. The first involved a family who owned an apple farm. They had exhausted all of their commercial loans and were on the verge of filing for bankruptcy. They needed $3.5 million to keep the farm operating. The family did have a stock portfolio and we were able to arrange the loan they needed, and did so within five-to-seven days, saving the farm.

The other story concerns a husband and wife. She had cancer and their insurance company dropped them. They had access to a portfolio with stock that could not have been used as collateral under most circumstances; however, using that stock as collateral, we were able to get them the much-needed $250,000. This story also has a happy ending as the woman received treatment and her cancer went into remission.

The point: proceeds from securities loans arranged by Equities First offer borrowers’ wide latitude in how they are used. Global institutional investors look to EFH to provide securities-based lending services as a more flexible alternative with significant advantages over conventional margin loans. From individuals with short-term needs for a few hundred thousand dollars to large investment institutions looking for options for their clients to diversify multimillion dollar portfolios, an EFH securities-based loan opens new possibilities in alternative funding for:

• Leveraged buyouts
• Mergers and acquisitions
• Retiring high-interest debt
• Bridge loans
• Refinancing margin accounts, and
• Mortgages – new, refinance, or home equity loans.

Many investors think of margin accounts when they are looking to gain leverage from their investments. However, securities loans are a more attractive alternative because they can offer a higher loan-to-value (LTV) ratio, lower fixed-interest rates, and other significant advantages over conventional margin loans

Jeff Smith 

When deciding to work with a securities-based lender, conducting a thorough due diligence on your lender is critical. Here are five key questions to ask any lender you are considering. Professionals at any experienced firm will be able to answer these questions with confidence.

1. What is your performance like?

   You want to know what to expect from the transaction. Beginning with the term sheet, ask the lender about the process of funding the loan. The lender should give you a step-by-step scenario of how the transaction will unfold.

   How long does it typically take for the lender to provide funding? How often are you informed regarding the interest charge and any dividends that the shares are entitled? And last, what is the course of action taken to return collateral?
    

2. What is your track record?

   A simple question, but one of the most important. A successful lender should have completed a significant number of successful loan transactions without a hitch.

   How many loans has the lender successfully completed? On what exchanges has the lender completed the transactions? In what countries are the clients based?
    

3. What law firms do you work with?

   The lender's law firm is an integral partner in the transaction. The lender's law firm should possess experience and capabilities in dealing with stock-based lending.
    

4. When the loan is finalized, what firm will hold the shares?

   Ideally, you are looking for a top-of-the-line investment bank that holds global custodial accounts, and has experience in handling securities loans.
    

5. Can I have references?

   Though any lender might tell you what to expect from the process, a former client can tell you what actually happens. The reference should be able to reaffirm the reputation of the lender and the quality of work provided.