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EX-23.1 - EX-23.1 - GAIN Capital Holdings, Inc.y75376a4exv23w1.htm
EX-10.49 - EX-10.49 - GAIN Capital Holdings, Inc.y75376a4exv10w49.htm
EX-10.29 - EX-10.29 - GAIN Capital Holdings, Inc.y75376a4exv10w29.htm
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As filed with the Securities and Exchange Commission on January 8, 2010.
Registration No. 333-161632
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Amendment No. 4
to
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
GAIN CAPITAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
 
 
         
Delaware
(State or other jurisdiction of incorporation or organization)
  6221
(Primary Standard Industrial Classification Code Number)
  20-4568600
(I.R.S. Employer
Identification Number)
 
Bedminster One
135 Route 202/206
Bedminster, New Jersey 07921
(908) 731-0700
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
 
 
Glenn H. Stevens
President and Chief Executive Officer
GAIN Capital Holdings, Inc.
Bedminster One
135 Route 202/206
Bedminster, New Jersey 07921
(Name, address including zip code and telephone number, including area code, of agent for service)
 
 
Copies to:
     
Andrew P. Gilbert, Esq.
Morgan, Lewis & Bockius LLP
502 Carnegie Center
Princeton, New Jersey 08540
Tel: (609) 919-6600
Fax: (609) 919-6701
  Joseph A. Hall, Esq.
Davis Polk & Wardwell LLP
450 Lexington Avenue
New York, New York 10017
Tel: (212) 450-4500
Fax: (212) 450-3500
 
Approximate date of commencement of proposed sale to the public:  As soon as practicable after the effective date hereof.
 
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  o
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o Accelerated filer o Non-accelerated filer þ Smaller reporting company o
(Do not check if a smaller reporting company)
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any state where the offer or sale is not permitted.
 
Subject to Completion, Dated January 8, 2010
 
(GAIN CAPITAL HOLDINGS, INC. LOGO)
Shares
 
GAIN Capital Holdings, Inc.
 
COMMON STOCK
 
 
 
 
This is our initial public offering of common stock. Our stockholders are selling all of the shares of our common stock, par value $0.00001 per share, offered by this prospectus. We are not selling any shares in this offering and will not receive any of the proceeds from the sale of shares by the selling stockholders. Currently, no public market exists for our shares. We anticipate that the initial public offering price will be between $      and $      per share.
 
We intend to list the common stock on the NASDAQ Global Market under the symbol “GCAP.
 
 
 
 
Investing in our common stock involves risks. See “Risk Factors” beginning on page 16.
 
 
 
 
PRICE $      PER SHARE
 
 
 
 
                         
          Underwriting
    Proceeds to
 
    Price to
    Discounts and
    Selling
 
    Public     Commissions     Stockholders  
 
Per share
  $                $                $             
Total
  $       $       $  
 
The selling stockholders have granted the underwriters the right to purchase an additional shares of common stock to cover over-allotments.
 
The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
 
The underwriters expect to deliver the shares of common stock to purchasers on          , 2010.
 
 
 
 
MORGAN STANLEY DEUTSCHE BANK SECURITIES
 
          , 2010


 

 
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You should rely only on the information contained in this prospectus. We, the selling stockholders and the underwriters have not authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We, the selling stockholders and the underwriters are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus or a free-writing prospectus is accurate only as of its date, regardless of its time of delivery or any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.
 
For investors outside the United States: Neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.
 
Unless otherwise stated, all references to “us,” “our,” “GAIN,” “GAIN Capital,” “we,” the “Company” and similar designations refer to GAIN Capital Holdings, Inc. and its subsidiaries. Our logo, trademarks and service marks are the property of GAIN Capital Holdings, Inc. Other trademarks or service marks appearing in this prospectus are the property of their respective holders.


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PROSPECTUS SUMMARY
 
This summary highlights information contained elsewhere in this prospectus that we believe is important to understanding how our business is currently being conducted. You should read the entire prospectus carefully, including the “Risk Factors” section, the “Management’s Discussion and Analysis” section, the consolidated financial statements and related notes included in this prospectus and the “Prospectus Summary — Recent Developments” section concerning our cessation of our operations in China during 2008, before making an investment decision. As a result of our review of our regulatory compliance in China during 2008, we decided to terminate all service offerings to residents of China and ceased our trading operations located in that country. As of December 31, 2008, we no longer accept new customers or maintain direct customer accounts from residents of China. Therefore, we have presented certain historical information throughout this prospectus that both includes and excludes customer account activity from residents of China. We believe reporting such information without our historical China operations better assists the reader in evaluating our operating performance for comparative purposes with subsequent periods. In addition, you should also note that our preferred stock contains a redemption feature which allows the holders of our preferred stock to require us to repurchase the preferred stock at a fixed price. Such repurchase right must be recorded by us at fair value as a non-cash gain or loss from the recorded level in the immediately prior period. This embedded derivative causes fluctuation in our net income which is not reflective of our operating performance and will no longer exist at and after our initial public offering. As a result, we have presented adjusted net income, a financial measure not calculated in accordance with Generally Accepted Accounting Principles in the United States, or GAAP, which represents our net income/(loss) excluding the change in fair value of the embedded derivative in our preferred stock. This non-GAAP financial measure has certain limitations in that it does not have a standardized meaning and thus our definition may be different from similar non-GAAP financial measures used by other companies and/or analysts and may differ from period to period. As a result, it may be difficult to compare our financial performance to that of other companies.
 
Our Company
 
We are an online provider of retail foreign exchange trading and related services founded in 1999 by a group of experienced Wall Street trading professionals. We offer our customers 24-hour direct access to the global over-the-counter, or OTC, foreign exchange markets, where participants trade directly with one another rather than through a central exchange or clearing house. In a foreign exchange trade, participants buy one currency and simultaneously sell another currency. Our trading platform provides a wide array of information and analytic tools that allow our customers to identify, analyze and execute their trading strategies efficiently and cost-effectively. We believe our proprietary technology, multilingual customer service professionals and effective educational programs provide a high degree of customer satisfaction and loyalty. Furthermore, our scalable and flexible technology infrastructure allows us to enhance our product service offerings to meet the rapidly changing needs of the marketplace.
 
Foreign exchange, or forex, trading is one of the fastest growing areas of retail trading in the financial services industry. According to its most recent report, the Aite Group, a financial services industry market research firm, reported that by the end of 2008, average daily trading volume in the retail forex market reached approximately $100.0 billion, a 900% increase from 2001. Our total annual customer trading volume, which is based on the U.S. Dollar equivalent of notional amounts traded, grew from $120.3 billion in 2004 to $1.50 trillion in 2008, representing a compounded annual growth rate of 87.9%. Our annual customer trading volume from customers residing outside of China grew from $114.3 billion in 2004 to $1.33 trillion in 2008, representing a compounded annual growth rate of 84.7%.
 
Our annual net revenue grew from $22.2 million in 2004 to $188.1 million in 2008, representing a compounded annual growth rate of 70.6%. Our annual net revenue from customers residing outside of China grew from $20.8 million in 2004 to $163.7 million in 2008, representing a compounded annual growth rate of 67.5%. Our net income grew from $7.1 million in 2004 to $231.4 million in 2008, representing a compounded annual growth rate of 138.9%. Our adjusted net income, a non-GAAP financial measure which represents our net income/(loss) excluding the change in fair value of the embedded derivative in our preferred stock, increased from $7.1 million in 2004 to $49.6 million in 2008, representing a compounded annual growth rate of 62.6%.


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We believe customers residing outside the United States represent a significant area of growth for our business. We have a geographically diverse customer base and currently service customers residing in over 140 countries worldwide. For the year ended December 31, 2008, approximately 53.0% of our customer base was located outside of the United States, representing approximately 41.4% of our total trading volume. Customers residing in China represented approximately 18.0% of our customer base and approximately 11.5% of our total trading volume for the year ended December 31, 2008.
 
We use financial metrics, including tradable accounts and traded accounts, to measure our aggregate customer account activity. Tradable accounts represent customers who maintain cash balances with us that are sufficient to execute a trade in compliance with our policies. As of September 30, 2009, we had 47,374 tradable accounts. The number of tradable accounts is an important indicator of our ability to attract new customers that can potentially lead to trading volume and revenue in the future, although it does not represent actual trades executed. We believe that the most relevant measurement which correlates to volume and revenue is the number of traded accounts, because this represents customers who executed a forex transaction with us during a particular period. During the nine months ended September 30, 2009, 43,565 traded accounts executed a forex transaction with us compared to 45,001 traded accounts (including 11,403 traded accounts from customers residing in China) for the nine months ended September 30, 2008, representing an overall decrease of 3.2%. Traded accounts from customers residing outside of China increased 29.6% during the nine months ended September 30, 2009, compared to the nine months ended September 30, 2008. During the year ended December 31, 2008, 52,555 traded accounts (including 11,647 traded accounts from customers residing in China) executed trades with us, compared to 43,139 traded accounts (including 11,568 traded accounts from customers residing in China) in 2007, representing an increase of 21.8%. Traded accounts from customers residing outside of China increased 29.6% for the year ended December 31, 2008, compared to the year ended December 31, 2007.
 
We seek to attract and support customers through direct and indirect channels. Our primary direct channel is our retail forex trading Internet website, FOREX.com, which is available in English, traditional and simplified Chinese, Japanese, Russian and Arabic. It provides currency traders of all experience levels with full trading capabilities, along with extensive educational and support tools. In addition, we utilize our relationships with retail financial services firms, such as broker-dealers and Futures Commission Merchants, or FCMs, to attract additional customers. These firms offer our forex trading services to their existing customers under their own brand in exchange for a revenue sharing arrangement with us. We refer to these firms as our white label partners. We also have relationships with introducing brokers who refer their customers to us for a fee.
 
Our customer base is comprised primarily of self-directed retail traders who utilize our online platform and tools to trade forex and certain other asset classes. Our customer base also includes accounts managed by authorized intermediaries, such as money managers, trading on behalf of a retail account holder, which we refer to as managed accounts. For the nine months ended September 30, 2009, self-directed investors represented 93.0% of our customer trading volume and managed accounts represented the remaining 7.0% of our customer trading volume.
 
The majority of our revenue is derived from our activities as a market-maker to our retail customers, where we act as the counterparty to our customers’ trades. We provide both buy and sell quotes for each of the 37 currency pairs we offer. We have extensive experience in the forex market and have used this experience to develop risk management systems and procedures that allow us to manage market and credit risk in accordance with pre-defined exposure limits in real-time. A key component of our approach to managing risk is that we do not take proprietary directional market positions where we would actively initiate market positions in anticipation of future movements in the prices of currencies. Instead, we continuously evaluate market risk exposure, and we actively hedge a portion of our customer transactions on our wholesale forex trading platform on a continuous basis. As a result of our hedging activities, we usually have open positions in various currencies at any given time. We also maintain liquidity relationships with three established, global prime brokers and at least six other wholesale forex trading partners, which we believe provide us with access to a deep forex liquidity pool. We maintain levels of capital in excess of those currently required under applicable regulations.


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Our Market Opportunity
 
Historically, participation in the forex trading market was only available to commercial and investment banks and other large institutional investors. We believe that the expansion of online forex trading firms, such as our company, has led to reduced trading costs and increased investor awareness of the forex market, resulting in greater retail participation. We believe that improved accessibility and convenience has spurred the growth of our industry, similar to the impact online equity brokers had on growth in the U.S. equities markets in the late 1990s.
 
The forex market is one of the highest notional dollar volume traded financial markets in the world, with daily trading volumes growing at a compounded annual growth rate of 14.8% from approximately $1.4 trillion per day in 2001 to approximately $3.2 trillion per day by April 2007, as stated by the Bank for International Settlements.
 
We believe retail forex trading is poised for continued, rapid growth as a result of the following trends:
 
  •  increasing recognition of currency trading as an alternative investment and as a tool for portfolio diversification by retail traders, authorized traders and investment professionals globally;
 
  •  improved access to the forex market, reduced transaction costs and more efficient execution;
 
  •  increased availability of investor education relating to the forex market and trading opportunities;
 
  •  expansion of marketing efforts by many leading firms in the forex industry;
 
  •  increasing media coverage of the forex market;
 
  •  heightened domestic and international regulatory oversight; and
 
  •  rising global broadband and wireless penetration.
 
Our Competitive Strengths
 
We believe that we have maintained and will continue to enhance our strong position in the retail forex market by leveraging the following competitive strengths:
 
Leading FOREX.com brand name and strong global marketing capability
 
We believe that we have developed FOREX.com into the category-defining brand in the online forex trading industry. For the nine months ended September 30, 2009, FOREX.com averaged approximately 1.4 million “unique” visitors per month and we currently service customers from over 140 countries. We calculate the number of unique visitors to FOREX.com by monitoring the number of visitors (as tracked by our website) over a specified period of time, and then subtracting all repeat visits by each individual visitor over such period.
 
Our sales and marketing strategy leverages the strength of the FOREX.com brand name by employing a combination of direct marketing techniques and focused branding programs. Through our direct marketing efforts, in 2008 we generated 1,158,682 registered users of our demonstration trading accounts which simulate live trading on our proprietary platform, referred to as registered practice trading accounts (including 380,025 registered practice trading account users in China), representing a compounded annual growth rate of 81.8% from 105,959 registered practice trading account users in 2004. For the nine months ended September 30, 2009, we generated 675,658 registered practice trading account users. Complementing our direct marketing strategy, we have assembled a multilingual, 102-person retail sales force that utilizes a highly interactive approach to convert registered practice trading accounts into tradable accounts and manages ongoing customer retention efforts. We have further leveraged the FOREX.com brand name to successfully forge partnerships with white label partners and introducing brokers to allow us to acquire customers that we believe we could not otherwise efficiently attract.
 
We have achieved significant growth through the international expansion of our customer base. We have grown our company internationally through an efficient business model that combines our centralized trading, middle- and back-office functions located in the United States with direct and indirect marketing techniques tailored for each local market. This approach is designed to achieve a consistent brand experience while minimizing overhead costs.


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Superior customer experience and service focus
 
We offer current and prospective customers a high level of service and a wide range of customizable tools and resources to assist them in learning about trading forex and certain other asset classes and to prepare them for trading in the market. We have a multilingual customer service staff located in the United States that is available seven days a week to handle customer inquiries via telephone, email and online chat, with continuous coverage beginning Sunday at 10:00 a.m. through Friday at 5:00 p.m. and Saturday 9:00 a.m. to 5:00 p.m. (Eastern Standard time). We also offer comprehensive education and training programs, the majority of which are utilized by prospective customers, which have been internally developed and designed to accommodate a variety of experience levels and learning preferences, from self-study to fully instructional programs.
 
Our emphasis on providing a superior customer experience is evidenced by our high customer satisfaction. In July 2007, we conducted a customer survey to our English-speaking active customers who executed a trade with us 90 days prior to the survey, in which over 90.0% indicated they would recommend FOREX.com to a friend or family member. When asked to rank their reasons for choosing FOREX.com, the three most common responses were execution quality, quality of the trading platform and customer service.
 
Consistent execution quality
 
We believe our customers choose us in part due to the consistent quality of our trade execution capabilities, which is comprised of three main aspects: timing, certainty of execution and pricing. We believe that our proprietary rate engine provides our customers with access to forex liquidity at competitive market rates. We are able to provide our customers with a high degree of certainty in the execution of their trades as a result of our liquidity relationships with three established global prime brokers, Deutsche Bank, The Royal Bank of Scotland plc, or RBS, and UBS AG, or UBS, as well as relationships with at least six other wholesale forex trading partners. Through these relationships, our access to a deep pool of forex liquidity assists in ensuring that we are able to execute our customers’ trades in any of the 37 currency pairs and notional amounts they desire.
 
Highly scalable proprietary technology with a proven track record of innovation
 
We believe that our proprietary technology provides us with significant competitive advantages. Our scalable and flexible technology infrastructure allows us to quickly adapt to meet the rapidly changing needs of the marketplace. For example, in 2009 we introduced trading in the gold and silver spot market onto our platform. In addition, our proprietary technology allows us to quickly integrate other trading platforms that are attractive to our customers and can benefit from our aggregation of retail pricing received from our wholesale forex trading partners and our offsite environmentally-controlled, secure facilities housing our hardware and network connections. In 2007, we began offering MetaTrader, an online trading platform popular with the international retail trading community, which we license from a third party. We believe that our integrated online trading platform, including our proprietary rate engine which aggregates the retail prices received from our wholesale forex partners and publishes real-time quotes, offers our customers a consistent level of trade execution and decision support for all products we offer.
 
Extensive risk management experience and capital position in excess of current regulatory requirements
 
We have extensive experience in the forex market and have leveraged this experience to develop proprietary risk management systems and procedures that allow us to manage market and credit risk in accordance with predefined exposure limits in real-time and maintain a conservative capital position while taking into account specific market events and market volatility. A key component of our approach to managing risk is that we do not take proprietary directional market positions where we would actively initiate market positions in anticipation of future movements in the prices of currencies. Instead, we continuously evaluate market risk exposure, and we actively hedge customer transactions with our wholesale forex trading platform on a continuous basis. As a result of our hedging activities, we are likely to have open positions in various currencies at any given time.
 
As part of our risk management philosophy, we maintain capital levels in excess of those required under applicable regulations in multiple jurisdictions. We believe that our excess capital position in the United States


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compares favorably to that of many of our competitors that operate primarily in forex trading and positions us favorably for potential future increases in minimum capital requirements domestically and abroad. Additionally, we believe that our capital position enhances our access to foreign exchange liquidity, thereby improving our ability to provide customers with attractive pricing and facilitating our trading and hedging activities. In addition, our capital position allows us to provide capital to our affiliates as needed, to accommodate their business growth and meet potential increases in minimum capital requirements.
 
Experienced management team
 
Our senior management team is comprised of experienced executives with significant forex, financial services and financial technology expertise. In addition, our senior management team has extensive experience in many critical aspects of our business, including trading and risk management, retail brokerage operations, compliance, application development and technology infrastructure. For example, prior to joining us in 2000, Glenn Stevens, our President and Chief Executive Officer, served for seven years as managing director and chief forex dealer at Merrill Lynch & Co., Inc., and Mr. O’Sullivan, our Chief Dealer, served for six years as director of the New York sterling desk of Merrill Lynch & Co., Inc., prior to his joining us in 2000. We believe the experience of our senior management team, including over 25 years of forex trading experience for our President and Chief Executive Officer and over 20 years of forex trading experience for our Chief Dealer, has been integral to our success to date and will be critical to our successful expansion into new markets and products in the future.
 
Risks Associated with Our Business
 
An investment in our common stock involves substantial risks and uncertainties that may adversely affect our business, financial condition and results of operations and cash flows, including:
 
  •  The retail forex market has only recently become accessible to retail investors and, accordingly, we have a limited operating history upon which to evaluate our performance.  Our prospects may be materially adversely affected by the risks, expenses and difficulties frequently encountered in the operation of a new business in a rapidly evolving industry characterized by intense competition and evolving regulatory oversight and rules.
 
  •  The susceptibility of our revenue and profitability to changes in domestic and international market and economic conditions.  Our revenue and profitability is influenced by trading volume and currency volatility, which are directly impacted by disruption and volatility in domestic and international markets and economic conditions.
 
  •  The risk that our risk management policies and procedures may not be effective and may expose us to unidentified or unanticipated risks.  We depend upon our risk management policies to identify, monitor and control a variety of risks. Some of our methods for managing risk are discretionary in nature and based upon internally developed controls and observed historical market behaviors. Such policies may not adequately prevent losses or anticipate changes in the market.
 
  •  The impact on our business from potential trading losses.  A substantial portion of our revenue and operating profits is derived from our role as a market-maker. In such role, we are exposed to significant pricing and liquidity risks, as well as to risks relating to possible inaccuracies in our proprietary pricing mechanism, which may result in trading losses.
 
  •  The risk of corruption or disruption of our proprietary technology.  Our success in the past has largely been attributable to our proprietary technology. We rely on our proprietary technology to receive and properly process internal and external data in order to run our business. Any disruption or corruption of our proprietary technology may result in service interruptions or other negative consequences.
 
  •  The loss of our key personnel.  Our key employees have significant experience in the forex industry and have made significant contributions to our business and operations. Our continued success is dependent upon the retention of these employees.


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  •  Our dependence on wholesale forex trading partners and prime brokers in order to continually provide our market-making services.  Given the level of our customers’ trading volume, we depend upon third party financial institutions to provide us with access to forex market liquidity and competitive wholesale forex pricing spreads. In the event that we no longer have access to the competitive wholesale forex pricing spreads and/or levels of liquidity that we currently have, we may be unable to provide competitive forex trading services, which will materially adversely affect our business, financial condition and results of operations and cash flows.
 
  •  A risk of default by financial institutions holding our funds and other counterparties with whom we do business.  Our forex market-making operations require a commitment of capital that involves risk of losses due to the potential failure or default by the counterparties with whom we do business.
 
  •  The regulatory risks in jurisdictions where our operations may be restricted by existing and evolving regulatory requirements.  We operate in a heavily regulated environment that imposes significant compliance requirements where failure to comply may result in regulatory actions and sanctions against us. For example, we face the potential risk of enforcement actions and sanctions for our prior operations in China.
 
You should consider these risks and others described in this prospectus before investing in our common stock. For a more detailed discussion of these and other significant risks associated with operating our business and investing in our common stock, you should read the section entitled “Risk Factors” beginning on page 16 of this prospectus.
 
Our Growth Strategy
 
We intend to pursue the following strategies to continue to grow our forex business and to continue to expand our product offerings to our customers:
 
Increase penetration in our existing markets
 
We plan to increase penetration in our existing markets by continuing to focus on reaching the greatest number of prospective customers who may open registered practice trading accounts. We seek to accomplish this by employing a mixture of on- and off-line advertising, search engine marketing, email marketing, television and radio advertising, attendance at industry trade shows and strategic and public media relations. We intend to continue to focus on converting our registered practice trading accounts into traded accounts in order to grow our business and increase our market share. We believe we can most effectively generate registered practice trading accounts and convert them into traded accounts by continuing to tailor our marketing strategy to each customer type we target and by offering prospective customers training, educational tools and superior customer service.
 
Continue the international expansion of our customer base
 
We intend to enhance our growth through the continued expansion of our international customer base into new markets and continue to penetrate existing international markets. We believe owning and operating a leading forex Internet domain name enhances our ability to promote our advanced trading technology and tools, as well as our market leading customer service, while also generally building awareness of the forex market among retail investors. In addition to leveraging the FOREX.com brand name globally, we intend to grow internationally by continuing to open offices in areas where a local presence is helpful to our growth efforts and by selectively pursuing strategic acquisitions. For example, we are currently seeking local registration, licensing and authorization to conduct our forex trading services in Australia and Singapore. To successfully expand into other new international markets, we intend to employ a strategy that centralizes brand management, trading, middle- and back-office functions at our U.S. headquarters and tailors marketing programs and sales and customer support to the local market.
 
Expand our product offering
 
We intend to grow our business by offering our customers additional products which are complementary to our current product offerings. Since customers who trade in forex often trade in other financial products, we believe we have significant growth opportunities to cross-sell complementary products to these customers. Expanding our


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product offerings to include other financial products will enable our customers to execute diversified trading strategies across various products from a single, integrated trading platform. We believe our proprietary and scaleable technology infrastructure, along with our extensive forex trading experience, will allow us to introduce new products efficiently and cost effectively. As a result, we believe the expansion of our product offerings will allow us to attract and satisfy our customers’ increased trading needs, which will in turn result in increased customer trading volume with us. For example, we recently introduced spot trading in gold and silver, and have also introduced GAIN Capital Securities Inc., or GAIN Securities, a registered broker-dealer, for trading of equity securities. Some other products we intend to offer include:
 
  •  Forex trading products
 
We intend to offer additional forex trading products, including more currency pairs, currency options and a range of other currency-related investment products.
 
  •  Contracts for difference
 
Outside the United States, we intend to expand on our contracts for difference, or CFDs, offerings. CFDs are instruments linked to the performance of the price of an underlying financial instrument, including precious metals, energy products and other commodities, as well as stock indices and government bonds. Because CFDs are margin-based and are OTC traded, we believe that we can effectively apply our market-making and risk management expertise to these financial instruments.
 
  •  Listed exchange products
 
Our status as an FCM provides us with the regulatory ability to offer a variety of exchange-traded products, including futures and options on equity and fixed income indices, and commodities, to our customers in the United States. We also intend to expand the offerings of GAIN Securities to include advanced options trading, as well as fixed income and other equities products.
 
Increase our partnerships with other financial services firms
 
We intend to continue to develop relationships with white label partners and introducing brokers which provide us with additional channels to attract prospective customers that we believe we could not otherwise efficiently solicit. These prospective customers include individuals in jurisdictions where we are not currently registered with the local regulator and those customers who have demonstrated significant loyalty to their existing financial services firm. In these circumstances, the partnership arrangements are more profitable for us since the customers provided through these partnerships generate trading revenue for us, but generally do not require us to incur any incremental direct marketing or regulatory compliance expenses.
 
Pursue strategic acquisitions and alliances to expand our product and service offerings and geographic reach
 
We intend to continue to selectively pursue attractive acquisition and alliance opportunities. In the past, we have successfully expanded the breadth of our product and service offerings by acquiring companies with complementary products and services, such as our acquisition of the London-based RCG GAIN Limited (now known as GAIN Capital-Forex.com U.K., Ltd.), our purchase of a 51.0% interest, with rights to acquire up to a 95.0% interest, in Fortune Capital Co., Ltd. (now known as GAIN Capital Japan, Co. Ltd.) and our acquisition of a registered broker-dealer of equity securities (now known as Gain Securities). Additionally, we will consider acquisitions and alliances in key geographic markets to establish or increase our presence and accelerate our growth. Following this offering, we will have the ability to use our common stock as an additional acquisition currency with which to pursue future acquisitions.
 
Recent Developments
 
Termination of service offerings in China
 
Since 2006, a significant portion of our trading volume, trading revenue, net income and cash flow were generated from residents of China. When we commenced offering our forex trading services through our Chinese


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language website to residents of China in October 2003, we believed that our operations were in compliance with applicable Chinese regulations. However, as a result of our review of our regulatory compliance in China during 2008, in May 2008 we became aware of a China Banking and Regulatory Commission, or CBRC, prohibition on forex trading firms providing retail forex trading services to Chinese residents through the Internet without a CBRC permit. We do not have such a permit and to our knowledge, no such permit exists. As a result of this regulatory uncertainty, we decided to terminate all service offerings to residents of China and ceased our trading support operations located in that country. As of December 31, 2008, we no longer accept new customers or maintain direct customer accounts from residents of China. However, due to an ongoing relationship with one of our introducing brokers, eight immaterial legacy accounts (as of September 30, 2009) which were originally sourced through that introducing broker prior to the termination of our service offering in China, remained open. For the nine months ended September 30, 2009, the trading activity by these legacy accounts resulted in an immaterial amount of trading volume. We have taken steps to close these accounts, and all have been closed as of December 31, 2009. All references to “China” refer to mainland China and exclude the Hong Kong and Macau Special Administrative Regions.
 
We have become aware that the CBRC may, at a future date, issue regulations by which certain institutions will be allowed to engage in retail forex trading services. There is no assurance as to when these clarifying regulations will be issued or, if issued, whether we will be able to offer our trading services to Chinese residents under such regulations. As a result, we do not intend to offer our trading services and no longer accept or maintain direct customer accounts from residents of China, except as described above, until such time as we are able to obtain the necessary permits, licenses or approvals from the applicable Chinese regulators, in accordance with applicable Chinese regulations. We will continue to monitor the regulatory environment in China and, when possible, we will seek to obtain the necessary permits, licenses or approvals from the applicable Chinese regulators, or to partner with a firm with such approval, to resume our retail forex trading services in China. As our Chinese language website is also used by customers in other countries, we will continue to use it as we offer our services to Chinese-speaking customers who do not reside in China. We cannot provide any assurance that we will not be subject to fines or penalties, and if so in what amounts, relating to the period in which we provided forex trading services through the Internet to Chinese residents.
 
Corporate Information
 
We were incorporated in Delaware in October 1999 as GAIN Capital, Inc. In order to expand, either directly or through wholly-owned subsidiaries, into business activities not regulated by the Commodity Futures Trading Commission, or CFTC, or National Futures Association, or NFA, on August 1, 2003, all outstanding capital stock of GAIN Capital, Inc. was converted into capital stock of GAIN Capital Group, Inc. pursuant to an agreement and plan of merger by and among GAIN Capital Group, Inc., GAIN Merger Sub Inc. (a wholly-owned subsidiary of GAIN Capital Group, Inc.) and GAIN Capital, Inc. Pursuant to such agreement and plan of merger, GAIN Merger Sub Inc., merged with and into GAIN Capital, Inc., the surviving entity, and the holders of capital stock, warrants and options of GAIN Capital, Inc. received capital stock, warrants and options of GAIN Capital Group, Inc. on a one-for-one basis, and GAIN Capital, Inc. continued to exist as a wholly-owned subsidiary of GAIN Capital Group, Inc. The GAIN Capital, Inc. stockholders before the merger were the same as the GAIN Capital Group, Inc. stockholders after the merger.
 
As a condition to entering into a credit facility in 2006, the lending banks required that we pledge the ownership interests in certain of our operating subsidiaries as collateral. In order to facilitate such pledge, on March 27, 2006, all outstanding capital stock of GAIN Capital Group, Inc. was converted into capital stock of GAIN Capital Holdings, Inc. pursuant to an Agreement and Plan of Merger by and among GAIN Capital Group, Inc., GH Formation, Inc. (a wholly-owned subsidiary of GAIN Capital Group, Inc.) and GAIN Capital Holdings, Inc. Pursuant to such agreement and plan of merger, GH Formation, Inc. merged with and into GAIN Capital Group, Inc., the surviving entity, and the holders of capital stock, warrants and options of GAIN Capital Group, Inc. received capital stock, warrants and options of GAIN Capital Holdings, Inc. on a one-for-one basis, and GAIN Capital Group, Inc. continued to exist as an indirect wholly-owned subsidiary of GAIN Capital Holdings, Inc. The GAIN Capital Group, Inc. stockholders before the merger were the same as the GAIN Capital Holdings, Inc. stockholders after the merger.


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For tax planning purposes, contemporaneously with the foregoing merger, on March 27, 2006, GAIN Capital Group, Inc. was converted to a limited liability company, GAIN Capital Group, LLC, and GAIN Capital, Inc. was converted to a limited liability company, GAIN Capital, LLC, thereby allowing profits and losses to pass through such entities. At the same time, GAIN Holdings, LLC, a newly created holding company and wholly-owned subsidiary of GAIN Capital Holdings, Inc., became the sole member and holder of all of the membership interests of GAIN Capital Group, LLC. On April 28, 2006, GAIN Capital, LLC merged with and into GAIN Capital Group, LLC and ceased to exist as a separate entity. The membership interests of GAIN Holdings, LLC were pledged as collateral in connection with the credit facility referenced above.
 
Our principal executive offices are located at Bedminster One, 135 Route 202/206, Bedminster, New Jersey 07921. Our telephone number is (908) 731-0700. On August 18, 2009, we entered into a lease agreement for approximately 45,000 square feet of office space at 135 Route 202/206, Bedminster, New Jersey, which we are using as our new principal executive offices. The term of the lease runs from January 1, 2010 to December 1, 2025, and we substantially moved to our new facilities in January, 2010. We believe this new facility will accommodate our needs for the foreseeable future. We operate our market-making services out of our Bedminster (New Jersey), London and Tokyo offices and our sales and support services out of our Bedminster, New York City, Woodmere (Ohio), London, Tokyo and Hong Kong offices. We have a representative office and a technology development office in Shanghai. Consistent with the termination of our business in China, we are in the process of closing our Shanghai offices. Our corporate website address is www.gaincapital.com. The information on our website is not incorporated by reference into this prospectus and should not be considered to be a part of this prospectus. We have included our website address as an inactive textual reference only. As of September 30, 2009, we employed 362 individuals worldwide.
 
We are a registered FCM and Forex Dealer Merchant, or FDM, with the Commodity Futures Trading Commission, or CFTC, and a member of the National Futures Association, or NFA. In 2008, we acquired a 51.0% interest, with rights to acquire up to a 95.0% interest, in GAIN Capital Japan, Co. Ltd., a Tokyo-based introducing broker regulated by the Financial Supervisory Authority in Japan, or the Japan FSA. In October 2009, we increased our ownership interest in GAIN Capital Japan, Co. Ltd. to 70.0%. We also operate GAIN Securities, a registered broker-dealer (which is registered with the Securities and Exchange Commission, or SEC, and is a member of the Financial Industry Regulatory Authority, or FINRA). We are authorized as principal and counterparty to spot foreign currency trades, CFDs and gold and silver spot contracts in the U.K. and Japan, and we are seeking authorization in Singapore and Australia. We are also registered as a Securities Arranger with the Cayman Islands Monetary Authority, or CIMA, in the Cayman Islands and registered with the Securities and Futures Commission, or SFC, in Hong Kong to act as an introducer to Gain Capital Group, LLC in the United States.
 


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THE OFFERING
 
Common Stock offered by the selling stockholders
          shares
 
Common stock to be outstanding immediately after this offering
          shares
 
Use of proceeds We will not receive any of the proceeds from the sale of shares by the selling stockholders. See “Use of Proceeds.”
 
Proposed NASDAQ Global Market symbol
“GCAP”
 
Risk factors See “Risk Factors” beginning on page 16 of this prospectus and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in shares of our common stock.
 
The number of shares of our common stock to be outstanding after this offering is based on the number of shares outstanding as of          , 2010. The number of shares of our common stock to be outstanding after this offering does not take into account:
 
  •            shares of common stock issuable upon the exercise of outstanding stock options as of           , 2010 at a weighted average exercise price of $      per share;
 
  •            shares of common stock issuable pursuant to outstanding restricted stock units as of          , 2010;
 
  •  an aggregate of          shares of common stock that will be reserved for future issuance under our 2010 Omnibus Incentive Compensation Plan as of the closing of this offering; and
 
  •  an aggregate of          shares of common stock that will be reserved for future issuance under our 2010 Employee Stock Purchase Plan.
 
 
Unless otherwise noted, the information in this prospectus assumes that the underwriters do not exercise their over-allotment option granted by the selling stockholders, and has been adjusted to reflect the -for-1 stock split of our common stock effected immediately prior to the completion of this offering, the conversion of all outstanding shares of our preferred stock into an aggregate of          shares of common stock upon the completion of this offering and the filing of our amended and restated certificate of incorporation and the adoption of our amended and restated by-laws upon the completion of this offering.


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SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
 
The following table presents our summary historical consolidated financial data for the periods presented and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included elsewhere in this prospectus. The consolidated statements of operations data for the fiscal years ended December 31, 2006, 2007 and 2008 and the consolidated statements of financial condition data as of December 31, 2007 and 2008 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statements of operations data for the fiscal years ended December 31, 2004 and 2005 and the consolidated statements of financial condition data as of December 31, 2004, 2005 and 2006 are derived from our audited historical consolidated financial statements not included in this prospectus.
 
The consolidated statements of income data for the nine-month periods ended September 30, 2008 and 2009 and the consolidated statement of financial condition data as of September 30, 2009 are derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus which have been prepared on the same basis as the audited consolidated financial statements and reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of our results of operations and financial position. The consolidated statements of financial condition data as of September 30, 2008 are derived from our unaudited consolidated financial statements not included in this prospectus. The results of operations for the nine months ended September 30, 2009 are not necessarily indicative of the results to be expected for the full year ended December 31, 2009.
 
As a result of the termination of our trading operations in China, the historical financial information presented below is not indicative of our future performance. For the year ended December 31, 2008, net revenue associated with customers residing in China was $24.4 million, compared to $20.6 million for the year ended December 31, 2007. Our total direct expenses attributable to our operations in China were $5.9 million for the year ended December 31, 2008, compared to $4.8 million for the prior year. In addition, due to the non-cash impact of the redemption feature contained in our preferred stock which requires fair value accounting, there are fluctuations in our net income which will cease upon our initial public offering and which is not reflective of our operating performance.
 
The pro forma consolidated statement of financial condition data as of September 30, 2009 gives effect to this offering based on an assumed initial public offering price of $      per share, which is the midpoint of the range listed on the cover page of this prospectus. The pro forma earnings per common share data for the year ended December 31, 2008 and the nine months ended September 30, 2009 reflect the sale by our selling stockholders of shares of common stock pursuant to this offering based on an assumed initial public offering price of $      per share, which is the midpoint of the range listed on the cover page of this prospectus.


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          Nine Months Ended
 
    Year Ended December 31,     September 30,  
    2004(2)     2005(2)     2006(1)     2007(1)     2008(1)     2008(1)     2009(1)  
    (in thousands, except share and per share data)  
 
Consolidated Statements of Operations Data:
                                                       
REVENUE
                                                       
Trading revenue
  $ 21,257     $ 36,249     $ 69,471     $ 118,176     $ 186,004     $ 129,331     $ 113,797  
Other revenue
    665       223       242       437       2,366       1,984       1,654  
                                                         
Total non-interest revenue
    21,922       36,472       69,713       118,613       188,370       131,315       115,451  
Interest revenue
    324       1,519       3,145       5,024       3,635       3,180       228  
Interest expense
    (33 )     (110 )     (2,431 )     (4,299 )     (3,905 )     (3,157 )     (1,848 )
                                                         
Net interest revenue/(expense)
    291       1,409       714       725       (270 )     23       (1,620 )
                                                         
Net revenue
    22,213       37,881       70,427       119,338       188,100       131,338       113,831  
                                                         
EXPENSES
                                                       
Employee compensation and benefits
    5,035       9,511       17,258       25,093       37,024       27,453       29,621  
Selling and marketing
    1,186       3,256       12,517       21,836       29,312       21,975       26,791  
Trading expenses and commissions
    2,973       7,279       10,321       10,436       16,310       12,992       10,431  
Bank fees
    245       507       935       2,316       3,754       2,595       3,415  
Depreciation and amortization
    301       494       897       1,911       2,496       1,897       2,013  
Communications and data processing
    155       424       873       1,659       2,467       1,681       1,950  
Occupancy and equipment
    306       530       1,045       1,616       2,419       1,715       2,391  
Bad debt provision/(recovery)
          836       574       1,164       1,418       1,289       593  
Professional fees
    877       761       1,295       1,380       3,104       1,981       2,549  
Software expense
    11       21       78       123       888       541       712  
Professional dues and memberships
    15       15       48       187       773       566       565  
Write-off of deferred initial public offering costs
                            1,897              
Change in fair value of convertible preferred stock embedded derivative(2)
                61,732       165,280       (181,782 )     (170,279 )     40,820  
Impairment of intangible assets
                165                          
Other
    477       155       3,085       (627 )     1,424       1,041       1,091  
                                                         
Total
    11,581       23,789       110,823       232,374       (78,496 )     (94,553 )     122,942  
                                                         
INCOME/(LOSS) BEFORE INCOME TAX EXPENSE AND EQUITY IN EARNINGS OF EQUITY METHOD INVESTMENT
    10,632       14,092       (40,396 )     (113,036 )     266,596       225,891       (9,111 )
Income tax expense
    3,504       5,881       9,063       21,615       34,977       24,040       11,423  
Equity in earnings of equity method investment
          (3 )     (43 )           (214 )     (80 )      
                                                         
NET INCOME/(LOSS)
    7,128       8,208       (49,502 )     (134,651 )     231,405       201,771       (20,534 )
                                                         
Net income/(loss) applicable to noncontrolling interest
                            (21 )           (15 )
                                                         
Net income/(loss) applicable to GAIN Capital Holdings, Inc. 
  $ 7,128     $ 8,208     $ (49,502 )   $ (134,651 )   $ 231,426     $ 201,771     $ (20,519 )
                                                         
Effect of redemption of preferred shares
                (39,006 )           (63,913 )     (63,913 )      
Effect of preferred share accretion
    (2,892 )     (63 )     2,205                          
                                                         
Net income/(loss) applicable to GAIN Capital Holdings, Inc. common shareholders
  $ 4,236     $ 8,145     $ (86,303 )   $ (134,651 )   $ 167,513     $ 137,858     $ (20,519 )
                                                         
Earnings/(loss) per common share:
                                                       
Basic
  $ 0.95     $ 1.96     $ (30.90 )   $ (70.89 )   $ 130.12     $ 107.06     $ (15.71 )
                                                         
Diluted
  $ 0.27     $ 0.49     $ (30.90 )   $ (70.89 )   $ 11.17     $ 9.18     $ (15.71 )
                                                         
Weighted average common shares outstanding used in computing earnings/(loss) per common share:
                                                       
Basic
    4,445,869       4,157,464       2,792,895       1,899,386       1,287,360       1,287,650       1,306,265  
                                                         
Diluted
    15,838,150       16,634,016       2,792,895       1,899,386       15,002,277       15,019,396       1,306,265  
                                                         
Pro forma (unaudited)(3)
                                                       
Pro forma earnings/(loss) per common share:
                                                       
Basic
                                  $ 38.56             $ 15.54  
                                                         
Diluted
                                  $ 3.31             $ 1.36  
                                                         
Pro forma weighted average common shares outstanding used in computing pro forma earnings/(loss) per common share:
                                                       
Basic
                                    1,287,360               1,306,265  
                                                         
Diluted
                                    15,002,277               14,932,401  
                                                         
 
 
(1) For each of the periods indicated, in accordance with Statement of Financial Accounting Standards, or SFAS, No. 133, we accounted for an embedded derivative liability attributable to the redemption feature of our outstanding preferred stock. This redemption feature and the associated embedded derivative liability will no longer be required to be recognized upon conversion of our preferred stock in connection with the completion of this offering. See “Prospectus Summary-Reconciliation of Net Income/(Loss) to Adjusted Net Income.”
 
(footnotes continued on following page)


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(2) These amounts do not include the impact of the embedded derivative liability of approximately $8.7 million (unaudited) and $37.6 million (unaudited) as of December 31, 2004 and 2005, respectively, and the change in fair value for the years ended December 31, 2004 and 2005 of $6.0 million (unaudited) and $28.8 million (unaudited), respectively.
 
(3) These amounts do not include the impact of the change in fair value of our convertible, redeemable preferred stock embedded derivative, the effect of redemption of preferred shares and the effect of preferred share accretion. For the year ended December 31, 2008, the change in fair value resulted in a gain of $181.8 million and for the nine months ended September 30, 2009 the change in fair value resulted in a loss of $40.8 million.
 
                                                                 
                Pro Forma
 
    As of December 31,     As of September 30,     As of September 30,  
    2004     2005     2006     2007     2008     2008     2009     2009  
    (in thousands unless otherwise stated)  
 
Consolidated Statements of Financial Condition Data:
                                                               
Cash and cash equivalents
  $ 18,188     $ 22,482     $ 31,476     $ 98,894     $ 176,431     $ 160,195     $ 197,938     $             
Receivables from brokers
  $ 36,383     $ 59,080     $ 71,750     $ 74,630     $ 75,817     $ 94,196     $ 100,171     $    
Total assets
  $ 56,084     $ 82,661     $ 113,491     $ 180,628     $ 264,816     $ 272,096     $ 315,710     $    
Payables to brokers, dealers, FCMs, and other regulated entities
  $ 6,037     $ 4,577     $ 5,248     $ 2,163     $ 1,679     $ 1,560     $ 1,732     $    
Payables to customers
  $ 29,451     $ 50,031     $ 70,321     $ 106,741     $ 122,293     $ 152,042     $ 168,266     $    
Convertible, redeemable preferred stock embedded derivative
              $ 99,286     $ 264,566     $ 82,785     $ 94,287     $ 123,604     $    
Notes payable
              $ 27,500     $ 49,875     $ 39,375     $ 42,000     $ 31,500     $    
Total shareholders’ equity/(deficit)
  $ 15,305     $ 23,605     $ (154,242 )   $ (316,340 )   $ (172,154 )   $ (204,362 )   $ (188,831 )   $  
 
Selected Operational Data
 
                                                         
    As of December 31,     As of September 30,  
    2004     2005     2006     2007     2008     2008     2009  
    ($ in thousands unless otherwise stated)  
 
Number of opened accounts(4):
                                                       
Total
    13,572       30,626       63,576       105,924       154,190       142,555       195,559  
China
    751       3,202       8,395       19,869       27,358       27,309       27,362  
Number of tradable accounts:
                                                       
Total
    5,022       11,761       27,836       41,120       36,744       41,145       47,374  
China
    420       1,631       4,799       9,702       2,839       9,165       8  
Adjusted net capital in excess of regulatory requirements(5)
  $ 13,509     $ 20,065     $ 15,296     $ 44,856     $ 98,571     $ 70,657     $ 68,604  
 
                                                         
          Nine Months Ended
 
    Year Ended December 31,     September 30,  
    2004     2005     2006     2007     2008     2008     2009  
 
Number of traded accounts:
                                                       
Total
    6,432       13,896       28,270       43,139       52,555       45,001       43,565  
China
    642       2,416       5,533       11,568       11,647       11,403       6  
Total trading volume (dollars in billions)
                                                       
Total
  $ 120.3     $ 231.9     $ 447.4     $ 674.5     $ 1,498.6     $ 1,124.4     $ 928.3  
China
  $ 6.0     $ 24.4     $ 50.8     $ 103.4     $ 172.4     $ 143.8     $ 0.2  
Net deposits received from customers (dollars in millions):
                                                       
Total
  $ 33.5     $ 70.2     $ 102.8     $ 184.2     $ 277.3     $ 227.0     $ 186.9  
China
  $ 1.8     $ 6.8     $ 10.5     $ 26.0     $ 25.3     $ 23.5     $ (1.3 )
Revenue per million traded
  $ 176.8     $ 156.3     $ 155.3     $ 175.2     $ 124.1     $ 115.0     $ 122.6  
 
(4) Opened customer accounts represent accounts opened with us on a cumulative basis at any time since we commenced operations.
 
(5) Adjusted net capital in excess of regulatory requirements represents the excess funds over the regulatory minimum requirements as defined by the regulatory bodies that regulate our operating subsidiaries.
 
(footnotes continued on following page)


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Selected Geographic Data
 
                                                         
          Nine Months
 
    Year Ended December 31,     Ended September 30,  
    2004     2005     2006     2007     2008     2008     2009  
 
Customer trading volume by region (dollars in billions)
                                                       
U.S. 
  $ 55.4     $ 122.2     $ 238.3     $ 355.4     $ 878.9     $ 647.4     $ 506.8  
China(6)
    6.0       24.4       50.8       103.4       172.4       143.8       0.2 (7)
Canada
    4.3       9.6       29.2       58.6       122.9       91.8       122.2  
Europe, Middle East and Africa
    14.1       27.9       42.9       64.3       153.1       117.2       126.5  
Asia (ex-China)
    31.3       33.8       42.7       54.0       96.4       74.6       110.0  
Rest of World
    9.2       14.0       43.5       38.8       74.9       49.6       62.6  
                                                         
Total
  $ 120.3     $ 231.9     $ 447.4     $ 674.5     $ 1,498.6     $ 1,124.4     $ 928.3  
                                                         
 
(6) As a result of our review of our regulatory compliance in China, we decided to terminate our service offerings to residents of China and ceased our trading operations located in that country as of December 31, 2008. Accordingly, we do not expect to generate significant trading volume or related revenue from customers in China for the foreseeable future. For further information, please see “Prospectus Summary — Recent Developments”.
 
(7) For the nine months ended September 30, 2009, a small number of existing customer accounts, which were originally opened through our relationship with one of our introducing brokers prior to the termination of our service offering in China, continued to trade using our platform. The trading activity by these residual accounts resulted in the trading volume for the period. We have taken steps to close these accounts, and all have been closed as of December 31, 2009.
 
Reconciliation of Net Income/(Loss) to Adjusted Net Income
 
Our Convertible, Redeemable Preferred Stock Series A, Series B, Series C, Series D, and Series E contains a redemption feature which allows the holders of our preferred stock at any time on or after March 31, 2011, upon the written request of holders of at least a majority of the outstanding shares of preferred stock voting together as a single class, to require us to redeem all of the shares of preferred stock then outstanding. We have determined that this redemption feature effectively provides such holders with an embedded option derivative meeting the definition of an “embedded derivative” pursuant to Statement of Financial Accounting Standards, or SFAS, No. 133, Accounting for Derivative Instruments and Hedging Activities. Consequently, the embedded derivative must be bifurcated and accounted for separately. Because the embedded derivative in our preferred stock will no longer be applicable following conversion of our preferred stock in connection with this offering, there will be no further accounting adjustment required for change in fair value of the embedded derivative in our preferred stock. This redemption feature and related accounting treatment will no longer be applicable upon conversion of our preferred stock in connection with our initial public offering. Historically, in accordance with SFAS No. 133, we have adjusted the carrying value of the embedded derivative to the fair value of our company at each reporting date, based upon the Black-Scholes options pricing model, and reported the preferred stock embedded derivative liability on the Consolidated Statements of Financial Condition with change in fair value recorded in our Consolidated Statements of Operations and Comprehensive Income. This has impacted our net income but has not affected our cash flow generation or operating performance. This accounting treatment causes our earnings to fluctuate, but in our view does not reflect operating or future performance of our company. We further discuss the accounting for the embedded derivative in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates — Fair Value Derivative Liabilities.”
 
To reconcile between our net income/(loss) and adjusted net income, we use a financial measure not calculated in accordance with GAAP. Adjusted net income is a non-GAAP financial measure and represents our net income/(loss) excluding the change in fair value of the embedded derivative in our preferred stock.
 


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          Nine Months Ended
 
    Year Ended December 31,     September 30,  
    2006     2007     2008     2008     2009  
 
Net (loss)/income applicable to GAIN Capital Holdings, Inc. 
  $ (49,502 )   $ (134,651 )   $ 231,426     $ 201,771     $ (20,519 )
Change in fair value of convertible preferred stock embedded derivative
    61,732       165,280       (181,782 )     (170,279 )     40,820  
                                         
Adjusted net income
  $ 12,230     $ 30,629     $ 49,644     $ 31,492     $ 20,301  
                                         
Adjusted earnings per common share
                                       
Basic
  $ 4.38     $ 16.13     $ 38.56     $ 24.46     $ 15.54  
                                         
Diluted
  $ 0.79     $ 2.05     $ 3.31     $ 2.10     $ 1.36  
                                         
 
We believe our reporting of adjusted net income and adjusted earnings per common share better assists investors in evaluating our operating performance. We also believe adjusted net income and adjusted earnings per common share give investors a presentation of our operating performance in prior periods that more accurately reflects how we will be reporting our operating performance in future periods. However, adjusted net income and adjusted earnings per common share are not a measure of financial performance under GAAP and such measures should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with GAAP, such as net income/(loss) and earnings per common share.
 
                 
    As of September 30, 2009  
    Actual     Pro Forma  
    (in thousands)  
 
Consolidated Statement of Financial Condition Data:
               
Cash and cash equivalents
  $ 197,938          
Total assets
  $ 315,710          
Notes payable
  $ 31,500          
Total convertible, redeemable preferred stock
  $ 169,390          
Total shareholders’ deficit
  $ (188,831 )        
 
The Pro Forma financial information gives effect to the -for-1 stock split of our common stock effected immediately prior to the completion of this offering and the conversion of all of our Series A, B, C, D, and E preferred stock into an aggregate of          shares of common stock upon the closing of this offering.
 
Our stockholders are selling all of the shares of our common stock offered by this prospectus. We are not selling any shares in this offering and will not receive any of the proceeds from the sale of shares by the selling stockholders.

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RISK FACTORS
 
Investing in our common stock involves a substantial risk. You should consider carefully the following risks and other information in this prospectus, including our consolidated financial statements and related notes, before deciding whether to invest in our common stock. If any of the events highlighted in the following risks actually occurs, our business, results of operations or financial condition would likely suffer. In such an event, the trading price of our common stock could decline and you could lose all or part of your investment.
 
Risks Related to Our Business
 
The retail foreign exchange, or forex, market has only recently become accessible to retail investors and, accordingly, we have a limited operating history upon which to evaluate our performance.
 
The retail forex market has only recently become accessible to retail investors. Prior to 1996, retail investors generally did not directly trade in the forex market and, we believe most current retail forex traders only recently viewed currency trading as an alternative investment class. We commenced doing business in October 1999. Our forex trading operations were launched in June 2000, at which time we began offering forex trading services domestically and internationally. Accordingly, we have only a limited operating history in a relatively new international retail forex trading market upon which you can evaluate our prospects and future performance. Our prospects may be materially adversely affected by the risks, expenses and difficulties frequently encountered in the operation of a new business in a rapidly evolving industry characterized by intense competition and evolving regulatory oversight and rules.
 
Our revenue and profitability are influenced by trading volume and currency volatility, which are directly impacted by domestic and international market and economic conditions that are beyond our control.
 
In the past two years, there has been significant disruption and volatility in the global financial markets and economic conditions, and many countries, including the United States, are currently in recession. Our revenue is influenced by the general level of trading activity in the forex market. Our revenue and operating results may vary significantly from period to period due primarily to movements and trends in the world’s currency markets and to fluctuations in trading levels. We have generally experienced greater trading volume in periods of volatile currency markets. In the event we experience lower levels of currency volatility, our revenue and profitability will likely be negatively affected. Like other financial services firms, our business and profitability are directly affected by elements that are beyond our control, such as economic and political conditions, broad trends in business and finance, changes in the volume of foreign currency transactions, changes in supply and demand for currencies, movements in currency exchange rates, changes in the financial strength of market participants, legislative and regulatory changes, changes in the markets in which such transactions occur, changes in how such transactions are processed and disruptions due to terrorism, war or extreme weather events. Any one or more of these factors, or other factors, may adversely affect our business and results of operations and cash flows. A weakness in equity markets, such as the current economic slowdown causing a reduction in trading volume in U.S. or foreign securities and derivatives, could result in reduced trading activity in the forex market and therefore could have a material adverse effect on our business, financial condition and results of operations and cash flows. As a result, period to period comparisons of our operating results may not be meaningful and our future operating results may be subject to significant fluctuations or declines.
 
Reduced spreads in foreign currencies, levels of trading activity and trading through alternative trading systems could harm our business.
 
Computer-generated buy and sell programs and other technological advances and regulatory changes in the forex market may continue to tighten spreads on foreign currency transactions. Tighter spreads and increased competition could make the execution of trades and market-making activities less profitable. In addition, new and enhanced alternative trading systems have emerged as an option for individual and institutional investors to avoid directing their trades through market-makers, which could result in reduced revenue derived from our market-making business.


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Our risk management policies and procedures may not be effective and may leave us exposed to unidentified or unexpected risks.
 
We are dependent on our risk management policies and the adherence to such policies by our trading staff. Our policies, procedures and practices used to identify, monitor and control a variety of risks, including risks related to human error, customer defaults, market movements, fraud and money-laundering, are established and reviewed by the risk committee of our board of directors. Some of our methods for managing risk are discretionary by nature and are based on internally developed controls and observed historical market behavior, and also involve reliance on standard industry practices. These methods may not adequately prevent losses, particularly as they relate to extreme market movements, which may be significantly greater than historical changes in market prices. Our risk management methods also may not adequately prevent losses due to technical errors if our testing and quality control practices are not effective in preventing software or hardware failures. In addition, we may elect to adjust our risk management policies to allow for an increase in risk tolerance, which could expose us to the risk of greater losses. Our risk management methods rely on a combination of technical and human controls and supervision that are subject to error and failure. These methods may not protect us against all risks or may protect us less than anticipated, in which case our business, financial condition and results of operations and cash flows may be materially adversely affected.
 
We may incur material trading losses from our market-making activities.
 
A substantial portion of our revenue and operating profits is derived from our role as a market-maker. In our role as a market-maker, we attempt to derive a profit from the difference between the prices at which we buy and sell, or sell and buy, foreign currencies. Since these activities involve the purchase or sale of foreign currencies for our own account, we may incur trading losses for a variety of reasons, including:
 
  •  price changes in foreign currencies;
 
  •  lack of liquidity in foreign currencies in which we have positions; and
 
  •  inaccuracies in our proprietary pricing mechanism, or rate engine, which evaluates, monitors and assimilates market data and reevaluates our outstanding currency quotes, and is designed to publish prices reflective of prevailing market conditions throughout the trading day.
 
These risks may affect the prices at which we are able to sell or buy foreign currencies, or may limit or restrict our ability to either resell foreign currencies that we have purchased or repurchase foreign currencies that we have sold.
 
In addition, competitive forces often require us to match the breadth of quotes other market-makers display and to hold varying amounts and types of foreign currencies at any given time. By having to maintain positions in certain currencies, we are subjected to a high degree of risk. We may not be able to manage such risk successfully and may experience significant losses from such activities, which could have a material adverse effect on our business, financial condition and results of operations and cash flows.
 
We are exposed to losses due to lack of accurate or timely information.
 
As a market-maker, we provide liquidity by buying from sellers and selling to buyers. We may frequently trade with parties who have different or more timely information than we do, and as a result, we may accumulate unfavorable positions preceding price movements in currency pairs in which we are a market-maker. We refer to the two currencies that make up a forex exchange rate as a currency pair. Should the frequency or magnitude of these unfavorable positions increase, our business, financial condition and results of operations and cash flows would be materially adversely affected.


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We depend on our proprietary technology. Any disruption or corruption of our proprietary technology or our inability to maintain technological superiority in our industry could have a material adverse effect on our business, financial condition and results of operations and cash flows. We may experience failures while developing our proprietary technology.
 
We rely on our proprietary technology to receive and properly process internal and external data. Any disruption for any reason in the proper functioning, or any corruption, of our software or erroneous or corrupted data may cause us to make erroneous trades, accept customers from jurisdictions where we do not possess the proper licenses, authorizations or permits, or require us to suspend our services and could have a material adverse effect on our business, financial condition and results of operations and cash flows. In order to remain competitive, our proprietary technology is under continuous development and redesign. As we develop and redesign our proprietary technology, there is an ongoing risk that failures may occur and result in service interruptions or other negative consequences such as slower quote aggregation, slower trade execution, erroneous trades, or mistaken risk management information.
 
Our success in the past has largely been attributable to our proprietary technology that has taken many years for us to develop. We believe our proprietary technology has provided us with a competitive advantage relative to many forex market participants. If our competitors develop more advanced technologies, we may be required to devote substantial resources to the development of more advanced technology to remain competitive. The forex market is characterized by rapidly changing technology, evolving industry standards and changing trading systems, practices and techniques. We may not be able to keep up with these rapid changes in the future, develop new technology, realize a return on amounts invested in developing new technologies or remain competitive in the future.
 
Systems failures could cause interruptions in our services or decreases in the responsiveness of our services which could harm our business.
 
If our systems fail to perform, we could experience disruptions in operations, slower response times or decreased customer service and customer satisfaction. Our ability to facilitate transactions successfully and provide high quality customer service depends on the efficient and uninterrupted operation of our computer and communications hardware and software systems. These systems have in the past experienced periodic interruptions and disruptions in operations, which we believe will continue to occur from time to time. Our systems also are vulnerable to damage or interruption from human error, natural disasters, power loss, telecommunication failures, break-ins, sabotage, computer viruses, intentional acts of vandalism and similar events. We do not have fully redundant capabilities. While we currently maintain a disaster recovery plan, or DRP, which is intended to minimize service interruptions and secure data integrity, our DRP may not work effectively during an emergency. Any systems failure that causes an interruption in our services or decreases the responsiveness of our services could impair our reputation, damage our brand name and materially adversely affect our business, financial condition and results of operations and cash flows.
 
Our recent move to a new principal headquarters could be disruptive to our business.
 
On August 18, 2009, we entered into a new lease agreement for office space which we are using as our new corporate headquarters. In January 2010 we substantially moved our operations into the new facility. Nevertheless, the build-out of the new facility and the move may be disruptive to our personnel and operations, and may continue to require substantial management time and attention. In addition, we could encounter delays in executing our plans, which could entail further disruption and associated costs. If these disruptions result in a decline in productivity of our personnel, negative impacts on operations such as service and support, or if the move is delayed for any reason or we experience unanticipated expenses associated with the move, our business and operating results may be harmed.
 
We may not be able to protect our intellectual property rights or may be prevented from using intellectual property necessary for our business.
 
We rely on a combination of trademark, copyright, trade secret and fair business practice laws in the United States and other jurisdictions to protect our proprietary technology, intellectual property rights and our


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brand. We also enter into confidentiality and invention assignment agreements with our employees and consultants, and confidentiality agreements with other third parties. We also rigorously control access to proprietary technology. We do not have any patents. It is possible that third parties may copy or otherwise obtain and use our proprietary technology without authorization or otherwise infringe on our rights. We may also face claims of infringement that could interfere with our ability to use technology that is material to our business operations.
 
In the future, we may have to rely on litigation to enforce our intellectual property rights, protect our trade secrets, determine the validity and scope of the proprietary rights of others or defend against claims of infringement or invalidity. Any such litigation, whether successful or unsuccessful, could result in substantial costs and the diversion of resources and the attention of management, any of which could negatively affect our business.
 
Attrition of customer accounts and failure to attract new accounts could have a material adverse effect on our business, financial condition and results of operations and cash flows. Even if we do attract new customers, we may fail to attract the customers in a cost-effective manner, which could materially adversely affect our profitability and growth.
 
Our customer base is primarily comprised of individual retail customers who generally trade in the forex market with us for short periods. Although we offer products and tailored services designed to educate, support and retain our customers, our efforts to attract new customers or reduce the attrition rate of our existing customers may not be successful. If we are unable to maintain or increase our customer retention rates or generate a substantial number of new customers in a cost-effective manner, our business, financial condition and results of operations and cash flows would likely be adversely affected. For the year ended December 31, 2008, we incurred sales and marketing expenses of $29.3 million. Although we have spent significant financial resources on sales and marketing expenses and related expenses and plan to continue to do so, these efforts may not be cost-effective at attracting new customers. In particular, we believe that rates for desirable advertising and marketing placements, including online, search engine, print and television advertising, are likely to increase in the foreseeable future, and we may be disadvantaged relative to our larger competitors in our ability to expand or maintain our advertising and marketing commitments. Additionally, our sales and marketing methods are subject to regulation by the Commodity Futures Trading Commission, or CFTC, and National Futures Association, or NFA. The rules and regulations of these organizations impose specific limitations on our sales methods, advertising and marketing. If we do not achieve our advertising objectives, our profitability and growth may be materially adversely affected.
 
We are subject to litigation risk which could adversely affect our reputation, business, financial condition and results of operations and cash flows.
 
Many aspects of our business involve risks that expose us to liability under U.S. federal and state laws, as well as the rules and enforcement efforts of our regulators and self-regulatory organizations worldwide. These risks include, among others, disputes over trade terms with customers and other market participants, customer losses resulting from system delay or failure and customer claims that we or our employees executed unauthorized transactions, made materially false or misleading statements or lost or diverted customer assets in our custody. We may also be subject to regulatory investigation and enforcement actions seeking to impose significant fines or other sanctions, which in turn could trigger civil litigation for our previous operations that may be deemed to have violated applicable rules and regulations in various jurisdictions.
 
The volume of claims and the amount of damages and fines claimed in litigation and regulatory proceedings against financial services firms has been increasing, particularly in the current environment. The amounts involved in the trades we execute, together with rapid price movements in our currency pairs, can result in potentially large damage claims in any litigation resulting from such trades. Dissatisfied customers may make claims against us regarding the quality of trade execution, improperly settled trades, mismanagement or even fraud, and these claims may increase as our business expands.
 
Litigation may also arise from disputes over the exercise of our rights with respect to customer accounts and collateral. Although our customer agreements generally provide that we may exercise such rights with respect to customer accounts and collateral as we deem reasonably necessary for our protection, our exercise of these rights may lead to claims by customers that we did so improperly.


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Even if we prevail in any litigation or enforcement proceedings against us, we could incur significant legal expenses defending against the claims, even those without merit. Moreover, because even claims without merit can damage our reputation or raise concerns among our customers, we may feel compelled to settle claims at significant cost. The initiation of any claim, proceeding or investigation against us, or an adverse resolution of any such matter could have a material adverse effect on our reputation, business, financial condition and results of operations and cash flows.
 
We may be subject to customer litigation, financial losses, regulatory sanctions and harm to our reputation as a result of employee misconduct or errors that are difficult to detect and deter.
 
There have been a number of highly publicized cases involving fraud or other misconduct by employees of financial services firms in recent years. Our employees could execute unauthorized transactions for our customers, use customer assets improperly or without authorization, carry out improper activities on behalf of customers or use confidential customer or company information for personal or other improper purposes, as well as misrecord or otherwise try to hide improper activities from us.
 
In addition, employee errors, including mistakes in executing, recording or reporting transactions for customers, may cause us to enter into transactions that customers disavow and refuse to settle. Employee errors expose us to the risk of material losses until the errors are detected and the transactions are unwound or reversed. The risk of employee error or miscommunication may be greater for products that are new or have non-standardized terms. Further, such errors may be more likely to occur in the aftermath of any acquisitions during the integration of or migration from technological systems.
 
Misconduct by our employees or former employees could subject us to financial losses or regulatory sanctions and seriously harm our reputation. It may not be possible to deter or detect employee misconduct and the precautions we take to prevent and detect this activity may not be effective in all cases. Our employees may also commit good faith errors that could subject us to financial claims for negligence or otherwise, as well as regulatory actions.
 
Misconduct by employees of our customers can also expose us to claims for financial losses or regulatory proceedings when it is alleged we or our employees knew or should have known that an employee of our customer was not authorized to undertake certain transactions. Dissatisfied customers can make claims against us, including claims for negligence, fraud, unauthorized trading, failure to supervise, breach of fiduciary duty, employee errors, intentional misconduct, unauthorized transactions by associated persons and failures in the processing of transactions.
 
Any restriction in the availability of credit cards as a payment option for our customers could adversely affect our business, financial condition and results of operations and cash flows.
 
We currently allow our customers to use credit cards to fund their accounts with us and 78.5% of our customers elected to fund their accounts in this manner during 2008. There is a risk that in the future, new regulations or credit card issuing institutions may restrict the use of credit and debit cards as a means to fund accounts used to trade in investment products. The elimination or a reduction in the availability of credit cards as a means to fund customer accounts, particularly for our customers outside the United States, could have a material adverse effect on our business, financial condition and results of operations and cash flows.
 
Our customer accounts may be vulnerable to identity theft and credit card fraud.
 
Credit card issuers have adopted credit card security guidelines as part of their ongoing efforts to prevent identity theft and credit card fraud. We continue to work with credit card issuers to ensure that our services, including customer account maintenance, comply with these rules. There can be no assurances, however, that our services are fully protected from unauthorized access or hacking. When there is unauthorized access to credit card data that results in financial loss, there is the potential that we could experience reputational damage and parties could seek damages from us.


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In the current environment facing financial services firms, a firm’s reputation is critically important. If our reputation is harmed, or the reputation of the online financial services industry as a whole is harmed, our business, financial condition and results of operations and cash flows may be materially adversely affected.
 
Our ability to attract and retain customers and employees may be adversely affected if our reputation is damaged. If we fail, or appear to fail, to deal with issues that may give rise to reputation risk, we could harm our business prospects. These issues include, but are not limited to, appropriately dealing with potential conflicts of interest, legal and regulatory requirements, ethical issues, money-laundering, privacy, client data protection, record-keeping, sales and trading practices, and the proper identification of the legal, credit, liquidity, and market risks inherent in our business. Failure to appropriately address these issues could also give rise to additional legal risk to us, which could, in turn, increase the size and number of claims and damages asserted against us or subject us to regulatory enforcement actions, fines and penalties. Any such sanction would materially adversely affect our reputation, thereby reducing our ability to attract and retain customers and employees.
 
In addition, our ability to attract and retain customers may be adversely affected if the reputation of the online financial services industry as a whole or forex industry is damaged. In recent years, a number of financial services firms have suffered significant damage to their reputations from highly publicized incidents that in turn resulted in significant and in some cases irreparable harm to their business. The perception of instability within the online financial services industry could materially adversely affect our ability to attract and retain customers.
 
The loss of our key employees would materially adversely affect our business, including our ability to grow our business.
 
Our key employees, including Glenn Stevens, our chief executive officer, and Alexander Bobinski, our executive vice president, operations, have significant experience in the forex industry and have made significant contributions to our business. Henry Lyons, our chief financial officer, has significant experience with publicly-traded companies and has made significant contributions to our company. In addition, Timothy O’Sullivan, our chief dealer, and Andrew Haines, our chief information officer, have made significant contributions to our business. Our continued success is dependent upon the retention of these and other key executive officers and employees, as well as the services provided by our trading staff, technology and programming specialists and a number of other key managerial, marketing, planning, financial, technical and operations personnel. The loss of such key personnel could have a material adverse effect on our business. In addition, our ability to grow our business is dependent, to a large degree, on our ability to retain such employees. Currently, we have entered into an employment agreement with Mr. Stevens which will continue, unless earlier terminated by the parties, until December 31, 2010. The term of Mr. Stevens’ agreement will be automatically extended for an additional one-year period unless terminated. Our employment of Mr. Lyons, Mr. Bobinski, Mr. O’Sullivan, Mr. Haines and Ms. Roady is “at will” and not for any specified period of time.
 
Any future acquisitions may result in significant transaction expenses, integration and consolidation risks and risks associated with entering new markets, and we may be unable to profitably operate our consolidated company.
 
Although our growth strategy has not focused historically on acquisitions, we may in the future selectively pursue acquisitions and new businesses. Any future acquisitions may result in significant transaction expenses and present new risks associated with entering additional markets or offering new products and integrating the acquired companies. Because acquisitions historically have not been a core part of our growth strategy, we do not have significant experience in successfully completing acquisitions. We may not have sufficient management, financial and other resources to integrate companies we acquire or to successfully operate new businesses and we may be unable to profitably operate our expanded company. Additionally, any new businesses that we may acquire, once integrated with our existing operations, may not produce expected or intended results.


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The planned expansion of our market-making and brokerage activities into other financial products, including listed securities, contracts for difference, or CFDs, over-the-counter, or OTC, currency derivatives and gold and silver spot trading entails significant risk, and unforeseen events in such business could have an adverse effect on our business, financial condition and results of operation.
 
All of the risks that pertain to our market-making activities in the forex market will also apply if we expand our product offering to include listed securities, CFDs, OTC currency derivatives market-making and gold and silver spot trading. These risks include market risk, counterparty risk, liquidity risk, technology risk, third party risk and risk of human error. In addition, we have very little experience outside of the forex market and even though we expect to ease into these activities very slowly through internal growth or acquisition, any kind of unexpected event can occur that can result in great financial loss to us, including our inability to effectively integrate new products into our existing trading platform or our failure to properly manage the market risks associated with making-markets for new products. With respect to CFDs, the volatility characteristics of the CFD market may have an adverse impact on our ability to maintain profit margins similar to the profit margins we have realized with respect to forex trading. In addition, by further expanding our listed securities offerings, we are expanding from what is primarily a market-making business model into a business model that includes brokerage activities that require reliance upon third party clearing firms to hold our customers’ funds and execute our customers’ trades. The introduction of these and other potential financial products also poses a risk that our risk management policies, procedures and practices, and the technology that supports such activities, will be unable to effectively manage these new risks to our business. Failure to effectively manage such risks may have a material adverse effect upon our business, financial condition and results of operations and cash flows.
 
We may be unable to effectively manage our rapid growth and retain our customers.
 
The rapid growth of our business during our short history has placed significant demands on our management and other resources. If our business continues to grow at a rate consistent with our historical growth, we may need to expand and upgrade the reliability and scalability of our transaction processing systems, network infrastructure and other aspects of our proprietary technology. We may not be able to expand and upgrade our technology systems and infrastructure to accommodate increases in our business activity in a timely manner, which could lead to operational breakdowns and delays, loss of customers, a reduction in the growth of our customer base, increased operating expenses, financial losses, increased litigation or customer claims, regulatory sanctions or increased regulatory scrutiny.
 
In addition, due to our rapid growth, we will need to continue to attract, hire and retain highly skilled and motivated officers and employees. We may not be able to attract or retain the officers and employees necessary to manage this growth effectively.
 
We may be unable to respond to customers’ demands for new services and products and our business, financial condition and results of operations and cash flows may be materially adversely affected.
 
The market for Internet-based forex trading is characterized by:
 
  •  changing customer demands;
 
  •  the need to enhance existing services and products or introduce new services and products; and
 
  •  evolving industry practices.
 
New services and products provided by our competitors may render our existing services and products less competitive. Our future success will depend, in part, on our ability to respond to customers’ demands for new services and products on a timely and cost-effective basis and to adapt to address the increasingly sophisticated requirements and varied needs of our customers and prospective customers. We may not be successful in developing, introducing or marketing new services and products. In addition, our new service and product enhancements may not achieve market acceptance. Any failure on our part to anticipate or respond adequately to customer requirements or changing industry practices, or any significant delays in the development, introduction or availability of new services, products or service or product enhancements could have a material adverse effect on our business, financial condition and results of operations and cash flows.


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We face significant competition. Many of our competitors and potential competitors have larger customer bases, more established name recognition and greater financial, marketing, technological and personnel resources than we do which could put us at a competitive disadvantage. Additionally, some of our competitors and many potential competitors are better capitalized than we are, and able to obtain capital more easily which could put us at a competitive disadvantage.
 
We compete in the forex market based on our ability to execute our customers’ trades at competitive prices, to retain our existing customers and to attract new customers. Our competitors range from numerous sole proprietors with limited resources to a few sophisticated institutions which have larger customer bases, more established name recognition and substantially greater financial, marketing, technological and personnel resources than we do. These advantages may enable them, among other things, to:
 
  •  develop products and services that are similar to ours, or that are more attractive to customers than ours, in one or more of our markets;
 
  •  provide products and services we do not offer;
 
  •  provide execution and clearing services that are more rapid, reliable or efficient, or less expensive than ours;
 
  •  offer products and services at prices below ours to gain market share and to promote other businesses, such as forex options listed securities, CFDs, spot-precious metals and OTC derivatives;
 
  •  adapt at a faster rate to market conditions, new technologies and customer demands;
 
  •  offer better, faster and more reliable technology;
 
  •  outbid us for desirable acquisition targets;
 
  •  more efficiently engage in and expand existing relationships with strategic alliances;
 
  •  market, promote and sell their products and services more effectively; and
 
  •  develop stronger relationships with customers.
 
These larger and better capitalized competitors, including commercial and investment banking firms, may have access to capital in greater amounts and at lower costs than we do and thus, may be better able to respond to changes in the forex industry, to compete for skilled professionals, to finance acquisitions, to fund internal growth and to compete for market share generally. Access to capital is critical to our business to satisfy regulatory obligations and liquidity requirements. Among other things, access to capital determines our creditworthiness, which if perceived negatively in the market could materially impair our ability to provide clearing services and attract customer assets, both of which are important sources of revenue. Access to capital also determines the degree to which we can expand our operations. Thus, if we are unable to maintain or increase our capital on competitive terms, we could be at a significant competitive disadvantage, and our ability to maintain or increase our revenue and earnings could be materially impaired. Also, new or existing competitors in our markets could make it difficult for us to maintain our current market share or increase it in desirable markets. In addition, our competitors could offer their services at lower prices, and we may be required to reduce our fees significantly to remain competitive. A fee reduction without a commensurate reduction in expenses would decrease our profitability. We may not be able to compete effectively against these firms, particularly those with greater financial resources, and our failure to do so could materially and adversely affect our business, financial condition and results of operations and cash flows. We may in the future face increased competition, resulting in narrowing bid/offer spreads which could materially adversely affect our business, financial condition and results of operations and cash flows.
 
If we are unable to effectively compete in emerging international markets, either directly or through joint ventures with local firms, the future growth of our business may be adversely affected.
 
We regard emerging international markets as an important area of potential growth for our business. Due to cultural, regulatory and other factors relevant to those markets, however, we may be at a competitive disadvantage in those regions relative to local firms or to international firms that have a well established local presence. In some regions, we may need to enter into joint ventures with local firms in order to establish a presence in the local market,


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and we may face intense competition from other international firms over relatively scarce opportunities for market entry. Given the intense competition from other international brokers that are also seeking to enter these fast-growing markets, we may have difficulty finding suitable local firms willing to enter into the kinds of relationships with us that we may need to gain access to these markets. This competition could make it difficult for us to expand our business internationally as planned.
 
Our international operations present special challenges and our failure to adequately address such challenges could have a material adverse effect on our business, financial condition and results of operations and cash flows.
 
In 2008, we generated approximately 41.4% of our forex trading volume from customers outside the United States, which includes 11.5% from customers residing in China. Expanding our business in other emerging markets is an important part of our growth strategy. We face significant risks in doing business in international markets, particularly in developing regions. These business, legal and tax risks include:
 
  •  less developed or mature local technological infrastructure and higher costs, which could make our products and services less attractive or accessible in emerging markets;
 
  •  difficulty in complying with the diverse regulatory requirements of multiple jurisdictions, which may be more burdensome, not clearly defined, and subject to unexpected changes, potentially exposing us to significant compliance costs and regulatory penalties;
 
  •  less developed and established local financial and banking infrastructure, which could make our products and services less accessible in emerging markets;
 
  •  reduced protection of intellectual property rights;
 
  •  inability to enforce contracts in some jurisdictions;
 
  •  difficulties and costs associated with staffing and managing foreign operations, including reliance on newly hired local personnel;
 
  •  tariffs and other trade barriers;
 
  •  currency and tax laws that may prevent or restrict the transfer of capital and profits among our various operations around the world; and
 
  •  time zone, language and cultural differences among personnel in different areas of the world.
 
In addition, in order to be competitive in these local markets, or in some cases because of restrictions on the ability of foreign firms to do business locally, we may seek to operate through joint ventures with local firms as we have done, for example, in Japan. Doing business through joint ventures may limit our ability to control the conduct of the business and could expose us to reputational and greater operational risks.
 
As a result of our review of our regulatory compliance in China, we ceased offering our forex trading services to new and existing China customers as of December 31, 2008. We cannot provide any assurances that we will be able to resume providing our trading services to China residents.
 
The China Banking Regulatory Commission, or CBRC, a Chinese regulatory body, prohibits foreign firms and banking institutions from providing forex trading services to residents of China without a permit. We do not have, and may not be able to obtain, such a permit. In light of these developments, we ceased all service offerings to residents of China. We no longer market to or accept new customers resident in China and no longer provide forex trading services to pre-existing China customers, except to eight immaterial legacy customer accounts (as of September 30, 2009), which were originally opened through our relationship with one of our introducing brokers prior to the termination of our service offerings in China. We have taken steps to close these accounts, and all have been closed as of December 31, 2009. We cannot provide any assurances that we will be able to resume our trading operations in China. To our knowledge, the Chinese government has never issued a permit to any foreign company to allow such foreign company to conduct online forex trading services to residents of China.


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The cessation of our trading operations in China and the termination of our services to residents of China may have a negative impact on our international expansion, which is one of our key growth strategies.
 
Historically, a significant portion of our trading volume, trading revenue, and net income in recent periods have been generated from residents of China. As a result of the cessation of our trading operations in China and the termination of our services to residents of China, we will not generate any trading volume or related revenue from customers in China until such time that we obtain the necessary permits, licenses or approvals from the applicable Chinese regulators. We cannot provide any assurances as to whether, and if so, to what extent, these developments would trigger investigations by regulatory bodies in other jurisdictions where we operate. All of these issues, individually or together may have a material adverse effect on our business, financial condition and results of operations and cash flows.
 
The Canadian regulatory environment is complex and evolving, and our forex trading services may not be compliant with the regulations of all provinces and territories in Canada. If we are deemed to have violated local regulations, or if local regulators so require, we may need to register our business in one or more provinces or territories, or offer our trading services through white label partners. Any such new white label partnership could negatively impact our profitability because we would have to share a portion of our revenue with the white label partner.
 
Approximately 13.2% of our customer trading volume for the nine months ended September 30, 2009 was generated from customers located in Canada, with more than half of such volume generated from accounts in the Province of Ontario. In Canada, the securities industry is governed locally by provincial or territorial legislation, and there is no national regulator. Local legislation differs from province to province and territory to territory. We have previously determined that the provincial laws of British Columbia would require us to register as a dealer to offer our trading services directly, so we have conducted our business in British Columbia through Questrade, Inc., a registered investment dealer in Canada, since December 1, 2004. In other provinces and territories in Canada, where we conduct the bulk of our Canadian business, we provide our services directly from our U.S. facilities, without registering as a dealer.
 
The Canadian regulatory environment is complex and evolving, and we cannot be certain that our forex trading services are currently compliant with the regulations of each province and territory outside British Columbia. Moreover, local regulators in one or more provinces or territories may in the future announce that forex trading services must be carried out through a registered dealer. For example, on October 30, 2009, the Ontario Securities Commission issued interim guidance pursuant to a staff notice which took the position that rolling spot foreign exchange contracts and similar over-the-counter derivative contracts fall under the definition of securities, which would, absent exemptive relief, require, among other things, us to comply with the dealer registration and prospectus delivery requirements of Ontario securities law. Accordingly, we intend to seek exemptive relief from these requirements. If we are unsuccessful, we may seek to offer our services in the affected province or territory through a white label partnership with a registered dealer, or seek to register as a dealer in order to offer our trading services directly. In a province or territory where we need to enter into a white label partnership, our profitability would decrease significantly because we would have to share a portion of the revenue generated from customers in that province or territory with the white label partner. In addition to the potential adverse effect on our results of operations as a result of a need to enter into white label partnerships for our business in Canada, we may also be subject to enforcement actions and penalties or customer claims in any province or territory, including Ontario despite our planned application for exemptive relief, where our forex trading operations are deemed to have violated local regulations.
 
Gain Capital Holdings, Inc. is a holding company and accordingly depends on cash flow from its operating subsidiaries to meet our obligations. If our operating subsidiaries are unable to pay us dividends when needed, we may be unable to satisfy our obligations when they arise.
 
As a holding company with no material assets other than the stock of our operating subsidiaries, nearly all of our funds generated from operations are generated by our operating subsidiaries. Historically, we have accessed these funds through receipt of dividends from these subsidiaries. Some of our subsidiaries are subject to requirements of various regulatory bodies, including the Commodity Futures Trading Commission, or CFTC, and National Futures Association, or NFA, in the United States, the Financial Services Authority in the United Kingdom, the Financial Services Agency in Japan, the Securities and Futures Commission in Hong Kong and the


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Cayman Islands Monetary Authority in the Cayman Islands, relating to liquidity and capital standards, which limit funds available for the payment of dividends to the holding company. Accordingly, if our operating subsidiaries are unable, due to regulatory restrictions or otherwise, to pay us dividends and make other payments to us when needed, we may be unable to satisfy our obligations when they arise.
 
Risks Related to the Global Economic Environment
 
Our business could be adversely affected if global economic conditions continue to negatively impact our customer base.
 
Our customer base is primarily comprised of individual retail customers who view foreign currency trading as an alternative investment class. If global economic conditions continue to negatively impact the forex market or adverse developments in global economic conditions continue to limit the disposable income of our customers, our business could be materially adversely affected as our customers may choose to curtail their trading in the forex market which could result in reduced customer trading volume and trading revenue.
 
A systemic market event that impacts the various market participants with whom we interact could have a material adverse effect on our business, financial condition and results of operations and cash flows.
 
As a forex market-maker, we interact with various third parties through our relationships with our prime brokers, wholesale forex trading partners, white label partners and introducing brokers. Some of these market participants could be overleveraged. In the event of sudden, large market price movements, such market participants may not be able to meet their obligations to brokers who, in turn, may not be able to meet their obligations to their counterparties. As a result, a system collapse in the financial system could occur, which would have a material adverse effect on our business, financial condition and results of operations and cash flows.
 
A further decline in short-term interest rates could have an adverse effect on our interest income and revenues.
 
A portion of our revenue is derived from interest income. Our interest income is directly affected by the spread between the short-term interest rates we pay our customers on their balances and the short-term rates we earn from re-investing their cash. These spreads can widen or narrow when interest rates change. In addition, a portion of our interest income relates to customer balances on which we do not pay interest and therefore is directly affected by the absolute level of short-term interest rates. As a result, a portion of our interest income will decline if interest rates continue to fall, regardless of the interest rate spreads that affect the remaining portion of our interest income. Short-term interest rates are highly sensitive to factors that are beyond our control, including general economic conditions and the policies of various governmental and regulatory authorities. For the nine months ended September 30, 2009, our net interest revenue excluding the decrease of interest expense on notes payable of $0.9 million decreased $2.5 million to a $0.3 million expense compared to $2.2 million in revenue for the nine months ended September 30, 2008. This decrease was primarily due to the decline in the average effective interest rate earned on net customer deposits and investments from 1.77% for the nine months ended September 30, 2008, compared to 0.11% for the nine months ended September 30, 2009. Our interest income and revenue may be adversely affected if interest rates continue to decline.
 
Our operations in certain developing regions may be subject to the risks associated with politically unstable and less economically developed regions of the world. Trading in the currencies of these developing regions may expose our clients and the third parties with whom we interact to sudden and significant financial loss as a result of exceptionally volatile and unpredictable price movements and could negatively impact our business.
 
Our operations in some emerging markets may be subject to the political, legal and economic risks associated with politically unstable and less economically developed regions of the world, including the risks of war, insurgency, terrorism and government appropriation. For example, we do business in countries whose currencies may be less stable than those in our primary markets. Currency instability or government imposition of currency restrictions in these countries could impede our operations in the forex markets in these countries. In addition,


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emerging markets may be subject to exceptionally volatile and unpredictable price movements that can expose customers and brokers to sudden and significant financial loss. Trading in these markets may be less liquid, market participants may be less well capitalized and market oversight may be less extensive, all of which can increase trading risk, particularly in markets for derivatives, commodities and currencies. Substantial trading losses by customers or customer or counterparty defaults, or the prospect of them, in turn, can drive down trading volume and market-making revenue in these markets.
 
Risks Related to Third Parties
 
We are dependent on wholesale forex trading partners to continually provide us with forex market liquidity. In the event that we no longer have access to the prices and levels of liquidity that we currently have, we may be unable to provide competitive forex trading services, which will materially adversely affect our business, financial condition and results of operations and cash flows.
 
Given the level of our customers’ trading volume, in order to continually provide our market-making services, we rely on third party financial institutions to provide us with forex market liquidity. As of September 30, 2009, we have established trading relationships with at least nine financial institutions, including Deutsche Bank, RBS, UBS, Barclays Bank PLC, Merrill Lynch International Bank, Dresdner Bank AG, Goldman Sachs & Co., Skandinaviska Enskilda Banken AB and Man FX Clear LLC. These wholesale forex trading partners, although under contract with us, have no obligation to provide us with liquidity and may terminate our arrangements at any time. We also rely upon these third party financial institutions to provide us with competitive wholesale forex pricing spreads. In the event that we no longer have access to the competitive wholesale forex pricing spreads and/or levels of liquidity that we currently have, we may be unable to provide competitive forex trading services, which will materially adversely affect our business, financial condition and results of operations and cash flows.
 
We depend on the services of prime brokers to assist in providing us access to liquidity through our wholesale forex trading partners. The loss of one or more of our prime brokerage relationships could lead to increased transaction costs and capital posting requirements, as well as having a negative impact on our ability to verify our open positions, collateral balances and trade confirmations.
 
We depend on the services of prime brokers to assist in providing us access to liquidity through our wholesale forex trading partners. We currently have established three prime brokerage relationships with Deutsche Bank, RBS and UBS which act as central hubs through which we are able to deal with our existing wholesale forex trading partners. In return for paying a transaction-based prime brokerage fee, we are able to aggregate our customers and our trading positions, thereby reducing our transaction costs and increasing the efficiency of the capital we are required to post as collateral in order to conduct our market-making trading activities. Since we trade with our wholesale forex trading partners through our prime brokers, they also serve as a third party check on our open positions, collateral balances and trade confirmations. If we were to lose one or more of our prime brokerage relationships, we could lose this source of third party verification of our trading activity, which could lead to an increased number of record-keeping or documentation errors. Although we have relationships with wholesale forex trading partners who could provide clearing services as a back-up for our prime brokerage services, if we were to experience a disruption in prime brokerage services due to a financial, technical or other development adversely affecting any of our current prime brokers, our business could be materially adversely affected to the extent that we are unable to transfer positions and margin balances to another financial institution in a timely fashion. In the event of the insolvency of a prime broker, we might not be able to fully recover the assets we have deposited (and have deposited on behalf of our customers) with the prime broker or our unrealized profits since we will be among the prime broker’s unsecured creditors.
 
We are subject to risk of default by financial institutions that hold our funds and our customers’ funds.
 
We have significant deposits with banks and other financial institutions. Pursuant to current guidelines set forth by NFA and CFTC for our U.S.-regulated subsidiaries, we are not required to segregate customer funds from our own funds. As such, we aggregate our customers’ funds and our funds and hold them in collateral and deposit accounts at various financial institutions. In the event of insolvency of one or more of the financial institutions with whom we have deposited these funds, both us and our customers may not be able to recover our funds. Because our customers’ funds are aggregated with our own, they are not insured by the Federal Deposit Insurance Corporation.


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In any such insolvency we and our customers would rank as unsecured creditors in respect of claims to funds deposited with any such financial institution. As a result, we may be subject to claims by customers due to the loss of such funds and our business would be harmed by the loss of our funds.
 
We are subject to counterparty risk whereby defaults by parties with whom we do business can have an adverse effect on our business, financial condition and results of operations and cash flows.
 
Our forex market-making operations require a commitment of capital and involve risks of losses due to the potential failure of our customers to perform their obligations under these transactions. Our margin policy allows customers to leverage their account balances by trading notional amounts that may be significantly larger than their cash balances. We mark our customers’ accounts to market each time a currency price in their portfolio changes. While this allows us to closely monitor each customer’s exposure, it does not guarantee our ability to eliminate negative customer account balances prior to an adverse currency price change. Although we have the ability to alter our margin requirements without prior notice to our customers, this may not eliminate the risk that our access to liquidity becomes limited or market conditions, including currency price volatility and liquidity constraints, change faster than our ability to modify our margin requirements. If our customers default on their obligations, we remain financially liable for such obligations, and although these obligations are collateralized, since the value of our customers’ forex positions is subject to fluctuation as market prices change, we are subject to market risk in the liquidation of customer collateral to satisfy such obligations. In light of the current turbulence in the global economy, we face increased risk of default by our customers and other counterparties. For example, during the second half of 2008, Lehman Brothers Holdings Inc. declared bankruptcy, and many major U.S. financial institutions consolidated, were forced to merge or were put into conservatorship by the U.S. federal government, including The Bear Stearns Companies, Inc. Any liability arising from our forex operations could be significant and could have a material adverse effect on our business, financial condition and results of operations and cash flows.
 
Failure of third-party systems or third-party service and software providers upon which we rely could adversely affect our business.
 
We rely on certain third party computer systems or third party service and software providers, including trading platforms, back-office systems, Internet service providers and communications facilities. For example, for the nine months ended September 30, 2009, 24.5% of our forex trading volume was derived from trades utilizing our MetaTrader platform, a third-party trading platform we license that is popular in the international retail trading community and offers our customers a choice in trading interfaces. Additionally, we also rely on an agreement we entered into with Trading Central whereby Trading Central will provide us with investment research that we distribute to our customers. Any interruption in these third party services, or deterioration in their performance or quality, could adversely affect our business. If our arrangement with any third party is terminated, we may not be able to find an alternative systems or services provider on a timely basis or on commercially reasonable terms. This could have a material adverse effect on our business, financial condition and results of operations and cash flows.
 
Our computer infrastructure may be vulnerable to security breaches. Any such problems could jeopardize confidential information transmitted over the internet, cause interruptions in our operations or give rise to liabilities to third parties.
 
Our computer infrastructure is potentially vulnerable to physical or electronic computer break-ins, viruses and similar disruptive problems and security breaches. Any such problems or security breaches could give rise to liabilities to one or more third parties, including our customers, and disrupt our operations. A party able to circumvent our security measures could misappropriate proprietary information or customer information, jeopardize the confidential nature of information we transmit over the Internet or cause interruptions in our operations. Concerns over the security of Internet transactions and the safeguarding of confidential personal information could also inhibit the use of our systems to conduct forex transactions over the Internet. To the extent that our activities involve the storage and transmission of proprietary information and personal financial information, security breaches could expose us to a risk of financial loss, litigation and other liabilities. Our current insurance policies may not protect us against all of such losses and liabilities. Any of these events, particularly if they result in a loss of confidence in our services, could have a material adverse effect on our business, financial condition and results of operations and cash flows.


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We have relationships with introducing brokers who direct new customers to us. Failure to maintain these relationships could have a material adverse effect on our business, financial condition and results of operations and cash flows.
 
We have relationships with introducing brokers who direct new customers to us and provide marketing and other services for these customers. For example, for the nine months ended September 30, 2009, approximately 10.7% our forex trading volume was derived from Tradestation Securities, Inc., our largest introducing broker. In certain jurisdictions, we are only able to provide our services through white label partnerships. Many of our relationships with introducing brokers are non-exclusive or may be terminated by the brokers on short notice. In addition, under our agreements with introducing brokers, they have no obligation to provide us with new customers or minimum levels of transaction volume. Our failure to maintain our relationships with these introducing brokers, the failure of the introducing brokers to provide us with customers or our failure to create new relationships with introducing brokers would result in a loss of revenue, which could have a material adverse effect on our business, financial condition and results of operations and cash flows. To the extent any of our competitors offers more attractive compensation terms to one of our introducing brokers, we could lose the broker’s services or be required to increase the compensation we pay to retain the broker. In addition, we may agree to set the compensation for one or more introducing brokers at a level where, based on the transaction volume generated by customers directed to us by such brokers, it would have been more economically attractive to seek to acquire the customers directly rather than through the introducing broker. To the extent we do not enter into the most economically attractive relationships with introducing brokers, our introducing brokers terminate their relationship with us or our introducing brokers fail to provide us with customers, our business, financial condition and results of operations and cash flows would be materially, adversely affected.
 
Our relationships with our introducing brokers may also expose us to significant regulatory, reputational and other risks as we could be harmed by introducing broker misconduct or errors that are difficult to detect and deter.
 
We could be held responsible for improper conduct by our introducing brokers, even though we do not control their activities. Introducing brokers maintain customer relationships and delegate to us the responsibilities associated with forex and back-office operations. Furthermore, many of our introducing brokers operate websites, which they use to advertise our services or direct customers to us. It is difficult for us to closely monitor the contents of their websites to ensure that the statements they make in relation to our services are accurate and comply with applicable rules and regulations. Under the rules of the NFA, we are responsible for the activities of any party that solicits or introduces a customer to us unless such party is a member or associate of the NFA. As many of our introducing brokers are not members or associates of the NFA, we are responsible for any misleading statements about us made on their websites. If such misleading statements are made, we may be subject to disciplinary action by the NFA. In 2006, the NFA filed a complaint against us alleging, among other things that the NFA found misleading statements on eight such third-party websites that the NFA believed inflated the profit potential and downplayed the risk of loss of forex trading. We contested the complaint, but ultimately agreed in 2007 to settle the case with the NFA. As part of the settlement, the NFA imposed a $100,000 fine on us in connection with the website statements as well as with findings about our written procedures relating to our anti-money laundering compliance program. Although we remediated the issues identified by the NFA, we have received subsequent correspondence from the NFA about our introducing brokers’ websites and the NFA may find additional misleading statements about us on our introducing brokers’ websites, which could result in further disciplinary action by the NFA, including the imposition of restrictions on our ability to use introducing brokers. In addition to the regulations of the NFA, we may also be held responsible for the activities of our introducing brokers by international regulatory authorities in much the same way as the NFA. Any disciplinary action taken against us or any restrictions imposed on us on our ability to use introducing brokers, as a result of our relationship with such introducing brokers in the United States and abroad, could have a material adverse effect on our reputation, damage our brand name and materially adversely affect our business, financial condition and results of operations and cash flows.


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We have relationships with white label partners who direct customer trading volume to us. Failure to maintain these relationships or develop new white label partner relationships could have a material adverse effect on our business, financial condition and results of operations and cash flows.
 
We have relationships with white label partners which provide forex trading to their customers by using our trading platform and other services and therefore provide us with an additional source of revenue. Many of our relationships with white label partners are non-exclusive or may be terminated by them on short notice. In addition, our white label partners have no obligation to provide us with minimum levels of transaction volume. Our failure to maintain our relationships with these white label partners, the failure of these white label partners to continue to offer online forex trading services to their customers using our trading platform, the loss of requisite licenses by our white label partners or our inability to enter into new relationships with white label partners would result in a loss of revenue, which could have a material adverse effect on our business, financial condition and results of operations and cash flows. For the nine months ended September 30, 2009, trading volume generated through Questrade, Inc. represented approximately 1.9% of our total trading volume. Failure to maintain these relationships or failure of these white label partners to continue to offer online forex trading services would result in a significant loss of revenue to us. To the extent any of our competitors offers more attractive compensation terms to one or more of our white label partners, we could lose the white label partnership or be required to increase the compensation we pay to retain the white label partner. Our relationships with our white label partners also may expose us to significant regulatory, reputational and other risks as we could be harmed by white label partner misconduct or errors that are difficult to detect and deter. If any of our white label partners provided unsatisfactory service to their customers or are deemed to have failed to comply with applicable laws or regulations, our reputation may be harmed as a result of our affiliation with such white label partner. Any such harm to our reputation would have a material adverse effect on our business, financial condition and results of operations and cash flows.
 
Risks Related to Regulation
 
We operate in a heavily regulated environment that imposes significant compliance requirements and costs on us. Failure to comply with the rapidly evolving laws and regulations governing our forex and other business may result in regulatory agencies taking action against us, which could significantly harm our business.
 
In those jurisdictions in which we are regulated, including the United States, the United Kingdom, Japan, Singapore, Australia, Hong Kong and the Cayman Islands, we are regulated by governmental bodies and/or self-regulatory organizations. In Australia and Singapore, we are currently seeking local registration, licensing and authorization to conduct our forex trading services.
 
Many of the regulations we are governed by are intended to protect the public, our customers and the integrity of the markets, and not necessarily our shareholders. Substantially all of our operations involving the execution and clearing of transactions in foreign currencies, CFDs, gold and silver and securities are conducted through subsidiaries that are regulated by governmental bodies or self-regulatory organizations. In the United States, we are principally regulated by the CFTC, SEC, FINRA and NFA. We are also regulated in all regions by applicable regulatory authorities and the various exchanges of which we are members. For example, we are regulated by the Financial Services Authority in the U.K., or FSA, the Monetary Authority of Singapore, or MAS, the Australian Securities and Investment Commission in Australia, or ASIC, and the Securities and Futures Commission in Hong Kong, or SFC, among others. In Australia and Singapore, we are currently seeking local registration, licensing and authorization to conduct our forex trading services. In addition, we have acquired a 70.0% interest, with rights to acquire up to a 95.0% interest, in Fortune Capital Co., Ltd. (now known as GAIN Capital Japan, Co. Ltd.), a Tokyo based market maker authorized by the Financial Supervisory Authority in Japan, or Japan FSA. These regulators and self-regulatory organizations regulate the conduct of our business in many ways and conduct regular examinations of our business to monitor our compliance with these regulations. Among other things, we are subject to regulation with regard to:
 
  •  our sales practices, including our interaction with and solicitation of customers and our marketing activities;
 
  •  the custody, control and safeguarding of our customers’ assets;


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  •  account statements, record keeping and retention;
 
  •  maintaining specified minimum amounts of capital and limiting withdrawals of funds from our regulated operating subsidiaries;
 
  •  making regular financial and other reports to regulators;
 
  •  anti-money laundering practices;
 
  •  licensing for our operating subsidiaries and our employees;
 
  •  the conduct of our directors, officers, employees and affiliates; and
 
  •  supervision of our business.
 
Compliance with these regulations is complicated, time consuming and expensive. Even minor, inadvertent irregularities can potentially give rise to claims that applicable laws and regulations have been violated. Failure to comply with all potentially applicable laws and regulations could lead to fines and other penalties which could adversely affect our revenues and our ability to conduct our business as planned.
 
As we operate in many jurisdictions in a manner which does not require local registration, licensing or authorization, our growth may be limited by various restrictions and we remain at risk that we may be required to cease operations if we become subject to regulation by local government bodies.
 
In jurisdictions outside the United States in which we have no permanent establishment (which in aggregate contributed about 41.4% of our total customer volume for 2008), we seek to operate in a manner which enables us to deal with customers in the relevant jurisdiction in compliance with applicable local law but which does not require local registration, licensing or authorization from local governmental agencies or self regulatory organizations responsible for the regulation of forex transactions. We determine the nature and extent of services we can offer and the manner in which we conduct our business in such jurisdictions based on a variety of factors.
 
In such jurisdictions, we are generally restricted from:
 
  •  direct marketing to retail investors including the operation of a website specifically targeted to investors in a particular foreign jurisdiction;
 
  •  dealing with retail customers unless they can be classified as professional, sophisticated or high net worth investors; and
 
  •  maintaining a presence in a foreign jurisdiction including computer servers, bank accounts and the provision of local account process services.
 
These restrictions may limit our ability to grow our business in that jurisdiction or may result in increased overhead costs or degradation in service provision to customers in that jurisdiction. Accordingly, we currently have only a limited presence in a number of significant markets and may not be able to gain a significant presence there unless and until regulatory barriers to international firms in certain of those markets are modified. Consequently, we cannot assure you that our international expansion will continue and that we will be able to develop our business in emerging markets as we currently plan.
 
Furthermore, we are exposed to the risk that our regulatory analysis is subsequently determined by a local regulatory agency or other legitimate authority to be incorrect and that we have not been in compliance with local law. In these circumstances we are exposed to sanction by local enforcement agencies and our contracts with customers may be unenforceable. We may also be required to cease the conduct of our business with customers in the relevant jurisdiction and/or we may determine that compliance with the regulatory requirements for continuance of the business are too onerous to justify making the necessary changes to continue that business.


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Servicing customers via the internet may require us to comply with the laws and regulations of each country in which we are deemed to conduct business. Failure to comply with such laws may negatively impact our financial results.
 
Since our services are available over the Internet in foreign countries and we have customers residing in foreign countries, foreign jurisdictions may require us to qualify to do business in their country. We believe that the number of our customers residing outside of the United States will increase over time. We are required to comply with the laws and regulations of each country in which we conduct business, including laws and regulations currently in place or which may be enacted related to Internet services available to their citizens from service providers located elsewhere. Any failure to develop effective compliance and reporting systems could result in regulatory penalties in the applicable jurisdiction, which could have a material adverse effect on our business, financial condition and results of operations and cash flows.
 
Our failure to comply with regulatory requirements could subject us to sanctions and could have a material adverse effect on our business, financial condition and results of operations and cash flows.
 
Many of the laws and regulations by which we are governed grant regulators broad powers to investigate and enforce compliance with their rules and regulations and to impose penalties and other sanctions for non-compliance. Our ability to comply with all applicable laws and regulations is dependent in large part on our internal compliance function as well as our ability to attract and retain qualified compliance personnel, which we may not be able to do. If a regulator finds that we have failed to comply with applicable rules and regulations, we may be subject to censure, fines, cease-and-desist orders, suspension of our business, removal of personnel, civil litigation or other sanctions, including, in some cases, increased reporting requirements or other undertakings, revocation of our operating licenses or criminal conviction. The ensuing negative publicity, potential litigation and loss of customers could have a material adverse effect on our business, financial condition and results of operations and cash flows.
 
The regulatory environment in which we operate is subject to continual change. Changes in the regulatory environment could have a material adverse effect on our business, financial condition and results of operations and cash flows.
 
The legislative and regulatory environment in which we operate has undergone significant changes in the recent past and there may be future regulatory changes in our industry. The financial services industry in general has been subject to increasing regulatory oversight in recent years. The governmental bodies and self-regulatory organizations that regulate our business have proposed and may consider additional legislative and regulatory initiatives and may adopt new or revised laws and regulations. As a result, in the future, we may become subject to new regulations that may affect the way in which we conduct our business and may make our business less profitable. For example, a regulatory body may reduce the levels of leverage we are allowed to offer to our customers, which may adversely impact our business, financial condition and results of operations and cash flows. Changes in the interpretation or enforcement of existing laws and regulations by those entities may also adversely affect our business. For example, the NFA recently revised its rules and regulations such that, beginning November 30, 2009, all Futures Dealer Merchants must, depending upon the currencies being traded, maintain customer security deposits in notional amounts equal to between 1% and 4% of the notional amounts of currencies being traded.
 
In addition, the regulatory enforcement environment has created uncertainty with respect to certain practices or types of transactions that in the past were considered permissible and appropriate among financial services firms, but that later have been called into question or with respect to which additional regulatory requirements have been imposed. Legal or regulatory uncertainty and additional regulatory requirements could result in a loss of business. Our business via our U.K. affiliate in the European Economic Area, or EEA, is targeted for substantial growth as part of our plan to expand our international customer base. The regulation of the financial services industry in the EEA has been the subject of recent regulatory expansion, most notably the Markets in Financial Instruments Directive, or MiFID, the implementation of which was required by EEA member states by November 1, 2007. This directive extends the coverage of the existing Investment Services Directive and introduces new and more extensive requirements for most firms engaged in financial services relating to the conduct of their business and internal organization. Further regulatory measures are expected both in relation to the conduct of the financial services


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industry and in relation to capital requirements. These measures when implemented by EEA member states, including the U.K., may result in an increase in our anticipated costs of conducting our business with a corresponding reduction in anticipated profitability of the businesses we plan to develop and grow in the EEA.
 
We are required to maintain high levels of capital, which could constrain our growth and subject us to regulatory sanctions.
 
The CFTC, SEC, FINRA, NFA and other U.S. and non-U.S. regulators have stringent rules requiring that we maintain specific minimum levels of regulatory capital in our operating subsidiaries that conduct our spot foreign exchange, CFDs, gold and silver spot trading and securities business. As of December 31, 2008, on a separate company basis, we would have been required to maintain approximately $10.7 million minimum capital in the aggregate across all jurisdictions, representing a $5.2 million increase from our minimum regulatory capital requirement at December 31, 2007. Additionally, as a Futures Commission Merchant and Forex Dealer Member, we are required to maintain adjusted net capital of $20.0 million plus 5% of the amount of customer liabilities over $10.0 million. Regulators continue to evaluate and modify regulatory capital requirements from time to time in response to market events and to improve the stability of the international financial system. Additional revisions to this framework or new capital adequacy rules applicable to us may be proposed and ultimately adopted, which could further increase our minimum capital requirements in the future.
 
Even if regulators do not change existing regulations or adopt new ones, our minimum capital requirements will generally increase in proportion to the size of our business conducted by our regulated subsidiaries. As a result, we will need to increase our regulatory capital in order to expand our operations and increase our revenue, and our inability to increase our capital on a cost-efficient basis could constrain our growth. In addition, in many cases, we are not permitted to withdraw regulatory capital maintained by our subsidiaries without prior regulatory approval or notice, which could constrain our ability to allocate our capital resources most efficiently throughout our global operations. In particular, these restrictions could limit our ability to pay dividends or make other distributions on our shares and, in some cases, could adversely affect our ability to withdraw funds needed to satisfy our ongoing operating expenses, debt service and other cash needs.
 
Regulators monitor our levels of capital closely. We are required to report the amount of regulatory capital we maintain to our regulators on a regular basis, and we must report any deficiencies or material declines promptly. While we expect that our current amount of regulatory capital will be sufficient to meet anticipated short-term increases in requirements, any failure to maintain the required levels of regulatory capital, or to report any capital deficiencies or material declines in capital could result in severe sanctions, including fines, censure, restrictions on our ability to conduct business and revocation of our registrations. The imposition of one or more of these sanctions could ultimately lead to our liquidation, or the liquidation of one or more of our subsidiaries.
 
Procedures and requirements of the Patriot Act may expose us to significant costs or penalties.
 
As participants in the financial services industry, we are, and our subsidiaries are, subject to laws and regulations, including the Patriot Act of 2001, that require that they know their customers and monitor transactions for suspicious financial activities. The cost of complying with the Patriot Act and related laws and regulations is significant. We face the risk that our policies, procedures, technology and personnel directed toward complying with the Patriot Act are insufficient and that we could be subject to significant criminal and civil penalties due to noncompliance. Such penalties could have a material adverse effect on our business, financial condition and results of operations and cash flows. In 2006, the NFA filed a complaint against us alleging, among other things, that we


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had failed to develop and implement an adequate anti-money laundering program and that the NFA had found misleading statements on our introducing brokers’ websites. In our answer to the complaint, we acknowledged the deficiencies in our anti-money laundering compliance program, and we ultimately agreed to settle the entire case in 2007. As part of the settlement, the NFA imposed a $100,000 fine on us in connection with our anti-money laundering procedures as well as the NFA’s findings of misleading statements on certain of our introducing brokers’ websites. Although we remediated the issues identified by the NFA, the NFA may find additional deficiencies in our policies, procedures, technology and personnel directed toward complying with the Patriot Act, which could result in further disciplinary action by the NFA. In addition, as an online broker with customers worldwide, we may face particular difficulties in identifying our customers and monitoring their activities.
 
We may be subject to possible enforcement action and sanction for our operations in various jurisdictions, including operations which may be deemed to have violated regulations in those jurisdictions, including China. In addition, we continue to operate in certain jurisdictions where we are pursuing applicable registration.
 
We currently do not offer forex trading services to or accept new customers resident in China, except for a small number of existing customer accounts which were originally opened through our relationship with one of our introducing brokers prior to the termination of our service offering in China that continue to trade using our platform and have resulted in an immaterial amount of trading volume for us. However, we may be subject to possible enforcement action and sanction if we are determined to have previously offered such services in violation of Chinese regulations. In such a case, the CBRC may impose fines or other penalties on us. To our knowledge, current Chinese law and regulation does not specifically provide for any enforcement processes or penalties in this context. As a result, we are unable to estimate amounts of any potential fines or penalties.
 
Also, we currently provide our forex trading services through our white label partnership in British Columbia and directly in all other territories of Canada. Despite recent regulatory changes in Canada, the regulatory treatment of retail forex trading in provinces other than British Columbia and Ontario has been, and continues to be, unclear. We cannot be certain that our forex trading services are currently compliant with the regulations of all provinces and territories in Canada. If our forex trading services are deemed to have violated local regulations, or if local regulators so require, we may need to register our business in one or more provinces or territories or offer our trading services through white label partners. We are also currently seeking local registration, licensing or authorization to conduct direct forex trading activities in Australia and Singapore. We may be subject to possible enforcement action and sanction from regulators in any or all of those jurisdictions because our current and previous operations, which involve us providing forex trading services directly to customers without licenses or permits in those jurisdictions, may have violated local rules and regulations. Such sanction could be in the form of fines, suspension of business orders or other penalties.
 
Due to the evolving nature of financial regulations in certain jurisdictions of the world, our operations may be disrupted if a regulatory authority deems them inappropriate and requires us to comply with additional regulatory requirements.
 
The legislative and regulatory environment in which we operate has undergone significant changes in the recent past and there may be future regulatory changes affecting our industry. The financial services industry in general has been subject to increasing regulatory oversight in various jurisdictions throughout the world. We have benefited from recent regulatory liberalization in several emerging markets in developing regions which has enabled us to increase our presence in those markets. Our ability to continue to expand our presence in these regions, however, will depend to an important extent upon continued evolution of the regulatory environment in these several markets, and there is no assurance that favorable regulatory trends will continue. Moreover, we currently have only a limited presence in a number of significant markets and may not be able to gain a significant presence there unless and until regulatory barriers to international firms in certain of those markets are modified. Consequently, we cannot assure you that our recent success in various regions will continue or that we will be able to develop our business in emerging markets as we currently plan. To the extent current activities are deemed inappropriate, we may incur a disruption in services offered to current customers as we are forced to comply with additional regulations.


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We are subject to risks relating to potential liability under securities and commodity futures laws and may incur significant legal expenses defending ourselves against or resolving any actions or investigations relating to such laws. An adverse resolution to any such action or investigation could have an adverse effect on our business, financial condition and results of operations and cash flows.
 
We are exposed to substantial risks of liability under federal and state securities laws, federal commodity futures laws, other federal and state laws and court decisions, as well as rules and regulations promulgated by the Securities and Exchange Commission, or SEC, the CFTC, the Federal Reserve, state securities regulators, the self-regulatory organizations, or SROs, such as NFA, and other foreign regulatory agencies. We could incur significant legal expenses in defending ourselves against and resolving actions or investigations by such regulatory agencies. An adverse resolution of any future actions or investigations by such regulatory agencies against us could result in a negative perception of our company and cause the market price of our common stock to decline or otherwise have an adverse effect on our business, financial condition and results of operations and cash flows.
 
Risks Related to the Offering
 
An active trading market for our common stock may not develop, which may cause our common stock to trade at a discount from the initial offering price and make it difficult for you to sell the shares you purchase.
 
Prior to this offering, there has been no public trading market for our common stock. We cannot predict the extent to which investor interest in our company will lead to the development or maintenance of an active trading market. The initial public offering price per share of our common stock has been determined by agreement among us and the underwriters and may not be indicative of the price at which our common stock will trade in the public trading market after this offering. If an active trading market does not develop, you may have difficulty selling any shares of our common stock that you buy.
 
The market price of our common stock may be volatile, which could cause the value of your investment to decline.
 
Securities markets worldwide experience significant price and volume fluctuations. This market volatility, as well as the factors listed below, some of which are beyond our control, could affect the market price of our common stock:
 
  •  quarterly variations in our results of operations and cash flows or the results of operations and cash flows of our competitors;
 
  •  future announcements concerning us or our competitors, including the announcement of acquisitions;
 
  •  changes in government regulations or in the status of our regulatory approvals or licensure;
 
  •  public perceptions of risks associated with our services or operations;
 
  •  developments in our industry; and
 
  •  general economic, market and political conditions and other factors that may be unrelated to our operating performance or the operating performance of our competitors.
 
If securities or industry analysts do not publish research or reports about our business, if they change their recommendations regarding our common stock adversely, or if we fail to achieve analysts’ earnings estimates, the market price and trading volume of our common stock could decline.
 
The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of the analysts who cover us or our industry make unfavorable comments about our market opportunity or business, the market price of our common stock would likely decline. If one or more of these analysts ceases coverage of us or fails to regularly publish reports on us, we could lose visibility in the financial markets, which could cause the market price of our common stock or trading


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volume to decline. On our part, if we fail to achieve analysts’ earnings estimates, the market price of our common stock would also likely decline.
 
Because we do not intend to pay dividends for the foreseeable future, investors in the offering will benefit from their investment in shares only if our common stock appreciates in value.
 
We currently intend to retain our future earnings, if any, to finance the operation and growth of our business and do not expect to pay any dividends in the foreseeable future. As a result, the success of an investment in our common stock will depend upon any future appreciation in its value. Our common stock may not appreciate in value or even maintain the price at which investors in this offering have purchased their shares.
 
Certain provisions in our amended and restated certificate of incorporation may prevent efforts by our stockholders to change our direction or management.
 
Provisions contained in our amended and restated certificate of incorporation could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our stockholders. For example, our amended and restated certificate of incorporation authorizes our board of directors to determine the rights, preferences, privileges and restrictions of unissued series of preferred stock, without any vote or action by our stockholders. We could issue a series of preferred stock that could impede the completion of a merger, tender offer or other takeover attempt. These provisions may discourage potential acquisition proposals and may delay, deter or prevent a change of control of us, including through transactions, and, in particular, unsolicited transactions, that some or all of our stockholders might consider to be desirable. As a result, efforts by our stockholders to change our direction or management may be unsuccessful. See “Description of Capital Stock — Section 203 of the General Corporation Law of the State of Delaware.”
 
We cannot predict our future capital needs. As a result, we may need to raise significant amounts of additional capital. There can be no assurance that we will be able to obtain the necessary capital when we need it, or on acceptable terms, if at all.
 
Our business depends on the availability of adequate funding and regulatory capital under applicable regulatory requirements. Historically, we have satisfied these needs from internally generated funds and from our preferred equity securities financings. We currently anticipate that our available cash resources will be sufficient to meet our presently anticipated working capital and capital expenditure requirements for at least the next 12 months. We may need to raise additional funds to:
 
  •  support more rapid expansion;
 
  •  develop new or enhanced services and products;
 
  •  respond to competitive pressures;
 
  •  acquire complementary businesses, products or technologies; or
 
  •  respond to unanticipated requirements.
 
Additional financing may not be available when needed on terms favorable to us.
 
Our management and other affiliates have significant control of our common stock and could control our actions in a manner that conflicts with our interests and the interests of other stockholders.
 
As of September 30, 2009, our executive officers, directors and affiliated entities together beneficially own approximately 88.4% of the outstanding capital stock, assuming the exercise of options, warrants and other common stock equivalents which are currently exercisable, held by these stockholders. As a result, these stockholders, acting together, will be able to exercise considerable influence over matters requiring approval by our stockholders, including the election of directors, and may not always act in the best interests of other stockholders. Such a concentration of ownership may have the effect of delaying or preventing a change in our control, including transactions in which our stockholders might otherwise receive a premium for their shares over then current market prices.


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Our internal controls over financial reporting may not be effective and our independent registered public accounting firm may not be able to certify as to their effectiveness, which could have a significant and adverse effect on our business and reputation.
 
We are evaluating our internal controls over financial reporting in order to allow management to report on, and our independent registered public accounting firm to attest to, our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002, as amended, and rules and regulations of the SEC thereunder, which we refer to as Section 404. We are in the process of documenting and testing our internal control procedures in order to satisfy the requirements of Section 404, which includes annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent registered public accounting firm that addresses the effectiveness of internal controls.
 
As we continue our evaluation, we may identify material weaknesses that we may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act of 2002, as amended, for compliance with the requirements of Section 404. We will be required to comply with the requirements of Section 404 for the year ending December 31, 2010. In addition, if we fail to achieve and maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404. We cannot be certain as to the timing of completion of our evaluation, testing and any remediation actions or the impact of the same on our operations. If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, our independent registered public accounting firm may not be able to opine as to the effectiveness of our internal control over financial reporting and we may be subject to sanctions or investigation by regulatory authorities, such as the SEC. As a result, there could be a negative reaction in the financial markets due to a loss of confidence in the reliability of our financial statements. In addition, we may be required to incur costs in improving our internal control system and the hiring of additional personnel. Any such action could negatively affect our results of operations and cash flows.


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SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
 
This prospectus contains forward looking statements. These forward looking statements include, in particular, statements about our plans, strategies and prospects under the headings “Prospectus Summary,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” These statements are based on our current expectations and projections about future events and are identified by terminology such as “may,” “should,” “expect,” “scheduled,” “plan,” “seek,” “intend,” “anticipate,” “believe,” “estimate,” “aim,” “potential,” or “continue” or the negative of those terms or other comparable terminology. Although we believe that our plans, intentions and expectations are reasonable, we may not achieve our plans, intentions or expectations.
 
These forward-looking statements involve risks and uncertainties. Important factors that could cause actual results to differ materially from the forward looking statements we make in this prospectus are set forth in “Risk Factors” and elsewhere in this prospectus. We undertake no obligation to update any of the forward looking statements after the date of this prospectus to conform those statements to reflect the occurrence of future events, except as required by applicable law.
 
You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement on Form S-1, of which this prospectus forms a part, that we have filed with the Securities and Exchange Commission, or SEC, completely and with the understanding that our actual future results, levels of activity, performance and achievements may be different from what we expect and that these differences may be material. We qualify all of our forward looking statements by these cautionary statements.


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USE OF PROCEEDS
 
The selling stockholders are selling all of the shares of common stock in this offering and we will not receive any proceeds from the sale of such shares.
 
DIVIDEND POLICY
 
We have never declared or paid cash dividends on our common or preferred stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any cash dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, general business conditions and other factors that our board of directors may deem relevant.


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CAPITALIZATION
 
The following table sets forth our cash and cash equivalents and capitalization as of September 30, 2009:
 
  •  on an actual basis; and
 
  •  on a pro forma basis to give effect to the filing of our amended and restated certificate of incorporation to reflect the   -for-1 stock split of our common stock effected immediately prior to the completion of this offering and the conversion of each share of our outstanding preferred stock into an aggregate of          shares of common stock prior to the completion of this offering (for further information, please see “Description of Capital Stock”).
 
You should read this table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere in this prospectus.
 
                 
    As of September 30, 2009  
    Actual     Pro Forma  
    (in thousands, except share data)  
 
Cash and cash equivalents
  $ 197,938     $             
                 
Long-term debt
  $ 31,500     $  
                 
Convertible, redeemable preferred stock:
               
Undesignated preferred stock, $0.00001 par value; no shares authorized, issued and outstanding, on an actual basis; no shares authorized, no shares issued and outstanding, on a pro forma basis
             
Series A convertible, redeemable preferred stock, $0.00001 par value, 4,545,455 shares authorized and 865,154 shares issued and outstanding on an actual basis; and no shares authorized, issued and outstanding on a pro forma basis
    2,009          
Series B convertible, redeemable preferred stock, $0.00001 par value, 7,000,000 shares authorized and 2,610,210 shares issued and outstanding on an actual basis; and no shares authorized, issued and outstanding on a pro forma basis
    5,412          
Series C convertible, redeemable preferred stock, $0.00001 par value, 2,496,879 shares authorized and 1,055,739 shares issued and outstanding on an actual basis; and no shares authorized, issued and outstanding on a pro forma basis
    5,319          
Series D convertible, redeemable preferred stock, $0.00001 par value, 3,254,678 shares authorized and 3,254,678 shares issued and outstanding on an actual basis; and no shares authorized, issued and outstanding on a pro forma basis
    39,840          
Series E preferred stock, $0.00001 par value, 3,738,688 shares authorized and 2,611,606 shares issued and outstanding on an actual basis; and no shares authorized, issued and outstanding on a pro forma basis
    116,810          
                 
Total convertible, redeemable preferred stock
    169,390          
                 
Common stock, $0.00001 par value, 27,000,000 shares authorized and 1,309,052 shares issued and outstanding on an actual basis;          shares authorized and           shares issued and outstanding on a pro forma basis
               
Additional paid-in capital
    (179,516 )        
Accumulated other comprehensive income
    484          
Accumulated deficit
    (10,318 )        
                 
Total shareholders’ deficit(1)
    189,350          
                 
Total capitalization
  $ 11,547     $  
                 
 
 
(1) Total shareholders’ deficit does not include approximately $519,000 related to noncontrolling interest.


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The outstanding share information is based upon shares of our common stock outstanding as of          , 2010. This number excludes:
 
  •            shares of our common stock issuable upon the exercise of options that were outstanding as of          , 2010, with a weighted average exercise price of $      per share;
 
  •            shares of common stock issuable pursuant to outstanding restricted stock units as of     , 2010;
 
  •            shares of common stock reserved for future issuance under our 2010 Omnibus Incentive Compensation Plan, which will become effective on the date of this prospectus; and
 
  •            shares of common stock reserved for future issuance under our 2010 Employee Stock Purchase Plan, which will become effective on the date of this prospectus.
 
Our stockholders are selling all of the shares of our common stock offered by this prospectus. We are not selling any shares in this offering and will not receive any of the proceeds from the sale of shares by the selling stockholders.


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SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA
 
The following table presents our selected historical consolidated financial data for the periods presented and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included elsewhere in this prospectus. The consolidated statements of operations data for the fiscal years ended December 31, 2006, 2007 and 2008 and the consolidated statements of financial condition data as of December 31, 2007 and 2008 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statements of operations data for the fiscal years ended December 31, 2004 and 2005 and the consolidated statements of financial condition data as of December 31, 2004, 2005 and 2006 are derived from our audited historical consolidated financial statements not included in this prospectus.
 
The consolidated statements of income data for the nine-month periods ended September 30, 2008 and 2009 and the consolidated statement of financial condition data as of September 30, 2009 are derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus which have been prepared on the same basis as the audited consolidated financial statements and reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of our results of operations and financial position. The consolidated statements of financial condition data as of September 30, 2008 are derived from our unaudited consolidated financial statements not included in this prospectus. The results of operations for the nine months ended September 30, 2009 are not necessarily indicative of the results to be expected for the full year ended December 31, 2009.
 
As a result of the termination of our trading operations in China, the historical financial information presented below is not indicative of our future performance. For the year ended December 31, 2008, net revenue associated with customers residing in China was $24.4 million, compared to $20.6 million for the year ended December 31, 2007. Our total direct expenses attributable to our operations in China were $5.9 million for the year ended December 31, 2008, compared to $4.8 million for the prior year. In addition, due to the non-cash impact of the redemption feature contained in our preferred stock which requires fair value accounting, there are fluctuations in our net income which will cease upon our initial public offering and which is not reflective of our operating performance.
 
The pro forma consolidated statement of financial condition data as of September 30, 2009 gives effect to this offering based on an assumed initial public offering price of $      per share, which is the midpoint of the range listed on the cover page of this prospectus. The pro forma earnings per common share data for the year ended December 31, 2008 and the nine months ended September 30, 2009 reflect the sale by our selling stockholders of           shares of common stock pursuant to this offering based on an assumed initial public offering price of $      per share, which is the midpoint of the range listed on the cover page of this prospectus.


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    Year Ended December 31,     Nine Months Ended September 30,  
    2004(2)     2005(2)     2006(1)     2007(1)     2008(1)     2008(1)     2009(1)  
    (in thousands unless otherwise stated)  
 
Consolidated Statements of Financial Condition Data:
                                                       
REVENUE
                                                       
Trading revenue
  $ 21,257     $ 36,249     $ 69,471     $ 118,176     $ 186,004     $ 129,331     $ 113,797  
Other revenue
    665       223       242       437       2,366       1,984       1,654  
                                                         
Total non-interest revenue
    21,922       36,472       69,713       118,613       188,370       131,315       115,451  
Interest revenue
    324       1,519       3,145       5,024       3,635       3,180       228  
Interest expense
    (33 )     (110 )     (2,431 )     (4,299 )     (3,905 )     (3,157 )     (1,848 )
                                                         
Net interest revenue/(expense)
    291       1,409       714       725       (270 )     23       (1,620 )
                                                         
Net revenue
    22,213       37,881       70,427       119,338       188,100       131,338       113,831  
                                                         
EXPENSES
                                                       
Employee compensation and benefits
    5,035       9,511       17,258       25,093       37,024       27,453       29,621  
Selling and marketing
    1,186       3,256       12,517       21,836       29,312       21,975       26,791  
Trading expenses and commissions
    2,973       7,279       10,321       10,436       16,310       12,992       10,431  
Bank fees
    245       507       935       2,316       3,754       2,595       3,415  
Depreciation and amortization
    301       494       897       1,911       2,496       1,897       2,013  
Communications and data processing
    155       424       873       1,659       2,467       1,681       1,950  
Occupancy and equipment
    306       530       1,045       1,616       2,419       1,715       2,391  
Bad debt provision/(recovery)
          836       574       1,164       1,418       1,289       593  
Professional fees
    877       761       1,295       1,380       3,104       1,981       2,549  
Software expense
    11       21       78       123       888       541       712  
Professional dues and memberships
    15       15       48       187       773       566       565  
Write-off of deferred initial public offering costs
                            1,897              
Change in fair value of convertible preferred stock embedded derivative(2)
                61,732       165,280       (181,782 )     (170,279 )     40,820  
Impairment of intangible assets
                165                          
Other
    477       155       3,085       (627 )     1,424       1,041       1,091  
                                                         
Total expenses
    11,581       23,789       110,823       232,374       (78,496 )     (94,553 )     122,942  
                                                         
INCOME/(LOSS) BEFORE INCOME TAX EXPENSE AND EQUITY IN EARNINGS OF EQUITY METHOD INVESTMENT
    10,632       14,092       (40,396 )     (113,036 )     266,596       225,891       (9,111 )
Income tax expense
    3,504       5,881       9,063       21,615       34,977       24,040       11,423  
Equity in earnings of equity method investment
          (3 )     (43 )           (214 )     (80 )      
                                                         
NET INCOME/(LOSS)
    7,128       8,208       (49,502 )     (134,651 )     231,405       201,771       (20,534 )
                                                         
Net income/(loss) applicable to noncontrolling interest
                            (21 )           (15 )
                                                         
Net income/(loss) applicable to GAIN Capital Holdings, Inc. 
  $ 7,128     $ 8,208     $ (49,502 )   $ (134,651 )   $ 231,426     $ 201,771     $ (20,519 )
                                                         
Effect of redemption of preferred shares
                (39,006 )           (63,913 )     (63,913 )      
Effect of preferred share accretion
    (2,892 )     (63 )     2,205                          
                                                         
Net income/(loss) applicable to GAIN Capital Holdings, Inc. common shareholders
  $ 4,236     $ 8,145     $ (86,303 )   $ (134,651 )   $ 167,513     $ 137,858     $ (20,519 )
                                                         
Earnings/(loss) per common share:
                                                       
Basic
  $ 0.95     $ 1.96     $ (30.90 )   $ (70.89 )   $ 130.12     $ 107.06     $ (15.71 )
                                                         
Diluted
  $ 0.27     $ 0.49     $ (30.90 )   $ (70.89 )   $ 11.17     $ 9.18     $ (15.71 )
                                                         
Weighted average common shares outstanding used in computing earnings/(loss) per common share:
                                                       
Basic
    4,445,869       4,157,464       2,792,895       1,899,386       1,287,360       1,287,650       1,306,265  
                                                         
Diluted
    15,838,150       16,634,016       2,792,895       1,899,386       15,002,277       15,019,396       1,306,265  
                                                         
Pro forma (unaudited)(3)
                                                       
Pro forma earnings/(loss) per common share:
                                                       
Basic
                                  $ 38.56             $ 15.54  
                                                         
Diluted
                                  $ 3.31             $ 1.36  
                                                         
Pro forma weighted average common shares outstanding used in computing pro forma earnings per common share:
                                                       
Basic
                                    1,287,360               1,306,265  
                                                         
Diluted
                                    15,002,277               14,932,401  
                                                         
 
 
(1) For each of the periods indicated, in accordance with SFAS No. 133, we accounted for an embedded derivative liability attributable to the redemption feature of our outstanding preferred stock. This redemption feature and the associated embedded derivative liability will no
 
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longer be required to be recognized upon conversion of our preferred stock in connection with the completion of this offering. See “Prospectus Summary-Reconciliation of Net Income/(Loss) to Adjusted Net Income.”
 
(2) These amounts do not include the impact of the embedded derivative liability of approximately $8.7 million (unaudited) and $37.6 million (unaudited) as of December 31, 2004 and 2005, respectively, and the change in fair value for the years ended December 31, 2004 and 2005 of $6.0 million (unaudited) and $28.8 million (unaudited), respectively.
 
(3) These amounts do not include the impact of the change in fair value of our convertible, redeemable preferred stock embedded derivative, the effect of redemption of preferred shares and the effect of preferred share accretion. For the year ended December 31, 2008, the change in fair value resulted in a gain of $181.8 million and for the nine months ended September 30, 2009 the change in fair value resulted in a loss of $40.8 million.
 
                                                                 
                Pro Forma
 
    As of December 31,     As of September 30,     As of September 30,  
    2004     2005     2006     2007     2008     2008     2009     2009  
    (in thousands unless otherwise stated)  
 
Consolidated Statements of Financial Condition Data:
                                                               
Cash and cash equivalents
  $ 18,188     $ 22,482     $ 31,476     $ 98,894     $ 176,431     $ 160,195     $ 197,938     $             
Receivables from brokers
  $ 36,383     $ 59,080     $ 71,750     $ 74,630     $ 75,817     $ 94,196     $ 100,171     $    
Total assets
  $ 56,084     $ 82,661     $ 113,491     $ 180,628     $ 264,816     $ 272,096     $ 315,710     $    
Payables to brokers, dealers, FCMs, and other regulated entities
  $ 6,037     $ 4,577     $ 5,248     $ 2,163     $ 1,679     $ 1,560     $ 1,732     $    
Payables to customers
  $ 29,451     $ 50,031     $ 70,321     $ 106,741     $ 122,293     $ 152,042     $ 168,266     $    
Convertible, redeemable preferred stock embedded derivative
              $ 99,286     $ 264,566     $ 82,785     $ 94,287     $ 123,604     $    
Notes payable
              $ 27,500     $ 49,875     $ 39,375     $ 42,000     $ 31,500     $    
Total shareholders’ equity/(deficit)
  $ 15,305     $ 23,605     $ (154,242 )   $ (316,340 )   $ (172,154 )   $ (204,362 )   $ (188,831 )   $  
 
Selected Operational Data
 
                                                         
    As of December 31,     As of September 30,  
    2004     2005     2006     2007     2008     2008     2009  
    ($ in thousands unless otherwise stated)  
 
Number of opened accounts(4):
                                                       
Total
    13,572       30,626       63,576       105,924       154,190       142,555       195,559  
China
    751       3,202       8,395       19,869       27,358       27,309       27,362  
Number of tradable accounts:
                                                       
Total
    5,022       11,761       27,836       41,120       36,744       41,145       47,374  
China
    420       1,631       4,799       9,702       2,839       9,165       8  
Adjusted net capital in excess of regulatory requirements(5)
  $ 13,509     $ 20,065     $ 15,296     $ 44,856     $ 98,571     $ 70,657     $ 68,604  
 
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          Nine Months Ended
 
    Year Ended December 31,     September 30,  
    2004     2005     2006     2007     2008     2008     2009  
 
Number of traded accounts:
                                                       
Total
    6,432       13,896       28,270       43,139       52,555       45,001       43,565  
China
    642       2,416       5,533       11,568       11,647       11,403       6  
Total trading volume (dollars in billions)
                                                       
Total
  $ 120.3     $ 231.9     $ 447.4     $ 674.5     $ 1,498.6     $ 1,124.4     $ 928.3  
China
  $ 6.0     $ 24.4     $ 50.8     $ 103.4     $ 172.4     $ 143.8     $ 0.2  
Net deposits received from customers (dollars in millions):
                                                       
Total
  $ 33.5     $ 70.2     $ 102.8     $ 184.2     $ 277.3     $ 227.0     $ 186.9  
China
  $ 1.8     $ 6.8     $ 10.5     $ 26.0     $ 25.3     $ 23.5     $ (1.3 )
Revenue per million traded
  $ 176.8     $ 156.3     $ 155.3     $ 175.2     $ 124.1     $ 115.0     $ 122.6  
 
(4) Opened customer accounts represent accounts opened with us on a cumulative basis at any time since we commenced operations.
 
(5) Adjusted net capital in excess of regulatory requirements represents the excess funds over the regulatory minimum requirements as defined by the regulatory bodies that regulate our operating subsidiaries.
 
Selected Geographic Data
 
                                                         
          Nine Months Ended
 
    Year Ended December 31,     September 30,  
    2004     2005     2006     2007     2008     2008     2009  
 
Customer trading volume by region (dollars in billions)
                                                       
U.S. 
  $ 55.4     $ 122.2     $ 238.3     $ 355.4     $ 878.9     $ 647.4     $ 506.8  
China(6)
    6.0       24.4       50.8       103.4       172.4       143.8       0.2 (7)
Canada
    4.3       9.6       29.2       58.6       122.9       91.8       122.2  
Europe, Middle East and Africa
    14.1       27.9       42.9       64.3       153.1       117.2       126.5  
Asia (ex-China)
    31.3       33.8       42.7       54.0       96.4       74.6       110.0  
Rest of World
    9.2       14.0       43.5       38.8       74.9       49.6       62.6  
                                                         
Total
  $ 120.3     $ 231.9     $ 447.4     $ 674.5     $ 1,498.6     $ 1,124.4     $ 928.3  
                                                         
 
(6) As a result of our review of our regulatory compliance in China, we decided to terminate our service offerings to residents of China and ceased our trading operations located in that country as of December 31, 2008. Accordingly, we do not expect to generate significant trading volume or related revenue from customers in China for the foreseeable future. For further information, please see “Prospectus Summary — Recent Developments”.
 
(7) For the nine months ended September 30, 2009, a small number of existing customer accounts, which were originally opened through our relationship with one of our introducing brokers prior to the termination of our service offering in China, continued to trade using our platform. The trading activity by these residual accounts resulted in the trading volume for the period. We have taken steps to close these accounts, and all have been closed as of December 31, 2009.


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The statements in this discussion regarding the industry outlook, our expectations regarding the future performance of our business, and the other non-historical statements in this discussion are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in the “Risk Factors” section. You should read the following discussion together with the section entitled “Risk Factors” and our consolidated financial statements and notes thereto included elsewhere in this prospectus.
 
Overview
 
We are an online provider of retail forex trading and related services founded in 1999 by a group of experienced Wall Street trading professionals. We offer our customers a forex trading platform that provides 24-hour direct access to the global over-the-counter foreign exchange markets, where participants trade directly with one another rather than through a central exchange or clearing house. In a foreign exchange trade, participants buy one currency and simultaneously sell another currency. We provide this access through our proprietary trading platform and trade management tools, educational services, research and dedicated customer service. Our customer base is comprised primarily of self-directed retail traders, representing approximately 93.0% of our customers as of September 30, 2009. The remainder of our customer base is comprised of customers with accounts that have assigned trading authority to either third party authorized traders, or to our wholly-owned subsidiary GCAM, LLC, or GCAM. GCAM offers our managed account services whereby our professional traders create and execute forex investment strategies on behalf of institutional and individual customers. We refer to customers who have assigned trading authority as managed accounts, which represented approximately 7.0% of our customers as of September 30, 2009.
 
We use financial metrics, including tradable accounts and traded accounts, to measure our aggregate customer account activity. Tradable accounts represent customers who maintain cash balances with us that are sufficient to execute a trade in compliance with our policies. Although tradable accounts are an important indicator of our ability to attract new customers that can potentially lead to volume and revenue in future periods, it does not represent actual trades executed. We believe the most relevant measurement which correlates to volume and revenue is the number of traded accounts, because these represent customers who executed a forex transaction with us during a particular period. As of December 31, 2008, we had 36,744 tradable accounts, which include 2,839 tradable accounts from customers residing in China, and as of September 30, 2009, we had 47,374 tradable accounts. For the year ended December 31, 2008, we had 52,555 traded accounts, which include 11,647 traded accounts from customers residing in China, and for the nine months ended September 30, 2009, we had 43,565 traded accounts.
 
We have experienced annual revenue growth in excess of 57.6% since 2000 and a compounded annual revenue growth rate of 70.6% from January 1, 2006 to December 31, 2008. Our annual revenue from customers residing outside of China has grown in excess of 59.0% since 2000, with a compounded annual growth rate of 70.2% from January 1, 2006 to December 31, 2008. We generated $113.8 million of total net revenue and a net loss of $20.5 million for the nine months ended September 30, 2009, including a loss of $40.8 million relating to the change in fair value of our preferred stock embedded derivative, and $188.1 million of total net revenue, including $24.4 million in total net revenue attributable to customers residing in China, and $231.4 million of net income, including $11.1 million in net income attributable to customers residing in China, in the year ended December 31, 2008, including a $181.8 million gain relating to the change in fair value of our preferred stock embedded derivative and $1.9 million write-off of deferred initial public offering costs, each of which we believe to be non-operational in nature. The preferred stock embedded derivative liability is attributable to the redemption feature of our outstanding preferred stock which allows the holders of our preferred stock at any time on or after March 31, 2011, upon the written request of holders of at least a majority of the outstanding shares of preferred stock voting together as a single class, to require us to redeem all of the shares of preferred stock then outstanding and is non-cash and therefore causes net income to fluctuate and not reflect our operating performance. This redemption provision and the associated embedded derivative liability will no longer be required to be recognized upon conversion of our preferred stock in connection with this offering. Excluding the impact of a $40.8 million loss relating to the change in fair market value of our embedded derivative, our adjusted net income for the nine months ended


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September 30, 2009 was $20.3 million. We believe our net capital position and customer assets help make us one of the largest global retail foreign exchange services providers.
 
We believe the following operating measurements are the main drivers of our revenue:
 
  •  customer trading volume;
 
  •  trading revenue per million traded;
 
  •  net deposits received from customers; and
 
  •  traded accounts.
 
Customer trading volume is the aggregate notional value of trades our customers execute. Trading revenue per million traded is the revenue we realize from our market-making activities (including spread revenue) per one million of U.S. dollar-equivalent trading volume, and is calculated as trading revenue divided by the result obtained from dividing trading volume by one million. Net deposits received from customers represents customers’ deposits less withdrawals for a given period, and correlates to our customers’ ability to place additional trades, which potentially increases our trading volumes. Traded accounts impact our revenue because this represents the number of customers who executed trades during a specific period, which impacts customer trading volume.
 
Our revenue performance for any one period is a function of customer trading volume, impacted in part by the factors listed above, and the profitability of these trades, as measured by trading revenue per million traded. The profitability of our customer trading volume is impacted by the following:
 
  •  dealable spread that we charge our customers and pay to our wholesale forex trading partners;
 
  •  the mix of the currency pairs that our customers transacted during the period; and
 
  •  the performance of our managed flow portfolio.
 
As a market-maker, we act as counterparty to our customers when executing a trade. We believe it is neither economically optimal nor necessary from a risk perspective to hedge all of our customers’ trades on a one-to-one basis. Instead, we hedge a select portion of these trades on an aggregate basis in our managed flow portfolio. Our managed flow portfolio is treated in the following manner:
 
  •  Natural Hedging — Many trades are naturally hedged, where one customer executing a trade in a currency is offset by a trade taken by another customer. When a transaction within the portfolio is naturally hedged, we do not hedge our exposure by entering into a transaction with our wholesale forex trading partners. Accordingly, for naturally hedged transactions we capture the entire bid/offer spread on the two offsetting transactions while completely hedging our exposure and reducing our overall risk.
 
  •  Net Exposure — Generally, there is also a portion of our managed flow portfolio that is not naturally hedged, which we refer to as our net exposure. We manage our net exposure by applying position and exposure limits established under our risk management policies and by continuous, active monitoring by our traders. A portion of our net exposure may be hedged with our wholesale forex trading partners based on our risk management guidelines. We do not actively initiate market positions in anticipation of future movements in the prices of currencies in the market, referred to as proprietary directional market positions. However, as a result of our hedging activities, we are likely to have open positions in various currencies at any given time. In the event of unfavorable market movements, we may take a loss on such position.
 
  •  Redirected Trades — In certain cases, specific trades from customers generally handled in our managed flow portfolio may be redirected and offset with our wholesale forex trading partners. These trades may be selected based on size, and whether they relate to currencies that are experiencing lower transaction volume or higher volatility in trading prices.
 
By directing a large portion of our customers’ trades into our managed flow portfolio, which we refer to as our managed flow trades, we have the opportunity to maximize trading revenue by capturing the full spread on orders that naturally offset each other within the managed flow portfolio. Factors that may impact the rate of profitability of our managed flow portfolio include currency price trends and the results of our hedging strategies in accordance


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with our risk management policies. Alternatively, we realize lower trading revenue per million traded from those trades that we immediately offset, which we refer to as offset flow trades, because on such trades we receive the retail spread from our customers and pay the wholesale spread to our wholesale forex trading partners. In general, we make higher trading revenue per million traded on our managed flow trades than we do on our offset flow trades.
 
Our customer base resides in over 140 countries outside of the United States and is comprised of two categories. The first are direct customers sourced through our retail forex trading website, FOREX.com (our flagship brand), which is a currency trading Internet site that is available in English, traditional and simplified Chinese, Russian and Arabic, and provides currency traders of all experience levels with a full-service trading platform, along with extensive educational and support tools. The second are indirect customers sourced through either retail financial services firms that provide customers to us, which we refer to as introducing brokers, or financial institutions which offer our currency trading services to their existing client base under their own brand, which we refer to as white label partners. For the nine months ended September 30, 2009, 66.4% of customer trading volume was generated from our direct customers and 33.6% was generated from introducing brokers and white label partners. For the year ended December 31, 2008, 67.3% of customer trading volume was generated from our direct customers and 32.7% was generated from introducing brokers and white label partners.
 
For the nine months ended September 30, 2009, the total dollar value traded by our customers, or customer trading volume, was $928.3 billion (including $0.2 billion from customers residing in China), trading revenue per million traded was $122.6, net deposits received from customers was $186.9 million (including $1.3 million that was paid to customers residing in China) and the number of traded accounts was 43,565 (including six accounts from customers residing in China, which were opened through one of our white label partners prior to the termination of our operations in China). For the year ended December 31, 2008, customer trading volume was $1,498.6 billion (including $172.4 billion from customers residing in China), trading revenue per million traded was $124.1, net deposits received from customers was $277.3 million (including $25.3 million from customers residing in China) and the number of traded accounts was 52,555 (including 11,647 from customers residing in China).
 
Since 2006, a significant portion of our trading volume, trading revenue, net income and cash flow were generated from residents of China. When we commenced offering our forex trading services through our Chinese language website to residents of China in October 2003, we believed that our operations were in compliance with applicable Chinese regulations. However, as a result of our review of our regulatory compliance in China during 2008, in May 2008 we became aware of a China Banking and Regulatory Commission, or CBRC, prohibition on forex trading firms providing retail forex trading services to Chinese residents through the Internet without a CBRC permit. We do not have such a permit and to our knowledge, no such permit exists. As a result of this regulatory uncertainty, we decided to terminate all service offerings to residents of China and ceased our trading support operations located in that country. As of December 31, 2008, we no longer accept new customers or maintain direct customer accounts from residents of China. However, due to an ongoing relationship with one of our introducing brokers, eight immaterial legacy accounts (as of September 30, 2009), which were originally sourced through that introducing broker prior to the termination of our service offering in China, remained open. For the nine months ended September 30, 2009, the trading activity by these legacy accounts resulted in an immaterial amount of trading volume. We have taken steps to close these accounts, and all have been closed as of December 31, 2009. We are unable to predict if we may be subject to fines or penalties, and if so in what amounts, as a result of this insignificant trading activity on our platform in China. Our customer trading volume, revenue and net income related to our service offerings and trading services to residents of mainland China was $172.4 billion, $24.4 million and $11.1 million, respectively, for the year ended December 31, 2008 and $103.4 billion, $20.6 million, and $9.2 million, respectively, for the year ended December 31, 2007. All references to “China” refer to mainland China and exclude the Hong Kong and Macau Special Administrative Regions.
 
We have also become aware that the CBRC may, at a future date, issue regulations by which certain institutions will be allowed to engage in retail forex trading services. There is no assurance as to when these clarifying regulations will be issued or, if issued, whether we will be able to offer our trading services to Chinese residents under such regulations. As a result, we do not intend to offer our trading services and no longer accept or maintain direct customer accounts from residents of China, except as described above, until such time as we are able to obtain the necessary permits, licenses or approvals from the applicable Chinese regulators, in accordance with applicable Chinese regulations. We will continue to monitor the regulatory environment in China and, when possible, we will


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seek to obtain the necessary permits, licenses or approvals from the applicable Chinese regulators, or to partner with a firm with such approval, to resume our retail forex trading services in China. As our Chinese language website is also used by customers in other countries, we will continue to use it as we offer our services to Chinese-speaking customers who do not reside in China. We cannot provide any assurance that we will not be subject to fines or penalties relating to the period in which we provided forex trading services through the Internet to Chinese residents.
 
General Market and Economic Conditions
 
In the past two years, the global market and general economic conditions have experienced a significant downturn. In the United States, market and economic conditions remain challenged as credit remains contracted. U.S. equity markets were adversely impacted by lower corporate earnings, the challenging conditions in the credit markets and continued general uncertainty. In addition, U.S. economic activity was negatively impacted by declines in consumer spending, business investment and the downturn in the commercial and residential real estate markets. In Europe and Asia, market and economic conditions continued to be challenged by adverse economic developments. We believe that these conditions, together with deterioration in the overall economy and increased unemployment rates, impacted overall retail consumer spending, including the discretionary funds and trading patterns of our customer base during the nine months ended September 30, 2009. We are unable to predict the degree and duration of the impact of the current global market and general economic conditions on our business.
 
Revenue
 
We generate revenue primarily from trading revenue, commissions and interest income. Trading revenue is our largest source of revenue and is derived from gains, offset by losses, from our trading positions and our revenue resulting from dealing spreads on customer transactions where we earn the difference between the retail price quoted to our customers and the wholesale price received from our wholesale forex trading partners. Any position we take is a result of acting as counterparty to our customers’ trades. We do not actively initiate market positions in anticipation of future movements in the prices of currencies, referred to as proprietary directional market positions. However, as a result of our hedging activities, we are likely to have open positions in various currencies at any given time.
 
For the nine months ended September 30, 2009, approximately 91.9% of our customer trading volume was directed into our managed flow portfolio, allowing us to keep part or all of the dealable spread and resulting in daily mark-to-market gains or losses based on the performance of the managed flow portfolio. During the same period we immediately offset the remaining 8.1% of transaction volume from customers by executing equal and offsetting trades with our wholesale forex trading partners. On these trades we earn the difference between the retail and wholesale spread while minimizing market risk. Regardless of the routing of their trades, our customers’ trading experience is identical with respect to trade execution. For the year ended December 31, 2008, 87.0% of our customer trade volume was directed into our managed flow portfolio and we immediately offset the remaining 13.0%. Trading revenue represented 99.9% of our total net revenue for the nine months ended September 30, 2009, and 98.9% of our total net revenue for the year ended December 31, 2008. We believe that our customer trading volumes are driven by ten main factors. Six of these factors are broad external factors outside of our control which impact general forex market trading, as well as our customer trading volumes, and include:
 
  •  changes in the financial strength of market participants;
 
  •  economic and political conditions;
 
  •  trends in business and finance;
 
  •  changes in the supply, demand and volume of foreign currency transactions;
 
  •  legislative changes; and
 
  •  regulatory changes.
 
Many of the above factors impact the volatility of foreign currency rates, which is in turn positively correlated with forex trading volume. In general, an increase in our customer trading volume results in an increase in our


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trading revenue derived from spread capture, and an increase in our strategic hedging activities. Our customer trading volume is also affected by four other factors which we believe differentiate us from our competitors:
 
  •  the effectiveness of our sales activities;
 
  •  the attractiveness of our superior website;
 
  •  the effectiveness of our customer service team; and
 
  •  the effectiveness of our marketing activities.
 
In order to increase customer trading volume, we focus our marketing and our customer service and education activities on attracting new customers, growing customer assets on deposit and increasing overall customer trading activity.
 
Trading revenue is recorded on a trade date basis. Changes in net unrealized gains or losses are recorded under trading revenue on the Consolidated Statements of Income for a specified period of time. For the nine months ended September 30, 2009, and for the year ended December 31, 2008, no single customer accounted for more than 3.0% of our trading volume for the period.
 
Other revenue is comprised of account management, transaction and performance fees related to customers who have assigned trading authority to GCAM, inactivity and training fees charged to customer accounts, as well as other miscellaneous items. For the nine months ended September 30, 2009, other revenue was $1.7 million and for the year ended December 31, 2008, other revenue was $2.4 million.
 
Net interest revenue consists primarily of the revenue generated by our cash and customer cash held by us at banks, money market funds and on deposit at our wholesale forex trading partners, less interest paid to customers on their net liquidating account value and interest expense on notes payable. A customer’s net liquidating account value equals cash on deposit plus the marking to market of open positions as of the measurement date. Our cash and customer cash is generally invested in money market funds which primarily invest in short-term U.S. government securities. Such deposits and investments earned interest at an average effective rate of 0.11% for the nine months ended September 30, 2009, and 1.50% for the year ended December 31, 2008. Interest paid to customers varies among customer accounts primarily due to the net liquidating value of a customer account as well as interest promotions that may be available from time to time. Interest income and interest expense are recorded when earned and incurred. Net interest expense was $1.6 million for the nine months ended September 30, 2009 and $0.3 million for the year ended December 31, 2008.
 
Although our revenue has grown at a compounded annual growth rate of 63.4% from $70.4 million for the year ended December 31, 2006 (including $8.7 million from customers residing in China), to $188.1 million for the year ended December 31, 2008 (including $24.4 million from customers residing in China), management anticipates that such continued growth may be negatively impacted in the future by the duration of the recent downturn in the global economy, continued contraction in the credit market and our termination of services to residents of China. In addition, management anticipates that historical growth patterns may not be indicative of future growth levels, due in part to the increased scale of our operations globally and the continued recent challenges of the macroeconomic environment.
 
To determine our trading revenue generated from our customers residing in China, we were required to make certain assumptions because we did not account for our China business separately on a historical basis. In order to calculate trading revenue generated from customers residing in China, we removed the China customer trading volume from our total volume and then applied an assumed level of profitability based on the relative profitability of the China customer transactions which we historically strategically hedged.
 
Operating Expenses
 
Employee compensation and benefits
 
Our largest operating expense is employee compensation and benefits, which includes salaries, bonuses, stock-based compensation, group insurance, contributions to benefit programs and other related employee costs. Due in part to the efficiencies created by our proprietary technology and forex trading platform, our compensation and benefits as a percentage of net revenue has declined from 21.0% for the year ended December 31, 2007 to 19.7% for


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the year ended December 31, 2008. Compensation and benefits was 26.0% of net revenue for the nine months ended September 30, 2009. The increase in employee compensation and benefits as a percentage of revenue for the nine months ended September 30, 2009 is primarily due to a decline in revenue for the nine months ended September 30, 2009. The revenue decline for the nine months ended September 30, 2009 is primarily due to overall economic conditions and our termination of services in China. Bonus costs, which are performance based and vary year to year, represented 19.0% of our employee compensation and benefits for the nine months ended September 30, 2009 compared to 26.4% for the year ended December 31, 2008, 31.8% for the year ended December 31, 2007 and 35.8% for the year ended December 31, 2006.
 
Selling and marketing
 
Our second largest expense item is selling and marketing expense, which is primarily concentrated in online display and search engine advertising, and to a lesser extent print and television advertising. Our marketing strategy employs a combination of direct marketing and focused branding programs, with the goal of raising awareness of our retail forex trading internet website, FOREX.com, and attracting customers in a cost-efficient manner. As part of our strategy to increase customer trading volume and attract new accounts, we have increased selling and marketing expense from $12.5 million for the year ended December 31, 2006 to $21.8 million for the year ended December 31, 2007 to $29.3 million for the year ended December 31, 2008. For the nine months ended September 30, 2009 selling and marketing expense was $26.8 million.
 
Trading expense and commissions
 
Our third largest expense item is trading expense and commissions. Trading expense and commissions consists primarily of compensation paid to our white label partners and introducing brokers. We generally provide white label partners with the platform, systems and back-office services necessary for them to offer forex trading services to their customers. We also establish relationships with introducing brokers that identify and direct potential forex trading customers to us. White label partners and introducing brokers generally handle marketing and the other expenses associated with attracting the customers they direct to us. Accordingly, we do not incur any incremental sales and marketing expense in connection with trading revenue generated by customers provided through our white label partners and introducing brokers. We do, however, pay a portion of the forex trading revenue generated by the customers of our white label partners and introducing brokers to our white label partners and introducing broker partners and record this payment under trading expense. These costs are largely variable and fluctuate according to the trading volume produced by the customers directed to us. During the nine months ended September 30, 2009, we generated approximately 33.6% of our trading volume through customers introduced to us by white label partners and introducing brokers and paid approximately $10.4 million in total trading expenses and commissions. During the year ended December 31, 2008, we generated approximately 32.7% of our trading volume through customers introduced to us by white label partners and introducing brokers and paid approximately $16.3 million in total trading expenses and commissions compared to the year ended December 31, 2007 when we generated approximately 33.8% of our trading volume through customers introduced to us by white label partners and introducing brokers and paid approximately $10.4 million in total trading expense and commissions.
 
Other expenses
 
Other expense categories separately disclosed in our results of operations include bank fees, depreciation and amortization, communications and data processing, occupancy and equipment, bad debt provision, professional fees and other miscellaneous expenses.
 
Change in fair value of convertible preferred stock and embedded derivative
 
Our Convertible, Redeemable Preferred Stock Series A, Series B, Series C, Series D, and Series E contains a redemption feature which allow the holders of our preferred stock at any time on or after March 31, 2011, upon the written request of holders of at least a majority of the outstanding shares of preferred stock voting together as a single class, to require us to redeem all of the shares of preferred stock then outstanding. We have determined that this redemption feature effectively provides such holders with an embedded option derivative meeting the definition of an “embedded derivative” pursuant to Statement of Financial Accounting Standards or SFAS, No. 133, Accounting for


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Derivative Instruments and Hedging Activities. Consequently, the embedded derivative must be bifurcated and accounted for separately. This redemption feature and related accounting treatment will no longer be required to be recognized upon conversion of our preferred stock in connection with our initial public offering. Historically, in accordance with SFAS No. 133, we have adjusted the carrying value of the embedded derivative to the fair value of our Company at each reporting date, based upon the Black-Scholes options pricing model, and reported the preferred stock embedded derivative liability on the Consolidated Statements of Financial Condition with change in fair value recorded in our Consolidated Statements of Operations and Comprehensive Income. This has impacted our net income but has not affected our cash flow generation or operating performance. This accounting treatment causes our earnings to fluctuate, but in our view does not reflect operating or future performance of our company. We further discuss the accounting for the embedded derivative in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates — Fair Value Derivative Liabilities”.
 
To reconcile between our net income/(loss) and adjusted net income, we use a financial measure not calculated in accordance with Generally Accepted Accounting Principles in the United States, or GAAP. Adjusted net income is a non-GAAP financial measure and represents our net income/(loss) excluding the change in fair value of the embedded derivative in our preferred stock. Because the embedded derivative in our preferred stock will no longer be applicable following conversion of our preferred stock in connection with this offering, there will be no further accounting adjustment required for change in fair value of the embedded derivative in our preferred stock following this offering. This non-GAAP financial measures has certain limitations in that it does not have a standardized meaning and thus the Company’s definition may be different from similar non-GAAP financial measures used by other companies and/or analysts and may differ from period to period. Thus it may be more difficult to compare the Company’s financial performance to that of other companies.
 
                                         
          Nine Months Ended
 
    Year Ended December 31,     September 30,  
    2006     2007     2008     2008     2009  
          (in thousands unless otherwise stated)        
 
Net (loss)/income applicable to GAIN Capital Holdings, Inc. 
  $ (49,502 )   $ (134,651 )   $ 231,426     $ 201,771     $ (20,519 )
Change in fair value of convertible, redeemable preferred stock embedded derivative
    61,732       165,280       (181,782 )     (170,279 )     40,820  
                                         
Adjusted net income
  $ 12,230     $ 30,629     $ 49,644     $ 31,492     $ 20,301  
                                         
Adjusted earnings per common share
                                       
Basic
  $ 4.38     $ 16.13     $ 38.56     $ 24.46     $ 15.54  
                                         
Diluted
  $ 0.79     $ 2.05     $ 3.31     $ 2.10     $ 1.36  
                                         
Net revenue
  $ 70,427     $ 119,338     $ 188,100     $ 131,338     $ 113,831  
Total expenses
    110,823       232,374       (78,496 )     (94,553 )     122,942  
                                         
(Loss)/income before income tax expense and equity in earnings of equity method investment
    (40,396 )     (113,036 )     266,596       225,891       (9,111 )
Change in fair value of convertible, redeemable preferred stock embedded derivative
    61,732       165,280       (181,782 )     (170,279 )     40,820  
                                         
Adjusted income before income tax expense and equity in earnings of equity method investment
  $ 21,336     $ 52,244     $ 84,814     $ 55,612     $ 31,709  
                                         
Income tax expense
  $ 9,063     $ 21,615     $ 34,977     $ 24,040     $ 11,423  
                                         
Adjusted effective tax rate
    42.5 %     41.4 %     41.2 %     43.2 %     36.0 %
                                         


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We believe our reporting of adjusted net income and adjusted earnings per common share better assists investors in evaluating our operating performance. We also believe adjusted net income and adjusted earnings per common share give investors a presentation of our operating performance in prior periods that more accurately reflects how we will be reporting our operating performance in future periods. However, adjusted net income and adjusted earnings per common share are not a measure of financial performance under GAAP and such measures should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with GAAP, such as net income/(loss) and earnings/(loss) per common share.
 
Write-off of initial public offering costs
 
In December 2008, we wrote off $1.9 million of legal, audit, tax, and other professional fees that were previously capitalized in anticipation of an initial public offering in 2008.
 
Public company expense
 
As a public company we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, and the other rules and regulations of the SEC, as well as the requirements of the Sarbanes-Oxley Act of 2002. We expect these rules and regulations to increase our legal, accounting, auditing and other financial compliance costs and to make some of our activities more time consuming and costly. As such, we expect to incur significant expenditures in the near term to expand our systems and hire and train personnel to assist us in complying with these requirements.


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Results of Operations
 
Nine months ended September 30, 2009 compared to nine months ended September 30, 2008
 
The following table sets forth our Results of Operations for the nine months ended September 30, 2009 and nine months ended September 30, 2008.
 
                                                 
    Nine Months
          Nine Months
                   
    Ended
          Ended
                   
    September 30,
    % of Net
    September 30,
    % of Net
    Increase/(Decrease)  
    2008     Revenue     2009     Revenue     Amount     %  
                (dollars in thousands)              
 
REVENUE:
                                               
Trading revenue
  $ 129,331       98.5 %   $ 113,797       100.0 %   $ (15,534 )     (12.0 )%
Other revenue
    1,984       1.5 %     1,654       1.5 %     (330 )     (16.6 )%
                                                 
Total non-interest revenue
    131,315       100.0 %     115,451       101.5 %     (15,864 )     (12.1 )%
Interest revenue
    3,180       2.4 %     228       0.2 %     (2,952 )     (92.8 )%
Interest expense
    (3,157 )     (2.4 )%     (1,848 )     (1.6 )%     1,309       (41.5 )%
                                                 
Total net interest revenue/(expense)
    23       0.0 %     (1,620 )     (1.4 )%     (1,643 )     (7,143.5 )%
                                                 
Net revenue
    131,338       100.0 %     113,831       100.0 %     (17,507 )     (13.3 )%
                                                 
EXPENSES:
                                               
Employee compensation and benefits
    27,453       20.9 %     29,621       26.0 %     2,168       7.9 %
Selling and marketing
    21,975       16.7 %     26,791       23.5 %     4,816       21.9 %
Trading expenses and commissions
    12,992       9.9 %     10,431       9.2 %     (2,561 )     (19.7 )%
Bank fees
    2,595       2.0 %     3,415       3.0 %     820       31.6 %
Depreciation and amortization
    1,897       1.4 %     2,013       1.8 %     116       6.1 %
Communications and data processing
    1,681       1.3 %     1,950       1.7 %     269       16.0 %
Occupancy and equipment
    1,715       1.3 %     2,391       2.1 %     676       39.4 %
Bad debt provision/(recovery)
    1,289       1.0 %     593       0.5 %     (696 )     (54.0 )%
Professional fees
    1,981       1.5 %     2,549       2.2 %     568       28.7 %
Software expense
    541       0.4 %     712       0.6 %     171       31.6 %
Professional dues and memberships
    566       0.4 %     565       0.5 %     (1 )     (0.2 )%
Change in fair value of convertible, redeemable preferred stock embedded derivative
    (170,279 )     129.6 %     40,820       35.9 %     211,099       (124.0 )%
Other
    1,041       0.8 %     1,091       1.0 %     50       4.8 %
                                                 
Total
    (94,553 )     (72.0 )%     122,942       108.0 %     217,495       (230.0 )%
                                                 
INCOME/(LOSS) BEFORE INCOME TAX EXPENSE AND EQUITY IN EARNINGS OF EQUITY METHOD INVESTMENT
    225,891       172.0 %     (9,111 )     (8.0 )%     (235,002 )     (104.0 )%
Income tax expense
    24,040       18.3 %     11,423       10.0 %     (12,617 )     (52.5 )%
Equity in earnings of equity method investment
    (80 )     (0.1 )%           0.0 %     80       (100.0 )%
                                                 
NET INCOME/(LOSS)
    201,771       153.6 %     (20,534 )     (18.0 )%     (222,305 )     (110.2 )%
                                                 
Net income/(loss) applicable to noncontrolling interest
          0.0 %     (15 )     (0.0 )%     (15 )     0.0 %
                                                 
Net income/(loss) applicable to GAIN Capital Holdings, Inc. 
  $ 201,771       153.6 %   $ (20,519 )     (18.0 )%   $ (222,290 )     (110.2 )%
                                                 


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Overview
 
Our total net revenue for the nine months ended September 30, 2009 was $113.8 million, a decrease of $17.5 million, or approximately 13.3%, compared to the nine months ended September 30, 2008. Our total net revenue increased $2.0 million to $113.8 million for the nine months ended September 30, 2009 compared to total net revenue of $111.8 million associated with customers residing outside of China for the nine months ended September 30, 2008. For the nine months ended September 30, 2009 we incurred a net loss of $20.5 million, a decrease of $222.3 million, or approximately 110.2% in performance, compared to the nine months ended September 30, 2008. Our adjusted net income (a non-GAAP measure which excludes the impact of the embedded derivative liability) for the nine months ended September 30, 2009 was $20.3 million, a decrease of $11.2 million, or approximately 35.5%, compared to the nine months ended September 30, 2008. Except where specifically stated, our results for the nine months ended September 30, 2009 reflect the termination of our trading services to customers residing in China as of December 31, 2008, the impact of the embedded derivative liability associated with our outstanding preferred stock and the following principal factors:
 
  •  customer trading volume decreased by $196.1 billion to $928.3 billion ($143.8 billion of trading volume was attributable to customers residing in China for the comparable 2008 period);
 
  •  trading revenue per million traded increased by $7.6 to $122.6, or 6.6%;
 
  •  net deposits received from customers decreased by $40.1 million to $186.9 million ($23.5 million of net deposits received was attributable to customers residing in China during the comparable 2008 period); and
 
  •  traded accounts decreased by 1,436 from 45,001 to 43,565 (11,403 traded accounts were attributable to customers residing in China for the comparable 2008 period).
 
Revenue
 
Our total net revenue decreased $17.5 million to $113.8 million for the nine months ended September 30, 2009 compared to $131.3 million for the nine months ended September 30, 2008. Trading revenue decreased $15.5 million to $113.8 million for the nine months ended September 30, 2009 compared to $129.3 million for the nine months ended September 30, 2008. The decrease in trading revenue was primarily due to a decrease in customer trading volume of $196.1 billion for the nine months ended September 30, 2009 to $928.3 billion compared to $1,124.4 billion for the nine months ended September 30, 2008. Traded accounts decreased by 1,436 accounts, to 43,565, or 3.2% in the nine months ended September 30, 2009. We believe our net revenue and trading revenue declines were primarily the result of our termination of our service offerings and trading services in China as of December 31, 2008 and global economic conditions, partially offset by increased trading revenue generated outside of China resulting from our marketing efforts during the nine months ended September 30, 2009.
 
During the nine months ended September 30, 2009 our net revenue increased 1.8%, customer trading volume decreased 5.3% and traded accounts increased 29.6% with respect to our customers residing outside of China compared to the nine months ended September 30, 2008. Our net deposits received from customers residing outside of China decreased by $15.2 million during that same period.
 
For the nine months ended September 30, 2008 net revenue associated with customers residing in China was $19.6 million. For the nine months ended September 30, 2008 customer trading volume was $143.8 billion from customers residing in China, net deposits received from customers was $23.5 million from customers residing in China, and traded accounts from residents residing in China was 11,403. The revenue decline associated with global economic conditions and our termination of our service offerings and trading services in China was partially offset by our increased marketing efforts, which resulted in increased enrollment in our demonstration trading accounts which simulate live trading on our proprietary platform, referred to as registered practice trading accounts (and increased the number of tradable accounts outside of China) and our continued international expansion, which resulted in increased customers and customer trading volume outside of China.
 
Trading revenue per million traded increased by $7.6, or 6.6%, to $122.6 for the nine months ended September 30, 2009 and net deposits received from customers decreased by $40.1 million for the nine months ended September 30, 2009 to $186.9 million compared to $227.0 million for the nine months ended September 30, 2008. We believe our trading revenue per million was not materially affected by our termination of our service


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offerings and trading services to residents of China as of December 31, 2008. We believe the increase in trading revenue per million was primarily due to the mix of currency pairs and volume that our customers traded during the nine months ended September 30, 2009 compared to the mix of currency pairs and volume that our customers traded during the same period in 2008.
 
Our other revenue decreased $0.3 million to $1.7 million for the nine months ended September 30, 2009 compared to $2.0 million for the nine months ended September 30, 2008, primarily due to a $0.5 million decrease in trading commissions received. We estimate that our termination of our service offerings and trading services to residents of China had no material impact on our other revenue for the nine months ended September 30, 2008. For the nine months ended September 30, 2009, our net interest revenue excluding the decrease of interest expense on notes payable of $0.9 million decreased $2.5 million to a $0.3 million expense compared to $2.2 million in revenue for the nine months ended September 30, 2008. This was primarily due to the decline in the average effective interest rate earned on net customer deposits and investments from 1.77% for the nine months ended September 30, 2008, compared to 0.11% for the nine months ended September 30, 2009. We estimate that our termination of our service offerings and trading services to residents of China as of December 31, 2008 had no material impact on our net interest revenue for the nine months ended September 30, 2009.
 
Total expenses
 
Our total expenses increased $217.5 million to $122.9 million for the nine months ended September 30, 2009 compared to $94.6 million of income for the nine months ended September 30, 2008, the majority of which was attributable to a $40.8 million loss relating to the change in fair value of our preferred stock embedded derivative for the nine months ended September 30, 2009 compared to a $170.3 million gain for the nine months ended September 30, 2008. Other changes in our expenses were primarily due to a $2.2 million increase in employee compensation and benefits, a $4.8 million increase in selling and marketing, and a $2.6 million decrease in trading expenses and commissions during the period. The remaining increase of $2.0 million was due to spending increases of $2.7 million, offset by $0.7 million of decreases in each of our remaining expense categories with no individual category representing more than $0.9 million. For the nine months ended September 30, 2008, our total direct expenses associated with our former operations in China were $5.1 million.
 
Employee compensation and benefits expenses increased $2.1 million, or 7.9%, to $29.6 million for the nine months ended September 30, 2009 from $27.5 million for the nine months ended September 30, 2008. Salaries increased $3.5 million primarily due to headcount increasing from 301 as of September 30, 2008 to 362 as of September 30, 2009. These headcount increases were mainly in the marketing and sales functions and were required to support the overall growth in our business. Bonus expense for the nine months ended September 30, 2009 decreased $2.3 million as compared to the nine months ended September 30, 2008, primarily due to less favorable operating results of our business. The remaining increase in employee compensation and benefits was due to stock-based compensation expense. For the nine months ended September 30, 2008, our total direct employee compensation and benefits expenses associated with our former operations in China were $1.1 million.
 
Selling and marketing expenses increased $4.8 million, or 21.9%, to $26.8 million for the nine months ended September 30, 2009 compared to $22.0 million for the nine months ended September 30, 2008. Increased sales and marketing expenses were primarily due to increased online, search engine and television advertising, and increased spending to support our growth. For the nine months ended September 30, 2008, our total direct selling and marketing expenses associated with our former operations in China was $2.7 million.
 
Trading expenses and commissions decreased $2.6 million to $10.4 million for the nine months ended September 30, 2009 compared to $13.0 million for the nine months ended September 30, 2008, primarily due to a decrease of $64.2 billion in customer trading volume directed to us from our white label partners and introducing brokers to $312.2 billion for the nine months ended September 30, 2009 compared to $376.4 billion for the nine months ended September 30, 2008. This expense is largely variable and is directly associated with customer trading volume directed to us from our white label partners and introducing brokers. We estimate that trading expenses were not materially impacted by our termination of our service offerings and trading services to residents of China as of December 31, 2008. For the nine months ended September 30, 2008, our total direct trading expenses and commissions associated with our former operations in China were $0.6 million.


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Other expense increased $0.1 million, depreciation and amortization increased $0.1 million, communication and data processing increased $0.3 million, professional fees increased $0.6 million, occupancy and equipment increased $0.7 million, bad debt provision decreased $0.7 million and professional dues and memberships decreased by less than $0.1 million compared to the nine months ended September 30, 2008. These changes in expenses were required to support the overall growth of our business. Bank fees increased $0.8 million compared to the nine months ended September 30, 2008 primarily due to an increase in credit card processing fees as a result of an increase of $36.9 million in total net deposits received from customers funded through the use of customer credit cards compared to the nine months ended September 30, 2008. The changes in other expense, communication and data processing, depreciation and amortization, professional fees, bad debt provision and occupancy and equipment were impacted by the termination of our service offerings and trading services to residents of China as of December 31, 2008. For the nine months ended September 30, 2008, our total direct other expenses related to our former operations in China were $0.5 million.
 
Income taxes
 
Income tax expense decreased $12.6 million to $11.4 million for the nine months ended September 30, 2009 compared to $24.0 million for the nine months ended September 30, 2008. Our effective tax rate was 125.4% for the nine months ended September 30, 2009 and 10.6% for the nine months ended September 30, 2008. Our adjusted effective tax rate was 36.0% for the nine months ended September 30, 2009 compared to 43.2% for the nine months ended September 30, 2008. This non-GAAP financial measure has certain limitations in that it does not have a standardized meaning and thus our definition may be different from similar non-GAAP financial measures used by other companies and/or analysts and may differ from period to period. Thus it may be more difficult to compare our financial performance to that of other companies. For the nine months ended September 30, 2008, the total income tax expense related to our operations in China was $6.3 million. The difference between our effective tax rate and adjusted tax rate is due to the lack of impact on our income tax expense from the change in fair value of our convertible preferred stock embedded derivative.


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Year End Results
 
The following table sets forth our Results of Operations for the three years ended December 31, 2008
 
                                                                 
    Year Ended
          Year Ended
          Year Ended
          Increase/(Decrease)  
    December 31,
    % of Net
    December 31,
    % of Net
    December 31,
    % of Net
    2007 Over
    2008 Over
 
    2006     Revenue     2007     Revenue     2008     Revenue     2006     2007  
                      (dollars in thousands)                    
 
REVENUE:
                                                               
Trading revenue
  $ 69,471       98.6 %   $ 118,176       99.0 %   $ 186,004       98.9 %     70.1 %     57.4 %
Other revenue
    242       0.3 %     437       0.4 %     2,366       1.3 %     80.6 %     441.4 %
                                                                 
Total non-interest revenue
    69,713       99.0 %     118,613       99.4 %     188,370       100.2 %     70.1 %     58.8 %
Interest revenue
    3,145       4.5 %     5,024       4.2 %     3,635       1.9 %     59.7 %     (27.6 )%
Interest expense
    (2,431 )     (3.5 )%     (4,299 )     (3.6 )%     (3,905 )     (2.1 )%     76.8 %     (9.2 )%
                                                                 
Total net interest revenue
    714       1.0 %     725       0.6 %     (270 )     (0.1 )%     1.5 %     (137.2 )%
                                                                 
Net revenue
    70,427       100.0 %     119,338       100.0 %     188,100       100.0 %     69.4 %     57.6 %
                                                                 
EXPENSES:
                                                               
Employee compensation and benefits
    17,258       24.5 %     25,093       21.0 %     37,024       19.7 %     45.4 %     47.5 %
Selling and marketing
    12,517       17.8 %     21,836       18.3 %     29,312       15.6 %     74.5 %     34.2 %
Trading expenses and commissions
    10,321       14.7 %     10,436       8.7 %     16,310       8.7 %     1.1 %     56.3 %
Bank fees
    935       1.3 %     2,316       1.9 %     3,754       2.0 %     147.7 %     62.1 %
Depreciation and amortization
    897       1.3 %     1,911       1.6 %     2,496       1.3 %     113.0 %     30.6 %
Communications and data processing
    873       1.2 %     1,659       1.4 %     2,467       1.3 %     90.0 %     48.7 %
Occupancy and equipment
    1,045       1.5 %     1,616       1.4 %     2,419       1.3 %     54.6 %     49.7 %
Bad debt provision
    574       0.8 %     1,164       1.0 %     1,418       0.8 %     102.8 %     21.8 %
Professional fees
    1,295       1.8 %     1,380       1.2 %     3,104       1.7 %     6.6 %     124.9 %
Software expense
    78       0.1 %     123       0.1 %     888       0.5 %     57.7 %     622.0 %
Professional dues and membership
    48       0.1 %     187       0.2 %     773       0.4 %     289.6 %     313.4 %
Write-off of deferred initial public offering costs
          0.0 %           0.0 %     1,897       1.0 %            
Change in fair value of convertible preferred stock embedded derivative
    61,732       87.7 %     165,280       138.5 %     (181,782 )     (96.6 )%     167.7 %     (210.0 )%
Impairment of intangible assets
    165       0.2 %           0.0 %           0.0 %     (100.0 )%      
Other
    3,085       4.4 %     (627 )     (0.5 )%     1,424       0.8 %     (120.3 )%     (327.1 )%
                                                                 
Total
    110,823       157.4 %     232,374       194.7 %     (78,496 )     (41.7 )%     109.7 %     (133.8 )%
                                                                 
INCOME/(LOSS) BEFORE INCOME TAX EXPENSE AND EQUITY IN EARNINGS OF EQUITY METHOD INVESTMENT
    (40,396 )     (57.4 )%     (113,036 )     (94.7 )%     266,596       141.7 %     179.8 %     (335.9 )%
Income tax expense
    9,063       12.9 %     21,615       18.1 %     34,977       18.6 %     138.5 %     61.8 %
Equity in earnings of equity method investment
    (43 )     (0.1 )%           0.0 %     (214 )     (0.1 )%     (100.0 )%     0.0 %
                                                                 
NET INCOME/(LOSS)
    (49,502 )     (70.3 )%     (134,651 )     (112.8 )%     231,405       123.0 %     172.0 %     (271.9 )%
                                                                 
Net income/(loss) applicable to noncontrolling interest
          0.0 %           0.0 %     (21 )     0.0 %     0.0 %     0.0 %
                                                                 
Net income/(loss) applicable to GAIN Capital Holdings, Inc. 
  $ (49,502 )     (70.3 )%   $ (134,651 )     (112.8 )%   $ 231,426       123.0 %     172.0 %     (271.9 )%
                                                                 


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Year ended December 31, 2008 compared to year ended December 31, 2007
 
Overview
 
Our total net revenue increased $68.8 million, or 57.6%, to $188.1 million for the year ended December 31, 2008, compared to $119.3 million for the year ended December 31, 2007. Our total net income increased by $366.1 million to $231.4 million for the year ended December 31, 2008, compared to a loss of $134.7 million for the year ended December 31, 2007. Our adjusted net income (a non-GAAP measure which excludes the impact of the embedded derivative liability) increased $19.0 million, or approximately 62.1%, to $49.6 million for the year ended December 31, 2008, compared to $30.6 million for the year ended December 31, 2007. Our results for the year ended December 31, 2008 reflect the impact of the embedded derivative liability associated with our outstanding preferred stock and the following principal factors:
 
  •  customer trading volume increased by $824.0 billion to $1,498.6 billion, or 122.2% ($172.4 billion of trading volume was attributable to customers residing in China for the 2008 period);
 
  •  trading revenue per million traded decreased by $51.1 to $124.1, or 29.2%;
 
  •  net deposits received from customers increased by $93.1 million to $277.3 million, or 50.5% ($25.3 million of net deposits received was attributable to customers residing in China during the 2008 period); and
 
  •  traded accounts increased from 43,139 to 52,555, or 21.8% (11,647 traded accounts were attributable to customers residing in China for the 2008 period).
 
Revenue
 
Our total net revenue increased $68.8 million, or 57.6%, to $188.1 million for the year ended December 31, 2008, compared to $119.3 million for the year ended December 31, 2007. Trading revenue increased $67.8 million to $186.0 million for the year ended December 31, 2008, compared to $118.2 million for the year ended December 31, 2007. The increase in trading revenue was primarily due to an increase in customer trading volume for the year ended December 31, 2008 of $824.0 billion, or 122.2%, to $1,498.6 billion, compared to $674.5 billion for the year ended December 31, 2007. In addition, traded accounts for the year ended December 31, 2008, increased by 9,416 to 52,555, or 21.8%. We believe our revenue growth was primarily the result of increased currency volatility in 2008 which increased our customer trading volumes and our trading revenue, our increased marketing efforts which resulted in increased enrollment in our registered practice trading accounts and increased the number of tradable accounts, and our continued international expansion, which resulted in increased customers and customer trading volume.
 
For the year ended December 31, 2008 net revenue associated with customers residing in China was $24.4 million, compared to $20.6 million for the year ended December 31, 2007. For the year ended December 31, 2008 customers residing in China represented $172.4 billion of our customer trading volume, $25.3 million of our net deposits and 11,647 of our traded accounts, compared to $103.4 billion of our customer trading volume, $26.0 million of our net deposits and 11,568 of our traded accounts for the year ended December 31, 2007.
 
Trading revenue per million traded decreased by $51.1, or 29.2%, to $124.1 and net deposits received from customers increased for the year ended December 31, 2008 by $93.1 million, or 50.5%, to $277.3 million compared to $184.2 million for the year ended December 31, 2007. We believe the decline in trading revenue per million traded was primarily due to the reduction in the wholesale forex pricing spreads that we receive from our wholesale forex trading partners and our reaction to increased market pressure on pricing among our competitors during the year ended December 31, 2008 compared to the year ended December 31, 2007. We believe that the reduction during 2008 in the wholesale forex pricing spreads that we receive from our wholesale forex trading partners was a result of increased competition among financial institutions that supply wholesale forex pricing and an increase in the demand from retail forex traders. As a result of this increased competition among wholesale forex trading partners and increased demand from retail forex traders, we believe tighter forex pricing spreads were offered industry wide. In order to remain competitive, we in turn offered tighter forex pricing spreads to our customers. We do not believe that our trading revenue per million traded results were materially impacted by our termination of our business with customers residing in China.


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Our other revenue increased $2.0 million to $2.4 million for the year ended December 31, 2008 from $0.4 million for the year ended December 31, 2007. The increase was primarily due to a $1.3 million increase in trading commissions related to the introduction in 2008 of our Forex Pro trading program which allows selected clients to receive tighter spreads on trades in return for a commission fee paid to us. The additional $0.7 million increase was the result of customer inactivity fees received by us from customers who maintain accounts that have not executed a trade and have not maintained the required minimum account balance during the year ended December 31, 2008. The increase in customer inactivity fees is primarily due to our increased customer base.
 
Our net interest revenue decreased $1.0 million to interest expense of $0.3 million for the year ended December 31, 2008 compared to $0.7 million for the year ended December 31, 2007 due to a decrease in the average effective interest rate earned on our deposits and investments which was 1.5% for the year ended December 31, 2008 compared to 3.8% for the year ended December 31, 2007.
 
Certain balances have been reclassified to conform with the concepts of Regulation S-X, Rule 9.04. These include the reclassification of $2.1 million, $3.7 million, and $2.7 million for the year ended December 31, 2006, 2007 and 2008, respectively, from interest expense on notes payable to interest expense in the net interest revenue (expense) category on the Consolidated Statements of Operations and Comprehensive Income (Loss).
 
Total expenses
 
Our total expenses decreased $310.9 million, or 133.8%, to a net gain of $78.5 million for the year ended December 31, 2008, including a gain of $181.8 million relating to the change in fair value of our preferred stock embedded derivative and a $1.9 million loss relating to the write-off of our deferred initial public offering costs, compared to $232.4 million, including $165.3 million relating to the change in fair value of our preferred stock embedded derivative, for the year ended December 31, 2007. Other changes in our expenses were primarily due to a $11.9 million increase in employee compensation and benefits, a $7.5 million increase in selling and marketing, a $5.9 million increase in trading expenses, a $2.1 million increase in other expense, $1.7 million increase in professional fees and a $1.4 million increase in bank fees. The remaining increase of $3.8 million was due to spending increases in each of our remaining expense categories with no individual category increasing more than $0.8 million. For the year ended December 31, 2008, our total direct expenses associated with our operations in China were $5.9 million compared to $4.8 million for the year ended December 31, 2007.
 
Employee compensation and benefits expenses increased $11.9 million, or 47.5%, to $37.0 million for the year ended December 31, 2008, from $25.1 million for the year ended December 31, 2007. Salaries and benefits (excluding bonus and stock compensation) increased $7.3 million primarily due to increases in headcount from 299 at December 31, 2007 to 319 at December 31, 2008. The increase in the headcount was primarily in the marketing and sales functions and was required to support the overall growth in our business. Stock compensation expense increased $2.8 million due to increased grants distributed in 2008. Bonus expense increased $1.8 million primarily due to the favorable operating results of our business. For the year ended December 31, 2008, our total direct employee compensation and benefits expenses associated with our operations in China were $1.4 million compared to $0.7 million for the year ended December 31, 2007.
 
Selling and marketing expenses increased $7.5 million, or 34.2%, to $29.3 million for the year ended December 31, 2008 from $21.8 million for the year ended December 31, 2007. Increased sales and marketing expenses were primarily due to increased online, search engine, consulting, print and television advertising. For the year ended December 31, 2008, our total direct selling and marketing expenses associated with our operations in China were $3.1 million compared to $2.5 million for the year ended December 31, 2007, an increase of $0.6 million, or approximately 24.3%.
 
Trading expenses and commissions increased $5.9 million to $16.3 million for the year ended December 31, 2008 compared to $10.4 million for the year ended December 31, 2007, primarily due to an increase in customer trading volume directed to us from our white label partners and introducing brokers of $261.6 billion to $489.4 billion for the year ended December 31, 2008, compared to $227.8 billion for the year ended December 31, 2007. This expense is largely variable and is directly associated with customer trading volume directed to us from our white label partners and introducing brokers. For the year ended December 31, 2008, our total direct trading


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expenses and commissions from our operations in China were $0.7 million compared to $1.0 million for the year ended December 31, 2007.
 
Other expense increased $2.1 million to $1.5 million for the year ended December 31, 2008 compared to a gain of $0.6 million for the year ended December 31, 2007, primarily due to a $1.5 million recovery that was originally reserved in 2006 relating to the bankruptcy of one of our wholesale forex trading partners. We incurred $0.1 million in expense related to the closure of our China office. Software expense increased $0.8 million, professional dues and membership expense increased $0.6 million, and travel expense increased $0.2 million. These increased expenses were required to support the overall growth of our business. For the year ended December 31, 2008, our total other direct expense and commissions from our operations in China was $0.2 million compared to $0.2 million for the year ended December 31, 2007.
 
Professional fee expense increased $1.7 million to $3.1 million for the year ended December 31, 2008 compared to $1.4 million for the year ended December 31, 2007 due to a $1.0 million increase in legal expenses, $0.5 million increase in consulting expense and $0.2 million increase in audit fees. These increased expenses were required to support the overall growth of our business. For the years ended December 31, 2008 and 2007, we believe that total other direct expenses related to our operations in China were not material.
 
Bank fees increased $1.4 million to $3.7 million for the year ended December 31, 2008 from $2.3 million for the year ended December 31, 2007. Increased bank fees were primarily due to an increase in credit card processing fees as a result of an increase of $51.7 million in the total net deposits received from customers funded through the use of customer credit cards. For the years ended December 31, 2008 and 2007, we believe that our total direct bank fees related to our operations in China were not material.
 
Communications and data processing expenses increased $0.8 million, occupancy and equipment expenses increased $0.8 million, depreciation and amortization expense increased $0.6 million and bad debt provision increased $0.3 million. These increased expenses were required to support the overall growth of our business. For the year ended December 31, 2008, our total direct communications and data processing expenses from our operations in China were $0.1 million compared to $0.1 million for the year ended December 31, 2007.
 
In December 2008, we wrote off $1.9 million of legal, audit, tax, and other professional fees that were previously capitalized in anticipation of an initial public offering in 2008. The change in fair value of the preferred stock embedded derivative amounted to a gain of $181.8 million for the year ended December 31, 2008 compared to a loss of $165.3 million for the year ended December 31, 2007. We have determined that the convertible feature in the Company’s Convertible, Redeemable Preferred Stock Series A, Series B, Series C, Series D and Series E meets the definition of an “embedded derivative” in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. Based on the Black Scholes options pricing model the embedded derivative is recorded at fair value and reported in the preferred stock embedded derivative liability on the Consolidated Statements of Financial Condition with change in fair value recorded to our Consolidated Statements of Operations and Comprehensive Income.
 
Income taxes
 
Income taxes increased $13.4 million to $35.0 million for the year ended December 31, 2008 from $21.6 million for the year ended December 31, 2007. Our effective tax rate was 13.1% for year ended December 31, 2008 and 19.1% for the year ended December 31, 2007. Our adjusted effective tax rate was 41.2% for the year ended December 31, 2008 compared to 41.4% for the year ended December 31, 2007. This non-GAAP financial measure has certain limitations in that it does not have a standardized meaning and thus our definition may be different from similar non-GAAP financial measures used by other companies and/or analysts and may differ from period to period. Thus, it may be more difficult to compare our financial performance to that of other companies. For the year ended December 31, 2008, our income tax expense related to our operations in China was $7.5 million compared to $6.5 million for the year ended December 31, 2007. The difference between our effective tax rate and adjusted tax rate is due to the fact that our income tax expense is not affected by the change in fair value of our convertible, redeemable preferred stock embedded derivative from prior periods.


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Year ended December 31, 2007 compared to year ended December 31, 2006
 
Overview
 
Our total net revenue increased $48.9 million, or 69.4%, to $119.3 million for the year ended December 31, 2007, compared to $70.4 million for the year ended December 31, 2006. Our total net income decreased $85.1 million to a $134.7 million loss for the year ended December 31, 2007, compared to a $49.5 million loss for the year ended December 31, 2006. Our adjusted net income (a non-GAAP measure which excludes the impact of the embedded derivative liability) increased $18.4 million, or approximately 150.4%, to $30.6 million for the year ended December 31, 2007, compared to $12.2 million for the year ended December 31, 2006. Our results for the year ended December 31, 2007 reflect the impact of the embedded derivative liability associated with our outstanding preferred stock and the following principal factors:
 
  •  customer trading volume increased by $227.1 billion to $674.5 billion, or 50.8% ($103.4 billion of trading volume was attributable to customers residing in China for the 2007 period);
 
  •  trading revenue per million traded increased by $19.9 to $175.2, or 12.8%;
 
  •  net deposits received from customers increased by $81.4 million to $184.2 million, or 79.1% ($26.0 million of net deposits received was attributable to customers residing in China during the 2007 period); and
 
  •  traded accounts increased from 28,270 to 43,139, or 52.6% (11,568 traded accounts were attributable to customers residing in China for the 2007 period).
 
Revenue
 
Our total net revenue increased $48.9 million, or 69.4%, to $119.3 million for the year ended December 31, 2007, compared to $70.4 million for the year ended December 31, 2006. Trading revenue increased $48.7 million to $118.2 million for the year ended December 31, 2007, compared to $69.5 million for the year ended December 31, 2006. The increase in trading revenue was primarily due to an increase in customer trading volume for the year ended December 31, 2007 of $227.1 billion, or 50.8%, to $674.5 billion, compared to $447.4 billion for the year ended December 31, 2006. Traded accounts increased by 14,869 accounts, to 43,139, or 52.6% for the year ended December 31, 2007. We believe our revenue growth was primarily the result of: increased currency volatility in 2007 which increased our customer trading volumes and our trading revenue; our increased marketing efforts which resulted in increased enrollment in our registered practice trading accounts and increased the number of tradable accounts; and our continued international expansion, which resulted in increased customers and customer trading volume.
 
For the year ended December 31, 2007 net revenue associated with customers residing in China was $20.6 million, compared to $8.7 million for the year ended December 31, 2006. For the year ended December 31, 2007 customers residing in China represented $103.4 billion of our customer trading volume, $26.0 million of our net deposits and 11,568 of our traded accounts, compared to $50.8 billion of our customer trading volume, $10.5 million of our net deposits and 5,533 of our traded accounts for the year ended December 31, 2006.
 
Trading revenue per million traded increased by $19.9, or 12.8%, to $175.2 and net deposits received from customers increased for the year ended December 31, 2007 by $81.4 million, or 79.1%, to $184.2 million compared to $102.8 million for the year ended December 31, 2006. We believe the increase in trading revenue per million was primarily due to increased currency volatility during the year ended December 31, 2007 compared to the year ended December 31, 2006.
 
Our other revenue increased to $0.4 million for the year ended December 31, 2007 from $0.2 million for the year ended December 31, 2006 primarily due to a $0.2 million increase in customer inactivity fees received by us from customers who maintain accounts that have not executed a trade and have not maintained the required minimum account balance during the year ended December 31, 2007. The increase in customer inactivity fees is primarily due to our increased customer base.
 
Our net interest revenue remained consistent at $0.7 million for the year ended December 31, 2007 compared to the year ended December 31, 2006.


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Total expenses
 
Our total expenses increased $121.6 million, or 109.7%, to $232.4 million, including $165.3 million relating to the change in fair value of our preferred stock embedded derivative, for the year ended December 31, 2007 compared to $110.8 million, including $61.7 million relating to the change in fair value of our preferred stock embedded derivative, for the year ended December 31, 2006. Other changes in our expenses were primarily due to a $9.3 million increase in selling and marketing, a $7.8 million increase in employee compensation and benefits and a $1.4 million increase in bank fees, partially offset by a $3.7 million decrease in other expense. The remaining increase of $3.2 million was due to spending increases in each of our remaining expense categories with no individual category increasing more than $1.0 million. For the year ended December 31, 2007, our total direct expenses associated with our China operations were $4.8 million compared to $2.8 million for the year ended December 31, 2006.
 
Selling and marketing expenses increased $9.3 million, or 74.5%, to $21.8 million for the year ended December 31, 2007 from $12.5 million for the year ended December 31, 2006. Increased sales and marketing expenses were primarily due to increased online, search engine, print and television advertising. For the year ended December 31, 2007, our total direct selling and marketing expenses associated with our China operations were $2.5 million compared to $1.2 million for the year ended December 31, 2006.
 
Employee compensation and benefits expenses increased $7.8 million, or 45.4%, to $25.1 million for the year ended December 31, 2007, from $17.3 million for the year ended December 31, 2006. Salaries and benefits (excluding bonus and stock compensation) increased $4.6 million primarily due to headcount increasing from 241 at December 31, 2006 to 299 at December 31, 2007. These headcount increases were primarily in the marketing and sales functions and were required to support the overall growth in our business. Bonus expense increased $1.8 million primarily due to the favorable operating results of our business. The remaining increase in employee compensation and benefits was due to stock compensation expense. For the year ended December 31, 2007, our total direct employee compensation and benefits expenses associated with our China operations were $0.7 million compared to $0.3 million for the year ended December 31, 2006.
 
Bank fees increased $1.4 million to $2.3 million for the year ended December 31, 2007 from $0.9 million for the year ended December 31, 2006. Increased bank fees were primarily due to an increase in credit card processing fees as a result of an increase of $46.5 million in the total net deposits received from customers funded through the use of customer credit cards. For the years ended December 31, 2007 and 2006, we believe that our total bank fees related to our operations in China were not material.
 
Other expense decreased $3.7 million to a gain of $0.6 million for the year ended December 31, 2007 from $3.1 million for the year ended December 31, 2006. In 2006, we fully reserved $2.3 million due to the bankruptcy of one of our wholesale forex trading partners. We settled the bankruptcy claim by the Refco Trustee for $0.8 million in 2007 which resulted in a credit to other expense of $1.5 million. Depreciation and amortization expenses increased $1.0 million, communications and data processing expenses increased $0.8 million, occupancy and equipment expenses increased $0.6 million, bad debt provision increased $0.6 million, and professional fee expense increased $0.1 million. These increased expenses were required to support the overall growth of our business. Impairment of intangible assets decreased by $0.2 million due to a non-recurring charge related to the purchase of a marketing list from a wholesale forex trading partner. Trading expenses and commissions increased $0.1 million. This expense is largely variable and is directly associated with the customer trading volume related to our white label partners and introducing brokers. For the year ended December 31, 2007 our total other direct expenses associated with our China operations were $0.2 million compared to $0.1 million for the year ended December 31, 2006.
 
Income taxes
 
Income taxes increased $12.6 million to $21.6 million for the year ended December 31, 2007 from $9.1 million for the year ended December 31, 2006. Our effective tax rate was 19.1% for year ended December 31, 2007 and 22.4% for the year ended December 31, 2006. Our adjusted effective tax was 41.4% for the year ended December 31, 2007 compared to 42.5% for the year ended December 31, 2006. This non-GAAP financial measure has certain limitations in that it does not have a standardized meaning and thus our definition may be different from similar non-GAAP financial measures used by other companies and/or analysts and may differ from period to period. Thus, it


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may be more difficult to compare our financial performance to that of other companies. The decrease in our effective tax rate was primarily due to the reduced effect of state and local income taxes and other permanent items in relation to the increase of income before taxes. The difference between our effective tax rate and adjusted tax rate is due to the lack of impact on our income tax expense from the change in fair value on our convertible preferred stock embedded derivative. For the year ended December 31, 2007, our total income tax expense related to our China operations was $6.5 million compared to $2.5 million for the year ended December 31, 2006.
 
Quarterly results of operations for the three-month periods ended September 30, 2007 through September 30, 2009
 
The following table sets forth our unaudited quarterly Results of Operations for the three-month periods ended September 30, 2007 through September 30, 2009. The unaudited quarterly consolidated information has been prepared on the same basis as our audited consolidated financial statements, and, in the opinion of management, the statement of operations data includes all adjustments, consisting of normal recurring adjustments, necessary for the fair statements of the results of operations for these periods. You should read this table in conjunction with our financial statements and the related notes located elsewhere in this prospectus. The results of operations for any quarter are not necessarily indicative of the results of operations for any future periods.
 


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Table of Contents

                                                                         
    Three Months Ended  
    September 30,
    December 31,
    March 31,
    June 30,
    September 30,
    December 31,
    March 31,
    June 30,
    September 30,
 
    2007     2007     2008     2008     2008     2008     2009(1)     2009     2009  
                      (dollars in thousands)                    
                            (unaudited)                          
 
REVENUE:
                                                                       
Trading revenue
  $ 33,009     $ 39,243     $ 47,432     $ 38,978     $ 42,921     $ 56,673     $ 31,885     $ 45,107     $ 36,805  
Other Revenue
    49       199       520       237       1,226       383       710       358       586  
                                                                         
Total non-interest revenue
    33,058       39,442       47,952       39,215       44,147       57,056       32,595       45,465       37,391  
Interest revenue
    1,299       1,267       1,176       996       1,008       455       91       79       57  
Interest expense
    (1,709 )     (1,148 )     (1,147 )     (1,012 )     (999 )     (747 )     (631 )     (614 )     (603 )
                                                                         
Total net interest revenue/(expense)
    (410 )     119       29       (16 )     9       (292 )     (540 )     (535 )     (546 )
                                                                         
Net revenue
    32,648       39,561       47,981   &n