WHAT ARE THE RISKS WITH THIS APPROACH?

This section is subject to the disclaimer on forward looking statements

General risks

There are business and market risks inherent in any listed security, which could materially affect the Company’s earnings and the pricing of E72 Shares, including:

(a) movements in local and international economies and share and capital markets;

(b) changes in interest rates and other general economic conditions;

(c) changes in investor sentiment and perceptions;

(d) upheaval and uncertainty due to terrorist activities, insurrection, war and general conflict;

(e) changes in government fiscal, monetary and regulatory policies and statutory changes; and

(f) the use of leverage within E72IPL will magnify ALL of the above risks within its operation and hence the value and pricing of E72 Shares.

External risk factors

There are a number of external risk factors over which E72 has little or no control which could materially affect the future pricing of E72 Shares or the Company’s earnings, including:

(a) taxation, where changes to tax legislation and regulation, or their interpretation, may adversely affect the value of an investment in E72 Shares and may affect E72 shareholders differently;

(b) changing economic conditions in Australia and globally which may affect E72’s business and financial condition. Any protracted slowdown in economic conditions or adverse changes in such factors as the level of inflation, interest rates, exchange rates, government policy (including fiscal, monetary and regulatory policies) and employment rates, among others, are outside the control of E72 and the directors and may result in materially adverse impacts on the business and its operating results;

(c) stock market losses, poor investment returns or volatility, a weakening or downturn of the financial services, funds and wealth management industries;

(d) changes in accounting standards or in the interpretation of those accounting standards that occur in the future may adversely impact on E72’s business or the costs associated with E72’s business and may adversely affect its financial condition; and

(e) illiquidity and subsequent volatility in the sale price of E72 Shares, with no guarantee that a more active market in E72 Shares will develop despite the changed and increased activities of E72.

Specific risk factors

The key issues impacting the success of the business undertaken by E72 are:

(a) the Company’s success and growth strategy depends heavily upon the board of Directors, especially Andrew Brown, who will be responsible for the investment operation. The loss of their services and particularly those of Mr. Brown for any reason could have a material and adverse effect on the Company’s business, operating results and financial condition;

(b) the success and profitability of the Company depends, in large part, upon the ability of the Andrew Brown to trade appropriately in leveraged products, optimize the timing of entry and exit from such products, use appropriate protective overlays where desired, and invest in well-managed companies which have the ability to increase in value over time. In most cases, the directors and management of E72 will be unlikely to be in a position to influence materially the decisions and strategies made and adopted by the management of those companies;

(c) E72IPL, as a subsidiary of E72, will be operating an investment strategy which will use proportionally large quantums of debt capital to leverage the small equity capital base. Debt capital will be provided by operators of CFD platforms, where leverage can be as high as 199.5:1 for equity index and currency contracts (0.5% equity/margin; 99.5% debt), 19:1 for individual securities (5% equity/95% debt) and by providers of margin loans over individual securities where the highest level of leverage is proportionally lower at 3:1 (25% equity; 75% debt). E72IPL will be maintaining a maximum level of gross exposure (where the gross initial value of long and short positions are aggregated, not netted) of 5:1. This implies that an adverse move of approximately 16% would eliminate E72IPL and hence E72’s equity capital base;

(d) In the event that E72’s capital is depleted, the Company may need to raise additional equity or debt funds in the future to finance its activities and requirements. There is no assurance that the Company will be able to obtain additional financing when required in the future, that it will be able to pay margin calls to CFD or margin loan providers or that the terms and time frames associated with such funding will be acceptable to E72. This may have an adverse effect on the Company’s ability to achieve its strategic goals and have a negative effect on its financial results.

(e) CFD and margin loan providers will have a first ranking security over the individual exposures entered into. In the event that E72IPL/E72 is unable to provide requisite margin financing, CFD and margin loan providers will have an irrefutable right to close out positions, and invoke personal guarantees if there is a shortfall;

(f) CFD and margin loan providers have a right to change the margin terms offered to customers at any time with little or no notice in light of market movements and circumstances. This can lead to a need to provide additional margin at short notice, which may not be possible, and result in E72IPL reducing or eliminating desired positions.

(g) the price of investments that the Company may purchase can fall as well as rise; the price of investments that the Company may short-sell can rise as well as fall and lead to theoretically infinite losses;

(h) the past performance of investments and funds managed by directors and persons associated with the directors are not necessarily a guide to the future performance of the Company;

(i) E72IPL may make investments in companies with small market capitalisations. In general, trading in securities in such entities has more limited liquidity than larger companies and so has the potential for greater volatility. Accordingly, the returns that may be generated by the Company are likely to also be subject to that greater volatility;

(j) E72IPL may make investments in securities which have limited or no voting entitlements. In general, such securities trade at a large discount to intrinsic value, but there is no guarantee that E72IPL will be able to exert adequate influence to change the voting rights of such securities, which may remain trading at high discounts. In addition, trading in such securities tends to have more limited liquidity than fully voting securities;

(k) E72IPL may make investments in securities not listed on an organised stock exchange, where financial performance is heavily uninfluenced by managerial expertise, and where no ready market for the sale or liquidation of such investments exists. Accordingly, these investments carry substantially larger risks of financial loss;

(l) E72IPL may give financial support to companies whose securities are not listed on an organised stock exchange and where the capacity to repay such financial assistance is heavily influenced by managerial expertise. Accordingly, the extension of such support carries substantially larger risks of financial loss;

(m) in the course of acquiring or selling investments, the Company is required to deal with counterparties who may be incapable of settling transactions due to financial stress. E72IPL aims to mitigate this risk by dealing with brokers and counterparties of good standing;

(n) shareholders are strongly advised to regard any investments in the Company as a long term proposition and to be aware that, as with any equity investment, substantial fluctuations in the value of their investment may occur over time;

(o) operating costs for the Company as a proportion of total assets are affected by the level of total assets of the Company. The Company’s pro-forma balance sheet disclosed in Section 3.4 illustrates that the Company will have a very modest level of initial operating funds, which may have an impact on the Company’s ability to execute its strategic plans in the event that a component of that capital is lost;

(p) the price at which E72 Shares are traded on NSX may be below the net asset value of those E72 Shares. E72’s constitution does not entitle E72 shareholders to require the Company to implement a share buy-back or any other capital reconstruction or to take any other remedial action;

(q) poor investment performance by E72 could inhibit the ability of E72 to raise funding in the future and reduce the willingness of distribution or administrative partners to do business with E72;

(r) E72 could become subject to litigation in relation to investment losses, negligence or claims under contractual relationships with customers or suppliers; and

(s) E72 is dependent upon its own financial management systems, which if damaged or disrupted could lead to financial loss. E72 attempts to mitigate such damage by utilising third party outsourced providers and backing up key business records.