Form 10
Table of Contents

As filed with the Securities and Exchange Commission on March 31, 2011

File No.                         

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10

GENERAL FORM FOR REGISTRATION OF SECURITIES

PURSUANT TO SECTION 12(b) OR 12(g) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

 

WisdomTree Investments, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   13-3487784

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

380 Madison Avenue, 21st Floor

New York, New York

  10017
(Address of Principal Executive Office)   (Zip Code)

Registrant’s telephone number, including area code:

(212) 801-2080

Securities to be registered pursuant to Section 12(b) of the Act:

 

Title of each class

to be registered

 

Name of each exchange on which

each class is to be registered

Common Stock, $0.01 par value per share  

Securities to be registered pursuant to Section 12(g) of the Act: None

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   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

 


Table of Contents

TABLE OF CONTENTS

 

ITEM 1.

 

BUSINESS

     1   

ITEM 1A.

 

RISK FACTORS

     17   

ITEM 2.

 

FINANCIAL INFORMATION

     27   

ITEM 3.

 

PROPERTIES

     46   

ITEM 4.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     47   

ITEM 5.

 

DIRECTORS AND EXECUTIVE OFFICERS

     49   

ITEM 6.

 

EXECUTIVE COMPENSATION

     52   

ITEM 7.

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

     69   

ITEM 8.

 

LEGAL PROCEEDINGS

     71   

ITEM 9.

 

MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     71   

ITEM 10.

 

RECENT SALES OF UNREGISTERED SECURITIES

     72   

ITEM 11.

 

DESCRIPTION OF OUR CAPITAL STOCK

     74   

ITEM 12.

 

INDEMNIFICATION OF DIRECTORS AND OFFICERS

     74   

ITEM 13.

 

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     76   

ITEM 14.

 

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     76   

ITEM 15.

 

FINANCIAL STATEMENTS AND EXHIBITS

     77   

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this registration statement, including documents incorporated by reference herein, constitute “forward-looking statements.” Forward-looking statements generally can be identified by the use of forward- looking terminology such as “outlook,” “objective,” “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “should,” “plans,” or “continue,” or similar expressions suggesting future outcomes or events. Such forward-looking statements reflect our current expectations regarding future events and operating performance and speak only as of the date of this registration statement. Such forward-looking statements are based on a number of assumptions which may prove to be incorrect, including, but not limited to the assumption that the projects will operate and perform in accordance with our expectations. Forward-looking statements involve significant risks and uncertainties, should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether or not or the times at or by which such performance or results will be achieved. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements, including, but not limited to, the factors discussed under “Risk Factors.” Our business is both competitive and subject to various risks.

These risks include, without limitation:

 

   

We have only a limited operating history and we have not yet reported net income.

 

   

Difficult market conditions and declining prices of securities can adversely affect our business by reducing the market value of the assets we manage or causing customers to sell their fund shares and triggering redemptions.

 

   

Volatility and disruption of the capital and credit markets, and adverse changes in the global economy, may significantly affect our results of operations and may put pressure on our financial results.

 

   

The amount and mix of our assets under management, which impact revenue, are subject to significant fluctuations.

 

   

Most of our assets under management are held in ETFs that invest in foreign securities and we have substantial exposure to foreign market conditions and we are subject to currency exchange rate risks.

 

   

We derive a substantial portion of our revenues from products invested in emerging markets.

 

   

We derive a substantial portion of our revenues from a limited number of products.

Other factors, such as general economic conditions, including currency exchange rate fluctuations, also may have an effect on the results of our operations. Many of these risks and uncertainties can affect our actual results and could cause our actual results to differ materially from those expressed or implied in any forward-looking statement made by us or on our behalf. For a description of risks that could cause our actual results to materially differ from our current expectations, please see Item 1A. “Risk Factors” in this registration statement.

These forward-looking statements are made as of the date of this registration statement and, except as expressly required by applicable law, we assume no obligation to update or revise them to reflect new events or circumstances.

 

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ITEM 1. BUSINESS

Unless otherwise stated, or the context otherwise requires, references in this registration statement to “we,” “us,” “our” and “WisdomTree” refer to WisdomTree Investments, Inc. and those entities owned or controlled by WisdomTree Investments, Inc. WisdomTree® is our U.S. registered service mark. Diversified Trends Indicator and DTI® are trademarks of Alpha Financial Technologies, LLC.

Summary

We are the eighth largest sponsor of exchange traded funds, or ETFs, in the United States based on assets under management, or AUM, as of March 29, 2011, with an AUM of more than $11 billion. An ETF is an investment fund that holds assets such as equities, bonds, currencies or commodities and trades at approximately the same price as the net asset value of its underlying assets. ETFs offer exposure to a wide variety of investment themes, including the broad U.S. and global markets, as well as specific sectors, regions, countries and asset classes, such as commodities, real estate or currencies. We currently offer a comprehensive family of 46 ETFs, which includes 34 international and domestic equity ETFs, 9 currency ETFs, two recently launched international fixed income ETFs and one recently launched managed futures strategy ETF.

The ETF industry is among the fastest growing sectors of the broader asset management industry. We believe ETFs have been one of the most innovative, revolutionary and disruptive technologies to emerge in the last two decades in the asset management industry. Compared to mutual funds, ETFs provide investors with better transparency, greater liquidity, improved tax efficiency and lower costs. We believe these characteristics make ETFs an effective investment tool for many investors, from both active and passive institutional managers to retail investors, and have contributed to the rapid growth of the ETF industry, which has experienced a compound annual growth rate of 31.2% over the past ten years. Despite this rapid growth, we believe there is considerable potential for further growth in the ETF industry as investors become more familiar with the benefits of ETFs compared to mutual funds and other investment products. Over the last several years, as a percent of total ETF and long-term mutual fund inflows and AUM, ETFs’ share has been growing. In fact, in 2008, the mutual fund industry experienced net outflows while the ETF industry experienced net inflows. And as of the end of 2010, mutual fund assets under management remains down 12% from the peak it reached in 2007, while the AUM of ETFs have increased 72% during that same period. We believe the trend towards ETFs will continue and accelerate as the ETF industry benefits from investor education initiatives, the shift by financial advisors to fee-based models, the launch of innovative new products, the introduction of new distribution channels and changing investor demographics.

We are not a traditional asset manager. We are an ETF sponsor focused on creating the most innovative and thoughtful ETFs for the marketplace. We believe there is a considerable growth opportunity for ETFs and are positioning WisdomTree to capitalize on this growth. Our goal is to become one of the top five ETF sponsors in the United States by focusing on our core competitive strengths:

 

   

the strong performance of our ETFs;

 

   

a track record of innovative product development;

 

   

our strong, seasoned and innovative management team;

 

   

our marketing, research and sales expertise;

 

   

strong brand recognition;

 

   

our ability to develop our own proprietary indexes; and

 

   

our highly scalable business model.

We intend to use these core competitive strengths to:

 

   

leverage our asset levels, trading volumes and performance track record

 

   

continue to launch innovative new products that diversify our product offerings and revenue stream; and

 

   

selectively pursuing acquisitions and partnerships.

We provide investment advisory and other management services to the WisdomTree Trust and WisdomTree ETFs. In exchange for providing these services, we receive advisory fee revenues based on a percentage of the ETFs average daily net assets. Our expenses are predominantly related to selling, operating and marketing our ETFs. Our revenues have

 

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increased substantially since we launched in June 2006. Our revenues increased to $41.6 million in 2010 compared to $22.1 million in 2009 and $23.6 million in 2008. We have improved our net loss to $7.5 million in 2010, from a loss of $21.2 million in 2009 and a loss of $27.0 million in 2008.

Our principal executive office is located at 380 Madison Avenue, 21st Floor, New York, New York, 10017, and our telephone number is (212) 801-2080. Our website is www.WisdomTree.com. Information contained on, or that can be accessed through, our website is not part of this registration statement.

We have applied to have our common stock listed on the              under the symbol “        .”

Our Industry

ETFs have been in existence for nearly two decades. The first ETF, the Standard & Poor’s Depositary Receipts commonly known as the SPDR, or the “Spider,” was launched in the United States in 1993 and tracked the Standard & Poor’s 500 index. The success of this first ETF led to the creation of additional ETFs. In 1996, Barclays Global Investors launched “iShares” ETFs (then known as World Equity Benchmark Shares, or WEBS) based on MSCI country indexes. The “Diamond” ETF, which is based on the Dow Jones Industrial Average Index, was introduced in 1998 and the “QQQ”, which tracks the Nasdaq 100 index, was launched in 1999. Due to the success of these and other early ETFs, the scale and scope of ETFs has grown rapidly. As of February 28, 2011, there were approximately 1,000 ETFs in the United States with an aggregate AUM reaching over $1 trillion.

ETFs were initially marketed mostly to institutional investors for use primarily in sophisticated trading strategies like hedging, but today, industry experts believe that institutional investors account for only about half of the assets held in ETFs. ETFs have gained in popularity among a broad range of investors and have impacted the way they invest and where they invest. ETFs have provided investors with access to various investment themes and asset classes such as international and emerging market equities, commodities, real estate, currencies and sophisticated trading strategies, which were once reserved for the exclusive use of hedge funds and other institutional investors, and all at significantly lower fees.

Exchange Traded Funds

An ETF is an investment fund that holds assets such as equities, bonds, currencies or commodities and trades at approximately the same price as the net asset value of its underlying assets over the course of the trading day. ETFs offer exposure to a wide variety of asset classes and investment themes, including the broad U.S. and global markets and specific sectors, regions and countries, as well as the standard asset classes and investment styles. There are also ETFs that track certain specific investments, such as commodities, real estate or currencies. Like mutual funds, equity ETFs are baskets of investments that represent a diversified group of companies. However, ETFs have the following characteristics that distinguish them from mutual funds:

 

   

Transparency. ETFs disclose the composition of their underlying portfolios on a daily basis, unlike mutual funds which typically disclose their holdings every 90 days. As a result, investors “know what they own” and can make more informed investment decisions and respond to market activity.

 

   

Intraday Trading. Like stocks, ETFs can be bought and sold on exchanges throughout the trading day at market prices. ETFs update the indicative values of their underlying portfolios every 15 seconds. In contrast, mutual funds cannot be bought or sold using intraday prices but rather are bought or sold using end-of-day net asset values. As publicly-traded securities, ETF shares can be purchased on margin and sold short, enabling the use of hedging strategies, and traded using stop orders and limit orders, which allow investors to specify the price points at which they are willing to trade.

 

   

Tax Efficiency. In the United States, whenever a mutual fund or ETF realizes a capital gain that is not balanced by a realized loss, it must distribute the capital gain to its shareholders. These gains are taxable to all shareholders, even those who reinvest the gain distributions in additional shares of the fund. However, most ETFs have an additional mechanism not utilized by mutual funds that helps them reduce or eliminate taxable gains. ETFs typically redeem their shares through “in-kind” redemptions in which low-cost securities are transferred out of the ETF in exchange for fund shares. As a practical matter, mutual funds can not use this process. These in-kind redemption transactions are not taxable events for the ETF. By using this process, ETFs avoid the transaction fees and tax impact incurred by mutual funds that sell securities to generate cash to pay out redemptions. It is not uncommon for equity ETFs to distribute no capital gains to shareholders at the end of the year. In fact, all of our 34 WisdomTree equity ETFs had zero capital gain

 

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distributions in 2010. Tax-efficiency is also improved by the relatively low turnover in the indexes the ETFs are designed to track, which contrasts with active mutual fund managers who typically trade their holdings much more frequently.

 

   

Lower Fees. ETFs typically offer lower expense ratios because the vast majority of ETFs are not actively managed. While there are typically brokerage commissions charged for the purchase and sale of an ETF similar to what you would pay when you purchase or sell individual securities, the administrative fees that ETFs charge tend to be significantly lower as compared to their mutual fund counterparts. Also, ETFs are generally shielded from the costs associated with buying and selling shares to accommodate purchases and redemptions. On average, the fee for U.S. equity funds charged by ETFs is 0.53% while mutual funds are 1.42%.

Since ETFs trade like an equity security, they also offer significant accessibility and flexibility for investors. ETFs do not carry a minimum holding period or trade size. They can be easily accessed through online brokers or through a financial advisor. No paperwork is required between the fund sponsor and the end customer. Although investors typically pay brokerage commissions to buy or sell an ETF, ETFs do not carry “sales loads” or pay trailer fees to brokers like mutual funds. We believe these features make ETFs an attractive alternative to mutual funds or high-fee financial products or structures such as hedge funds.

Reasons for Using ETFs

ETFs are used in various ways by a range of investors, from conservative to speculative. ETF strategies include:

 

   

Low Cost Index Investing. Because of their low cost, ETFs are used by investors seeking to track a variety of indexes encompassing equities, commodities or fixed income over the short and long term.

 

   

Improved Access to Specific Asset Classes. Investors often use ETFs to gain access to specific market sectors or regions around the world using an ETF that holds a portfolio of securities in that region or segment instead of buying individual securities.

 

   

Protective Hedging. Investors seeking to protect their portfolios may use ETFs as a hedge against unexpected declines in prices.

 

   

Income Generation. Investors seeking to obtain income from their portfolios may buy dividend-paying ETFs, which encompass a basket of dividend-paying stocks rather than buying individual stocks or a fixed income ETF that typically distributes monthly income.

 

   

Speculative Investing. Investors with a specific directional opinion about a market sector may choose to buy or sell (long or short) an ETF covering or leveraging that market sector.

 

   

Arbitrage. Sophisticated investors may use ETFs in order to exploit perceived value differences between the ETF and the value of the ETF’s underlying portfolio of securities.

 

   

Asset Allocation. Investors seeking to invest in various asset classes to develop an asset allocation model in a cost-effective manner can do so easily with ETFs, which offer broad exposure to various asset classes in a single security.

 

   

Diversification. By definition, ETFs represent a basket of securities and each fund may contain hundreds or even thousands of different individual securities. The “instant diversification” of ETFs provides investors with broad exposure to an asset class, market sector or geography.

 

   

Unconflicted Advice. Currently, ETFs are not sold with a sales loads or 12b-1 fees, which are fees paid for marketing and selling mutual fund shares, such as compensating brokers and others who sell fund shares. Therefore, we believe a financial advisor recommending an ETF for their client is generally giving objective advice when recommending an ETF over a mutual fund. We do not pay commissions nor do we offer 12b-1 fees to financial advisors to use or recommend our ETFs.

 

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The ETF Industry

Over the last decade, ETFs have experienced a compound annual growth of 31.2% from $66 billion in AUM in 2000 to nearly $1 trillion in AUM at the end of 2010, yet, at the end of 2010, there were only 967 ETFs compared to more than 6,000 mutual funds. The chart below reflects the AUM of the ETF industry in the United States since 1995:

LOGO

Source: Investment Company Institute, National Stock Exchange, Bloomberg, WisdomTree

 

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As of February 28, 2011, we were the eighth largest ETF sponsor in the United States by AUM:

 

        

ETF Sponsor

   AUM  
              (in millions)  
 

1

  

iShares

   $ 460,209   
 

2

  

StateStreet

     256,728   
 

3

  

Vanguard

     158,566   
 

4

  

PowerShares

     45,994   
 

5

  

ProShares

     24,268   
 

6

  

Van Eck

     21,308   
 

7

  

Deutsche Bank

     13,448   
   

8

  

WisdomTree

     10,279   
 

9

  

Rydex

     7,624   
 

10

  

First Trust

     6,658   
 

11

  

Direxion

     5,794   
 

12

  

Merrill (HOLDRs)

     5,601   
 

13

  

U.S. Commodity Funds

     5,061   
 

14

  

ETF Securities

     3,860   
 

15

  

Claymore

     3,569   
 

16

  

Schwab

     3,530   
 

17

  

PIMCO

     2,431   
 

18

  

GlobalX

     1,496   
 

19

  

ALPS

     1,100   
 

20

  

GreenHaven

     700   
 

21

  

RevenueShares

     606   
 

22

  

Emerging Global Shares

     472   
 

23

  

IndexIQ

     463   
 

24

  

AdvisorShares

     199   
 

25

  

Fidelity

     186   
 

26

  

X-Shares

     139   
 

27

  

Teucrium

     82   
 

28

  

Credit Suisse

     55   
 

29

  

FactorShares

     25   
 

30

  

Grail

     18   
 

31

  

Javelin

     15   
 

32

  

OneFund

     15   
 

33

  

FaithShares

     11   
 

34

  

ESG Shares

     3   
             
    

Total

   $ 1,040,513   

Source: Bloomberg, WisdomTree

ETF Industry Growth Opportunity

We believe there is considerable growth potential in the ETF industry and that we are well-positioned to capitalize on this growth. We believe our growth, and the growth of the ETF industry in general, will be accelerated by the following factors:

 

   

Education and Greater Investor Awareness. Over the last several years, ETFs have been taking a greater share of inflows and AUM from mutual funds. For example:

 

   

As a percent of total ETF and long-term mutual fund inflows, ETF inflows have increased from 23% in 2005 to 32% in 2010, according to the Investment Company Institute, and we expect this trend to continue or accelerate.

 

   

The same data reflects that during the recent market downturn in 2008, while traditional long-term mutual funds were experiencing outflows of $224 billion, ETFs were experiencing inflows of $178 billion.

 

   

As of the end of 2010, mutual funds had total AUM of approximately $11.8 trillion. This reflects a decline in AUM of 12% from its peak in 2007. During that same period, ETF total AUM increased 72%.

 

   

As a percent of total ETF and long-term mutual fund AUM, ETF AUM has increased from 4.2 % in 2005 to 10% in 2010.

We believe as a result of the recent market downturn, investors have become more aware of some of the deficiencies of their mutual fund and other financial products. In particular, we believe investors are beginning to focus on important characteristics of their traditional investments – namely transparency, liquidity and fees. Their attention and education focused on these important investment characteristics may be one of the drivers of the shift in inflows from traditional mutual funds to ETFs. We believe as investors become more aware and educated about ETFs and their benefits, ETFs will continue to take market share from traditional mutual funds and other financial products or structures such as hedge funds, separate accounts and single stocks.

 

   

Move to Fee-Based Models. Over the last several years, many financial advisors have changed the fees they charge clients from one that is “transaction-based”, that is based on commission for trades or receiving sales loads, to a “fee-based” approach, where an overall fee is charged based on the value of AUM. This fee-based approach lends itself to the advisor selecting no-load, lower-fee financial products, and in our opinion, better aligns the advisor with the interests of their client. Since ETFs generally charge lower fees than mutual funds, we believe this model shift will benefit the ETF industry. As major brokerage firms and asset managers encourage their advisors to move towards fee-based models, we believe overall usage of ETFs will likely increase.

 

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Innovative Product Offerings. Historically, ETFs tracked traditional equity indexes, but the volume of ETF growth has lead to significant innovation and product development. As demand increased, ETF sponsors continued to innovate and today, ETFs are in virtually every asset class including commodities, fixed income, alternative strategies, leveraged/inverse, real estate and currencies. We believe there are substantial areas for ETFs to continue to innovate, including alternative-based strategies, hard and soft commodities, and actively-managed strategies. Expansion into these new asset classes should fuel further growth and investments from investors who typically access these products through hedge funds, separate accounts, stock investments or the futures and commodity markets.

 

   

New Distribution Channels. Discount brokers, including TD Ameritrade, E*Trade and Fidelity, now offer free trading and promotion of select ETFs. We believe the promotion of ETF trading by discount brokers and their marketing of ETFs to a wider retail channel will contribute to the future growth of ETFs.

 

   

Changing Demographics. As the “baby boomer” generation continues to mature and begins to retire, we expect that there will be a greater demand for a broad range of investment solutions, with a particular emphasis on income generation and principal protection, and that more of these retiring investors will seek advice from professional financial advisors. We believe these financial advisors will migrate more of their clients’ portfolios to ETFs due to their lower fees, better fit within fee-based models, and their ability to (i) provide access to more diverse market sectors, (ii) improve multi-asset class allocation and (iii) be used for different investment strategies, including income generation. Overall, we believe ETFs best meet the needs of this large and important group of investors.

 

   

Expansion Into 401(k) Retirement Plans. Historically, 401(k) plans were almost exclusively comprised of mutual funds. However, we believe ETFs are particularly well-suited to 401(k) retirement plans and that these plans present a large and growing opportunity for our industry. ETFs are easy-to-implement, fully transparent investment vehicles covering the full range of asset allocation categories, and are available at significantly lower costs than most traditional mutual funds. In addition, regulatory reform laws are anticipated to go into effect in the second half of 2011 that will require 401(k) retirement plan sponsors to disclose all fees associated with their plans. We believe that as investors become aware of fees associated with using mutual funds in traditional 401(k) retirement plans, they will replace their mutual funds with ETFs because of their lower fees.

Regulatory Framework of the ETF Industry

Not all exchange traded products, or ETPs, are ETFs. ETFs are a distinct type of security that have benefits very different than other ETPs. ETFs are open-end investment companies or unit investment trusts regulated by the Investment Company Act of 1940, as amended. This regulatory structure provides for the highest level of investor protection within a pooled investment product. For example, each ETF is required to have an independent board of Trustees not affiliated with the fund’s investment manager. In addition, ETFs operate under regulations that prohibit affiliated transactions, have standard pricing and valuation rules and mandated compliance programs. ETPs that are not ETFs are not registered under the Investment Company Act and are not required to operate under these higher standards. ETPs can take a number of forms, including exchange traded notes, grantor trusts or limited partnerships. Each of these structures has implications for taxes, liquidity, tracking error and credit risk. Though creating an ETF may require additional regulatory and operational hurdles, we believe that ETFs are the best investment structure for investors and we expect to continue creating products using the ETF structure.

Because ETFs do not fit into the regulatory provisions governing mutual funds, ETF sponsors need to apply to the Securities and Exchange Commission, or SEC, for “exemptive relief” from certain provisions of the Investment Company Act in order to operate ETFs. This exemptive relief allows the ETF sponsor to bring products to market for the specific products or structures they have applied for. Applying for exemptive relief can be costly and take several months to several years depending on the type of exemptive relief sought.

Corporate Structure

The WisdomTree ETFs are issued by the WisdomTree Trust. The WisdomTree Trust is a Delaware statutory trust registered with the SEC as an open-end management investment company. The Board of the WisdomTree Trust, or the Trustees, is separate from the Board of Directors of our company, WisdomTree Investments, Inc. The Trustees are primarily responsible for overseeing the management and affairs of the WisdomTree ETFs and the Trust for the benefit of the WisdomTree ETF stockholders. We have licensed the use of our own fundamentally-weighted indexes for ETFs on an exclusive basis to the WisdomTree Trust for the WisdomTree ETFs.

 

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Like most ETFs, the day-to-day business of the Trust is generally performed by third-party service providers, such as the adviser, sub-adviser, distributor and administrator, although the Trustees are responsible for overseeing the Trust’s service providers. The Trustees have approved us to serve as the investment adviser to the WisdomTree Trust as well as provide general management and administration of WisdomTree Trust and each of its ETFs. In turn, we have contracted with other third party service providers for some of these services. In addition, Jonathan Steinberg, our Chief Executive Officer, serves as a Trustee and President of the WisdomTree Trust and Amit Muni, our Chief Financial Officer, serves as Treasurer of the Trust.

Our investment management agreement with the WisdomTree Trust and WisdomTree ETFs must be renewed and specifically approved at least annually by a vote of the Trustees.

The following diagram depicts the corporate structure:

LOGO

 

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Corporate History

WisdomTree Investments, Inc. was incorporated by our Chief Executive Officer and founder, Jonathan Steinberg, in Delaware as Financial Data Systems, Inc., on September 19, 1985, but was inactive until October 1988 when it acquired the assets relating to what would become Individual Investor magazine, a monthly personal finance magazine. In December 1991, it completed an initial public offering and commenced trading on the Nasdaq Stock Market. In 1993, the company’s name was changed to Individual Investor Group, Inc. and throughout the 1990’s it was a financial media company that published several magazines, including Individual Investor and Ticker, newsletters, as well as maintained several online financial related websites. In addition, the company also began developing stock indexes. Due to the economic downturn in the financial media industry in 2000 and 2001, the company sold its media properties in order to preserve its capital while it pursued a new business plan focusing on developing and licensing its stock indexes. The company’s common stock was de-listed from Nasdaq and began quotation on the over-the-counter market known as the Pink Sheets. In 2002, the company’s name was changed to Index Development Partners, Inc., and Jonathan Steinberg, along with Luciano Siracusano, our Chief Investment Strategist, continued development of the concepts for our fundamentally weighted index methodology. While this concept was being developed, the company sought to obtain financing to recapitalize and become an ETF sponsor. Between 2004 and 2005, the company obtained financing from a core group of investors including former hedge fund manager Michael Steinhardt, Professor Jeremy Siegel of The Wharton School of the University of Pennsylvania and the venture capital firm of RRE Ventures, LLC. Michael Steinhardt became our Chairman and Professor Jeremy Siegel became the senior investment strategy advisor for our company and Board. James Robinson, IV of RRE Ventures also joined our Board. In 2005, the company’s name was changed to WisdomTree Investments, Inc. WisdomTree Investments, Inc. launched its first 20 ETFs in June 2006. Our common stock continues to be quoted on the Pink Sheets, now known as OTC Markets, and we intend to seek listing of our common stock on in connection with the filing of this Form 10 with the U.S. Securities and Exchange Commission.

Our Business

Overview

We are the eighth largest sponsor of ETFs in the United States based on AUM. In June 2006, we launched 20 ETFs and, as of February 28, 2011, we had 45 ETFs with AUM of approximately $10.3 billion.

Through our operating subsidiary, we provide investment advisory and other management services to the WisdomTree Trust and WisdomTree ETFs. In exchange for providing these services, we receive advisory fee revenues based on a percentage of the ETFs average daily net assets. Our expenses are predominantly related to selling, operating and marketing our ETFs.

We have contracted with third parties to provide some of the investment advisory and other management services to the WisdomTree ETFs. We have contracted with Mellon Capital Management Corporation to act as sub-advisor and provide portfolio management services for the WisdomTree ETFs. We have also contracted with Bank of New York to provide fund administration, custody, accounting and other related services for the WisdomTree ETFs. Both of these parties are part of The Bank of New York Mellon Corporation, collectively BNY Mellon.

Our primary business is an ETF sponsor. However, in conjunction with the development of our indexes for our ETFs, we also license our indexes to third parties for use in financial products or for separate accounts. This is not currently a material part of our business and we do not believe this will become a material part of our business in the future.

We also have a small team dedicated to promoting the use of WisdomTree ETFs in 401(k) retirement plans through our wholly-owned subsidiary, WisdomTree Retirement Services, Inc. We believe the benefits of ETFs, along with pending regulatory disclosure of fees paid by 401(k) plan participants and sponsors, will foster more use of low cost ETFs in 401(k) plans. This initiative is still in its early stages and is expected to be a long-term investment.

Our revenues have increased substantially since we launched in June 2006. Our revenues increased to $41.6 million in 2010 compared to $22.1 million in 2009 and $23.6 million in 2008. With only approximately five years of operations, we have improved our net loss to $7.5 million in 2010, from a loss of $21.2 million in 2009 and a loss of $27.0 million in 2008.

Our Products

Today, we offer a comprehensive family of 46 ETFs, which includes 34 international and domestic equity ETFs, 9 currency income ETFs, two recently launched international fixed income ETFs and one recently launched managed futures strategy ETF.

 

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Equity ETFs

We offer equity ETFs covering the U.S. and international developed and emerging markets. These ETFs offer access to the securities of large, mid and small-cap companies, companies located in the United States, developed markets and emerging markets, as well as companies in particular market sectors, including basic materials, energy, utilities and real estate. As described in more detail below, our equity ETFs track our proprietary fundamentally weighted indexes, as opposed to market capitalization weighted indexes, which assign more weight to stocks with the highest market capitalizations. These fundamentally weighted indexes focus on securities of companies that pay regular cash dividends or on securities of companies that have generated positive cumulative earnings over a certain period. We believe these factors, rather than market capitalization alone, provide investors with better risk adjusted returns.

Currency ETFs

We offer currency ETFs that provide investors with exposure to developed and emerging market currencies, including the Chinese Yuan, the Brazilian Real, the Euro and the Japanese Yen. Currency ETFs invest in U.S. money market securities, forward currency contracts and swaps and seek to achieve the total returns reflective of both money market rates in selected countries available to foreign investors and changes to the value of these currencies relative to the U.S. dollar. We launched the industry’s first currency ETFs in May 2008 using an actively managed strategy.

International Fixed Income ETF

In August 2010, we launched an ETF that predominantly invests in a broad range of local debt denominated in the currencies of emerging market countries and on March 17, 2011, we launched an ETF that invests in local debt denominated in the currencies of Asia Pacific ex-Japan countries. We intend to launch additional fixed income bond funds and broaden our product offerings in this category.

Alternative Strategy ETF

In January 2011, we launched the industry’s first managed futures strategy ETF. This fund seeks to achieve positive returns in rising or falling markets that are not directly correlated to broad market equity or fixed income returns. This fund is managed using a quantitative, rules-based strategy designed to provide returns that correspond to the Diversified Trends Indicator™, or DTI®. The DTI is a long/short rules-based managed futures indicator developed by Victor Sperandeo of Alpha Financial Technologies, LLC and is a widely used indicator designed to capture the economic benefit derived from rising or declining price trends in the markets for commodity, currency and U.S. Treasury futures. We have an exclusive license to manage an ETF against this indicator. We also intend to explore additional alternative strategy products in the future.

The type and AUM for each of our ETFs are listed below as of February 28, 2011:

 

     Number
of Funds
     Type      AUM  
                   (in millions)  

Equity ETFs:

        

U.S. Equity ETFs

     12         Index based       $ 2,220   

Emerging Markets Equity ETFs

     4         Index based       $ 3,496   

International Developed Equity ETFs

     14         Index based       $ 2,276   

International Sector Equity ETFs

     4         Index based       $ 248   

Currency ETFs

     9         Actively Managed       $ 1,378   

International Fixed Income ETF

     1         Actively Managed       $ 620   

Alternative Strategy ETF

     1         Actively Managed       $ 41   
                    

Total

     45          $ 10,279   

Index Based ETFs

Our equity ETFs seek to track our own fundamentally weighted indexes. Most of today’s ETFs track market capitalization weighted indexes. Market capitalization weighted ETFs assign more weight to stocks with the highest market capitalizations, which is a function of stock price. This means that if a stock is overvalued, market capitalization weighted funds will give the overvalued stock greater weight as its price and market capitalization increases and the opposite is true if a stock is undervalued, where market capitalization weighted funds will give it less weight. Without a way to rebalance away from these stocks, market capitalization weighted funds essentially hold more of a company’s stock as its price is going up and less

 

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as the price of the company’s stock is going down. In other words, these funds buy high and sell low. Market history contains many examples of overvalued stocks, for example, the technology and dot-com bubble of the late 1990s. We believe this structural flaw can expose investors to potentially higher risks and lower returns. To address the structural flaw of market cap-weighting, we use a rules-based methodology to weight companies in our ETFs by a measure of fundamental value instead of market capitalization. After researching fundamental indicators of value, we believe the most effective metrics are cash dividends or earnings. Our research indicated that weighting by cash dividends or earnings provided investors with better risk adjusted returns than market capitalization weighted indexes. Our funds are rebalanced annually and designed to reset back to an indicator of fundamental value – either cash dividends paid or earnings generated. All of our index based equity ETFs are based on this approach. We believe this fundamentally weighted approach offers better returns than comparable ETFs or mutual funds tracking market capitalization weighted indexes over the long-term.

Actively Managed ETFs

In 2008, we obtained regulatory approval to launch actively managed ETFs, which are ETFs that are not based on an index but rather are actively managed with complete transparency of the ETF’s portfolio on a daily basis. We are one of only a limited number of ETF sponsors who have obtained permission from the SEC to launch actively managed ETFs. This has enabled us to develop products not yet offered by other ETF sponsors. Our actively managed ETFs include our currency ETFs, international fixed income ETFs and managed futures strategy ETF.

Historical Net ETF Inflows and AUM

The following charts reflect our historical net ETF inflows, market share of industry inflows and ETF AUM since we launched our funds in June 2006:

LOGO

LOGO

 

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LOGO

We have experienced positive net inflows each year since we launched our first ETFs in June 2006. While we have experienced significant fluctuations in our net inflows quarter to quarter, we have only experienced one quarter of net outflows – approximately $15.5 million of net outflows in the third quarter of 2008 – when the overall market sentiment was extremely negative. Our ETF AUM declined from $4.6 billion in 2007 to $3.2 billion at the end of 2008 as a result of $2.3 billion decline in the market value of the securities our ETFs hold resulting from the global economic crisis despite $907 million of net inflows. Our market share also declined during that period as investors began to sell off equity investments and invest in government fixed income and commodity ETFs. At that time, we did not have fixed income or commodity presence. Part of our growth strategy is to diversify our product offering.

Over the last several quarters, our market share of net ETF inflows has also been increasing. We believe this trend is a result of our strong product offering in emerging market equities, new products we launched such as currency and international fixed income, as well as a longer track record for our equity funds launched in 2006 and 2007. Our growth strategy seeks to increase our market share of ETF industry inflows.

Distribution and Sales

We distribute our funds primarily through financial advisors in the major channels in the asset management industry using our own sales professionals. These channels include brokerage firms, registered investment advisors, institutional investors, private wealth managers and discount brokers. We typically do not target our ETFs directly to the retail segment but rather to financial advisors who act as the intermediary between the end client and us. We do not pay commissions nor do we offer 12b-1 fees to financial advisors to use or recommend the use of our ETFs.

We have developed an extensive network and relationships with financial advisors and we believe our ETFs and related research are structured to meet their needs and those of their clients. Our sales professionals act in a consultative role to provide the financial advisor with value-added services. We consistently grow our network of financial advisors and we opportunistically seek to introduce new products that best deliver our investment strategies to investors through these distribution channels.

We have a team of 25 sales professionals located in the United States as of February 28, 2011. In 2010, we entered into two distribution agreements with two external distribution firms to serve as the external marketing agents for the WisdomTree ETFs in the U.S. independent broker-dealer channel and in Latin America. These arrangements expand our distribution capabilities to channels that we believe we would have difficulty accessing in a cost-effective manner.

Marketing and Advertising

Our marketing effort is focused on three objectives: (1) generating new clients and inflows to our ETFs; (2) retaining existing clients, with a focus on cross-selling additional WisdomTree ETFs; and (3) building brand awareness. We pursue these objectives through a multi-faceted marketing strategy targeted at financial professionals within the asset management industry. We utilize the following strategies:

 

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Targeted Advertising. In an effort to maximize the goal of reaching financial advisors, we create highly targeted multi-media advertising campaigns limited to established core financial media. For example, our television advertising runs exclusively on the cable networks, CNBC, and Bloomberg Television; online advertising runs on ETF-specific web sites, such as www.seekingalpha.com and www.etfdatabase.com; and print advertising runs in core financial publications, including Barron’s and Institutional Investor.

 

   

Media Relations. We have a full time public relations manager who has established relationships with the major financial media outlets including: the Wall Street Journal, Barron’s, the Financial Times, Bloomberg, Reuters and USA Today. We utilize these relationships to help create awareness of the WisdomTree ETFs and the ETF industry in general. Key members of management including our Chief Investment Strategist, Luciano Siracusano, our President & Chief Operating Officer, Bruce Lavine, and our Director of Research, Jeremy Schwartz, are frequent market commentators and conference panelists regarding the ETF industry.

 

   

Direct Marketing. We have a database of approximately 100,000 financial advisors to which we regularly market through targeted and segmented communications such as on-demand research presentations, ETF-specific or educational events and presentations, quarterly newsletters and market commentary from our senior investment strategy advisor, Professor Jeremy Siegel.

 

   

Sales Support. We create comprehensive marketing materials to support our sales process including whitepapers, research reports, investment ideas and performance data for all WisdomTree ETFs.

We will continue to evolve our marketing and communication efforts in response to changes in the ETF industry, market conditions and marketing trends.

Research

Our research team has three core functions: index development and oversight, investment research and sales support. In its index development role, the research group is responsible for creating the investment methodologies and overseeing the maintenance of our indexes that WisdomTree’s equity ETFs are designed to track. The team also provides a variety of investment research around these indexes and market segments. Our research is typically academic-type research to support our products, including white papers on the strategies underlying our indexes and ETFs, investment insight on current market trends, and types of investment strategies that drive long-term performance. We distribute our research through our sales professionals, online through our website, targeted emails to financial advisors, or through financial media outlets, including interviews on CNBC. On some occasions our research has been included in “op-ed” letters appearing in the Wall Street Journal. Finally, the research team supports our sales professionals in meetings as market experts and through custom reports. In addition, we often consult with our senior investment strategy advisor, Professor Jeremy Siegel, on product development ideas.

Business Transactions

Joint Venture with Mellon Capital Management Corporation and The Dreyfus Corporation

In 2008, we entered into a mutual participation agreement with Mellon Capital Management Corporation and The Dreyfus Corporation in which we agreed to collaborate in developing currency and fixed income ETFs under the WisdomTree Trust. Under the agreement, we contribute our expertise in operating the ETFs, sales, marketing and research, and Mellon Capital and Dreyfus contributed sub-advisory, fund administration and accounting services for these collaborated ETFs. All third-party costs and profits and losses are shared equally. This agreement expires in March 2013. As of February 28, 2011, approximately $2.0 billion of our AUM is related to this agreement. If this agreement were to expire, we would be required to contract separately with Mellon Capital and Dreyfus, or pay another third party to provide for these services. Although we would then have to pay for these services, we would not have to share any profits or losses related to these ETFs. At this time, we are not aware if this agreement will expire or be renewed.

Treasury Equity, LLC

In 2007, we acquired the rights to an application pending with the SEC for exemptive relief to operate currency funds from Treasury Equity, LLC, a private company. Following this purchase we continued to pursue the application for the exemptive relief and ultimately it formed the basis for our regulatory ability to operate currency ETFs. In exchange, we issued approximately 1.2 million shares of common stock valued at approximately $2.3 million during 2008 and 2009. In

 

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addition, until March 2017, we will pay Treasury Equity, LLC a quarterly fee based on the assets under management of our currency ETFs.

Our Competitive Strengths

Our business strategy is designed to support our efforts to be among the top 5 ETF sponsors in the United States. Key to executing this strategy is a focus on our core competitive strengths:

 

   

Strong ETF Performance. We use a rules-based methodology to weight companies in our equity ETFs by a measure of fundamental value instead of market capitalization. We believe this approach will yield better risk adjusted returns over the long-term than our competitors’ market capitalization weighted products. Approximately 77% of the approximately $8.2 billion invested in our 34 equity ETFs on February 28, 2011 were in funds that, since their respective inceptions, outperformed their competitive benchmarks through that date. 20 of our 34 equity ETFs outperformed their competitive benchmarks since their respective inception through February 28, 2011. Our strategy is to maintain our performance by consistently applying our investment philosophy and process.

 

   

Track Record of Innovative Product Development. We believe we have created a track record of innovation that places us at the forefront of ETF providers. This innovation began with our equity ETFs which follow our own fundamentally weighted methodology. Our recent innovations include:

 

   

We launched the industry’s first emerging markets small cap equity ETF.

 

   

We launched the industry’s first actively managed currency ETFs.

 

   

We launched the industry’s first equity ETF that invests in local shares in India using an innovative ETF structure that complies with regulations related to foreign ownership limits of Indian companies.

 

   

We launched the industry’s first ETF designed to offer investors broad exposure to the international developed equity markets while at the same time hedging the currency fluctuations between foreign currencies.

 

   

We launched the industry’s first managed futures strategy ETF. This ETF allows investors access to a sophisticated strategy at a much lower cost point than most competing products. We launched this fund under our actively managed ETF approval and used derivatives to maximize the ETFs performance in a cost-effective and risk-appropriate manner.

We believe our expertise in using the breadth and depth of our regulatory exemptive relief, which allows us to launch index-based and actively managed ETFs, including ETFs that use alternative strategies and derivatives, creates a strategic advantage by enabling us to launch innovative ETFs that others may not be able to launch in the short-term.

 

   

Strong, Seasoned and Innovative Management Team. We have built a strong and dedicated senior leadership team. Most of our leadership team have significant ETF or financial services industry experience in fund operations, regulatory and compliance oversight, product development and management or marketing and communications. We believe our team, by developing an ETF sponsor from the ground up despite significant competitive, regulatory and operational barriers, has demonstrated an ability to innovate as well as recognize and respond to market opportunities.

 

   

Marketing, Research and Sales Expertise. The majority of our personnel are professionals dedicated to marketing, research and sales. While our sales professionals are the primary point of contact with financial advisors who use our ETFs, their efforts are enhanced through value-added services provided by our research and marketing efforts. We believe the recent growth we have experienced by strategically aligning marketing campaigns with targeted research and sales initiatives differentiates us from our competitors.

 

   

Strong Brand Recognition. With our launch in 2006, we made a tactical decision to establish the WisdomTree brand through targeted television, print and online advertising, as well as public relations efforts using our investors, Michael Steinhardt and Professor Jeremy Siegel. We believe we have been successful in these efforts and WisdomTree has created a strong and recognized brand associated with product innovation, customer service and integrity.

 

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Development of Indexes. Our equity ETFs use our own indexes, which we believe gives us several advantages. Most importantly, we are able to considerably increase our speed to market. Our product development and index teams work closely to identify potential new ETFs for the marketplace. Because we can create indexes ourselves, we have the ability to create innovative indexes and related ETFs much more rapidly than our competitors who have to work with third party index providers. Also, we are able to maintain a consistent investment philosophy for our products which creates a unified investing experience for investors. The second advantage of being able to create our own proprietary indexes is cost. Our competitors license indexes from third parties and in exchange, they pay licensing fees, which in some cases may be significant. Since we create our own indexes, we do not incur any of these licensing costs and can therefore be more competitive on the fees we charge for our ETFs.

 

   

Highly Scalable Business Model. We have built a lean and efficient organization focused on our core competencies of product development, marketing, research and sales of ETFs. We have chosen to outsource to third parties those services which do not fit our core competency or are either cost, risk or people intensive. For example, we have outsourced the portfolio management responsibilities and fund accounting operations of our ETFs to BNY Mellon; therefore, we do not bear the risks or costs associated with trading securities nor need to maintain complex fund accounting systems or staff required to perform those functions. We believe outsourcing these commoditized functions is more cost efficient than building these capabilities internally. In turn, we believe we have built a very highly scalable business model.

Our Growth Strategy

Our goal is to be among the top five ETF sponsors in the United States. To achieve this goal, our strategy is to position us to capitalize on the growth of the ETF industry as well as increase our market share of industry inflows at a higher rate than we have historically experienced. Our average market share of industry inflows since inception was 1.7% as of the end of 2010. Our market share in recent quarters has been increasing and is higher than our average since inception. We believe this is a result of a variety of factors including increased investor demand for equities; greater acceptance of WisdomTree ETFs, and in particular, our strong product offering in emerging market equities; introduction of new WisdomTree ETFs; and a longer track record for our existing ETFs. We will seek to increase our market share by continuing to implement the following growth strategies:

 

   

Leverage our Asset Levels, Trading Volumes and Performance Track Record. We have built a professional sales force, established a strong brand, introduced innovative ETFs and established a performance track record. As we grow our assets under management, we believe several factors will continue to foster additional growth:

 

   

First, we believe higher asset levels in some of our ETFs make those ETFs more attractive to investors and financial advisors. For example, at December 31, 2009, our top 5 largest ETFs had assets under management of approximately $2.4 billion, yet one year later, they collectively had approximately $4.4 billion under management.

 

   

Second, higher trading volumes for ETFs make those ETFs more attractive for financial advisors and traders. As our assets under management have grown, so have our trading volumes. The average daily trading volume for our ETFs in 2009 was 1.8 million shares a day. In 2010, the average daily trading volume increased to approximately 3.6 million shares a day.

 

   

Third, a longer performance track record makes ETFs more attractive to all investors and in particular large institutional investors such as endowments or pension plans. Of particular significance are 3 year, 5 year and 10 year track records. At June 30, 2011, 31 of our ETFs will have at least 3 year track records, 19 of which will also have 5 year records. The existence of these track records now makes our ETFs eligible for evaluations by large investment research firms like Morningstar.

 

   

Continue to Launch Innovative New Products that Diversify our Product Offerings and Revenue Stream. Another key to increasing our AUM will be our ability to introduce new ETFs to the market place that meet investor needs. We believe our track record has shown we have the ability to create and sell innovative ETFs that meet market demand. It will also be important to diversify our product offering into different asset classes. As of February 28, 2011, 34 of our 45 ETFs are in equities. In 2008, we expanded into currency ETFs. In 2010, we launched our first international fixed income ETF and in early 2011, we launched our first alternative strategy ETF and another international fixed income ETF. Beginning in late 2008 and continuing into 2009 and early 2010, many investors sold their equity positions and invested in fixed income and

 

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commodity ETFs. At that time, we did not have fixed income or commodity presence and, although we did not experience net outflows, our AUM and revenues declined as we experienced negative market movement. We believe continued diversification will strengthen our business by allowing us to obtain inflows, maintain AUM and generate revenues during different market cycles.

 

   

Selectively Pursue Acquisitions or Partnerships. We may pursue acquisitions or enter into partnership or other commercial arrangements that will enable us to strengthen our current business, expand and diversify our product offering, increase our assets under management or enter into new markets. We believe entering into partnerships or acquisitions is a cost-effective means of growing our business and AUM. In 2007, we purchased certain assets and intellectual property from Treasury Equity, LLC which formed the basis for our currency ETFs. In 2008, we entered into a joint venture with Mellon Capital Management Corporation and The Dreyfus Corporation with respect to our currency and fixed income ETFs. We believe our management team is well equipped to identify and execute strategic opportunities for us.

Competition

The asset management industry is highly competitive and we face substantial competition in virtually all aspects of our business. Factors affecting our business include fees for our products, investment performance, brand recognition, business reputation, quality of service, and the continuity of our financial advisor relationships. We compete primarily with other ETF sponsors and mutual fund companies and secondarily against other investment management firms, insurance companies, banks, brokerage firms and other financial institutions that offer products that have similar features and investment objectives to those offered by us. The vast majority of the firms we compete with are subsidiaries of large diversified financial companies and many others are much larger in terms of AUM, years in operations, and revenues and, accordingly, have much larger sales organizations and budgets. In addition, these larger competitors may attract business through means that are not available to us, including retail bank offices, investment banking and underwriting contacts, insurance agencies and broker-dealers.

Recently, our competitors, Vanguard, Charles Schwab, iShares and FocusShares (through Scottrade Inc.), became engaged in significant price competition by lowering fees charged for ETFs offering similar investment strategies and waiving trading commission. These ETFs are broad based market capitalization weighted equity ETFs or with respect to iShares, related to gold. We do compete against these firms for similar related equity strategies; however, as described above, our indexes are fundamentally weighted, not market capitalization weighted. However, an index developer has created a series of fundamentally weighted indexes similar to ours which may be licensed by a competitor of ours. Some of our competitors have launched or will be launching fundamentally weighted ETFs of their own. Both the indexer and our competitors are using indexes with different fundamental weighting than our approach. If price competition intensifies or we begin to compete with other ETF sponsors using a fundamentally weighted approach at a lower price than ours, we may be required to reduce the advisory fees we charge in order to compete.

In 2008, the SEC announced a proposal to allow ETFs to form and operate without the need to obtain exemptive relief. This proposed rule has not yet been adopted and we do not know if or when it may be adopted. Removing the time barrier and expense needed to obtain exemptive relief may bring additional competitors into the marketplace.

We believe our ability to successfully compete will be based on our competitive fee structure and our ability to achieve consistently strong investment performance, develop distribution relationships, create new investment products, offer a diverse platform of investment choices and attract and retain talented sales professionals and other employees.

Regulation

The investment management industry is subject to extensive regulation and virtually all aspects of our business are subject to various federal and state laws and regulations. These laws and regulations are primarily intended to protect investment advisory clients and stockholders of registered investment companies. These laws and regulations generally grant supervisory agencies broad administrative powers, including the power to limit or restrict the conduct of our business and to impose sanctions for failure to comply with these laws and regulations. Further, such laws and regulations may provide the basis for litigation that may also result in significant costs to us. The costs of complying with such laws and regulations have increased and will continue to contribute to the costs of doing business:

 

   

The Investment Advisers Act of 1940 – The SEC is the federal agency generally responsible for administering the U.S. federal securities laws. Our subsidiary, WisdomTree Asset Management, Inc., or WTAM, is registered as an investment adviser under the Investment Advisers Act of 1940, as amended (the “Investment Advisers Act”) and, as such, is regulated by the SEC. The Investment Advisers Act requires

 

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registered investment advisers to comply with numerous and pervasive obligations, including, among others, recordkeeping requirements, operational procedures, registration and reporting and disclosure obligations.

 

   

The Investment Company Act of 1940 – The WisdomTree ETFs are registered with the SEC pursuant to the Investment Company Act of 1940, as amended (the “1940 Act”). WTAM, as an adviser to a registered investment company, must comply with the requirements of the 1940 Act and related regulations including, among others, requirements relating to operations, fees charged, sales, accounting, recordkeeping, disclosure and governance. In addition, the WisdomTree Trust generally has obligations with respect to the qualification of the registered investment company under the Internal Revenue Code.

 

   

Broker-Dealer Regulations – Although we are not registered with the SEC as a broker-dealer under the Securities Exchange Act of 1934, as amended, nor are we a member firm of the Financial Industry Regulatory Authority, or FINRA, many of our employees, including all of our salespersons, are licensed with FINRA and are registered as associated persons of the distributor of the WisdomTree ETFs and, as such, are subject to the regulations of FINRA that relate to licensing, continuing education requirements and sales practices. FINRA also regulates the content of our marketing and sales material.

In addition, in connection with this Form 10 filing, we intend to list our common stock on              and will therefore be also subject to their rules including corporate governance listing standards.

Intellectual Property

We regard our name, WisdomTree, as material to our business and have registered WisdomTree® as a service mark with the U.S. Patent and Trademark Office and in various foreign jurisdictions.

Our index-based equity ETFs are based on our own indexes and we do not license them from, nor do we pay licensing fees to, third parties for these indexes.

We have three patent applications pending with the U.S. Patent and Trademark office that relate to the operation of our ETFs and our index methodology. There is no assurance that patents will be issued from these applications and we do not rely upon future patents for a competitive advantage.

Employees

As of February 28, 2011, we had 61 full-time employees. Of these employees, 25 are engaged in our sales function with the remainder in providing managerial, finance, marketing, legal, regulatory compliance, operations and research functions. None of our employees are covered by a collective bargaining agreement and we consider our relations with employees to be good.

 

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ITEM 1A. RISK FACTORS

Any investment in our common stock involves a high degree of risk. You should consider carefully the specific risk factors described below in addition to the other information contained in this prospectus before making a decision to invest in our common stock. If any of these risks actually occur, our business, operating results, financial condition and prospects could be harmed. This could cause the trading price of our common stock to decline and a loss of all or part of your investment.

Risks Relating to our Industry and Business

We have only a limited operating history and we have not yet reported net income.

We launched our first 20 ETFs in June 2006 and have only a limited operating history in the asset management business upon which an evaluation of our performance can be made. Since we launched our first ETFs, we have incurred significant losses and we have not yet reported net income. We only began to generate positive cash flow on a full quarterly basis in the second fiscal quarter of the year ended December 31, 2010. We have a history of net losses and may not achieve or sustain profitability in the future. Even if we achieve profitability in the future, we may not be able to maintain or increase our level of profitability. We incurred net losses of $27.0 million, $21.2 million and $7.5 million in the years ended December 31, 2008, 2009 and 2010, respectively. We will continue to incur net losses until our average AUM reaches a level that will generate sufficient revenue to cover our expenses. Although our current revenue level is close to matching our expense level, we cannot be assured that we will record net income. Even if we achieve profitability in one quarter, because of the various risks outlined in this registration statement, we cannot be assured that we will continue to be profitable. As a result, recent historical growth may not provide an accurate representation of the growth we may experience in the future, which will make it difficult to evaluate our future prospects.

Difficult market conditions and declining prices of securities can adversely affect our business by reducing the market value of the assets we manage or causing customers to sell their fund shares and triggering redemptions.

We are subject to risks arising from adverse changes in market conditions and the declining price of securities, which may result in a decrease in demand for investment products, a higher redemption rate or a decline in AUM. Our revenue is directly impacted by the value of the securities held by our funds. As a result, our business can be expected to generate lower revenue in declining markets or general economic downturns. Substantially all of our revenue is determined by the amount of our AUM and much our AUM is represented by equity securities. Under our advisory fee arrangements, the advisory fees we receive are based on the market value of our AUM. A decline in the prices of securities held by the WisdomTree ETFs may cause our revenue to decline by either causing the value of our AUM to decrease, which would result in lower advisory fees, or causing investors in the WisdomTree ETFs to sell their shares in favor of investments they perceive to offer greater opportunity or lower risk, thus triggering redemptions that would also result in decreased AUM and lower fees. The securities markets are highly volatile, and securities prices may increase or decrease for many reasons, including general economic conditions, political events, acts of terrorism and other matters beyond our control.

Volatility and disruption of the capital and credit markets, and adverse changes in the global economy, may significantly affect our results of operations and may put pressure on our financial results.

Since our family of ETFs invests in both U.S. and international markets, its investment performance is subject to changing conditions in the global financial markets, and may also be affected by political, social and economic conditions in general. Beginning in the second half of 2007, and particularly during the second half of 2008 through early 2009, the financial markets were characterized by unprecedented levels of volatility and limited liquidity. This materially and adversely affected the capital and credit markets and led to a widespread loss of investor confidence. Although we did not experience significant net outflows of AUM, the effects of the financial crisis on the economy caused a significant decline in the value of equity securities, the market value of our AUM declined substantially and we faced a severe reduction of revenue. A similar disruption in the future, even if of a lesser magnitude, could cause us to experience net outflows of AUM or a decline in the value of equity and debt securities, thus reducing our AUM and revenue.

Fluctuations in the amount and mix of our assets under management may negatively impact revenue and operating margin.

The level of our revenue depends on the level and mix of assets under management. Our revenue is derived primarily from advisory fees based on a percentage of the value of our AUM and varies with the nature of the ETF, which

 

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have different fee levels. Any decrease in the value or amount of our assets under management because of market volatility or other factors negatively impacts our revenue. A decline in the prices of the securities held by our ETFs or in the sales of our investment products would reduce our revenue. Fluctuations in the amount and mix of our assets under management may be attributable in part to market conditions outside of our control that have had, and in the future could have, a negative impact on our revenue and operating margin.

We are subject to an increased risk of asset volatility from changes in the foreign markets as discussed below. Individual markets may be adversely affected by economic, political, financial, or other instabilities that are particular to the country or regions in which a market is located, including without limitation local acts of terrorism, economic crises or other business, social or political crises. Declines in these markets and currency fluctuations have caused in the past, and may cause in the future, a decline in our revenue. Changing market conditions and currency fluctuations may cause a shift in our asset mix between foreign and U.S. assets, potentially resulting in a decline in our revenue since we generally derive higher fee revenue from our ETFs investing in foreign markets, particularly in emerging markets.

Most of our assets under management are held in ETFs that invest in foreign securities and we have substantial exposure to foreign market conditions and we are subject to currency exchange rate risks.

Many of our ETFs invest in securities of companies, governments and other organizations located outside the United States and at February 28, 2011, approximately 65% of our AUM was held by these ETFs. Therefore the success of our business is closely tied to market conditions in foreign markets. Investments in non-U.S. issuers are effected by political, social and economic uncertainty effecting a country or region in which we are invested. In addition, fluctuations in foreign currency exchange rates could reduce the revenue we earn from these foreign invested ETFs. This occurs because an increase in the value of the U.S. dollar relative to non-U.S. currencies may result in a decrease in the dollar value of the AUM in these ETFs, which, in turn, would result in lower revenue. In addition, investors are likely to believe these ETFs, as well as our suite of currency ETFs, are a less attractive investment opportunity when the value of the U.S. dollar rises relative to non-U.S. currencies, which could have the effect of reducing investments in these ETFs, thus reducing revenue.

We derive a substantial portion of our revenue from products invested in emerging markets.

At February 28, 2011, approximately 40% of our ETF AUM were concentrated in four of our WisdomTree ETFs that invest in equity or fixed income securities issued by companies in emerging markets. In the year ended December 31, 2010, 42% of our revenue was derived from these four ETFs. As a result, our operating results are particularly exposed to the performance of those funds, economic and market conditions in this region, general investor sentiment regarding future growth in this region, and our ability to maintain the assets under management of those funds. In addition, because these funds have a higher expense ratio than our fund family in general, they generate a disproportionate percentage of our total revenue. If the AUM in these funds were to decline, either because of declining market values or because of net outflows from these funds, our revenue would be adversely affected.

We derive a substantial portion of our revenue from a limited number of products.

At February 28, 2011, approximately 52% of our ETF assets under management were concentrated in six of our 45 WisdomTree ETFs. As a result, our operating results are particularly exposed to the performance of those funds, investor sentiment toward investing in the strategies pursued by those funds and our ability to maintain the assets under management of those funds.

The WisdomTree ETFs have a limited track record and poor investment performance could cause our revenue to decline.

The WisdomTree ETFs have a limited track record upon which an evaluation of their investment performance can be made. The investment performance of our funds is important to our success. While strong investment performance could stimulate sales of our ETFs, poor investment performance, on an absolute basis or as compared to third-party benchmarks or competitive products, could lead to a decrease in sales or stimulate redemptions, thereby lowering the assets under management and reducing our revenue. Our fundamentally-weighted equity ETFs are designed to provide the potential for better risk-adjusted investment returns over full market cycles and are best suited for investors with a longer-term investment horizon. The investment approach of our equity ETFs may not perform well during certain shorter periods of time during different points in the economic cycle. While 77% of our AUM at December 31, 2010 was in WisdomTree ETFs that since their respective inceptions outperformed their respective benchmarks through December 31, 2010, the investment performance of our funds over shorter periods with different market conditions has not been as strong. Only seven of our 34

 

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funds that have a comparative benchmark outperformed their respective benchmarks during the year ended December 31, 2010. Past or present performance is not indicative of future performance.

We depend on BNY Mellon to provide us with critical services to operate our business and the WisdomTree ETFs and the failure of BNY Mellon to adequately provide such services could materially affect our operating business and harm our customers.

We depend upon BNY Mellon to provide the WisdomTree Trust with portfolio management services. BNY Mellon also provides us with custody services, fund accounting, administration, transfer agency and securities lending services. The failure of BNY Mellon to provide to us and the WisdomTree ETFs with these services could lead to operational issues and could result in financial loss to us and our customers. In addition, because our relationship with BNY Mellon involves a multitude of important services to us and portfolio management for the WisdomTree ETFs covers several different asset classes, changing this vendor relationship would require us to devote a significant portion of management’s time to negotiate a similar relationship with a new vendor or to have these services divided and provided by more than one vendor and subsequently to coordinate the transfer of these functions to this new vendor or vendors.

We depend on other third parties to provide many critical services to operate our business and the WisdomTree ETFs and the failure of key vendors to adequately provide such services could materially affect our operating business and harm our customers.

In addition to BNY Mellon, we depend on other third-party vendors to provide us with many services that are critical to operating our business, including a third-party provider of index calculation services for our indexes, a distributor of the WisdomTree ETFs and a third-party provider of indicative values of the portfolios of the WisdomTree ETFs. The failure of these key vendors to provide to us and the WisdomTree ETFs with these services could lead to operational issues and could result in financial loss to us and our customers.

The asset management business is intensely competitive.

Our business operates in intensely competitive industry segments. Our competitors include other ETF sponsors as well as mutual fund companies, commercial banks and thrift institutions, insurance companies, hedge funds, asset managers, brokerage and investment banking firms and other financial institutions, including multinational firms and subsidiaries of diversified conglomerates. We compete based on a number of factors, including name recognition, service, investment performance, product features and breadth of product choices, and fees. Many of our competitors have greater market share, offer a broader range of products and have greater financial resources than we do. Some financial institutions operate in a more favorable regulatory environment and have proprietary products and distribution channels which may provide certain competitive advantages to them and their investment products. In addition, over time certain sectors of the financial services industry have become considerably more concentrated, as financial institutions involved in a broad range of financial services have been acquired by or merged into other firms. This convergence could result in our competitors gaining greater resources and we may experience pressures on our pricing and market share as a result of these factors and as some of our competitors seek to increase market share by reducing prices. We believe that competition within the ETF industry will continue to increase as more traditional asset management companies become ETF sponsors.

Competitive fee pressures could reduce revenue and profit margins.

The investment management business is highly competitive and has relatively low barriers to entry. Although the ETF industry currently has a higher barrier to entry as a result of the need for ETF sponsors to obtain exemptive relief from the SEC in order to operate ETFs, we expect that additional companies, both new companies and traditional asset managers, many whom are much larger than us, will enter the ETF space. In addition, in 2008, the SEC proposed a rule that, if adopted, would eliminate the need to obtain this exemptive relief. To the extent that we are forced to compete on the basis of price, we may not be able to maintain our current fee structure. Fee reductions on existing or future new products could cause our revenue and profit margins to decline.

Our revenue could be adversely affected if the WisdomTree Trust determines that the advisory fees we received from the WisdomTree ETFs should be reduced.

Our advisory agreements with the WisdomTree Trust and the fees we collect from the WisdomTree ETFs are subject to review and approval by the independent trustees of the WisdomTree Trust. The advisory agreements are subject to initial review and approval. After the initial two-year term of the agreement for each ETF, the continuation of such

 

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agreement must be reviewed and approved by a majority of the independent trustees at least annually. In determining whether to approve the agreements, the independent trustees consider factors such as (i) the nature and quality of the services provided by us, (ii) the fees charged by us and the costs and profits realized by us in connection with such services, as well as any ancillary or “fall-out” benefits from such services, (iii) the extent to which economies of scale are shared with the WisdomTree ETFs, and (iv) the level of fees paid by other similar funds. If the independent trustees determine that the advisory fees we charge to any particular fund are too high, we will need to reduce our fees, which could adversely affect our revenue.

Our risk management policies and procedures, and those of our third-party vendors upon which we rely, may not be fully effective in identifying or mitigating risk exposure, including employee misconduct.

We have developed risk management policies and procedures and we continue to refine them as we conduct our business. Many of our procedures involve oversight of third-party vendors that provide us with critical services such as portfolio management, custody and fund accounting and administration, and index calculation services. Nonetheless, our policies and procedures to identify, monitor and manage risks may not be fully effective in mitigating our risk exposure. Moreover, we are subject to the risks of errors and misconduct by our employees, including fraud and non-compliance with policies. These risks are difficult to detect in advance and deter, and could harm our business, results of operations or financial condition. Although we maintain insurance and use other traditional risk-shifting tools, such as third-party indemnification, in order to manage certain exposures, they are subject to terms such as deductibles, coinsurance, limits and policy exclusions, as well as risk of counterparty denial of coverage, default or insolvency. If our policies and procedures do not adequately protect us from exposure and our exposure is not adequately covered by insurance or other risk-shifting tools, we may incur losses that would adversely affect our financial condition and could cause a reduction in our revenue as our customers shift their investments to the products of our competitors

Compliance with extensive, complex and changing regulation imposes significant financial and strategic costs on our business, and non-compliance could result in fines and penalties.

We are subject to extensive regulation of our business and operations. As a registered investment adviser, the SEC oversees our activities pursuant to its regulatory authority under the Investment Advisers Act. We also must comply with certain requirements under the Investment Company Act with respect to the WisdomTree ETFs for which we act as investment adviser. In addition, the content and use of our marketing and sales materials and our sales force is subject to the regulatory authority of FINRA. To a lesser extent, we are also subject to foreign laws and regulatory authority with respect to operational aspects of our funds that invest in securities of issuers in foreign countries and in the sales of our funds in foreign jurisdictions. Each of the regulatory bodies with jurisdiction over us has regulatory powers dealing with many aspects of our business, including the authority to grant, and, in specific circumstances to cancel, permissions to carry on particular businesses. Our failure to comply with applicable laws or regulations could result in fines, censure, suspensions of personnel or other sanctions, including revocation of our registration as an investment adviser. Even if a sanction imposed against us or our personnel is small in monetary amount, the adverse publicity arising from the imposition of sanctions against us by regulators could harm our reputation and thus result in redemptions from our ETFs and impede our ability to retain customers and develop new customers, all of which may reduce our revenue.

We face the risk of significant intervention by regulatory authorities, including extended investigation activity, adoption of costly or restrictive new regulations and judicial or administrative proceedings that may result in substantial penalties. Among other things, we could be fined or be prohibited from engaging in some of our business activities. The requirements imposed by our regulators are designed to ensure the integrity of the financial markets and to protect customers and other third parties who deal with us, and are not designed to protect our stockholders. Consequently, these regulations often serve to limit our activities, including through customer protection and market conduct requirements.

In addition, the regulatory environment in which we operate is subject to modifications and further regulation. New laws or regulations, or changes in the enforcement of existing laws or regulations, applicable to us and our clients also may adversely affect our business, and our ability to function in this environment will depend on our ability to constantly monitor and react to these changes. For example, in January 2011 the Commodity Futures Trading Commission proposed regulations that, if adopted, would impose upon us additional registration and licensing requirements and subject us to an additional and extensive regulatory structure. If adopted, these regulations would likely cause us to incur additional costs to achieve and maintain compliance.

Specific regulatory changes also may have a direct impact on our revenue. In addition to regulatory scrutiny and potential fines and sanctions, regulators continue to examine different aspects of the asset management industry. New

 

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regulation regarding the annual approval process for investment advisory agreements may result in the reduction of fees under these agreements. These regulatory changes and other proposed or potential changes may result in a reduction of revenue.

We may in the future be involved in legal proceedings that could require significant management time and attention and result in significant expense and may result in an unfavorable outcome which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

From time to time, we may be subject to litigation. In connection with any litigation in which we are involved, we may be forced to incur costs and expenses in connection with defending ourselves and the payment of any settlement or judgment in connection therewith if there is an unfavorable outcome. The expense of defending litigation may be significant. The amount of time to resolve lawsuits is unpredictable and defending ourselves may divert management’s attention from the day-to-day operations of our business, which could adversely affect our business, results of operations and cash flows. In addition, an unfavorable outcome in any such litigation could have a material adverse effect on our business, results of operations and cash flows.

Damage to our reputation could adversely affect our business.

We believe we have developed a strong brand and a reputation for innovative, thoughtful products, favorable long-term risk-adjusted investment performance and excellent client services. The WisdomTree name and brand are valuable assets and any damage to either could hamper our ability to maintain and grow our assets under management and attract and retain employees, thereby having a material adverse affect on our revenue. Risks to our reputation may range from regulatory issues to unsubstantiated accusations and managing such matters may be expensive, time-consuming and difficult.

Market disruptions that halt or disrupt trading or create extreme volatility could undermine investor confidence in the ETF investment structure and limit investor acceptance of ETFs.

The shares of the WisdomTree ETFs, like the shares of all ETFs, trade on exchanges in market transactions that generally approximate the value of the underlying portfolio of securities held by the particular ETF. Market trading involves risks such as the potential lack of an active market for fund shares and losses from trading. This can be exacerbated when markets conditions are extremely volatile or when trading is disrupted. For example, during the so-called “flash crash” that occurred in May 2010 the shares of some ETFs traded with extreme volatility that was not correspondent with the underlying value of their portfolio investments. Repeated circumstances of this type of market condition could undermine investor confidence in the ETF structure as an investment vehicle and limit further investor acceptance of ETFs. This could result in limited growth or a reduction in the overall ETF market and result in our revenue not growing as rapidly as it has in the recent past or even in a reduction of revenue.

We have experienced a period of significant growth in recent years, and if we were unable to manage this growth it could have a material adverse effect on our business.

We have experienced a period of significant growth in recent years, which has placed increased demands on our management and other resources and will continue to do so in the future. We may not be able to maintain or accelerate our current growth rate, manage our expanding operations effectively or achieve planned growth on a timely or profitable basis. Managing our growth effectively will involve, among other things:

 

   

continuing to retain, motivate and manage our existing employees and attract and integrate new employees;

 

   

developing, implementing and improving our operational, financial, accounting, reporting and other internal systems and controls on a timely basis; and

 

   

maintaining and developing our various support functions including human resources, information technology, legal and corporate communications.

If we are unable to manage our growth effectively, there could be a material adverse effect on our ability to maintain or increase revenue and profitability.

Continued growth will require continued investment in personnel, information technology infrastructure, and marketing activities, as well as further development and implementation of financial, operational and compliance systems and controls. We may not be successful in implementing all of the processes that are necessary to support our growth. Unless

 

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our growth results in an increase in our revenue that is at least proportionate to the increase in our costs associated with this growth, our gross margins and our future profitability will be adversely affected.

Our growth strategy also involves, among other things, diversifying our product line to include more ETFs in non-equity asset classes, including fixed income and alternative investment strategies. This will require us to develop products in areas in which we do not have significant prior experience. We may not be successful in developing new products and if developed and launched, we may not be successful in marketing these new products.

Our ability to operate our company effectively could be impaired if we fail to retain or recruit key personnel.

The success of our business and the implementation of our growth strategy are highly dependent on our ability to attract, retain and motivate highly skilled, and sometimes highly specialized, employees, including in particular, operations, product development, research and sales personnel. The market for these individuals is extremely competitive and is likely to become more so as additional investment management firms enter the ETF industry. We cannot be assured that our compensation methods will enable us to recruit and retain required personnel. In particular, our use of equity grants as a component of total employee compensation may be ineffective if the market price of our common stock declines. Also, we may also need to increase compensation, which would decrease our net income or increase our losses. If we are unable to retain and attract key personnel, it could have an adverse effect on our results of operations and financial condition.

Changes in U.S. federal income tax law could make some of our products less attractive to customers.

Many of the WisdomTree ETFs seek to obtain the investment return achieved by our proprietary indexes that weight index components based upon dividends. Corporate dividends currently enjoy favorable tax treatment under current U.S. federal income tax law. If the tax rates imposed on dividends were to be increased, it may make these WisdomTree ETFs less attractive to our customers.

Our expenses are subject to fluctuations that could materially affect out operating results.

Our results of operations are also dependent on the level of expenses, which can vary significantly from quarter to quarter. Our expenses may fluctuate primarily as a result of discretionary spending, including marketing, advertising and sales expenses we incur to support our growth initiatives. Accordingly, our results of operation may vary significantly from quarter to quarter.

Any significant limitation or failure of our technology systems that are critical to our operations could constrain our operations.

We are dependent upon the effectiveness of our information security policies, procedures and capabilities to protect the technology systems that we use to operate our business and to protect the data that reside on or are transmitted through them. Although we take protective measures to secure information, our technology systems may still be vulnerable to unauthorized access, computer viruses or other events that could result in inaccuracies in our information or system disruptions or failures, which could materially interrupt or damage our operations. Any inaccuracies, delays or system failures could subject us to client dissatisfaction and losses or result in material financial loss, regulatory violations, reputational harm or legal liability, which, in turn, could cause a decline in the company’s earnings or stock price.

Catastrophic and unpredictable events could have a material adverse effect on our business.

A terrorist attack, war, power failure, cyber-attack, natural disaster or other catastrophic or unpredictable event could adversely affect our future revenue, expenses and operating results by: interrupting our normal business operations; sustaining employee casualties, including loss of our key employees; requiring substantial expenditures and expenses to repair, replace and restore normal business operations; and reducing investor confidence. We have a disaster recovery plan to address certain contingencies, but we cannot be assured that this plan will be sufficient in responding or ameliorating the effects of all disaster scenarios. Similarly, these types of events could also affect the ability of the third-party vendors that we rely upon to conduct our business – e.g., BNY Mellon, which provides us with sub-advisory portfolio management services as well as custodial, fund accounting and administration services, or Standard & Poor’s, which provide us with index calculation services — to continue to provide these necessary services to us, even though they also have disaster recovery plans to address these contingencies. If we or our third-party vendors are unable to respond adequately or in a timely manner, this failure may result in a loss of revenue and/or increased expenses, either of which would have a material adverse effect on our operating results.

 

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A change of control of our company would automatically terminate our investment management agreements relating to the WisdomTree ETFs unless the Board of Trustees of the WisdomTree Trust and stockholders of the WisdomTree ETFs voted to continue the agreements.

Under the Investment Company Act, an investment management agreement with a fund must provide for its automatic termination in the event of its assignment. The fund’s board and stockholders must vote to continue the agreement following its assignment, the cost of which can be significant and which ordinarily would be borne by us in order to avoid dissatisfaction by the stockholders of the WisdomTree ETFs.

Under the Investment Advisers Act, a client’s investment management agreement may not be “assigned” by the investment advisor without the client’s consent. An investment management agreement is considered under both acts to be assigned to another party when a controlling block of the advisor’s securities is transferred. In our case, an assignment of our investment management agreements may occur if we sell or issue a certain number of additional shares of common stock in the future or if a third party were to acquire a controlling interest in our company. We cannot be certain that the Trustees and the stockholders of the WisdomTree ETFs would consent to assignments of our investment management agreements or approve new agreements with us if a change of control occurs. This restriction may discourage potential purchasers from acquiring a controlling interest in our company.

We may be subject to claims of infringement of third-party intellectual property rights, which could harm our business.

Third parties may assert against us alleged patent, copyright, trademark, or other intellectual property rights to intellectual property that is important to our business. Any claims that our products or processes infringe the intellectual property rights of others, regardless of the merit or resolution of such claims, could cause us to incur significant costs in responding to, defending, and resolving such claims, and may divert the efforts and attention of our management from our business. As a result of such intellectual property infringement claims, we could be required or otherwise decide that it is appropriate to:

 

   

pay third-party infringement claims;

 

   

discontinue selling the particular funds subject to infringement claims;

 

   

discontinue using the processes subject to infringement claims;

 

   

develop other intellectual property or products not subject to infringement claims, which could be time-consuming and costly or may not be possible; or

 

   

license the intellectual property from the third party claiming infringement, which license may not be available on commercially reasonable terms.

The occurrence of any of the foregoing could result in unexpected expenses, reduce our revenue and adversely affect our business and financial results.

We have applied for patents, but there is no assurance that they will be issued and we may not be able to enforce or protect our patents and other intellectual property rights, which may harm our ability to compete and harm our business.

Although we have applied for patents relating to our index methodology and relating to the operation of our equity ETFs, there is no assurance that patents will be issued. In addition, even if issued, our ability to enforce our patents and other intellectual property rights is subject to general litigation risks. While we have been competing without the benefit of these patents being issued, if they are not issued or we cannot successfully enforce them, we may lose the benefit of a future competitive advantage that they would otherwise provide to us. If we seek to enforce our rights, we could be subject to claims that the intellectual property right is invalid or is otherwise not enforceable. Furthermore, our assertion of intellectual property rights could result in the other party seeking to assert alleged intellectual property rights of its own or assert other claims against us, which could harm our business. If we are not ultimately successful in defending ourselves against these claims in litigation, we may be subject to the risks described in the immediately preceding risk factor entitled “We may be subject to claims of infringement of third-party intellectual property rights, which could harm our business.”

Fulfilling our public company financial reporting and other regulatory obligations will be expensive and time consuming.

Following the effectiveness of this registration statement on Form 10 and listing of our common stock on a national securities exchange, we will be required to implement specific corporate governance practices and adhere to a variety of

 

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reporting requirements and complex accounting rules under the Sarbanes-Oxley Act of 2002 (“SOX”) and the related rules and regulations of the SEC, as well as the rules of the securities exchange. We anticipate that compliance with these requirements will cause us to continue to incur significant legal and accounting compliance costs, and place significant demands on our accounting and legal staff, and on our accounting and information systems. We expect to hire additional staff with appropriate public company experience and technical knowledge, which is planned to increase our compensation expense.

Beginning with the fiscal year ended December 31, 2012, our management will be required to conduct an annual assessment of the effectiveness of our internal controls over financial reporting and include a report on our internal controls in our annual reports on Form 10-K pursuant to Section 404 of SOX. In addition, we are required to have our independent registered public accounting firm attest to and report on the effectiveness of our internal controls over financial reporting. We will incur significant costs in order to implement and maintain our internal control over financial reporting and comply with Section 404 of SOX, including necessary auditing and legal fees, and costs associated with accounting, internal audit, information technology, compliance and administrative staff.

We may face risks arising from future acquisitions.

We may acquire other companies in the future. Any such acquisition may be effected quickly, may occur at any time and may be significant in size relative to our existing operations. These acquisitions may involve numerous risks, including, among others:

 

   

failure to achieve financial or operating objectives;

 

   

failure to integrate successfully and in a timely manner any operations, products, services or technology;

 

   

diversion of the attention of management and other personnel;

 

   

failure to obtain necessary regulatory or other approvals;

 

   

failure to retain personnel;

 

   

failure to obtain any necessary financing on acceptable terms;

 

   

unforeseen liabilities of the acquired entity;

 

   

failure of counterparties to indemnify us against liabilities arising from the acquired entities; and

 

   

unfavorable market conditions that could negatively impact our growth expectations of the acquired.

These risks and the overall failure to manage successfully any potential acquisition could adversely affect out future profitability and may prevent us from realizing expected benefits from the acquisitions and could result in the impairment of goodwill and/or intangible assets recognized at the time of acquisition.

Risks Relating to our Common Stock

The market price of our shares may fluctuate.

The market price of our common stock may fluctuate widely, depending upon many factors, some of which may be beyond our control, including:

 

   

decreases in our assets under management;

 

   

variations in our quarterly operating results;

 

   

differences between our actual financial operating results and those expected by investors and analysts;

 

   

publication of research reports about us or the investment management industry;

 

   

changes in expectations concerning our future financial performance and the future performance of the ETF industry and the asset management industry in general, including financial estimates and recommendations by securities analysts;

 

   

our strategic moves and those of our competitors, such as acquisitions;

 

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changes in the regulatory framework of the ETF industry and the asset management industry in general and regulatory action, including action by the SEC to lesson the regulatory requirements or shortening the process to obtain regulatory relief under the Investment Company Act of 1940 that is necessary to become an ETF sponsor; and

 

   

changes in general economic or market conditions.

Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations may adversely affect the trading price of our common stock.

Future sales of our common stock in the public market by management or our large stockholders could lower our stock price.

Our two largest stockholders (each of whom has a representative on our Board of Directors), together with the other members of our Board of Directors and our executive officers, beneficially own approximately 60.4% of our outstanding common stock. Sales of a substantial portion of this common stock in the open market, or the perception that such sales could occur, could have an adverse affect on the market price of our common stock and cause it to decline.

Furthermore, these stockholders and management are parties to a registration rights agreement with us. Under that agreement, the holders of a majority of the shares subject to the agreement have the right to cause us to file one or more registration statements for the resale of their respective shares of common stock and cooperate in certain underwritten offerings. These registrations will require the company to incur costs and the subsequent sales could have an adverse affect on the market price of our common stock.

Future issuance of our common stock could lower our stock price and dilute the interests of existing stockholders.

As part of our growth strategy, we will explore various acquisition opportunities that may be presented to us. In connection with any such acquisition, we may issue our common stock as all or part of the consideration or we may sell our common stock in a public offering or private placement to obtain cash proceeds to finance the acquisition. The issuance of a substantial amount of common stock could have the effect of substantially diluting the interests of our current stockholders. In addition, the sale of a substantial amount of common stock in the public market, either in the initial issuance or in a subsequent resale by the target company or investors in a private placement could have an adverse affect on the market price of our common stock.

The members of our Board of Directors and our executive officers, as stockholders, control our company.

As of March 21, 2011, the members of our Board of Directors and our executive officers, as stockholders, collectively beneficially own 60.4% of our outstanding common stock. As a result of this ownership, they are able to control all matters requiring approval by stockholders of our company, including the election of directors. Furthermore, Michael Steinhardt, chairman of our Board of Directors, beneficially owns 32.8% of our outstanding common stock and James D. Robinson, IV, a director of our company, serves as a general partner of the general partner of three venture capital funds that together beneficially own 17.5% of our outstanding common stock. As a result, Messrs. Steinhardt and Robinson beneficially own an aggregate of 50.3% of our outstanding stock and have the ability to control all matters requiring approval by stockholders of our company.

Although our directors and officers have a duty of loyalty to us under Delaware law and our amended and restated certificate of incorporation, transactions that we enter into in which a director or officer has a conflict of interest are generally permissible so long as (1) the material facts relating to the director’s or officer’s relationship or interest as to the transaction are disclosed to our Board of Directors and a majority of our disinterested directors, or a committee consisting solely of disinterested directors, approves the transaction, (2) the material facts relating to the director’s or officer’s relationship or interest as to the transaction are disclosed to our stockholders and a majority of our disinterested stockholders approves the transaction or (3) the transaction is otherwise fair to us. Under our certificate of incorporation, representatives of our stockholders are not required to offer to us any transaction opportunity of which they become aware and could take any such opportunity for themselves or offer it to other companies in which they have an investment, unless such opportunity is expressly offered to them solely in their capacity as a director of ours.

 

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A provision in our certificate of incorporation and by-laws may prevent or delay an acquisition of our company, which could decrease the market value of our common stock.

Provisions of Delaware law and our amended and restated certificate of incorporation and amended and restated by-laws may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable. These provisions may also prevent or delay attempts by stockholders to replace or remove our current management or members of our Board of Directors. These provisions include:

 

   

a classified board of directors;

 

   

limitations on the removal of directors;

 

   

advance notice requirements for stockholder proposals and nominations;

 

   

the inability of stockholders to act by written consent or to call special meetings;

 

   

the ability of our Board of Directors to make, alter or repeal our amended and restated by-laws; and

 

   

the authority of our Board of Directors to issue preferred stock with such terms as our Board of Directors may determine.

In addition, upon the listing on our common stock on a national securities exchange, we will be subject to the provisions of Section 203 of the Delaware General Corporation Law, which limits business combination transactions with stockholders of 15% or more of our outstanding voting stock that our Board of Directors has not approved. These provisions and other similar provisions make it more difficult for stockholders or potential acquirers to acquire us without negotiation. These provisions may apply even if some stockholders may consider the transaction beneficial to them.

As a result, these provisions could limit the price that investors are willing to pay in the future for shares of our common stock. These provisions might also discourage a potential acquisition proposal or tender offer, even if the acquisition proposal or tender offer is at a premium over the then current market price for our common stock.

We do not intend to pay dividends in the foreseeable future.

We have never paid dividends on our common stock and, as discussed elsewhere in this registration statement, we intend to invest our available cash flow into our growth strategy for the foreseeable future. Thus, the shares of common stock may not realize a return in the form of dividends in the foreseeable future. Investors who anticipate the need for immediate dividends from shares of common stock should refrain from purchasing our common stock. In addition, our Board of Directors is authorized, without stockholder approval, to issue preferred stock with such terms as our Board of Directors may, in its discretion, determine. Our Board of Directors could, therefore, issue preferred stock with dividend rights superior to that of the common stock, which could also limit the payment of dividends on the common stock.

 

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ITEM 2. FINANCIAL INFORMATION

Selected Financial Data

You should read the following selected consolidated financial data 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 registration statement. The financial information as of and for the years ended December 31, 2008, 2009 and 2010 set forth below was derived from our audited consolidated financial statements and related notes included elsewhere in this registration statement. The financial information as of and for the years ended December 31, 2006 and 2007 set forth below was derived from our audited financial statements and notes that are not included in this registration statement. The consolidated financial statements as of and for the years ended December 31, 2008, 2009 and 2010 have been audited by Ernst & Young LLP, an independent registered public accounting firm. The historical financial information may not be indicative of our future performance.

 

     Year Ended December 31,  
     2006(1)     2007     2008     2009     2010  
     (in thousands, except per share amounts)  

Statement of Operations Data:

          

Revenues

          

ETF advisory fees

   $ 1,740      $ 18,158      $ 21,643      $ 20,812      $ 40,567   

Other income

     435        2,761        1,968        1,283        1,045   
                                        

Total revenues

     2,175        20,919        23,611        22,095        41,612   

Expenses

          

Compensation and benefits

     11,971        21,465        20,338        18,943        19,193   

Fund management and administration

     3,178        11,082        14,772        13,387        14,286   

Marketing and advertising

     2,788        6,434        5,875        2,762        3,721   

Sales and business development

     717        1,611        3,642        2,495        2,730   

Professional and consulting fees

     1,822        3,249        1,871        1,780        3,779   

Occupancy, communication and equipment

     525        1,010        1,564        1,087        1,118   

Depreciation and amortization

     36        78        337        360        314   

Third party sharing arrangements

     —          —          (320     89        2,296   

Other

     481        1,120        2,577        2,420        1,724   
                                        

Total expenses

     21,518        46,049        50,656        43,323        49,161   

Loss before provision for income taxes

     (19,343     (25,130     (27,045     (21,228     (7,549

Provision for income taxes

     —          —          —          —          —     
                                        

Net loss

     ($19,343     ($25,130     ($27,045     ($21,228     ($7,549
                                        

Net loss per share – basic and diluted

     ($0.25     ($0.26     ($0.27     ($0.21     ($0.07

Weighted-average common shares – basic and diluted

     78,482        98,518        100,236        103,397        111,981   

Statement of Financial Condition Data:

          

Cash and cash equivalents

   $ 57,734      $ 15,138      $ 13,275      $ 11,476      $ 14,233   

Total assets

   $ 59,032      $ 52,303      $ 34,856      $ 25,703      $ 29,142   

Total liabilities

   $ 5,626      $ 12,998      $ 12,800      $ 9,675      $ 11,907   

Stockholders’ equity

   $ 53,406      $ 39,304      $ 22,056      $ 16,028      $ 17,235   

Statistical Data (in millions):

          

Beginning of period AUM

   $ 0      $ 1,523      $ 4,559      $ 3,180      $ 5,979   

Net inflows

     1,408        2,962        907        1,773        3,134   

Market appreciation/(depreciation)

     115        74        (2,286     1,026        778   
                                        

End of period AUM

   $ 1,523      $ 4,559      $ 3,180      $ 5,979      $ 9,891   
                                        

 

(1) In June 2006, we received exemptive relief from the SEC and launched our first 20 ETFs.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the “Selected Financial Data” above and our consolidated financial statements and related notes that appear elsewhere in this registration statement. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in Item 1A. “Risk Factors.” We assume no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Executive Summary

We are the eighth largest sponsor of ETFs in the United States based on AUM. In June 2006, we launched 20 ETFs and, as of March 29, 2011, we had 46 funds with AUM of approximately $11.1 billion.

Through our operating subsidiary, we provide investment advisory and other management services to the WisdomTree ETFs. In exchange for providing these services, we receive advisory fee revenues based on a percentage of the ETFs average daily net assets under management.

Our expenses are predominantly related to selling, operating and marketing our ETFs. We have contracted with third parties to provide certain operational services for the ETFs. We have contracted with BNY Mellon to act as sub-advisor and provide portfolio management services, fund administration, custody, accounting and other related services for the WisdomTree ETFs.

We distribute our ETFs through financial advisors in the major channels in the asset management industry. These channels include brokerage firms, registered investment advisors, institutional investors, private wealth managers and discount brokers. We do not target our ETFs for sale directly to the retail segment but rather to the financial advisor who acts as the intermediary between the end client and us.

Our revenues have increased since we launched in June 2006 and reached a record of $41.6 million for 2010 compared to $22.1 million in 2009 and $23.6 million in 2008. Our expenses have increased to $49.2 million in 2010, from $43.3 million in 2009, which is down from $50.7 million in 2008. Our net loss has improved each year to a loss of $7.5 million in 2010, from a loss of $21.2 million in 2009 and a loss of $27.0 million in 2008.

Our revenues are highly correlated to the level and relative mix of our assets under management, as well as fees associated with our ETFs. In addition, a significant portion of our assets under management are invested in securities issued outside of the U.S. Therefore, our AUM and our revenues are affected by movements in global capital market levels and the strengthening or weakening of the U.S. dollar against other currencies. These market movements and currency exchange levels, as well as inflows or outflows and changes in the mix of investment products between asset classes can materially affect our operating results from period to period. It is our belief that our ability to gather inflows into our ETFs, coupled with general stock market trends, will have the greatest impact on our business.

The Market Environment in which we Operate

We operate in an extremely challenging and competitive business environment. We currently compete against several large ETF sponsors, many smaller sponsors, as well as new entrants to the marketplace, and will compete against large asset management companies who have recently launched or announced intentions to launch ETF products.

Since we launched our ETFs, the global equity markets have experienced significant volatility. The following chart reflects our ETF assets under management and major market equity indices since we launched our ETFs in June 2006:

 

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LOGO

The U.S. equity markets started to significantly decline in the second half of 2008 for many reasons including concerns over home values, the soundness of mortgage related financial products, safety of major financial institutions and the resulting freeze in the credit markets. The decline then spread worldwide. Investors sold their investments in equities and corporate debt and invested in U.S. government securities and commodities, particularly gold. The response from governments and central banks around the world to the financial crisis in 2008 was an unprecedented amount of monetary and fiscal stimulus. Central banks lowered interest rates to near zero, issued a number of debt guarantees for banks and other non-bank financial institutions, and began to increase the supply of money through open market asset purchases. Additionally, governments around the globe passed legislation that poured billions of dollars into the global economy.

After reaching a market bottom in March 2009, global financial markets staged a dramatic recovery with major global market indices rebounding in record fashion off of record declines. These actions alleviated the risk aversion that dominated the latter half of 2008 into the first quarter of 2009 and as a result financial markets rallied, investor sentiment improved and share prices rose.

Consequences of the Market Environment

The severe downturn in global financial markets, especially during the second half of 2008 and early 2009, caused significant changes in our assets under management, our financial results and operating cash flows. This was not as a result of net outflows from our ETFs. In fact, during the economic downturn, we experienced only one quarter of net outflows – the third quarter of 2008 when we had net outflows of approximately $15.5 million. The substantial decline in our AUM was primarily a result of a reduction in the market value of the securities our ETFs hold. Also affecting our AUM was our product offering. During the downturn, investors sold equities and invested in U.S. government securities and commodity ETFs, products we did not offer at that time.

Beginning in the second half of 2008, we took steps to lower our cost structure to respond to the deteriorating market conditions. We began a series of cost reduction initiatives including decreasing marketing, advertising and business development related spending, renegotiating fees or changing third party service providers, initiating headcount reductions and deferring non-business critical initiatives and hiring, and lastly, closing 10 of our ETFs in March 2010. In addition, in October 2009, we raised $5 million from predominantly our existing investors through the issuance of common stock in order to increase our liquidity.

As important as reducing our cost structure, we also took initiatives to address the decline in our revenues as a result of the deteriorating markets. We took actions to diversify our product offering, which were predominantly equity based, and revenue stream. In 2008 and 2009, we launched the industry’s first currency ETFs and as of February 28, 2011, we have nine currency ETFs. In August 2010, we launched our first fixed income ETF and in January 2011, we launched the industry’s

 

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first managed futures strategy ETF. We believe expanding our product offering into different asset classes will better serve to diversify our revenue stream.

Current State

As the markets have recovered, our assets under management have reached record levels which have had a corresponding positive affect on our revenues. Also, the cost reduction actions we initiated have contributed to an improvement in our net loss. We have also improved our financial condition and cash flows.

We believe challenging and volatile market conditions will continue in the foreseeable future. We will also continue to aggressively compete against the other ETF sponsors and new entrants to the marketplace. As we confront these challenges, we expect to continue to focus on executing our growth strategy and leveraging our core strengths as we discussed in the “Business” section of this Registration Statement. We are focused on controlling our cost base, while at the same time investing in our growth.

Historical Net ETF Inflows and AUM

The following charts reflect our historical net ETF inflows, market share of industry inflows and ETF AUM since we launched our funds in June 2006:

LOGO

LOGO

 

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LOGO

We have experienced positive net inflows each year since we launched our first ETFs in June 2006. While we have experienced significant fluctuations in our net inflows quarter to quarter, we have only experienced one quarter of net outflows – approximately $15.5 million of net outflows in the third quarter of 2008 – when the overall market sentiment was extremely negative. Our ETF AUM declined from $4.6 billion in 2007 to $3.2 billion at the end of 2008, primarily as a result of $2.3 billion of declines in the market value of the securities our ETFs hold resulting from the global economic crisis, despite $907 million of inflows. Our market share also declined during that period as investors began to sell off equity investments and invest in U.S. government fixed income and commodity ETFs. At that time, we did not have fixed income or commodity presence. Part of our growth strategy is to diversify our product offering.

Over the last several quarters, our market share of net ETF inflows has also been increasing. We believe this trend is a result of our strong product offering in emerging market equities, new product launches to diversify our product offering, as well as a longer track record for the funds we launched in 2006 and 2007. Our growth strategy seeks to increase our market share of ETF industry inflows.

Components of Revenue

ETF advisory fees

Approximately 98% of our revenues are comprised of advisory fees we earn from the WisdomTree ETFs. We earn this revenue based on a percentage of the average daily market value of assets under management. These percentages range from 0.28% to 0.95% based on the ETF. A summary of the average advisory fee we earn and assets under management as of February 28, 2011 by asset class is as follows:

 

     Advisory Fee     AUM  
           (in millions)  

Emerging Markets Equity ETFs

     0.73   $ 3,496   

International Developed Equity ETFs

     0.54   $ 2,276   

U.S. Equity ETFs

     0.34   $ 2,220   

Currency ETFs

     0.49   $ 1,378   

International Sector Equity ETFs

     0.58   $ 248   

International Fixed Income ETFs

     0.55   $ 620   

Alternative Strategy ETFs

     0.95   $ 41   
                

Total Average ETF Advisory Fee/Total AUM

     0.56   $ 10,279   

Most of all of our ETFs have a fixed advisory fee. In order to increase the advisory fee, we would need to obtain the approval from a majority of the ETF stockholders which may be difficult or not possible to obtain. There may also be a significant cost in obtaining this stockholder approval. We do not need stockholder approval to lower our advisory fee.

Our ETF advisory fee revenue may fluctuate based on general stock market trends which include market value appreciation or depreciation, currency fluctuations against the U.S. dollar and level of inflows or outflows from our ETFs. In

 

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addition, these revenues may fluctuate due to increased competition or a determination by the independent trustees of the WisdomTree ETFs to terminate or significantly alter the funds’ investment management agreements with us.

Other income

Other income includes fees from licensing our indexes to third parties, separate accounts for pension plans, fees from our 401(k) initiative and interest income from investing our corporate cash. The pension plan, for which we serve as investment advisor, withdrew its funds in the first quarter of 2011. These revenues are immaterial to our financial results and we do not expect them to be material in the near term.

Components of Expenses

We have been investing in our business to build a multi-asset class ETF platform and we intend to continue to invest toward that goal. Our operating expenses consist primarily of costs related to selling, operating and marketing our ETFs as well as the infrastructure needed to run our company.

Compensation and benefits

Employee compensation and benefits expense is expensed when incurred and includes salaries, incentive compensation, and related benefit costs. Virtually all our employees receive incentive compensation which is based on our operating results as well as their individual performance. Therefore, a portion of this expense will fluctuate with our business results. In order to attract and retain qualified personnel, we must maintain competitive employee compensation and benefit plans. In normal circumstances, as we grow, we expect to experience a general rise in employee compensation and benefit expenses over the long term; however the rate of increase should be less than the rate of increase in our revenues.

Also included in compensation and benefits are costs related to equity awards granted to our employees. We generally grant restricted stock and/or options when employees are hired and in intervals thereafter. In addition, we grant restricted stock and options to our employees as part of year end incentive compensation. Our executive management and Board of Directors believes very strongly that equity awards are an important part of our employees overall compensation package and that incentivizing our employees with equity in the company aligns the interest of our employees with that of our stockholders. We use the fair value method in recording compensation expense for restricted stock and options grants. Under the fair value method, compensation expense is measured at the grant date based on the estimated fair value of the award and is recognized as an expense over the vesting period. Fair value is determined on the date granted using the Black-Scholes option pricing model for the stock options and is determined by the market value of our common stock for restricted stock awards.

We expect our stock-based compensation in future periods to decline from previous expense levels. We granted a significant number of equity awards to attract and retain employees during our development stage in 2004 through 2006. These initial awards also carried higher fair values based on our prevailing stock price at that time. As these awards vest, they are being replaced by a lower number of awards.

Fund management and administration

Fund management and administration expenses are expensed when incurred and are comprised of costs we pay third-party service providers to operate our ETFs. Under our advisory agreement with the WisdomTree Trust, the Trustees have approved us and other third parties to provide essential management and administrative services to the Trust and each ETF in exchange for an advisory fee. The costs include:

 

   

portfolio management of our ETFs (sub-advisory);

 

   

fund accounting and administration;

 

   

custodial services;

 

   

accounting and tax services;

 

   

printing and mailing of stockholder materials;

 

   

index calculation;

 

   

distribution fees;

 

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legal and compliance services;

 

   

exchange listing fees;

 

   

trustee fees and expenses;

 

   

preparation of regulatory reports and filings;

 

   

insurance; and

 

   

other administrative services.

Of significance, we have contracted with BNY Mellon to act as sub-advisor and provide portfolio management, provide fund administration, custody and accounting related services for the WisdomTree ETFs. The fees we pay BNY Mellon have minimums per fund with additional fees based on a percentage of the ETFs average daily net assets under management of the funds above certain AUM levels. The fees we pay for accounting, tax, index calculation and exchange listing are based on the number ETFs we have. The remaining fees are based on a combination of both assets under management and number of funds, or as incurred.

Marketing and advertising

Marketing and advertising expenses are recorded when incurred and include the following costs:

 

   

advertising, public relations and product promotion campaigns that are initiated to promote our existing and new ETFs as well as brand awareness;

 

   

development and maintenance of our website; and

 

   

creation and preparation of marketing materials.

Our discretionary advertising comprises the largest portion of this expense and we expect these costs to increase in the future as we continue to execute our growth strategy and compete against other ETF sponsors. In the past, we have advertised primarily in the first and fourth quarters of the year but we may change that strategy going forward based on our financial results, competitive pressures and market conditions. Therefore, we may incur expenditures in certain periods to attract inflows, the benefit of which may or may not be recognized from increases to our assets under management in future periods. However, due to the discretionary nature of some of these costs, they can generally be reduced if there were a decline in the markets.

Sales and business development

Sales and business development expenses are recorded when incurred and includes the following costs:

 

   

travel and entertainment or conference related expenses for our sales force;

 

   

market data services for our research team;

 

   

sales related software tools; and

 

   

legal and other advisory fees associated with the development of new funds.

Professional and consulting fees

Professional fees are expensed when incurred and consist of fees we pay to corporate advisors including accountants, tax advisors, legal counsel, investment bankers or other consultants. These expenses fluctuate based on our needs or requirements at the time. Certain of these costs are at our discretion and can fluctuate year to year.

Also included in professional fees is stock based compensation related to restricted stock or option awards we granted to senior advisers to our Board of Directors. Under generally accepted accounting principles, these awards are considered variable expenses and are re-measured each reporting period with a corresponding impact to stockholders’ equity. As such, this expense may fluctuate based upon the market price of our common stock.

 

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Occupancy, communications and equipment

Occupancy, communications and equipment expense includes costs for our corporate headquarters in New York City. Our office space lease expires in January 2014. We have sub-leased a portion of our office space to an unrelated third party until January 2012.

Depreciation and amortization

Depreciation and amortization expense results primarily from amortization of leasehold improvements to our office space as well as depreciation on fixed assets we purchase which is depreciated over three or seven years.

Third-party sharing arrangements

We entered into a mutual participation agreement with Mellon Capital Management Corporation and The Dreyfus Corporation in which we agreed to collaborate in developing currency and fixed income ETFs under the WisdomTree Trust and share equally all third party costs, profits and losses. This line item includes our counterparties’ share of revenues less third party costs. In addition, we have entered into marketing agreements with two unrelated third parties – the first for marketing in the independent broker-dealer channel in the United States and the second for marketing in Latin America. Under both agreements, we will share a percentage of revenue based on incremental growth in assets under management.

Other

Other expenses consists primarily of insurance premiums, general office related expenses, securities license fees for our sales force, public company related expenses, corporate related travel and entertainment and board of director fees, including stock-based compensation related to equity awards we granted to our directors. In 2008 and 2009, other expenses also included stock-based compensation related to common stock we issued to Treasury Equity, LLC – see “Our Business” in this Form 10.

2011 Expense Outlook

We believe the ETF industry is still in its infancy and we have significant growth opportunities; therefore, it is important for us to strategically invest in our business when the right growth opportunities present themselves. Our investment in strategic growth initiatives includes anticipated higher spending on marketing, advertising and sales efforts, as well as increases in our headcount, particularly our sales force. We also intend to launch additional ETFs in 2011. Lastly, we may establish an international fund company to capitalize on growth opportunities outside of the U.S. We are still in the early stages of developing our plan but this would be the first step for possible international expansion. The investment in strategic growth initiatives is an estimate of planned expenses and some of these costs may or may not be realized depending on the nature of the growth initiatives or market conditions.

Seasonality

We believe seasonal fluctuations in the asset management industry are common with increased activity in the first and fourth quarters of the year primarily due to the seasonal trends of overall trading activity in the markets, timing of rebalancing of portfolios and retirement account funding activities. However, since we began our operations, we believe these seasonal trends may have been masked by the unprecedented volatility and negative market conditions in the global equity markets. Therefore, period to period comparisons of ours or the industry’s net inflows may not be meaningful and not indicative of results in future periods.

 

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Key Statistical Information

The following table presents key statistical information as well as other select data to better understand the revenue and expense drivers for our business:

 

     Year Ended December 31,  
     2010     2009      2008  

Total ETF Assets Under Management (in millions):

       

Beginning of period assets

   $ 5,979      $ 3,180       $ 4,559   

Inflows/(outflows)

     3,134        1,773         907   

Market appreciation/(depreciation)

     778        1,026         (2,286
                         

End of period assets

   $ 9,891      $ 5,979       $ 3,180   
                         

Average assets during the period

   $ 7,308      $ 3,964       $ 4,327   

International Developed Equity ETFs (in millions):

       

Beginning of period assets

   $ 1,953      $ 1,339       $ 2,813   

Inflows/(outflows)

     29        281         (235

Market appreciation/(depreciation)

     81        333         (1,239
                         

End of period assets

   $ 2,063      $ 1,953       $ 1,339   
                         

Average assets during the period

   $ 1,902      $ 1,471       $ 2,113   

Emerging Markets Equity ETFs (in millions):

       

Beginning of period assets

   $ 1,431      $ 384       $ 172   

Inflows/(outflows)

     1,911        650         520   

Market appreciation/(depreciation)

     438        397         (308
                         

End of period assets

   $ 3,780      $ 1,431       $ 384   
                         

Average assets during the period

   $ 2,202      $ 793       $ 439   

International Sector Equity ETFs (in millions):

       

Beginning of period assets

   $ 358      $ 247       $ 547   

Inflows/(outflows)

     (117     58         (47

Market appreciation/(depreciation)

     8        53         (253
                         

End of period assets

   $ 249      $ 358       $ 247   
                         

Average assets during the period

   $ 259      $ 257       $ 453   

U.S. Equity ETFs (in millions):

       

Beginning of period assets

   $ 1,330      $ 987       $ 1,027   

Inflows/(outflows)

     486        137         409   

Market appreciation/(depreciation)

     241        206         (449
                         

End of period assets

   $ 2,057      $ 1,330       $ 987   
                         

Average assets during the period

   $ 1,592      $ 1,084       $ 984   

Currency ETFs (in millions):

       

Beginning of period assets

   $ 906      $ 224         —     

Inflows/(outflows)

     253        646       $ 260   

Market appreciation/(depreciation)

     20        36         (36
                         

End of period assets

   $ 1,179      $ 906       $ 224   
                         

Average assets during the period

   $ 1,217      $ 359       $ 337   

 

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International Fixed Income ETF (in millions):

      

Beginning of period assets

     —          —          —     

Inflows/(outflows)

   $ 571        —          —     

Market appreciation/(depreciation)

     (7     —          —     
                        

End of period assets

   $ 564        —          —     
                        

Average assets during the period

   $ 136        —          —     

Average ETF Asset Mix (during the period):

      

International Developed Equity ETFs

     26     37     49

Emerging Markets Equity ETFs

     30     20     10

International Sector Equity ETFs

     4     7     10

U.S. Equity ETFs

     22     27     23

Currency ETFs

     16     9     8

International Fixed Income ETF

     2     —          —     
                        

Total

     100     100     100
                        

 

Average ETF Advisory Fee (during the period)

     0.56     0.52     0.52
                        

 

Number of ETFs (end of the period):

      

International Developed Equity ETFs

     14        15        14   

Emerging Markets Equity ETFs

     4        4        4   

International Sector Equity ETFs

     4        11        11   

U.S. Equity ETFs

     12        13        13   

Currency ETFs

     9        9        8   

International Fixed Income ETF

     1        —          —     
                        

Total

     44        52        50   
                        

Headcount

     60        54        57   

Results of Operations

Year Ended December 31, 2010 compared to December 31, 2009

Overview

 

     Year Ended
December 31,
    Change      Percent
Change
 
     2010     2009       

Assets Under Management (in millions)

         

Beginning of period assets

   $ 5,979      $ 3,180        

Net inflows

     3,134        1,773      $ 1,361         76.8

Market appreciation/(depreciation)

     778        1,026        
                     

End of period assets

   $ 9,891      $ 5,979      $ 3,912         65.4

Financial Results (in thousands)

         

Total revenues

   $ 41,612      $ 22,095      $ 19,517         88.3

Total expenses

     49,161        43,323        5,838         13.5
                                 

Net loss

     ($7,549     ($21,228   $ 13,679         (64.4 %) 

Our assets under management increased 65.4% from $6.0 billion in 2009 to $9.9 billion in 2010 primarily from $3.1 billion of net inflows. Our net loss improved to a loss of $7.5 million for the year ended 2010 as compared to a loss of $21.2 million in 2009 primarily due to higher average asset levels, cost reduction initiatives we initiated in 2008 and 2009 and higher average ETF advisory fee revenue.

 

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Revenues

 

     Year Ended
December 31,
    Change     Percent
Change
 
     2010     2009      

Average assets under management (in millions)

   $ 7,308      $ 3,964      $ 3,344        84.4

Average ETF advisory fee

     0.56     0.52     0.04     7.7

ETF advisory fees (in thousands)

   $ 40,567      $ 20,812      $ 19,755        94.9

Other income (in thousands)

     1,045        1,283        (238     (18.6 %) 
                                

Total revenues (in thousands)

   $ 41,612      $ 22,095      $ 19,517        88.3

ETF advisory fees

ETF advisory fee revenues increased 94.9% from $20.8 million in 2009 to a record $40.6 million in 2010. This increase was primarily due to higher average asset balances, which increased 84.4% due to strong net inflows, market appreciation and higher average ETF advisory fees, which increased from 0.52% to 0.56%. Approximately 61.0% of our ETF inflows were in our higher-priced emerging market equity ETFs, which contributed to the higher average ETF advisory fee we earned.

Other income

Other income decreased 18.6% from $1.3 million in 2009 to $1.0 million in 2010 primarily due to $0.4 million of lower interest and investment income as a result of low market interest rates and lower average cash balances, partly offset by $0.1 million of higher income from index licensing revenues.

Expenses

 

     Year Ended
December 31,
     Change     Percent
Change
 

(in thousands)

   2010      2009       

Compensation and benefits

   $ 19,193       $ 18,943       $ 250        1.3

Fund management and administration

     14,286         13,387         899        6.7

Marketing and advertising

     3,721         2,762         959        34.7

Sales and business development

     2,730         2,495         235        9.4

Professional and consulting fees

     3,779         1,780         1,999        112.3

Occupancy, communications and equipment

     1,118         1,087         31        2.9

Depreciation and amortization

     314         360         (46     (12.8 %) 

Third-party sharing arrangements

     2,296         89         2,207        2479.8

Other

     1,724         2,420         (696     (28.8 %) 
                                  

Total expenses

   $ 49,161       $ 43,323       $ 5,838        13.5
                                  

 

As a Percent of Revenues:

   Year Ended
December 31,
              
     2010     2009               

Compensation and benefits

     46.1     85.7     

Fund management and administration

     34.3     60.6     

Marketing and advertising

     8.9     12.5     

Sales and business development

     6.6     11.3     

Professional and consulting fees

     9.1     8.1     

Occupancy, communications and equipment

     2.7     4.9     

Depreciation and amortization

     0.8     1.6     

Third-party sharing arrangements

     5.5     0.4     

Other

     4.1     11.0     
                     

Total expenses

     118.1     196.1     
                     

 

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Compensation and benefits

Compensation and benefits expense increased 1.3% from $18.9 million in 2009 to $19.2 million in 2010. This increase was primarily due to an increase of $1.2 million related to higher incentive compensation due to our strong net inflows and overall business results, as well as costs related to increased headcount. Our headcount increased from 54 at the end of 2009 to 60 at the end of 2010, primarily in our sales related functions. Partly offsetting this increase was a decrease of $1.4 million in stock-based compensation as equity awards granted to employees in prior years become fully vested and replaced with a lower number of awards.

Fund management and administration

Fund management and administration expense increased 6.7% from $13.4 million in 2009 to $14.3 million in 2010. Higher average assets under management as well as fund processing expenses led to an increase of $0.6 million in portfolio management and fund accounting, administration and custody related fees. We also incurred $0.5 million in higher printing and legal related fees due to higher activity as well as $0.2 million in higher exchange listing fees for our ETFs due to a fee increase at the exchange. Partly offsetting these increases was a decrease of $0.8 million in fund related fees due to the closure of 10 of our ETFs in March 2010 along with lower costs from renegotiating vendor agreements. In addition, 2009 included a reduction of $0.3 million related to resolution of a portfolio management fee disagreement with BNY Mellon. We ended 2010 with 44 ETFs, down from 52 at the end of 2009. We closed 10 funds in March 2010 and launched 2 new funds during the year.

Marketing and advertising

Marketing and advertising expense increased 34.7% from $2.8 million in 2009 to $3.7 million in 2010 primarily due to higher discretionary advertising related expenses to promote our ETFs on television and online.

Sales and business development

Sales and business development expense increased 9.4% from $2.5 million in 2009 to $2.7 million in 2010 primarily due to higher sales related spending to support our growth.

Professional and consulting fees

Professional fees increased $2.0 million from $1.8 million in 2009 to $3.8 million in 2010. This increase was primarily due to $0.9 million of higher stock-based compensation related to equity awards granted to special advisors to our Board which fluctuates based upon the value of our common stock. Our stock price increased from $1.85 to $4.15 at the end of 2010. We also incurred $1.1 million in higher corporate advisory fees related to business strategy and related legal fees.

Occupancy, communications and equipment

Occupancy, communications and equipment expense remained relatively unchanged between 2009 and 2010.

Depreciation and amortization

Depreciation and amortization expense remained relatively unchanged between 2009 and 2010.

Third-party sharing arrangements

Third-party sharing arrangements increased $2.2 from $0.1 million in 2009 to $2.3 million in 2010. This increase was primarily due to higher net profits in our currency and fixed income ETFs which are subject to profit sharing agreement. with Mellon Capital and Dreyfus. Under the agreement, we share revenues and third party costs equally. This expense increased due to the higher average asset balances in these ETFs partly offset by higher marketing related costs. Average assets under management for our currency funds increased from $359 million in 2009 to $1.2 billion in 2010.

 

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Other

Other expense decreased 28.8% from $2.4 million in 2009 to $1.7 million in 2010. 2009 included a charge of $1.0 million as a result of our final issuance of common stock to Treasury Equity, LLC for satisfaction of certain conditions related to our currency ETFs.

Year Ended December 31, 2009 compared to December 31, 2008

Overview

 

     Year Ended
December 31,
    Change     Percent
Change
 
     2009     2008      

Assets Under Management (in millions)

        

Beginning of period assets

   $ 3,180      $ 4,559       

Net inflows

     1,773        907      $ 866        95.5

Market appreciation/(depreciation)

     1,026        (2,286    
                    

End of period ETF assets

   $ 5,979      $ 3,180      $ 2,799        88.0

Financial Results (in thousands)

        

Total revenues

   $ 22,095      $ 23,611      ($ 1,516     (6.4 %) 

Total expenses

     43,323        50,656        (7,333     (14.5 %) 
                                

Net loss

   ($ 21,228   ($ 27,045   $ 5,817        21.5

Assets under management increased 88.0% from $3.2 billion in 2008 to $6.0 billion in 2009 primarily from $1.8 billion of net inflows and $1.0 billion of market appreciation. Total revenues decreased 6.4% primarily due to a significant decline in the equity markets in the first quarter of 2009. However, our expenses decreased at a higher rate of 14.5% primarily due to cost reduction initiatives we initiated in 2008 and 2009. Our net loss improved to $21.2 million for the year ended 2009 as compared to $27.0 million in 2008 primarily due to these cost reduction initiatives.

Revenues

 

     Year Ended
December 31,
    Change     Percent
Change
 
     2009     2008      

Average assets under management (in millions)

   $ 3,964      $ 4,327        ($363     (8.4 %) 

Average ETF advisory fee

     0.52     0.52     —          —     

ETF advisory fees (in thousands)

   $ 20,812      $ 21,643        ($831     (3.8 %) 

Other income (in thousands)

     1,283        1,968        (685     (34.8 %) 
                                

Total revenues (in thousands)

   $ 22,095      $ 23,611        ($1,516     (6.4 %) 

ETF advisory fees

ETF advisory fee revenues decreased 3.8% from $21.6 million in 2008 to $20.8 million in 2009. This decrease was primarily a result of significant declines in our assets under management in the first quarter of 2009 due to overall equity market declines in the first quarter of 2009. Our assets under management decreased to a low of $2.4 billion on March 9, 2009. Even though our assets under management increased from that low point, it did not cause a corresponding increase in our average assets under management at the same rate because of the severe decline during the first quarter of 2009.

Other income

Other income decreased 34.8% from $2.0 million in 2008 to $1.3 million in 2009 primarily due to lower interest and investment income of $0.9 million as a result of low market interest rates and lower average cash balances. Partly offsetting this decrease was an increase of $0.2 million from licensing and separate account revenues.

 

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Expenses

 

(in thousands)

   Year Ended
December 31,
    Change     Percent
Change
 
   2009      2008      

Compensation and benefits

   $ 18,943       $ 20,338        ($1,395     (6.9 %) 

Fund management and administration

     13,387         14,772        (1,385     (9.4 %) 

Marketing and advertising

     2,762         5,875        (3,113     (53.0 %) 

Sales and business development

     2,495         3,642        (1,147     (31.5 %) 

Professional and consulting fees

     1,780         1,871        (91     (4.9 %) 

Occupancy, communications and equipment

     1,087         1,564        (477     (30.5 %) 

Depreciation and amortization

     360         337        23        6.8

Third-party sharing arrangements

     89         (320     409        127.8

Other

     2,420         2,577        (157     (6.1 %) 
                                 

Total expenses

   $ 43,323       $ 50,656        ($7,333     (14.5 %) 
                                 

 

     Year Ended
December 31,
              

Percent of Revenues

   2009     2008               

Compensation and benefits

     85.7     86.1     

Fund management and administration

     60.6     62.6     

Marketing and advertising

     12.5     24.9     

Sales and business development

     11.3     15.4     

Professional and consulting fees

     8.1     7.9     

Occupancy, communications and equipment

     4.9     6.6     

Depreciation and amortization

     1.6     1.4     

Third-party sharing arrangements

     0.4     (1.4 %)      

Other

     11.0     10.9     
                     

Total expenses

     196.1     214.5     
                     

Compensation and benefits

Compensation and benefits expense decreased 6.9% from $20.3 million in 2008 to $18.9 million in 2009. This decrease was primarily due to savings of $1.1 million from headcount related reductions in 2008 as well $0.3 million in lower incentive compensation.

Fund management and administration

Fund management and administration expense decreased 9.4% from $14.8 million in 2008 to $13.4 million in 2009. Higher average assets under management as well as fund processing expenses led to an increase of $0.6 million in portfolio management and fund accounting, administration and custody related fees. Offsetting this increase was a decrease of $1.3 million in printing, legal, accounting and index calculation fees. In addition, 2008 included a charge of $0.7 million related to portfolio management fees incurred in prior years due to a fee disagreement with BNY Mellon.

Marketing and advertising

Marketing and advertising expense decreased 53.0% from $5.9 million in 2008 to $2.8 million in 2009. This decrease in discretionary spending was a result of cost reduction initiatives implemented by management in reaction to the severe declines in the equity markets.

Sales and business development

Sales and business development expenses decreased 31.5% from $3.6 million in 2008 to $2.5 million in 2009. This decrease in discretionary spending was a result of cost reduction initiatives.

 

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Professional and consulting fees

Professional fees decreased 4.9% from $1.9 million in 2008 to $1.8 million in 2009. This decline was primarily due to a decrease of $0.8 million in lower corporate related legal and other consulting expenses, partly offset by $0.7 million in higher stock-based compensation related to equity awards granted to the senior advisors to our Board which fluctuates based upon the value of our common stock.

Occupancy, communications and equipment

Occupancy, communications and equipment expense decreased 30.5% from $1.6 million in 2008 to $1.1 million in 2009 primarily due to sub-leasing excess office space in our corporate offices.

Depreciation and amortization

Depreciation and amortization expense remained relatively unchanged between 2008 and 2009.

Third-party sharing arrangements

Third-party sharing arrangements increased from a reimbursement of $0.3 million to us in 2008 to a payment of $0.1 million from us in 2009. This change was primarily due to higher net profits in our currency ETFs which are subject to a profit sharing agreement with Mellon Capital and Dreyfus. Under the agreement, we share revenues and third party costs equally. This expense increased due to the higher average asset balances in these ETFs and lower third party costs. Average assets under management for our currency funds increased 6.4% from 2008 to 2009.

Other

Other expense decreased 6.1% from $2.6 million in 2008 to $2.4 million in 2009. In 2008, we recorded a $0.2 million charge related to a loss on our sub-leased space.

Quarterly Results

The following tables set forth our unaudited consolidated quarterly statement of operations data, both in dollar amounts and as a percentage of total revenues, and our unaudited consolidated quarterly operating data for the eight quarters ended December 31, 2010. In our opinion, this unaudited information has been prepared on substantially the same basis as the consolidated financial statements appearing elsewhere in this Form 10 and includes all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of the unaudited consolidated quarterly data. The unaudited consolidated quarterly data should be read together with the consolidated financial statements and related notes included elsewhere in this Form 10. The results for any quarter are not necessarily indicative of results for any future period, and you should not rely on them as such.

 

(in thousands)

  Q1/09     Q2/09     Q3/09     Q4/09     Q1/10     Q2/10     Q3/10     Q4/10  

Revenues

               

ETF advisory fees

  $ 3,558      $ 4,290      $ 5,536      $ 7,428      $ 8,467      $ 9,129      $ 9,860      $ 13,111   

Other income

    359        336        285        303        247        226        270        302   
                                                               

Total revenues

    3,917        4,626        5,821        7,731        8,714        9,355        10,130        13,413   

Expenses

               

Compensation and benefits

    4,751        4,264        5,153        4,775        5,255        4,600        4,405        4,933   

Fund management and administration

    3,191        3,205        3,317        3,674        3,397        3,306        3,569        4,014   

Marketing and advertising

    468        554        452        1,288        1,160        426        745        1,390   

Sales and business development

    442        579        661        813        460        746        766        758   

Professional and consulting fees

    303        414        432        631        1,024        707        795        1,253   

Occupancy, communication and equipment

    274        281        283        249        267        289        273        289   

Depreciation and amortization

    90        94        88        88        77        78        80        79   

Third party sharing arrangements

    23        40        62        (36     240        636        609        811   

Other

    386        392        361        1,281        426        427        405        466   
                                                               

Total expenses

    9,928        9,823        10,809        12,763        12,306        11,215        11,647        13,993   
                                                               

Net loss

    ($6,011     ($5,197     ($4,988     ($5,032     ($3,592     ($1,860     ($1,517     ($580
                                                               

 

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    Q1/09     Q2/09     Q3/09     Q4/09     Q1/10     Q2/10     Q3/10     Q4/10  

Revenues

               

ETF advisory fees

    90.8     92.7     95.1     96.1     97.2     97.6     97.3     97.7

Other income

    9.2     7.3     4.9     3.9     2.8     2.4     2.7     2.3
                                                               

Total revenues

    100.0     100.0     100.0     100.0     100.0     100.0     100.0     100.0

Expenses

               

Compensation and benefits

    121.3     92.2     88.5     61.8     60.3     49.2     43.5     36.8

Fund management and administration

    81.5     69.3     57.0     47.5     39.0     35.3     35.2     29.9

Marketing and advertising

    11.9     12.0     7.8     16.7     13.3     4.6     7.4     10.4

Sales and business development

    11.3     12.5     11.4     10.5     5.3     8.0     7.6     5.7

Professional and consulting fees

    7.7     8.9     7.4     8.2     11.8     7.6     7.8     9.3

Occupancy, communication and equipment

    7.0     6.1     4.9     3.2     3.1     3.1     2.7     2.2

Depreciation and amortization

    2.3     2.0     1.5     1.1     0.9     0.8     0.8     0.6

Third party sharing arrangements

    0.6     0.9     1.1     (0.5 %)      2.8     6.8     6.0     6.0

Other

    9.9     8.5     6.2     16.6     4.9     4.6     4.0     3.5
                                                               

Total expenses

    253.5     212.3     185.7     165.1     141.2     119.9     115.0     104.3
                                                               

Net loss

    (153.5 %)      (112.3 %)      (85.7 %)      (65.1 %)      (41.2 %)      (19.9 %)      (15.0 %)      (4.3 %) 
                                                               
    Q1/09     Q2/09     Q3/09     Q4/09     Q1/10     Q2/10     Q3/10     Q4/10  

Total ETF AUM (in thousands)

               

Beginning of period assets

  $ 3,180      $ 2,776      $ 3,663      $ 4,902      $ 5,979      $ 6,713      $ 6,240      $ 8,260   

Inflows/(Outflows)

    23        281        559        911        582        121        1,161        1,271   

Market appreciation/(depreciation)

    (427     606        680        166        152        (594     859        360   
                                                               

End of period assets

  $ 2,776      $ 3,663      $ 4,902      $ 5,979      $ 6,713      $ 6,240      $ 8,260      $ 9,891   
                                                               

Average assets during the period

  $ 2,885      $ 3,350      $ 4,182      $ 5,439      $ 6,311      $ 6,760      $ 7,055      $ 9,104   

International Developed Markets Equity ETFs (in thousands)

               

Beginning of period assets

  $ 1,339      $ 1,120      $ 1,324      $ 1,794      $ 1,953      $ 1,994      $ 1,674      $ 1,900   

Inflows/(Outflows)

    (31     (27     204        136        26        (38     (20     61   

Market appreciation/(depreciation)

    (188     231        266        23        15        (282     246        101   
                                                               

End of period assets

  $ 1,120      $ 1,324      $ 1,794      $ 1,953      $ 1,994      $ 1,674      $ 1,900      $ 2,062   
                                                               

Average assets during the period

  $ 1,182      $ 1,296      $ 1,510      $ 1,896      $ 2,169      $ 1,907      $ 1,794      $ 1,981   

Emerging Markets Equity ETFs (in thousands)

               

Beginning of period assets

  $ 384      $ 406      $ 759      $ 1,119      $ 1,431      $ 1,738      $ 1,728      $ 2,796   

Inflows/(Outflows)

    28        193        197        232        230        106        707        869   

Market appreciation/(depreciation)

    (6     160        163        80        77        (116     361        115   
                                                               

End of period assets

  $ 406      $ 759      $ 1,119      $ 1,431      $ 1,738      $ 1,728      $ 2,796      $ 3,780   
                                                               

Average assets during the period

  $ 391      $ 597      $ 887      $ 1,297      $ 1,308      $ 1,763      $ 2,153      $ 3,342   

International Sector Equity ETFs (in thousands)

               

Beginning of period assets

  $ 247      $ 190      $ 222      $ 322      $ 358      $ 228      $ 190      $ 247   

Inflows/(Outflows)

    (20     (8     52        34        (124     (1     20        (11

Market appreciation/(depreciation)

    (37     40        48        2        (6     (37     37        13   
                                                               

End of period assets

  $ 190      $ 222      $ 322      $ 358      $ 228      $ 190      $ 247      $ 249   
                                                               

Average assets during the period

  $ 212      $ 211      $ 269      $ 338      $ 345      $ 214      $ 218      $ 258   

U.S. Equity ETFs (in thousands)

               

Beginning of period assets

  $ 986      $ 866      $ 1,039      $ 1,271      $ 1,330      $ 1,468      $ 1,406      $ 1,779   

Inflows/(Outflows)

    81        15        43        (2     72        85        211        118   

Market appreciation/(depreciation)

    (201     158        189        61        66        (147     162        160   
                                                               

End of period assets

  $ 866      $ 1,039      $ 1,271      $ 1,330      $ 1,468      $ 1,406      $ 1,779      $ 2,057   
                                                               

Average assets during the period

  $ 896      $ 1,001      $ 1,164      $ 1,273      $ 1,406      $ 1,506      $ 1,540      $ 1,917   

Currency ETFs (in thousands)

               

Beginning of period assets

  $ 224      $ 194      $ 319      $ 396      $ 906      $ 1,284      $ 1,242      $ 1,266   

Inflows/(Outflows)

    (36     109        62        511        379        (31     (19     (75

Market appreciation/(depreciation)

    6        16        15        (1     (1     (11     43        (12
                                                               

End of period assets

  $ 194      $ 319      $ 396      $ 906      $ 1,284      $ 1,242      $ 1,266      $ 1,179   
                                                               

Average assets during the period

  $ 205      $ 245      $ 352      $ 634      $ 1,084      $ 1,370      $ 1,224      $ 1,189   

International Fixed Income ETFs (in thousands)

               

Beginning of period assets

    —          —          —          —          —          —        $ 0      $ 272   

Inflows/(Outflows)

    —          —          —          —          —          —          262        309   

Market appreciation/(depreciation)

    —          —          —          —          —          —          10        (17
                                                               

End of period assets

    —          —          —          —          —          —        $ 272      $ 564   
                                                               

Average assets during the period

    —          —          —          —          —          —        $ 126      $ 417   

 

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Average ETF Asset Mix (during the period)

                

International Developed Markets Equity ETFs

     41     39     37     35     34     29     25     22

Emerging Markets Equity ETFs

     14     18     21     24     21     26     31     37

International Sector Equity ETFs

     7     6     6     6     5     3     3     3

U.S. Equity ETFs

     31     30     28     23     22     22     22     21

Currency ETFs

     7     7     8     12     18     20     17     13

International Fixed Income ETFs

     —          —          —          —          —          —          2     4
                                                                

Total

     100     100     100     100     100     100     100     100
                                                                

Average ETF Advisory Fee (during the period)

     0.50     0.51     0.53     0.54     0.54     0.54     0.56     0.57

Number of ETFs (end of the period)

                

International Developed Markets Equity ETFs

     14        14        14        15        14        14        14        14   

Emerging Markets Equity ETFs

     4        4        4        4        4        4        4        4   

International Sector Equity ETFs

     11        11        11        11        4        4        4        4   

U.S. Equity ETFs

     13        13        13        13        12        12        12        12   

Currency ETFs

     8        9        9        9        8        8        9        9   

International Fixed Income ETFs

     —          —          —          —          —          —          1        1   
                                                                

Total

     50        51        51        52        42        42        44        44   
                                                                

Headcount

     53        56        55        54        55        54        56        60   

Liquidity and Capital Resources

The following table summarizes key data regarding our liquidity, capital resources and use of capital to fund our operations:

 

     Year Ended December 31,  
     2010     2009  

Balance Sheet Data (in thousands):

    

Cash and cash equivalents

   $ 14,233      $ 11,476   

Investments

     8,595        9,320   

Accounts receivable

     4,825        2,884   
                
     27,653        23,680   

Total liabilities

     (11,907     (9,675
                
   $ 15,746      $ 14,005   
                

 

     Year Ended December 31,  
     2010      2009     2008  

Cash Flow Data (in thousands):

       

Operating cash flows

   $ 2,128       ($ 15,027   ($ 15,615

Investing cash flows

     628         8,240        13,748   

Financing cash flows

     1         4,988        4   
                         

Increase/(decrease) in cash and cash equivalents

   $ 2,757         ($1,799     ($1,863
                         

Liquidity

Liquid assets consist of cash and cash equivalents, current receivables, and investments. Cash and cash equivalents include cash on hand and non-interest-bearing and interest-bearing deposits with financial institutions. Accounts receivable primarily represents advisory fees we earn from the WisdomTree ETFs which is collected by the fifth business day of the month following the month earned. Investments represent debt instruments of U.S. government and agency securities. Our liabilities consist primarily of payments owed to vendors and third parties in the normal course of business as well as accrued year end incentive compensation for employees.

Cash and cash equivalents increased $2.8 million in 2010 primarily due to $2.1 million of cash flows generated by our operating activities due to higher revenues from higher assets under management as well as proceeds from net redemptions of our investments.

Cash and cash equivalents decreased $1.8 million in 2009 primarily due to $15.0 million of cash used to fund our operations as a result of losses we incurred during the year. We received $5.0 million in financing during 2009 from

 

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investors in a private placement of our common stock in order to increase our liquidity. We also received proceeds from net redemptions of our investments.

Cash and cash equivalents decreased $1.9 million in 2008 primarily due to $15.6 million of cash used to fund our operations as a result of losses we incurred during the year. We also received net proceeds of from net redemptions of our investments.

Capital Resources

Our principal source of financing has been through the private placement of our common stock. We believe that current cash flows generated by our operating activities should be sufficient for us to fund our operations for at least the next 12 months. The table below reflects the capital contributions we have received from our private placements:

 

November 2004

   $ 9.0 million   

July 2005

     7.5 million   

December 2006

     56.5 million   

October 2009

     5.0 million   
        

Total

   $ 78.0 million   

Use of Capital

Our business does not require us to maintain a significant cash position. We expect that our main uses of cash will be to fund the ongoing operations of our business, invest in strategic growth initiatives, re-acquire shares of our common stock issued to our employees as incentive compensation as discussed below or expand our business through strategic acquisitions.

During the first three months of 2011, we repurchased approximately 310,000 shares from our employees at a cost of $1.6 million in connection with vesting of restricted stock. The amount repurchased represented the estimated tax liability the employees owed to the various taxing authorities related to the income they earned from vested shares. We expect to continue purchasing shares for similar reasons for the remainder of 2011.

Contractual Obligations

The following table summarizes our future cash payments associated with contractual obligations as of December 31, 2010. The primary obligation is for our operating lease for office space:

 

           Payments Due by Period  
          (in thousands)  
      Total    Less than 1
year
     1 to 3 years      3 to 5 years      More than 5
years
 

Capital lease

   $3,928    $ 1,360       $ 2,492       $ 76         —     

Off-Balance Sheet Arrangements

Other than operating leases, which are included in the table above, we do not have any off-balance sheet financing or other arrangements. We have neither created nor are party to any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating our business.

Critical Accounting Policies

Stock-Based Compensation

Stock-based compensation expense reflects the fair value of stock-based awards measured at grant date and is recognized over the relevant service period. The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model. The Black-Scholes option valuation model we use includes the input of certain variables that are dependent on future expectations, including the expected lives of our options from grant date to exercise date, the volatility of our underlying common shares in the market over that time period, the rate of dividends that we may pay during that time and an appropriate risk-free interest rate. Many of these assumptions require management’s judgment. If actual experience differs significantly from these estimates, stock-based compensation expense and our results of operations could be materially affected.

 

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Income and Deferred Taxes

We recognize an asset or liability for the deferred tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. These temporary differences will result in taxable or deductible amounts in future years when the reported amounts of assets are recovered or liabilities are settled. A valuation allowance is recorded to reduce the carrying values of deferred tax assets and liabilities to the amount that is more likely than not to be realized. As of December 31, 2010, we have net operating loss carry forwards and we have recognized a deferred tax asset for such carry forwards. Given the significant losses we have incurred since we began our operations, a valuation allowance has been recorded for the full amount of the deferred tax asset.

Recently Issued Accounting Pronouncements

In January 2010, ASU No. 2010-6, Improving Disclosures About Fair Value Measurement, adds required disclosures about items transferring into and out of Levels 1 and 2 in the fair value hierarchy; adding separate disclosures about purchase, sales, issuances, and settlements relative to Level 3 measurements; and clarifying, among other things, the existing fair value disclosures about the level of disaggregation. ASU No. 2010-6 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the requirement to provide Level 3 purchases, sales, issuances, and settlements on a gross basis, which is effective for fiscal years beginning after December 15, 2010. This standard impacts disclosure requirements only and did not have a material impact on our consolidated financial statements.

Quantitative and Qualitative Disclosure about Market Risk

In the normal course of business, our financial results are subject to market risk. Market risk to us generally represents the risk of changes in the value of financial instruments held in the portfolios of the WisdomTree ETFs that generally results from fluctuations in equity prices, foreign currency exchange rates against the U.S. dollar, and interest rates. A significant majority of our revenue—approximately 92%, 94% and 97% for the years ended December 31, 2008, 2009 and 2010, respectively—is derived from advisory agreements for the WisdomTree ETFs. Under these agreements, the advisory fee we receive is based on the market value of the assets in the WisdomTree ETF portfolios we manage.

Fluctuations in the value of these securities are common and are generated by numerous factors such as market volatility, the overall economy, inflation, changes in investor strategies, availability of alternative investment vehicles, government regulations and others. Accordingly changes in any one or a combination of these factors may reduce the value of investment securities and, in turn, the underlying assets under management on which our revenues are earned. These declines may cause investors to withdraw funds from our ETFs in favor of investments that they perceive as offering greater opportunity or lower risk, thereby compounding the impact on our revenues. Beginning in the second half of 2008 and into 2009, global equity markets experienced unprecedented volatility which caused significant declines in our assets under

 

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management and revenues during the quarters in that time period. Challenging and volatile market conditions might continue to be present in the foreseeable future.

In order to maximize yields, we invest our corporate cash in short-term interest earning assets, primarily money market instruments at a commercial bank and U.S. government and agency debt instruments which totaled $9.3 million and $8.6 million as of December 31, 2009 and 2010, respectively. We do not anticipate that changes in interest rates will have a material impact on our financial condition, operating results or cash flows.

ITEM 3. PROPERTIES

Our principal executive office is located at 380 Madison Ave, New York, New York 10017. We occupy approximately 20,000 square feet of office space under a lease that expires in January 2014. We have subleased approximately 6,500 square feet of our office space to a subtenant pursuant to a sublease that expires in January 2012. We believe that the space we lease is sufficient to meet our current and near term needs.

 

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ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information regarding the beneficial ownership of shares of our common stock as of March 21, 2011 by:

 

   

each person (including any “group” of persons as that term is used in Section 13d-3 of the Exchange Act) we know to be the beneficial owner of more than 5% of the outstanding shares of our common stock;

 

   

each of our named executive officers;

 

   

each of our directors; and

 

   

all of our directors and executive officers as a group.

Beneficial ownership is determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934. Except as otherwise indicated in the footnotes to the following table, we believe, based on the information provided to us, that the persons named in the following table have sole vesting and investment power with respect to the shares they beneficially own, subject to applicable community property laws. Unless otherwise noted, the business address of each of the persons and entities that beneficially own 5% or more of the outstanding shares of common stock is c/o WisdomTree Investments, Inc., 380 Madison Avenue, 21st Floor, New York, N.Y. 10017.

Percentage of beneficial ownership in the table below is based on 115,470,300 shares of our common stock deemed to be outstanding as of March 15, 2011, including shares of restricted stock issued to our employees but not yet vested.

 

Name of Beneficial Owner

   Number of
Common Shares
Beneficially Owned
     Percentage of
Common Shares
Beneficially

Owned (%)
 

Named Executive Officers

     

Jonathan L. Steinberg(1)

     10,721,559         8.8   

Bruce I. Lavine(2)

     1,958,014         1.7   

Amit Muni(3)

     507,866         0.4   

Luciano Siracusano, III(4)

     1,086,695         0.9   

Peter M. Ziemba(5)

     1,147,808         1.0   

Directors

     

Michael Steinhardt(6)

     37,822,029         32.8   

Steven L. Begleiter(7)

     —           —     

Anthony Bossone

     400,000         0.4   

R. Jarrett Lilien(8)

     608,771         0.5   

James D. Robinson, IV(9)

     20,212,823         17.5   

Frank Salerno(10)

     968,093         0.8   

Other 5% or Greater Stockholders

     

Entities Affiliated with RRE Ventures, LLC(11)

     20,212,823         17.5   

Flexpoint Fund, L.P.(12)

     10,000,000         8.7   

All directors and executive officers as a group (11 persons)(13)

     75,433,658         60.4   

 

(1) Includes (i) 798 shares of common stock owned by Mr. Steinberg’s spouse with whom he may be deemed to share voting power; (ii) 16,889 shares of common stock held in a joint account with Mr. Steinberg’s spouse with whom he shares voting power; (iii) 18,191 shares of restricted stock that do not vest within 60 days of March 15, 2011 and are not transferable by Mr. Steinberg until they vest, but over which he exercises voting control; and (iv) 6,814,292 shares of common stock issuable upon the exercise of options that are currently exercisable or will become exercisable within 60 days from March 15, 2011. Excludes an aggregate of 2,375,000 shares of common stock issuable upon exercise of options that are not exercisable within 60 days of March 15, 2011.
(2) Includes 460,395 shares of restricted stock that do not vest within 60 days of March 15, 2011 and are not transferable by Mr. Lavine until they vest, but over which he exercises voting power; and 150,000 shares of common stock issuable upon the exercise of options that are currently exercisable or will become exercisable within 60 days from March 15, 2011. Excludes an aggregate of 525,000 shares of common stock issuable upon exercise of options that are not exercisable within 60 days of March 15, 2011.
(3) Includes (i) 105,197 shares of restricted stock that do not vest within 60 days of March 15, 2011 and are not transferable by Mr. Muni until they vest, but over which he exercises voting power; and (ii) 150,000 shares of common stock issuable upon the exercise of options that are currently exercisable or will become exercisable within 60 days from March 15, 2011. Excludes an aggregate of 400,000 shares of common stock issuable upon exercise of options that are not exercisable within 60 days of March 15, 2011.

 

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(4) Includes (i) 18,191 shares of restricted stock that do not vest within 60 days of March 15, 2011 and are not transferable by Mr. Siracusano until they vest, but over which he exercises voting control; and (ii) 970,259 shares of common stock issuable upon the exercise of options that are currently exercisable or will become exercisable within 60 days from March 15, 2011. Excludes an aggregate of 475,000 shares of common stock issuable upon exercise of options that are not exercisable within 60 days of March 15, 2011.
(5) Includes (i) 8,100 shares of common stock which are held by a custodial account for the benefit of Mr. Ziemba’s minor son over which Mr. Ziemba has sole voting and dispositive power; (ii) 50,000 shares of restricted stock that will vest within 60 days from March 15, 2011 and which are not transferable until they vest but over which Mr. Ziemba exercises voting control; (iii) 105,197 shares of restricted stock that do not vest within 60 days of March 15, 2011 and are not transferable by Mr. Ziemba until they vests, but over which he exercises voting control; and (iv) 600,000 shares of common stock issuable upon the exercise of options that are currently exercisable or will become exercisable within 60 days from March 15, 2011. Excludes an aggregate of 300,000 shares of common stock issuable upon exercise of options that are not exercisable within 60 days of March 15, 2011.
(6) Includes 835,000 shares of common stock issuable upon the exercise of options that are currently exercisable or will become exercisable within 60 days from March 15, 2011. Does not include 2,666,667 shares of common stock owned by S Family Partners, L.P., a limited partnership for which Mr. Steinhardt’s spouse is the sole general partner and the limited partners are Mr. Steinhardt’s adult children. Mr. Steinhardt disclaims any beneficial ownership of the shares of common stock held by S Family Partners, L.P.
(7) Mr. Begleiter serves as a Managing Principal of Flexpoint Ford, LLC, an affiliate of Flexpoint Fund, L.P. However, Mr. Begleiter does not have voting or dispositive power over the 10,000,000 shares of common stock held by Flexpoint Fund, L.P., a private investment fund (See note 13 below).
(8) Includes (i) 26,316 shares of restricted stock that do not vest within 60 days of March 15, 2011 and are not transferable by Mr. Lilien until they vest, but over which he exercises voting power; and (ii) 263,157 shares of common stock issuable upon the exercise of options that are currently exercisable or will become exercisable within 60 days from March 15, 2011. Excludes an aggregate of 131,579 shares of common stock issuable upon exercise of options that are not exercisable within 60 days of March 15, 2011.
(9)

Includes 17,894,007 shares of common stock held by RRE Ventures III-A, L.P., 1,495,345 shares of common stock held by RRE Ventures Fund III, L.P., and 823,471 shares of common stock held by RRE Ventures III, L.P. (collectively the “RRE Entities”). The general partner of each of the RRE Entities is RRE Ventures GP III, LLC. The general partners of RRE Ventures GP III, LLC are James D. Robinson III, James D. Robinson IV, Stuart J. Ellman and Andrew L. Zalasin and they share voting and dispositive power over these shares. The business address of the Mr. Robinson is 130 East 59th Street, New York, NY 10022. Mr. Robinson disclaims beneficial ownership of the shares held by the RRE Entities except to the extent of his pecuniary interest in the shares.

(10) Includes (i) 100,180 shares of common stock held in a joint account with Mr. Salerno’s spouse with whom he shares voting and dispositive power, (ii) 283,334 shares of common stock held by Hillcrest Financial, LLC, a limited liability company of which Mr. Salerno and his spouse are the managing members and with whom Mr. Salerno shares voting and dispositive power, (iii) 11,628 shares of restricted stock that do not vest within 60 days of March 15, 2011 and are not transferable by Mr. Salerno until they vest, but over which he exercises voting power; and (iv) 572,951 shares of common stock issuable upon the exercise of options that are currently exercisable or will become exercisable within 60 days from March 15, 2011. Excludes an aggregate of 61,475 shares of common stock issuable upon exercise of options that are not exercisable within 60 days of March 15, 2011.
(11)

Includes 17,894,007 shares of common stock held by RRE Ventures III-A, L.P., 1,495,345 shares of common stock held by RRE Ventures Fund III, L.P., and 823,471 shares of common stock held by RRE Ventures III, L.P. (collectively the “RRE Entities”). The general partner of each of the RRE Entities is RRE Ventures GP III, LLC. The general partners of RRE Ventures GP III, LLC are James D. Robinson III, James D. Robinson IV, Stuart J. Ellman and Andrew L. Zalasin and they share voting and dispositive power over these shares. The business address of the RRE Entities is 130 East 59th Street, New York, NY 10022.

(12) The business address of Flexpoint Fund, L.P. is 676 N. Michigan Avenue, Suite 3300, Chicago, Il 60611.
(13) Includes an aggregate of 9,521,494 shares of common stock issuable upon the exercise of options that are currently exercisable or will become exercisable within 60 days of March 15, 2011 held by the named executive officers and directors included in this group.

 

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ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS

Directors and Executive Officers

The names, ages and positions of each of our directors and executive officers as of March 15, 2011 are as follows:

 

Name

  Age    

Position

Jonathan L. Steinberg     46      Chief Executive Officer and Director
Bruce I. Lavine     44      President, Chief Operating Officer and Director
Amit Muni     42      Executive Vice President—Finance and Chief Financial Officer
Luciano Siracusano, III     45      Executive Vice President—Director of Sales and Chief Investment Strategist
Peter M. Ziemba     53      Executive Vice President—Business and Legal Affairs and Chief Legal Officer
Michael Steinhardt (2)(3)     70      Non-Executive Chairman of the Board
Steven L. Begleiter     49      Director
Anthony Bossone (1)     40      Director
R. Jarrett Lilien (1)(2)(3)     49      Director
James D. Robinson, IV (3)     48      Director
Frank Salerno (1)(2)(4)     51      Director

 

(1) Member of the Audit Committee
(2) Member of the Compensation Committee
(3) Member of the Nominating Committee
(4) Lead Independent Director

The following paragraphs provide information as of the date of this registration statement about our directors and executive officers. The information presented includes information about each of our director’s specific experience, qualifications, attributes and skills that led to the conclusion that he should serve as a director.

Jonathan L. Steinberg founded our company and has served as our Chief Executive Officer since October 1988. He has been a member of our Board of Directors since October 1988, having served as Chairman of the Board of Directors from October 1988 to November 2004. He also served as Editor-in-Chief of Individual Investor and Ticker magazines, two magazines formerly published by our company. Mr. Steinberg, together with Mr. Siracusano, was responsible for the creation and development of our proprietary index methodology. Prior to founding WisdomTree, Mr. Steinberg was employed as an analyst in the Mergers and Acquisitions Department of Bear, Stearns & Co. Inc., an investment banking firm, from 1986 to 1988. Mr. Steinberg is the author of Midas Investing, published by Times Books, a division of Random House, Inc. He attended The Wharton School of Business at the University of Pennsylvania.

Bruce I. Lavine has served as our President and Chief Operating Officer since May 2006 and has been a member of our Board of Directors since January 2007. From 1998 to 2005, he was employed by Barclays Global Investors, an asset management firm, in the following positions: from 1998 to 1999, he served as Director, Financial Planning, Global Finance; from 1999 to 2003, he served as Chief Financial Officer, Director of New Product Development, U.S. iShares and Individual Investor Business; and from 2003 to May 2006 he served as Head of iShares Exchange Traded Funds, Europe. From 1995 to 1998, Mr. Lavine served as the Manager of Business Planning at Sequel, Inc., a computer hardware services company. From 1991 to 1994, Mr. Lavine was employed by Bristol-Myers Squibb Company, a pharmaceutical company, as a financial associate and then as a senior treasury analyst. Mr. Lavine received a B.S. with distinction in Commerce and an M.B.A. in Finance from the University of Virginia. Mr. Lavine is a Chartered Financial Analyst.

Amit Muni has served as our Executive Vice President—Finance and Chief Financial Officer since March 2008. Prior to joining our company, Mr. Muni served as Controller and Chief Accounting Officer of International Securities Exchange Holdings, Inc., an electronic options exchange, from 2003 until March 2008. Mr. Muni was Vice President, Finance, of Instinet Group Incorporated, an electronic agency broker-dealer, from 2000 to 2003. From 1996 until 2000, Mr. Muni was employed as a Manager of the Financial Services Industry Practice of PricewaterhouseCoopers LLP, an accounting firm. From 1991 until 1996, Mr. Muni was an accountant and a senior auditor for National Securities Clearing Corporation, a firm that provides centralized clearing, information, and settlement services to the financial industry. Mr. Muni received a B.B.A. in Accounting from Pace University and is a Certified Public Accountant.

 

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Luciano Siracusano, III has served as our Executive Vice President—Director of Sales and Chief Investment Strategist since March 2011. From October 2008 to March 2011, Mr. Siracusano served as our Director of Sales and Chief Investment Strategist. Prior to serving in those positions, Mr. Siracusano served as our Director of Research from 2001 until October 2008 and as a research analyst and editor of our various media publications from 1999 until 2001. Mr. Siracusano, together with Mr. Steinberg, was responsible for the creation and development of our fundamentally weighted index methodology. Prior to joining our company in 1999, Mr. Siracusano was an Equity Analyst at Value Line, Inc., an investment research firm, from 1998 to 1999. Preceding his career in finance, Mr. Siracusano served as Special Assistant to HUD Secretary Henry Cisneros and as a Special Assistant to New York Governor Mario Cuomo. Mr. Siracusano received his B.A. in Political Science from Columbia University.

Peter M. Ziemba has served as our Executive Vice President—Business and Legal Affairs and Chief Legal Officer since March 2011. From April 2007 to March 2011, Mr. Ziemba served as our Executive Vice President—Business and Legal Affairs and General Counsel. Prior to joining our company, Mr. Ziemba was a partner in the Corporate and Securities department of Graubard Miller, which served as our primary corporate counsel, from 1991 to 2007, and was employed as an associate at that firm beginning in 1982. Mr. Ziemba received his B.A. in History with university honors from Binghamton University and his J.D. cum laude from Benjamin N. Cardozo School of Law. Mr. Ziemba served as a director of our company from 1996 to 2003.

Michael Steinhardt has served as our non-executive Chairman of the Board since November 2004. From 1967 through 1995, Mr. Steinhardt served as Senior Managing Partner of Steinhardt Partners, L.P., a private investment company, and related investment entities. In 1995, Mr. Steinhardt closed Steinhardt Partners and eliminated his involvement in managing client assets. He founded and now serves as President of Steinhardt Management Co., Inc., which currently manages a single private investment fund investing in other funds managed by independent investment managers. Mr. Steinhardt currently devotes most of his time and financial resources to Jewish philanthropic causes, directed through The Steinhardt Foundation for Jewish Life for which he serves as Chairman. Mr. Steinhardt is the co-founder of Birthright Israel and he serves on its Board of Trustees and is a major supporter. He also serves as Co-Chair of the Areivim Philanthropic Group. He also serves on the Board of Trustees of New York University, Brandeis University and the Steinhardt Family Foundation and on the Board of Directors of the Taub Center for Social Policy Studies in Israel. Mr. Steinhardt received his B.S. in Economics from The Wharton School of Business of the University of Pennsylvania.

Steven L. Begleiter has served as a member of our Board of Directors since February 2011. Mr. Begleiter has served as Senior Principal at Flexpoint Ford, LLC, a private equity group focused on investments in financial services and healthcare, since October 2008. Prior to joining Flexpoint Ford, Mr. Begleiter spent 24 years at Bear Stearns & Co., serving first as an investment banker in the Financial Institutions Group and then as Senior Managing Director and member of its Management and Compensation Committee from 2002 to September 2008. Mr. Begleiter also served as head of Bear Stearns’ Corporate Strategy Group. Mr. Begleiter received his B.A. in Economics with honors from Haverford College.

Anthony Bossone has served as a member of our Board of Directors since January 2009. Since 2003 Mr. Bossone has been the Chief Financial Officer of Atlantic-Pacific Capital, Inc., a broker-dealer and global placement agent dedicated to raising capital for alternative investment funds. From 2001 to 2003, Mr. Bossone was the Assistant Controller at SAC Capital Advisors, LLC, a hedge fund advisory firm, and from 1999 until 2001, Mr. Bossone served as an equity trader at Schonfeld Securities, LLC, a securities trading firm. Mr. Bossone began his career at PricewaterhouseCoopers LLP in 1993 where he was an audit manager until 1999. Mr. Bossone received his B.S. in Business and Economics with highest honors from Lehigh University and is a Certified Public Accountant.

R. Jarrett Lilien has served as a member of our Board of Directors since November 2008. Since January 2009, Mr. Lilien has served as Managing Partner of Bendigo Partners, a private equity and consulting firm focused on technology-enabled financial service companies, which he co-founded. Between 1999 and May 2008, Mr. Lilien was employed by E*Trade Financial Corporation, a brokerage and financial services firm, holding various positions including President and Chief Operating Officer from 2003 to May 2008 and Acting Chief Executive Officer from November 2007 until March 2008. Prior to his service at E*Trade, Mr. Lilien was Chief Executive Officer of TIR Securities, a global institutional brokerage firm that he co-founded in 1989 and which was later sold to E*Trade. Prior to TIR Securities, Mr. Lilien held various positions at Paine Webber and Autranet, Inc., a division of Donaldson, Lufkin & Jenrette, Inc., both brokerage and financial service firms. Mr. Lilien currently serves as President of the Jazz Foundation of America and is on the Board of Directors of Baryshnikov Arts Center and on the Advisory Board of WFUV FM Radio. Mr. Lilien received his B.A. in Economics from the University of Vermont.

 

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James D. Robinson, IV has served as a member of our Board of Directors since November 2004. Mr. Robinson is a Managing Partner of RRE Ventures, LLC, a venture capital firm primarily focused on technology companies, which he co-founded in 1994. From 1992 to 1994 Mr. Robinson was employed by Hambrecht & Quist Venture Capital, a venture capital firm, where served as a General Partner for several investment funds for the firm. From 1986 to 1992, he was employed by JP Morgan & Company, where he worked on technology-related assignments, first within the Global Exposure Management group building risk management systems, and later as an investment banker in the Corporate Finance group focused on technology and communications companies. Mr. Robinson serves on the Board of Directors of numerous companies held in the investment portfolios of the RRE Ventures-affiliated funds. Mr. Robinson received a B.A. with a double degree in Computer Science and Business Administration from Antioch College and an M.B.A. from Harvard University.

Frank Salerno has served as a member of our Board of Directors since July 2005. From July 1999 until his retirement in February 2004, Mr. Salerno was Managing Director and Chief Operating Officer of Merrill Lynch Investment Advisors – Americas Institutional Division, an investment advisory company. Before joining Merrill Lynch, Mr. Salerno spent 18 years with Bankers Trust Company in various positions. In 1990, he assumed responsibility for Bankers Trust’s domestic index management business and in 1995 he became Chief Investment Officer for its Structured Investment Management Group. Mr. Salerno received a B.S. in Economics from Syracuse University and an M.B.A. in Finance from New York University. Mr. Salerno serves as a director and member of the audit committee and conflicts committee of K-Sea Transportation Partners, L.P., a NYSE-listed company.

Board Composition

Our Board of Directors currently consists of eight members. Pursuant to the Securities Purchase Agreement, dated October 15, 2009, among the company and the investor parties participating in the October 2009 private placement of common stock, each of Michael Steinhardt, individually, and RRE Ventures III-A, L.P., RRE Ventures Fund III, L.P., and RRE Ventures III, L.P. (collectively the “RRE Entities”), collectively, have the right to require the company to either (i) appoint a designee, reasonably acceptable to the Board of Directors, as a member of the Board of Directors, or (ii) provide a designee with notice of all board meetings and copies of all materials delivered to members of the Board of Directors and permit such designee to attend and observe each meeting of the Board of Directors. In addition, pursuant to the Securities Purchase Agreement, dated December 21, 2006, among the company and the investor parties participating in the December 2006 private placement of common stock, James D. Manley, a principal investor in that financing, has a similar right. Mr. Steinhardt serves as a director of our company as his own designee, Mr. Robinson serves as a director of our company as the designee of the RRE Entities, and Mr. Bossone serves as a director as the designee of Mr. Manley. These provisions are described in this registration statement under Item 7. “Certain Relationships and Related Party Transactions, and Director Independence.”

Our Board of Directors is divided into three staggered classes of directors of the same or nearly the same number. At each annual meeting of the stockholders, a class of directors will be elected for a three year term to succeed the directors of the same class whose terms are then expiring. The terms of the directors will expire upon the election and qualification of successor directors at the annual meeting of stockholders to be held in 2012 for Class I directors, 2013 for Class II directors and 2014 for Class III directors.

 

   

Our Class I directors will be Michael Steinhardt, Anthony Bossone and Bruce Lavine.

 

   

Our Class II directors will be James D. Robinson, IV and Steven Begleiter.

 

   

Our Class III directors will be Frank Salerno, R. Jarrett Lilien and Jonathan Steinberg.

Our amended and restated certificate of incorporation and amended and restated by-laws provide that the number of our directors shall be fixed from time to time by a resolution of the majority of our Board of Directors. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class shall consist of one third of the Board of Directors. The division of our Board of Directors into three classes with staggered three-year terms may delay or prevent stockholder efforts to effect a change of our management or a change in control.

Board Independence

We have not yet applied to have our shares listed on a stock exchange, but intend to do so promptly following the initial filing of this registration statement. Accordingly, our Board of Directors has not yet made a determination regarding the independence of our directors generally. Upon becoming a reporting company, we expect that the composition and functioning of our Board of Directors and each of our committees will comply with all applicable requirements of the stock exchange upon which our shares of common stock are listed and the rules and regulations of the Securities and Exchange Commission.

Lead Independent Director

In 2008, our Board of Directors determined that it would be good corporate practice to designate one of our independent directors as Lead Independent Director. Mr. Salerno has held this designation since the position was established. The duties of our lead independent director are as follows:

 

   

serve as the intra-meeting liaison between (i) our Board of Directors and management and (ii) amongst the independent directors;

 

   

serve as an ex-officio, non-voting member of each standing committee (of which he is not a member) of our Board or Directors;

 

   

ensure that appropriate reports and information is circulated to the independent directors on a timely basis by management and others.

 

   

lead our Board of Directors in the process of periodic reviews of the performance of the Chief Executive Officer, as well as in discussions regarding the Chief Executive Officer’s reports on senior management performance and management succession issues and plans;

 

   

chair meetings of the independent directors if the chairman is not present; and

 

   

perform such other appropriate duties as the independent directors shall assign to him or her from time to time.

 

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Senior Advisor to the Board of Directors

Since 2004, Professor Jeremy J. Siegel has served as senior investment strategy advisor to our company and our Board of Directors. In this position, Professor Siegel provides us with various services, including advice on market trends and financial products; participating in webinars, conference calls, seminars, speaking engagements and one-on-one meetings with persons interested in WisdomTree products; written market commentary for our newsletters and website; and general advice to senior management and our Board of Directors on our business.

Jeremy Siegel is the Russell E. Palmer Professor of Finance at The Wharton School at the University of Pennsylvania. He graduated from Columbia University and received his Ph.D. in Economics from the Massachusetts Institute of Technology, and spent one year as a National Science Foundation Post-Doctoral Fellow at Harvard University. Prof. Siegel taught for four years at the Graduate School of Business of the University of Chicago before joining the Wharton faculty in 1976. Professor Siegel has written and lectured extensively about the economy and financial markets and has appeared frequently on CNN, CNBC, NPR and other networks. He is a regular columnist for Kiplinger’s and Yahoo! Finance and contributor to national and international news media, including The Wall Street Journal, Barron’s and The Financial Times. He has also authored numerous professional articles and three books. His bestselling, “Stocks for the Long Run”, first published in 1994 and now in its third edition, was named as one of the ten-best investment books of all time by both the Washington Post and Business Week. His most recent book, “The Future for Investors: Why the Tried and the True Triumph over the Bold and New” was named one of the best business books published in 2005 by Business Week, The Financial Times and Barron’s.

ITEM 6. EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

Overview

This Compensation Discussion and Analysis provides comprehensive information regarding our compensation programs and policies for fiscal 2010 for our named executive officers, or “executive officers”, who consist of:

 

   

Jonathan Steinberg, our Chief Executive Officer (“CEO”);

 

   

Bruce Lavine, our President and Chief Operating Officer (“COO”);

 

   

Amit Muni, our Chief Financial Officer (“CFO”);

 

   

Luciano Siracusano, our Chief Investment Strategist (“CIS”); and

 

   

Peter Ziemba, our Chief Legal Officer (“CLO”).

We provide what we believe is a competitive total compensation opportunity for our executive management team through a combination of base salary, cash incentive bonuses, equity compensation and broad-based benefits programs. This Compensation Discussion and Analysis explains the following as they relate to the 2010 performance year:

 

   

our compensation philosophy and objectives;

 

   

our executive compensation process, including the role of our Compensation Committee and management; and

 

   

our policies, practices, and actions with respect to each compensation element.

Included in each description above will be the rationale for compensation decisions made for the 2010 performance year with respect to our executive officers.

Our Compensation Philosophy and Objectives

Our compensa