Contract analysis

I. Executive Summary This memorandum analyzes whether the proposed contribution of portfolio company shares held by Pinnacle Venture Fund II LP (EIN 84-3291067), a Delaware limited partnership ("Fund II"), to Pinnacle Continuation Vehicle LP ("PCV" or the "CV"), a Delaware limited partnership to be formed, via a contribution intended to qualify under Section 721 of the Internal Revenue Code of 1986, as amended (the "

II. Background and Transaction Overview A. Pinnacle Venture Fund II LP Pinnacle Venture Fund II LP ("Fund II") is a Delaware limited partnership formed pursuant to the Delaware Revised Uniform Limited Partnership Act. Fund II's Delaware Limited Partnership File Number is DE-LP-2019-04817, and its federal Employer Identification Number is 84-3291067. Fund II was organized in 2019 as the second flagship venture capital

III. Section 1202 QSBS Framework — Legal Overview A. Statutory Requirements for QSBS Eligibility (Section 1202(c)–(e))

Section 1202 of the Code provides for a partial or complete exclusion from gross income of gain realized on the sale or exchange of "qualified small business stock" held for more than five years. The provision was originally enacted as part of the Revenue Reconciliation Act of 1993 and has been amended on several occasions, most significantly by the Creating Small Business Jobs Act of 2010, which increased the exclus

Section 1202(g) — Pass-Through Treatment. Section 1202(g)(1) provides that stock held by a pass-through entity (including a partnership) is treated as meeting the QSBS requirements at the entity level if the requirements are met at the partner (or member or shareholder) level. More specifically, under Section 1202(g)(2), if a partnership acquires QSBS at original issuance, any person who is a partner in the partnersh

Section 1202(h) — Tacking Rules. Section 1202(h) sets forth the circumstances under which QSBS status (and the associated holding period) can be preserved when stock is transferred from one person to another. The subsection provides several specific tacking rules:

Section 1202(h)(1) — Transfers at Death. Stock acquired from a decedent (with basis determined under Section 1014) is treated as QSBS in the hands of the person acquiring the stock from the decedent if the stock was QSBS in the hands of the decedent.

Section 1202(h)(2) — Transfers by Gift. QSBS transferred by gift retains its QSBS character in the hands of the donee, and the donee tacks the donor's holding period under Section 1223(2).

Section 1202(h)(4) — Certain Partnership Transactions. This provision is the most directly relevant to the current transaction. Section 1202(h)(4)(A) provides that QSBS that is distributed by a partnership to a partner is treated as having been held by the distributee partner during the period the partnership held the stock, provided the partner was a partner at the time the partnership acquired the stock. Similarly,

IV. Analysis — QSBS Status of Each Portfolio Company A. Luminos Systems Inc.

1. Original Issuance and Acquisition Pinnacle Venture Fund II LP acquired shares of Luminos Systems Inc. at original issuance in the first quarter of 2020 through Luminos's Series B preferred stock financing. Fund II subsequently participated in Luminos's Series C preferred stock financing, acquiring additional shares at original issuance in that round as well. The aggregate cost basis for Fund II's Luminos shares ac

2. Qualified Small Business Status Luminos Systems Inc. is organized as a Delaware C-corporation, which satisfies the domestic C-corporation requirement for QSBS eligibility. The company's aggregate gross assets at the time of the Series B issuance in Q1 2020 have been confirmed to be below the $50 million threshold of Section 1202(d)(1). At the time of the Series B round, Luminos was an early-growth-stage company th

3. Holding Period The Series B shares were acquired in Q1 2020. As of August 2025, more than five years and four months have elapsed since the date of acquisition. The five-year holding period required under Section 1202(a) is therefore satisfied with respect to the Series B shares. For the Series C shares, the specific acquisition date must be verified. If the Series C closed in, for example, Q3 or Q4 of 2020, the f

4. Exclusion Ceiling Analysis The per-taxpayer exclusion ceiling for Luminos QSBS is the greater of (i) $10 million or (ii) 10 times the taxpayer's adjusted basis in the Luminos stock. Fund II's aggregate adjusted basis in Luminos stock is $58.5 million. Accordingly, at the partnership level, the 10× ceiling is $585 million. However, as noted above, the exclusion ceiling is applied at the partner level, not at the pa

5. QSBS Preservation Conclusion — Luminos Based on the foregoing analysis, the Luminos QSBS position presents a low risk profile. The holding period is satisfied, the gross asset test has been confirmed, the original issuance requirement is met, and the active business requirement is satisfied. If the Section 721 contribution to the CV preserves QSBS tacking (as analyzed in Section V below), QSBS status should be ful

1. Original Issuance and Acquisition Pinnacle Venture Fund II LP acquired shares of ClearArc Software Inc. at original issuance in the second quarter of 2020 through ClearArc's Series A preferred stock financing, for which Fund II served as the lead investor. Fund II subsequently participated in ClearArc's Series B preferred stock financing, acquiring additional shares at original issuance. The aggregate cost basis f

2. Qualified Small Business Status ClearArc Software Inc. is organized as a Delaware C-corporation, satisfying the domestic C-corporation requirement. ClearArc's aggregate gross assets at the time of the Series A issuance in Q2 2020 are believed to be below the $50 million threshold of Section 1202(d)(1). At the time of the Series A round, ClearArc was a seed-to-Series-A-stage company, and its asset base was almost c

3. Holding Period The Series A shares were acquired in Q2 2020. Assuming the closing occurred in or around May or June 2020, the five-year holding period would be satisfied in May or June 2025, and by August 2025 (the date of this memorandum), the holding period has already been satisfied with respect to the Series A tranche. For the Series B tranche, the specific acquisition date must be verified — if the Series B c

4. Exclusion Ceiling Analysis Fund II's aggregate adjusted basis in ClearArc stock is $37.4 million. The 10× ceiling is therefore $374 million per eligible taxpayer. The current fair market value of Fund II's ClearArc stake is $468 million, reflecting unrealized gain of $430.6 million ($468 million minus $37.4 million). As with Luminos, the per-taxpayer ceiling will be applied at the partner level, and the allocation

5. QSBS Preservation Conclusion — ClearArc The ClearArc QSBS position presents a moderate risk profile. The primary risk factors are: (a) Holding Period Timing. The five-year holding period is satisfied for the Series A tranche but is tight — only weeks or a month before the CV closing date. If the CV closing were to be accelerated to a date before the holding period is satisfied for a particular tranche, there could

1. Original Issuance and Acquisition Pinnacle Venture Fund II LP acquired shares of Vectral Cloud Inc. at original issuance in March 2021 through Vectral's Series B preferred stock financing. This was a single-tranche investment with a cost basis of $42.1 million. There was no subsequent follow-on investment by Fund II in Vectral — all of Fund II's Vectral shares were acquired in the March 2021 Series B round. The sh

2. Qualified Small Business Status Vectral Cloud Inc. is organized as a Delaware C-corporation, satisfying the domestic C-corporation requirement. The $50 Million Gross Asset Test — Active Diligence Required. Vectral's aggregate gross assets at the time of the Series B issuance in March 2021 were near the $50 million threshold of Section 1202(d)(1). This is the most significant QSBS risk factor in the entire transact

3. Holding Period The Series B shares were acquired in March 2021. The five-year holding period under Section 1202(a) will therefore not be satisfied until approximately March 2026. As of the CV target final close of October 31, 2025, the Vectral QSBS holding period will NOT be satisfied. Approximately five months will remain before the five-year mark is reached. This is the most significant QSBS issue in the transac

4. Exclusion Ceiling Analysis Fund II's aggregate adjusted basis in Vectral stock is $42.1 million. The 10× ceiling is therefore $421 million per eligible taxpayer. The current fair market value of Fund II's Vectral stake is $260 million, reflecting unrealized gain of $217.9 million ($260 million minus $42.1 million). The $421 million per-taxpayer exclusion ceiling is well in excess of the current aggregate unrealize

5. QSBS Preservation Conclusion — Vectral The Vectral QSBS position presents the highest risk profile of the three portfolio companies. There are two independent and material risk factors: (a) The $50 Million Gross Asset Threshold. Vectral's aggregate gross assets at the time of the Series B issuance were near the $50 million threshold. If the threshold was exceeded, the shares do not qualify as QSBS and no structura

V. Section 721 Contribution and QSBS Tacking — Core Legal Analysis A. The Proposed Transaction Structure The proposed transaction contemplates that Fund II will contribute its shares in Luminos Systems Inc., ClearArc Software Inc., and Vectral Cloud Inc. to the CV in exchange for limited partnership interests in the CV. This contribution is intended to qualify as a tax-free contribution under Section 721(a) of the Co

Section 1202(h)(4)(A) provides the primary statutory authority for QSBS tacking in the partnership context. The provision states that QSBS that is "distributed by a partnership to a partner" is treated as having been held by the distributee partner during the period the partnership held the stock, provided the partner was a partner at the time the partnership acquired the stock. This rule is unambiguous in its applic