Access our BDC Facts & Stats for a compendium of information regarding the business development companies (BDCs) that have taken measures to increase their use of leverage, the terms of BDC advisory agreements, and more.
On May 30, 2018, the Division of Investment Management of the Securities and Exchange Commission issued an exemptive order that permits private business development companies (“BDCs”) to conduct an exchange offer pursuant to which BDC investors, including directors and officers of the BDC, may elect to exchange their BDC shares for shares in a new split-off extension fund. The new split-off extension fund would receive a pro rata portion of the BDC’s assets and liabilities, including each of the BDC’s portfolio investments, in proportion to the percentage of the BDC shares exchanged. Relief from the Division was required to allow the BDC’s investment adviser to also act as the investment adviser of the new split-off extension fund and avoid potentially triggering common control prohibitions under the Investment Company Act of 1940. As private BDCs do not have publicly traded shares, this new exchange option would provide private BDC investors with a liquidity opportunity following the extension fund’s initial public offering. This new liquidity option should be considered when drafting a private BDC’s organizational documents in order to maximize its liquidity options at a later stage. A copy of the exemptive order can be found here.
On May 23, 2018, the Securities and Exchange Commission (the “Commission”) proposed establishing a research report safe harbor (Rule 139b) for unaffiliated brokers or dealers that publish or distribute research reports that cover investment funds. The Commission took this action in furtherance of the mandate of the Fair Access to Investment Research Act of 2017 (the “FAIR Act”). The FAIR Act required the Commission to expand the Rule 139 safe harbor for research reports to cover research reports on investment funds. Rule 139 permits a broker or dealer that is distributing an issuer’s securities to publish a research report about those securities without the report itself being deemed an offer to sell such securities. If adopted as proposed, the safe harbor would be made available to research reports on mutual funds, exchange-traded funds, registered closed-end funds, business development companies and similar covered investment funds. The safe harbor would be unavailable with respect to broker-dealers’ publication or distribution of research reports about closed-end registered investment companies or business development companies during their first year of operation. The adoption of an expanded safe harbor would reduce obstacles that currently prevent certain investors from accessing research reports on investment funds. However, the safe harbor would not extend to research reports issued by brokers or dealers affiliated with the investment fund. The public comment period will remain open for 30 days. The proposed rule is available here.
The recently updated Securities and Exchange Commission agenda (see here and here) provides some insight on what to expect in upcoming months. The amendments to the smaller reporting company definition, which were widely supported when proposed, remain in the “final rule stage.” Likewise, the amendments to implement the FAST Act report and disclosure update and simplification (to eliminate outdated, redundant and otherwise repetitive requirements) remain in the final rule stage. It will be interesting to see whether the Commission takes action on these measures before Commissioner Piwowar’s departure. Consistent with Corporation Finance Division Director Hinman’s recent Congressional testimony about which we previously blogged, the agenda now includes in the “proposed rule stage” extending the test-the-waters provision to non-EGCs. Also in the proposed rule stage are changes to Industry Guide 3 (disclosures for banks and other financial institutions), disclosure of payments by resource extraction issuers, and additional changes to the Regulation S-K disclosure requirements. A new item was added that is referenced as “amendments to financial disclosures for registered debt security offerings.” It is not clear to what this relates. Sadly, the changes to various communications safe harbors and other Securities Act rules for business development companies are in the “long-term actions” category. The long-term actions category also includes a number of measures that have been the subject of recommendations by the Commission’s Investor Advisory Committee, such as disclosures regarding board diversity and changes to the accredited investor definition. Consistent with recent comments by representatives of the Commission, a measure relating to harmonizing private placement rules is added to the long-term actions list.
Last year, the Staff of the Division of Corporation Finance announced that it would expand its acceptance of draft registration statement submissions from emerging growth companies to all companies seeking a review of their registration statement. This expansion of the confidential registration statement review process was made available for both initial public offerings (“IPOs”) and those offerings within one year of a public company’s IPO. Notwithstanding the expanded availability, the process of the non-public, confidential review was left unchanged requiring issuers to publicly file the confidentially submitted registration statement (and other nonpublic draft submissions) at least 15 days prior to any marketed offering presentation or at least 15 days prior to the requested effective date of the registration statement.
As a result of the aforementioned expanded confidential review process, on March 16, 2018, the Staff of the Division of Investment Management announced that it will similarly accept draft registration statements that are submitted by a business development company (“BDC”), even if the BDC does not qualify as an emerging growth company, for nonpublic, confidential review. The Division also will similarly accept for nonpublic, confidential review draft registration statements relating to offerings that are submitted by BDCs within one year of an IPO.
A copy of the Division of Investment Management’s announcement is available here.
On March 23, 2018, Congress passed a $1.3 trillion omnibus spending bill titled the Consolidated Appropriations Act of 2018, which included the Small Business Credit Availability Act. Included in the Small Business Credit Availability Act are various changes to the federal securities laws and regulations that impact business development companies (“BDCs”). Most significantly, the BDC-related portions of the legislation expand the ability of BDCs to utilize leverage and provide them with the ability to rely on more flexible SEC communication and offering rules currently only available to operating companies.
This chart summarizes the BDC-related provisions of the legislation.