SEC Adopts New Rules for Business Development Companies and Reproposes New Category of Eligible Portfolio Company
FOR IMMEDIATE RELEASE
Washington D.C., Oct. 26, 2006 - The Securities and Exchange Commission yesterday adopted new rules under the Investment Company Act that more closely align the permissible investment activities of business development companies (BDCs) with the purpose that Congress intended when it established BDCs. The Commission also reproposed for comment an additional definition of eligible portfolio company. These new rules will facilitate small business capital formation by providing added flexibility for BDCs to invest larger amounts in more types of smaller companies, consistent with the purpose of the Investment Company Act.
In 1980, Congress established BDCs as a new type of closed-end investment company for the purpose of making capital more readily available to small, developing, and financially troubled companies that do not have ready access to the public capital markets or other forms of conventional financing. To encourage investment in these smaller companies, the Investment Company Act requires BDCs to have at least 70% of their portfolio invested in certain assets, including securities of "eligible portfolio companies," at the time they make any new investments.
The Investment Company Act defines eligible portfolio company to include domestic operating companies that, among other things, do not have any class of securities that are marginable under rules promulgated by the Federal Reserve Board. In 1998, for reasons unrelated to small business capital formation, the Federal Reserve Board expanded its definition of margin security to include all publicly traded equity securities and most debt securities. These 1998 amendments had the unintended effect of reducing the number of companies that met the definition of eligible portfolio company.
The Commission adopted new rules under the Investment Company Act to address the impact of the Federal Reserve Board's 1998 amendments on the definition of eligible portfolio company.
- Rule 2a-46 defines an eligible portfolio company to include all private companies and companies whose securities are not listed on a national securities exchange.
- Rule 55a-1 conditionally permits a BDC to include in its 70% basket follow-on investments in a company that met the new definition of eligible portfolio company at the time of the BDC's initial investment in it, but no longer meets that definition.
These new rules will become effective 30 days after publication in the Federal Register.
In addition to adopting these two final rules, the Commission also reproposed for comment an additional definition of eligible portfolio company under the Investment Company Act. As reproposed, Rule 2a-46(b) would expand the definition of eligible portfolio company to include certain companies that list their securities on a national securities exchange. Specifically, the Commission seeks comment on a range of possible alternatives, which include the following ceilings for publicly traded eligible portfolio companies:
- public float of less than $75 million;
- market capitalization of less than $150 million;
- market capitalization of less than $250 million; or
- any other levels of public float or market capitalization that commenters might suggest, consistent with the purpose of the Investment Company Act.
The Commission seeks public comment on all aspects of this reproposal. Comments should be submitted within 60 days of the reproposal's publication in the Federal Register.
Additional materials: Final Rule Release No. IC-27538; Proposed Rule Release No. IC-27539