Definition of Eligible Portfolio Company: Amendment to Rule 2a-46 under the Investment Company Act

A Small Entity Compliance Guide¹

Introduction

The Securities and Exchange Commission recently adopted an amendment to Rule 2a-46 under the Investment Company Act. The amendment more closely aligns the definition of "eligible portfolio company," and the investment activities of business development companies ("BDCs"), with the purpose that Congress intended when it established BDCs in 1980. The amendment expands the definition of eligible portfolio company to include certain companies that list their securities on a national securities exchange ("Exchange").

Background

Congress established BDCs as a new category of closed-end investment companies to make capital more readily available to certain types of companies. To accomplish this purpose, the Investment Company Act generally prohibits a BDC from making any investment unless, at the time of the investment, at least 70 percent of its total assets are invested in securities of certain specific types of companies, including "eligible portfolio companies."

The Investment Company Act defines eligible portfolio company to include any domestic operating company that, among other things, do not have any class of securities that are marginable under rules promulgated by the Federal Reserve Board. In 2006, the Commission adopted Rule 2a 46 under the Investment Company Act which defines eligible portfolio company to include all domestic operating companies whose securities are not listed on an Exchange.

Amendments to Rule 2a-46

The Commission has amended Rule 2a-46 to expand the definition of eligible portfolio company also to include certain Exchange-listed companies. New paragraph (b) to Rule 2a-46 expands the definition to include any domestic operating company that has a class of securities listed on an Exchange and a market capitalization of less than $250 million on any day in the 60-day period immediately before the BDC's acquisition of its securities. A BDC may use information obtained from independent third parties to assist it in determining whether a possible investment target is an eligible portfolio company.

Other Resources

The adopting release for the amendment to Rule 2a-46 can be found on the Commission's website at http://www.sec.gov/rules/final/2008/ic-28266.pdf.

The text of Rule 2a-46 can be accessed through the "Investment Management" section of the Commission's website at http://www.sec.gov/divisions/investment.shtml.

Contacting the Securities and Exchange Commission

The SEC's Division of Investment Management is happy to assist small companies with questions regarding Rule 2a-46, including new Rule 2a-46(b). The Division's Office of Chief Counsel answers questions submitted by e-mail and telephone. You can submit a question by e-mail to imocc@sec.gov and a staff member of the office will call you to discuss your question. In addition, you can contact the Office of Chief Counsel at (202) 551-6825.

¹ This guide was prepared by the staff of the U.S. Securities and Exchange Commission as a "small entity compliance guide" under Section 212 of the Small Business Regulatory Enforcement Fairness Act of 1996, as amended. The guide summarizes and explains rules adopted by the SEC, but is not a substitute for any rule itself. Only the rule itself can provide complete and definitive information regarding its requirements.

http://www.sec.gov/info/smallbus/secg/rule2a-46-secg.htm