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Staff Responses to Inquiries Regarding Business Development Companies and Section 61(a) of the Investment Company Act of 1940

Oct. 17, 2019

The staff of the Division of Investment Management has prepared the following responses to inquiries received in connection with section 61(a) of the Investment Company Act of 1940 (the “1940 Act”). These responses are meant to assist business development companies (“BDCs”) that have obtained the requisite approvals for lowering their asset coverage in offering and conducting repurchases of their shares in accordance with section 61(a)(2)(D)(ii) of the 1940 Act. If you have questions or would like to provide feedback on these FAQs, please contact the Division’s Chief Counsel’s Office at (202) 551-6821.

Background

Section 61(a) of the 1940 Act was amended in 2018 to permit a BDC to lower its asset coverage for a class of senior security that represents indebtedness or which is stock from 200% to 150%, subject to certain conditions.[1] These conditions require, among other things, that the change in asset coverage be approved either by a “required majority” of the BDC’s board, or by a vote of the BDC’s shareholders.[2] Under section 61(a), a BDC that obtains board approval cannot reduce its asset coverage until one year after the approval date, whereas a BDC that obtains a shareholder approval is able to do so the day after the shareholder approval is obtained.

Section 61(a)(2)(D)(ii) imposes an additional condition on any BDC whose common shares are not listed on a national securities exchange.[3] Specifically, such a non-traded BDC must extend “to each person that is a shareholder as of the date of an approval … the opportunity (which may include a tender offer) to sell the securities held by that shareholder as of that applicable approval date, with 25 percent of those securities to be repurchased in each of the 4 calendar quarters following the calendar quarter in which that applicable approval date takes place.” In connection with this requirement, staff has received the following inquiries:

Consistent with the requirement in section 61(a)(2)(D)(ii) to extend an offer to repurchase, may a non-traded BDC provide the following (and, if so, at what price):

(1) A single offer to repurchase all the securities held by all shareholders of the fund as of the date of an approval, with the repurchase of 25% of the securities of such shareholders who accept the offer to be effectuated quarterly; or

(2) Four separate, quarterly offers to repurchase 25% of the securities held by all shareholders of the fund as of the date of an approval, with the repurchase of the securities of such shareholders who accept each offer to be effectuated in the same quarter as the offer?

Yes. The staff believes that the text of section 61(a)(2)(D)(ii) of the 1940 Act can be read to allow a non-traded BDC to provide either one offer or four separate quarterly offers, in each case with the repurchases to be effectuated quarterly. In the staff’s view, the price at which each repurchase is effectuated should be based on the current net asset value of the non-traded BDC at the time of that repurchase, rather than the net asset value at the time of the offer.[4]

Could a non-traded BDC effectuate the repurchase of securities more quickly than required in section 61(a)(2)(D)(ii)? For example, solely for purposes of section 61(a)(2)(D)(ii), could a non-traded BDC extend a single offer to repurchase all securities held by shareholders of the fund as of the date of an approval and repurchase 100% of the securities of shareholders who accept the offer in the first quarter rather than over four successive quarters?

The staff believes that section 61(a)(2)(D)(ii) was designed to protect the interests of those shareholders who do not wish to remain invested in a non-traded BDC with a lower asset coverage while providing the BDC sufficient time to sell assets, potentially including illiquid assets, to pay for the repurchased shares. Therefore, the staff would not recommend enforcement action under section 61 if a non-traded BDC that has, or raises, sufficient funds to effectuate the repurchases more quickly, does so, thereby enabling shareholders who accept the offer to have all their shares repurchased more quickly. A BDC planning to take this approach would need to (a) consider the consequences on the interests of any remaining shareholders, such as shareholder dilution and the potential effects on portfolio management, and (b) disclose, in conjunction with the offer to repurchase, its anticipated schedule for effectuating the repurchases because the timing of liquidity may be material to shareholders determining whether to accept the offer.

Does a BDC extending an offer to repurchase under section 61(a)(2)(D)(ii) need to conduct the offer under section 23(c) of the 1940 Act or under sections 13(e) and 14(e) of the Securities Exchange Act of 1934 (“1934 Act”) and the rules thereunder?

Section 61(a)(2)(D)(ii) imposes an obligation to make an offer to specific shareholders. It also permits, but does not require, that the offer take the form of a tender offer. The staff believes that while section 23(c) of the 1940 Act and sections 13(e) and 14(e) of the 1934 Act and the rules thereunder provide useful guidance and processes for non-traded BDCs making an offer under section 61(a)(2)(D)(ii), the staff does not believe that these provisions should be applied to the extent that doing so would be inconsistent with the text of section 61(a)(2)(D)(ii). Therefore, the staff believes that, in extending an offer to repurchase for the exclusive purpose of complying with an obligation under section 61(a)(2)(D)(ii), a non-traded BDC need not conduct the offer under section 23(c) of the 1940 Act or under sections 13(e) and 14(e) of the 1934 Act and the rules thereunder. A non-traded BDC may, however, but is not required to, utilize the forms, communications and filing processes under section 23(c) of the 1940 Act or section 13(e) of the 1934 Act and the rules thereunder that it would ordinarily use in extending an offer to repurchase or making a tender offer. The staff encourages non-traded BDCs to follow Commission filing requirements under, for instance, section 13(e) and the rules thereunder and provide related documents to shareholders. A non-traded BDC considering whether to use forms, communications and filing processes other than those it would ordinarily use for extending an offer to repurchase or making a tender offer should consider contacting the staff in the Division’s Chief Counsel’s Office to discuss.

If a non-traded BDC lists its common shares on a national securities exchange after receiving the requisite approval under section 61(a), is it required to offer to repurchase all the securities held by shareholders of the BDC as of the date of the approval and to repurchase the securities of shareholders who accept the offer?

Yes. In the staff’s view, the statute requires a BDC whose common shares are not listed on a national securities exchange on the date of an approval under section 61(a) to make an offer to repurchase. The staff believes that Section 61(a) does not provide an exception from this requirement for a BDC whose common shares become listed after the date of an approval.

However, the staff believes that the right to receive a repurchase offer or to sell securities pursuant to section 61(a)(2)(D)(ii) would not (a) transfer with the securities of the BDC if, following the listing of those securities, a shareholder were to sell them or (b) attach to securities that a shareholder purchases subsequent to the approval date.


These responses represent only the views of the staff of the Division of Investment Management and have no legal force or effect. The responses concern only repurchases by non-traded BDCs made for the exclusive purpose of complying with an obligation under section 61(a) of the 1940 Act and do not apply to any other type of repurchase program or transaction, or to any other issuers. These responses do not alter or amend applicable law and create no new or additional obligations for any person. They are not a rule, regulation, or statement of the Securities and Exchange Commission and the Commission has neither approved nor disapproved this information.

The staff also directs your attention to the anti-fraud and anti-manipulation provisions of the federal securities laws, including Sections 10(b) the 1934 Act and Rule 10b-5 thereunder. Responsibility for compliance with these and any other applicable provisions of the federal securities laws, including applicable liability provisions of sections 13(e) or 14(e) of the 1934 Act to the extent a fund engages in a tender offer, rests with those funds opting to avail themselves of lower asset coverage. The Division of Investment Management expresses no view with respect to the adequacy of disclosure concerning, and the applicability of any other federal or state laws to, a repurchase offer. Last, these responses are subject to modification or revocation at any time.


[1] The Consolidated Appropriations Act of 2018 was enacted on March 23, 2018. The enacted legislation contained a number of amendments to the 1940 Act that impacted BDCs. See Consolidated Appropriations Act, Pub. L. No. 115-141; 132 Stat. 348 (2018).

[2] See section 61(a) of the 1940 Act. Section 57(o) of the 1940 Act defines “required majority,” when used with respect to the approval of a proposed transaction, plan, or arrangement, as both a majority of a BDC’s directors or general partners who have no financial interest in such a transaction, plan, or arrangement and a majority of such directors or general partners who are not interested persons of the BDC.

If the BDC seeks approval from its shareholders, it must obtain a majority vote at an annual or special meeting of shareholders at which a quorum is present to change its asset coverage requirement.

[3] BDCs that do not have common shares listed on a national securities exchange are commonly referred to as “non-traded BDCs.”

[4] Many, if not most, non-traded BDCs disclose that they intend, subject to board approval, to conduct quarterly tender offers to provide liquidity to their shareholders.

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