SEC Proposes Offering Reforms for Business Development Companies and Registered Closed-End Funds

The Securities and Exchange Commission today voted to propose rule amendments to implement certain provisions of the Small Business Credit Availability Act and the Economic Growth, Regulatory Relief, and Consumer Protection Act.  

The proposal would improve access to capital and facilitate investor communications by business development companies and registered closed-end funds. Business development companies—or “BDCs”—are a type of closed-end fund established by Congress that primarily invest in small and developing companies.

The proposed amendments would modify the registration, communications, and offering processes available to BDCs and registered closed-end funds, building on offering practices that operating companies currently use.  

“This congressional mandate recognizes the importance of an efficient and cost-effective approach for these funds to raise capital in our public markets, which should ultimately benefit investors in these funds, including Main Street investors,” said SEC Chairman Jay Clayton.  “Moreover, the proposed changes should provide business development companies and registered closed-end funds with a more flexible offering process and facilitate capital formation in our public markets.” 

The Commission’s proposal would allow eligible funds to engage in a more streamlined registration process to sell securities in response to market opportunities. The proposed amendments also would allow BDCs and registered closed-end funds to use communications and prospectus delivery rules currently available to operating companies. The proposal includes additional amendments designed to help implement the congressionally-mandated amendments by further harmonizing the disclosure and regulatory framework for these funds with that of operating companies and by providing tools to help investors assess these funds and their offerings. These proposed amendments include new periodic and current reporting requirements and new structured data requirements. The Commission also is proposing a modernized approach to registration fee payments for closed-end funds that operate as “interval funds.”

The proposal will have a 60-day public comment period following its publication in the Federal Register.  

FACT SHEET

Securities Offering Reform for Closed-End Investment Companies

March 20, 2019

Action

The Commission is proposing rule and form amendments to allow business development companies and registered closed-end funds (collectively, “affected funds”) to use the registration, offering, and communications reforms the Commission adopted for operating companies in 2005. In 2018, Congress passed two laws directing the Commission to adopt many of these changes. The proposal also includes other amendments designed to help implement the congressionally-mandated amendments by further harmonizing the disclosure and regulatory framework for these funds with that of operating companies and by providing tools to help investors assess these funds and their offerings.

Proposal Highlights

Shelf Offering Process and New Short-Form Registration Statement 

Eligible affected funds would be able to engage in a more streamlined registration process to sell securities “off the shelf” in response to market opportunities through the use of a new short-form registration statement. Like operating companies, an affected fund would generally be eligible to use the short-form registration statement if it meets certain filing and reporting history requirements and has a public float of $75 million or more.

Ability to Qualify for Well-Known Seasoned Issuer (“WKSI”) Status

Eligible affected funds would be able to qualify as WKSIs and benefit from the same flexibility available to operating companies that qualify as WKSIs. These include a more flexible registration process and greater latitude to communicate with the market. Like operating companies, an affected fund would qualify as a WKSI if it meets certain filing and reporting history requirements and has a public float of $700 million or more.

Communications and Prospectus Delivery Reforms

Affected funds would be able to use many of the communication rules currently available to operating companies, including the use of a “free writing prospectus,” certain factual business information, forward-looking statements, and certain broker-dealer research reports. Like operating companies, affected funds would be able to satisfy their final prospectus delivery obligations by filing the prospectus with the Commission.

New Method for Interval Funds to Pay Registration Fees

Instead of registering a specific amount of shares and paying registration fees at the time of filing, under the proposal closed-end funds that operate as “interval funds” would register an indefinite number of shares and pay registration fees based on net issuance of shares, similar to what mutual funds and exchange-traded funds are currently permitted to do.

Structured Data Requirements

Under the proposal, affected funds would be required to use Inline XBRL to tag certain registration statement information, similar to current tagging requirements for mutual funds and exchange-traded funds. Business development companies also would be required to submit financial statement information using Inline XBRL, as operating companies currently do.  Funds that file Form 24F-2 in connection with paying their registration fees, including mutual funds and exchange-traded funds (as well as interval funds under the proposed amendments), would be required to submit the form in XML format.

Periodic Reporting Requirements

To support the proposed short-form registration statement framework, affected funds filing a short-form registration statement would be required to include certain key prospectus disclosure in their annual reports, as well as disclosure of material unresolved staff comments. Additionally, registered closed-end funds would have to provide management’s discussion of fund performance (or “MDFP”) in their annual reports, similar to requirements that currently apply to mutual funds, exchange-traded funds, and business development companies.

Current Reporting Requirements

Under the proposed amendments, registered closed-end funds would be required to file current reports on Form 8-K, like operating companies and business development companies are currently required to do. To better tailor Form 8-K disclosures to affected funds, and to enhance parity with operating companies, all affected funds would be subject to two new Form 8-K reporting events regarding material changes to investment objectives or policies and material write-downs of significant investments.

Incorporation by Reference Changes

The registration form for affected funds currently requires a fund to provide new purchasers with a copy of all previously-filed materials that are incorporated by reference into the registration statement. The proposal would eliminate this requirement and instead require affected funds to make incorporated materials readily available on a website.

What’s Next?

The comment period for the proposal will be open for 60 days following publication in the Federal Register.