In Response to Self-Executing Congressional Mandates, SEC Adopts Offering Reforms for Business Development Companies and Registered Closed-End Funds

The Securities and Exchange Commission today voted to adopt rule amendments to implement certain provisions of the Small Business Credit Availability Act and the Economic Growth, Regulatory Relief, and Consumer Protection Act relating to business development companies and other closed-end funds.

Business development companies—or BDCs—are a type of closed-end fund established by statute that primarily invest in small and developing companies. As directed by Congress, the rules will allow business development companies and other closed-end funds to use the securities offering rules that are already available to operating companies. The amendments are designed to streamline the registration, offering and investor communications processes for BDCs and registered closed-end funds and will provide important benefits to market participants and investors, including advancing capital formation and modernizing and streamlining disclosures. The Commission’s reforms will allow eligible funds to engage in a streamlined registration process that has long been available to operating companies, including modernized communications and prospectus delivery procedures and requirements. As a result, they will be better able to respond to market opportunities.

“The amendments we are adopting will modernize the offering process for eligible funds in a way that, as borne out by our experience with operating companies, will benefit both investors in these funds and the companies in which they invest,” said SEC Chairman Jay Clayton. “This is another example of our staff’s laudable efforts to modernize our rules in a manner that furthers all aspects of our mission. It is my hope, particularly when many of our small and medium sized businesses are facing profound challenges not of their own making, that these and other modernization efforts will provide those businesses more efficient access to financing.”  

The reforms include changes that supplement the specific amendments mandated by Congress. These changes are designed to better align the modern immediately-effective or automatically effective offering process long available to other types of funds with the structures of the newly eligible funds. They also include disclosure requirements and new structured data requirements that will make it easier for investors and others to analyze fund data.

Most of the amendments will become effective on Aug. 1, 2020.

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FACT SHEET

Securities Offering Reform for BDCs and Closed-End Investment Companies

April 8, 2020

Action

The Commission is adopting rule and form amendments to allow business development companies (“BDCs”) and registered closed-end funds (collectively, “affected funds”) to use the registration, offering, and communications rules that are already available to operating companies. In 2018, Congress passed two laws directing the Commission to adopt many of these changes. The reforms also include 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. 

These amendments are designed to reduce regulatory costs and facilitate capital formation, particularly for small and mid-sized businesses, while modernizing disclosures to streamline the way in which funds provide valuable information to investors.

Background

In 1980, Congress established BDCs 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.  In 2018, Congress directed the Commission, through the Small Business Credit Availability Act (the “BDC Act”) and the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Registered CEF Act”), to adopt rules that allow BDCs and other closed-end investment companies to use the securities offering rules that are already available to operating companies. 

Highlights

Shelf Offering Process and New Short-Form Registration Statement

Eligible affected funds will be able to engage in a streamlined registration process to sell securities “off the shelf” more quickly and efficiently in response to market opportunities through the use of a new short-form registration statement. Like operating companies, affected funds will generally be eligible to use the short-form registration statement if they meet certain filing and reporting history requirements and have a public float of $75 million or more. These amendments are designed to allow affected funds to raise capital more efficiently and cost-effectively and provide affected funds with greater flexibility to manage the timing of their offerings in response to market opportunities.

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

Eligible affected funds will be able to qualify as WKSIs and benefit from the same processes 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, affected funds will qualify as WKSIs if they meet certain filing and reporting history requirements and have a public float of $700 million or more. Allowing eligible affected funds to qualify for WKSI status will provide flexibility to those funds, including an ability to promptly tap favorable conditions in the public market, and may facilitate both capital formation and a reduction in the cost of capital for these funds.

Immediate or Automatic Effectiveness of Certain Filings

The amendments will expand the scope of rule 486 under the Securities Act of 1933 to registered closed-end funds or BDCs that conduct continuous offerings of securities, as defined under Commission rules. The amendments will permit these funds to make certain changes to their registration statements on an immediately-effective basis or on an automatically effective basis a set period of time after filing.  Rule 486 currently applies only to closed-end funds that operate as “interval funds,” and these amendments will provide parity for other non-listed closed-end funds.

Communications and Prospectus Delivery Reforms

Affected funds will 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 will be able to satisfy their final prospectus delivery obligations by filing their prospectuses with the Commission.

These amendments are designed to reduce regulatory costs while providing more timely information to investors.

New Method for Interval Funds and Certain Exchange-Traded Products to Pay Registration Fees

Instead of registering a specific amount of shares and paying registration fees at the time of filing, under the amendments, closed-end funds that operate as “interval funds” will register an indefinite number of shares and pay registration fees based on net issuance of shares. This approach is similar to that permitted for mutual funds and exchange-traded funds. The amendments also will allow continuously offered exchange-traded products that are not registered under the Investment Company Act to use a similar approach.

Periodic Reporting Requirements

To support the short-form registration statement framework, affected funds filing a short-form registration statement will be required to include certain key prospectus disclosure in their annual reports. In addition, affected funds filing a short-form registration statement will be required to disclose material unresolved staff comments. Registered closed-end funds also will be required 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 BDCs.

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 amendments will eliminate this requirement and instead require affected funds to make incorporated materials readily available on a website.

Structured Data Requirements

Affected funds will be required to tag certain registration statement information, similar to current tagging requirements for mutual funds and exchange-traded funds. BDCs also will be required to submit financial statement information, 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 today’s amendments), will be required to submit the form in XML format.

What’s Next?

The rule and form amendments will become effective on Aug. 1, 2020, with the exception of the amendments related to registration fee payments by interval funds and certain exchange-traded products, which will become effective on Aug. 1, 2021.

In addition, the Commission is adopting compliance dates for certain requirements under the amendments to provide a transition period after the effective date of the final rule:

• The requirement for registered closed-end funds to provide MDFP in their annual reports to shareholders will have a compliance date of Aug. 1, 2021.
• Inline XBRL structured data reporting requirements for financial statement, registration statement information, and prospectus information will have a compliance date of Aug. 1, 2022 for affected funds that are eligible to file a short-form registration statement. For all other affected funds subject to these structured data reporting requirements, the compliance date is Feb. 1, 2023.
• The requirement that Form 24F-2 filers (including existing filers) file reports on Form 24F-2 in an XML structured data format will have a compliance date of Feb. 1, 2022.