[Federal Register Volume 77, Number 4 (Friday, January 6, 2012)]
[Notices]
[Pages 826-828]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-33859]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 29896; 812-13781]
Cantilever Capital, LLC and Cantilever Group, LLC; Notice of
Application
December 29, 2011.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTIONS: Notice of application for an order under section 6(c) of the
Investment Company Act of 1940 (the ``Act'') granting an exemption from
section 12(d)(3) of the Act.
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Applicants: Cantilever Capital, LLC (``Cantilever'' or the ``Company'')
and Cantilever Group, LLC (the ``Adviser'').
Summary of Application: Cantilever, or any successor to Cantilever, and
the Adviser, or any successor to the Adviser (each, an ``Applicant''
and collectively, the ``Applicants'') seek an order under section 6(c)
of the Act to permit Cantilever to acquire the securities of various
investment managers that each derives more than 15% of its gross
revenues from securities related activities as defined in rule 12d3-
1(d)(1) under the Act, in excess of the limitations in rule 12d3-
1(b).\1\
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\1\ For the purposes of the requested order, ``successor'' is
limited to an entity or entities that result from a reorganization
into another jurisdiction or a change in the type of business
organization.
DATES: Filing Dates: The application was filed on June 8, 2010, and
amended on October 18, 2010, and December 5, 2011. Applicants have
agreed to file an amendment during the notice period, the substance of
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which is reflected in this notice.
Hearing or Notification of Hearing: An order granting the requested
relief will be issued unless the Commission orders a hearing.
Interested persons may request a hearing by writing to the Commission's
Secretary and serving applicants with a copy of the request, personally
or by mail. Hearing requests should be received by the Commission by
5:30 p.m. on January 23, 2012, and should be accompanied by proof of
service on the applicants, in the form of an affidavit or, for lawyers,
a certificate of service. Hearing requests should state the nature of
the writer's interest, the reason for the request, and the issues
contested. Persons who wish to be notified of a hearing may request
notification by writing to the Commission's Secretary.
ADDRESSES: Secretary, Securities and Exchange Commission, 100 F Street
NE. Washington, DC 20549-1090. Applicants, c/o Mr. David Ballard,
Cantilever Capital, LLC, 137 Rowayton Ave., Third Floor, Rowayton, CT
06853.
FOR FURTHER INFORMATION CONTACT: Jean E. Minarick, Senior Counsel, at
(202) 551-6811, or Janet M. Grossnickle, Assistant Director, at (202)
551-6821 (Division of Investment Management, Office of Investment
Company Regulation).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained via the
Commission's Web site by searching for the file number, or for an
applicant using the Company name box, at http://www.sec.gov/search/search.htm, or by calling (202) 551-8090.
Applicants' Representations
1. The Company, a Delaware limited liability company, intends to
operate as a non-diversified, closed-end management investment company
under the Act. The Company intends to elect to be treated as a business
development company under section 54 of the Act on or before June 30,
2014.\2\ The Adviser is a Delaware limited liability company organized
to manage the Company, which will be the sole client of the Adviser,
and will not engage in any other business. Cantilever will invest more
than 70% of the total value of its assets in securities of private
companies engaged exclusively in the investment management business
(each, an ``Investment Manager''), with the exception that certain
Investment Managers may, through affiliates (as defined below) or
subsidiaries, also provide limited broker-dealer services in connection
with distribution of their investment products or as part of a wealth
management business. Applicants expect that more than 15% of the
revenues of each Investment Manager will be from ``securities related
activities'' as defined in rule 12d3-1(d)(1) under the Act.\3\
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\2\ Section 2(a)(48) of the 1940 Act defines a business
development company to be any closed-end investment company that
operates for the purposes of making investment in securities
described in sections 55(a)(1) through 55(a)(3) of the Act, makes
available significant managerial assistance with respect to the
issuers of such securities and has elected to be subject to the
provisions of section 55 through 65 of the 1940 Act.
\3\ Subparagraph (d)(1) of rule 12d3-1 defines ``securities
related activities'' to mean a person's activities as a broker,
dealer, underwriter, registered investment adviser or investment
adviser to a registered investment company.
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2. Applicants will offer to make available to the Investment
Managers, and if desired by the Investment Managers provide, managerial
services including distribution and marketing advice; guidance on
industry best practices; advice on planning, strategy and product
development; geographic expansion and mergers and acquisitions, joint
ventures, and liftouts; advice on operations, accounting, legal,
capital structure, human resources and compensation, general management
and industry networking. Neither the Applicants nor their affiliates
will provide any managerial assistance that includes any activity
involving any Investment Manager's investment process or investment
decisions.
3. The Company will provide debt capital to Investment Managers,
[[Page 827]]
including Investment Managers that are or may become registered under
the Investment Advisers Act of 1940. In exchange for a non-voting, non-
controlling loan from the Company or its affiliates (as defined below),
the Investment Manager will issue a participating convertible debt
security to the Company (each, a ``Note'' and such loan, a ``Loan'').
Each Note will have a coupon and will provide for repayment of
principal at the Note's maturity (such maturity is contemplated to be
20 years after the issue date) in the event that it is not converted
into equity of the underlying Investment Manager at such time. If
converted into equity, it is expected that in most cases the equity
security received from the conversion of the Notes would consist of
non-voting securities and in any case would not represent more than 25%
of outstanding voting securities, or otherwise constitute control, of
the underlying Investment Manager. The Notes will not be actively or
publicly traded; they will be purchased by the Company in private
transactions and, generally, held to maturity.
4. Applicants represent that most of the Investment Managers
issuing the Notes will be registered investment advisers and the vast
majority of each Investment Manager's revenue will be earned by
charging a fee on assets under management or possibly also through a
performance fee. The amount of the Company's investments in each of the
Notes, which Applicants believe will be treated as equity securities
for purposes of rule 12d3-1, will likely constitute more than 5% of the
outstanding equity securities of each Investment Manager at the time of
the investment. In the event the Company invests in Notes of an
Investment Manager that are treated as debt securities for purposes of
rule 12d3-1, the principal amount of that debt will likely exceed 10%
of the outstanding principal amount of the Investment Manager's debt
securities. In addition, Applicants believe that there will be
instances whereby more than 5% of the value of Applicant's total assets
will be invested in each of several of the Investment Managers.\4\
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\4\ In order to comply with the Internal Revenue Code's
diversification requirements for regulated investment companies, it
is contemplated that, with respect to at least 50% of the Company's
total assets, each of the investments in an Investment Manager will
not constitute more 5% of the Company's total assets at the time of
investment. However, with respect to the remaining 50% of the
Company's total assets, the Company intends to make investments that
each constitute more than 5% but less than 25% of the value of the
Company's total assets, as measured at the time of the acquisition.
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5. Applicants believe that permitting the Company to invest in the
equity and debt securities of various Investment Managers, each of
which the Applicants believe will be an issuer that derives more than
15% of its gross revenues from ``securities related activities,'' in
excess of the quantitative limitations set forth in rule 12d3-1(b)
would be in the best interests of the Company's shareholders.
Applicants will comply with all other requirements of rule 12d3-1.
Applicants will require each of the Investment Managers to
contractually agree to be bound by the terms of the conditions of the
application.
Applicants' Legal Analysis
1. Section 12(d)(3) of the Act, with limited exceptions, prohibits
a registered investment company from purchasing or otherwise acquiring
any securities issued by any person who is a broker, a dealer, is
engaged in the business of underwriting, or is either an investment
adviser of a registered investment company or a registered investment
adviser. Rule 12d3-1 under the Act exempts the acquisition of
securities of an issuer that derived more than 15% of its gross
revenues in its most recent fiscal year from ``securities related
activities,'' provided that, among other things, immediately after the
acquisition of such issuer's equity or debt securities, (i) the
acquiring company has invested not more than 5% of the value of its
total assets in securities of the issuer and (ii) the acquiring company
owns (a) with respect to that class of the issuer's equity securities,
not more than 5% of the outstanding securities of that class or (b)
with respect to the issuer's debt securities, not more than 10% of the
outstanding principal amount of the issuer's debt securities. Section
6(c) of the Act provides that the Commission may conditionally or
unconditionally exempt any person, security or transaction from any
provision of the Act or any rule thereunder, if and to the extent that
such exemption is necessary or appropriate in the public interest and
consistent with the protection of investors and the purposes fairly
intended by the policy and provisions of the Act.
2. The Applicants request an order pursuant to section 6(c) of the
Act exempting the Applicants from the provisions of section 12(d)(3) of
the Act to the extent necessary to permit the Applicants to invest in
the equity and debt securities of various Investment Managers, each an
issuer that derives more than 15% of its gross revenues from
``securities related activities,'' in excess of the quantitative
limitations set forth in rule 12d3-1(b).
3. The Applicants state that section 12(d)(3) was intended (a) to
prevent investment companies from exposing their assets to the
entrepreneurial risks of securities related businesses, (b) to prevent
potential conflicts of interest and to eliminate certain reciprocal
practices between investment companies and securities related
businesses, and (c) to ensure that investment companies maintain
adequate liquidity in their portfolios.
4. The Applicants believe that the Company's investment in various
Investment Managers does not raise the same type of entrepreneurial
risks that may have concerned Congress in enacting section 12(d)(3).
The Applicants state that the ownership structure of most securities
related businesses has changed since the time of enactment from
partnership to a corporate form resulting in the limited liability
status of these entities. In this case, the Company states that it will
invest only in Investment Managers organized as corporations or other
limited liability entities. The Applicants argue that shareholders
choosing to invest in the Company will have sought exposure to a
vehicle that that provides a non-diversified investment in one or more
Investment Managers, and the Company's shareholders will be informed of
the risks, including entrepreneurial risk, of investing in the Company
by disclosure in the Company's prospectus in connection with its
initial public offering and its ongoing disclosure as a public company
following the offering.
5. The Applicants also believe that the proposed investments in
various Investment Managers will not create potential conflicts of
interest for the Applicants or their respective shareholders. One
potential conflict could occur if an investment company purchased
securities or other interests in a broker-dealer to reward that broker-
dealer for selling fund shares, rather than solely on investment merit.
The Applicants note that, as a condition to the granting of exemptive
relief, the Investment Managers and their affiliated persons within the
meaning of section 2(a)(3) of the Act and affiliated persons of such
affiliated persons (collectively, ``Affiliates'') and the clients of
the Investment Manager will not buy, sell or otherwise trade any
securities issued by the Applicants or any of its Affiliates.
6. Applicant states that another potential conflict of interest is
that investment advisers could be influenced to recommend to their
clients certain investment companies that invest in
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such investment adviser or its affiliates, thereby using the assets of
the investment companies to boost the price of the investment adviser's
securities. Applicant notes that, as a condition to the requested
order, the Investment Managers and their Affiliates will not sell any
securities issued by the Applicants as an underwriter, will not make a
market in any securities issued by the Applicants, will not act as
agent or a broker in connection with the sale of any shares of the
Applicants and will not recommend investing in securities of the
Applicants.
7. The Applicants state that another purpose of section 12(d)(3) is
to prevent investment companies from directing brokerage to a broker-
dealer in which the investment company has invested to enhance the
broker-dealer's profitability or to assist it during financial
difficulty, even though that broker-dealer may not offer the best price
and execution. The Company represents that its business is to provide
specialized debt capital to Investment Managers. The Applicants also
represent that Investment Managers today typically do not serve as
underwriters and broker-dealers (except as noted above) and thus it is
highly unlikely that there would be any opportunity to engage in any
transaction with an Investment Manager or its Affiliates, other than
the Company's investment (and any follow-on investment) in such
Investment Manager. Further, as a condition to the requested order, the
Applicants will not use any Investment Manager or any Affiliate thereof
as a broker-dealer for the purchase or sale of any portfolio
securities.
8. The Applicants also believe that section 12(d)(3) reflects a
concern with respect to the liquidity of an investment company's
portfolio. Because the shareholders that will invest in the Company
prior to its initial public offering (each of which will be intimately
familiar with the business of the Company) will have done so for the
specific purpose of buying and holding a vehicle that would provide for
an investment in Investment Managers, liquidity of the Company's
portfolio is not a concern for the Company's shareholders. Furthermore,
shareholders that invest in the Company during or following the initial
public offering will receive disclosure (i) in the Company's prospectus
in connection with its initial public offering and (ii) pursuant to its
ongoing reporting requirements as a public company following its
initial public offering. Such disclosure will describe the fact that
the Company's business (like that of business development companies
generally) is investing in illiquid investments of small, developing
companies, and more specifically, purchasing Notes in Investment
Managers. Moreover, the Company is a closed-end investment company that
does not offer redeemable securities; therefore, there are no minimum
liquidity standards applicable to the Company under the Act.
9. Applicant believes that its proposed acquisitions of the
securities of various Investment Managers do not present the potential
for the risks and abuses section 12(d)(3) is intended to eliminate,
including the risk of reciprocal practices. The Applicants believe that
the standards set forth in section 6(c) have been met.
Applicants' Conditions
The Applicants agree that the order granting the requested relief
will be subject to the following conditions:
1. Neither of the Applicants and none of their respective
Affiliates will engage in any transaction with an Investment Manager
other than (i) the Company's investment in the Investment Manager (and
any follow-on investment) and (ii) the Company's providing managerial
assistance to an Investment Manager. The managerial assistance provided
by the Company or any of its Affiliates will not include any activity
involving any Investment Manager's investment process or investment
decisions.
2. No Investment Manager or its Affiliates or client of an
Investment Manager or its Affiliates will (i) buy, sell or otherwise
trade securities issued by the Applicants or any of their respective
Affiliates, or (ii) buy, sell or otherwise trade securities owned by
the Applicants or any of their respective Affiliates in transactions
involving the Applicants or any of their respective Affiliates. Nor
will any Investment Manager or its Affiliates sell any securities
issued or owned by the Applicants or any of their respective Affiliates
as an underwriter, make a market in any securities issued or owned by
the Applicants or act as agent or as a broker in connection with the
sale of any securities issued or owned by the Applicants or any of
their respective Affiliates or recommend to their clients the purchase
of any such securities.
3. Neither of the Applicants nor any of their respective Affiliates
will use any Investment Manager or any Affiliate thereof as a broker-
dealer for the purchase or sale of any portfolio securities.
4. No Investment Manager or its Affiliates will provide any
services to the Applicants or any of their respective Affiliates.
5. No officer of the Applicants or member of the Applicants' board
of managers (``Board'') will be affiliated with an Investment Manager
or its Affiliates. The Applicants, their respective Affiliates or their
officers or directors will not (i) serve on the board of directors of
an Investment Manager, (ii) participate in the management of an
Investment Manager (except for providing managerial assistance) or
(iii) have other indicia of control as defined in the Act (other than
typical rights of debt holders, including, but not limited to, access
to certain information). The only affiliation the Applicants (or any of
their respective officers or members) will have will be as a provider
of debt capital.
6. The Applicants' respective Chief Compliance Officers will
monitor and report to the applicable Applicant's Board no less than
annually on compliance with these conditions.
7. The Applicants will comply with the provisions of rule 12d3-1
under the Act, except for paragraph (b) solely to the extent necessary
to permit the Company to invest (i) more than 5% of the value of its
total assets in equity securities issued by a registered investment
adviser, (ii) in more than 5% of the outstanding equity securities of a
registered investment adviser, and (iii) in more than 10% of the
outstanding principal amount of a registered investment adviser's debt
securities, provided that, (aa) immediately after the Company makes an
investment permitted by (i) and/or (ii), not more than 50% of the value
of the Company's total assets will consist of investments permitted by
(i) and/or (ii), (bb) in no event will the Company acquire more than
25% of the outstanding voting securities of a registered investment
adviser or otherwise control a registered investment adviser, and (cc)
immediately after the Company makes an investment permitted by (iii),
not more than 10% of the value of the Company's total assets will
consist of investments permitted by (iii).\5\
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\5\ For the purposes of this paragraph, the terms ``equity
security'' and ``debt securities'' have the meanings given them in
Rule 12d3-1.
For the Commission, by the Division of Investment Management,
under delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-33859 Filed 1-5-12; 8:45 am]
BILLING CODE 8011-01-P