[Federal Register Volume 77, Number 25 (Tuesday, February 7, 2012)]
[Notices]
[Pages 6156-6160]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-2670]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 29941; 812-13634]
Rand Capital Corporation, et al.; Notice of Application
February 1, 2012.
AGENCY: Securities and Exchange Commission (the ``Commission'').
ACTION: Notice of an application for an order under sections 6(c),
12(d)(1)(J), and 57(c) of the Investment Company Act of 1940 (``Act'')
granting exemptions from sections 12(d)(1)(A) and (C), 18(a),
[[Page 6157]]
21(b), 57(a)(1)-(a)(3), and 61(a) of the Act; under section 57(i) of
the Act and rule 17d-1 under the Act to permit certain joint
transactions otherwise prohibited by section 57(a)(4) of the Act; and
under section 12(h) of the Securities Exchange Act of 1934 (``Exchange
Act'') granting an exemption from section 13(a) of the Exchange Act.
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Applicants: Rand Capital Corporation (``Rand'') and Rand Capital SBIC,
Inc. (``Rand SBIC'').
Summary of Application: Applicants request an order permitting a parent
business development company (``BDC'') and its wholly-owned small
business investment company (``SBIC'') subsidiary and any future
wholly-owned BDC subsidiaries (``Future Subsidiaries'') to engage in
certain transactions that otherwise would be permitted if such parent
BDC and its subsidiaries were one company and to file certain reports
on a consolidated basis, and permitting such parent BDC to adhere to a
modified asset coverage requirement.
DATES: Filing Dates: The application was filed on February 6, 2009 and
amended on August 5, 2009, September 8, 2011 and January 10, 2012.
Hearing or Notification of Hearing: An order granting the
application 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 pm on February 27, 2012, and should be accompanied by proof of
service on 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, U.S. Securities and Exchange Commission, 100 F
Street NE., Washington, DC 20549-1090. Applicants, c/o Allen F. Grum,
Rand Capital Corporation, 2200 Rand Building, Buffalo, NY 14203.
FOR FURTHER INFORMATION CONTACT: Keith A. Gregory, Senior Counsel, at
(202) 551-6815, or Mary Kay Frech, Branch Chief, 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 an applicant
using the Company name box, at http://www.sec.gov/search/search.htm or
by calling (202) 551-8090.
Applicants' Representations
1. Rand, a New York corporation, is an internally managed, non-
diversified, closed-end investment company that has elected to be
regulated as a BDC under the Act.\1\ Rand's principal business is to
make venture capital investments in small, early-stage and developing
enterprises. Rand's principal objective is long-term capital
appreciation. Rand typically invests in debt securities and
concurrently acquires equity interests in the form of stock, warrants
or stock options or the right to convert debt securities into stock.
Rand has a six member board of directors (``Rand Board''), five of whom
are not ``interested persons'' of Rand within the meaning of section
2(a)(19) of the Act. The Rand Board appoints Rand's president and chief
executive officer and its executive vice president and chief financial
officer (collectively, the ``Principal Officers''). Subject to the
oversight of the Rand Board, the Principal Officers make all investment
decisions for Rand.
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\1\ Section 2(a)(48) of the Act defines a BDC to be any closed-
end investment company that operates for the purpose of making
investments in securities described in sections 55(a)(1) through
55(a)(3) of the Act and makes available significant managerial
assistance with respect to the issuers of such securities.
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2. Rand SBIC, a New York corporation, is an SBIC licensed by the
Small Business Administration (``SBA'') to operate under the Small
Business Investment Act of 1958 (``SBA Act''). Rand SBIC is registered
as an investment company under the Act and will elect to be regulated
as a BDC prior to relying on the requested order. Rand SBIC has the
same investment purposes and will invest in the same kinds of
securities as Rand.
3. Rand SBIC is a wholly-owned subsidiary of Rand, which owns all
of its outstanding voting stock. The Rand Board annually elects the
same persons who comprise the Rand Board to serve on the board of
directors of Rand SBIC. Pursuant to a by-law provision required by the
SBA, Rand SBIC is required to maintain an investment committee
consisting of the Principal Officers that has responsibility for all
investment decisions by Rand SBIC. Rand SBIC's operations have been and
will be consolidated with those of Rand for financial reporting and tax
purposes.
4. Rand may in the future create wholly-owned Future Subsidiaries
each of which (i) will be a BDC, and (ii) may be licensed by the SBA to
operate as an SBIC (collectively with Rand SBIC, the ``SBIC
Subsidiaries'') or may not be an SBIC.\2\ Any future SBIC Subsidiary
will be operated in the same manner as Rand SBIC and will be subject to
the requirements of the SBA Act and the SBA regulations. Rand SBIC, the
SBIC Subsidiaries and the Future Subsidiaries are collectively referred
to as the ``Subsidiaries.''
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\2\ All existing entities that currently intend to rely on the
order have been named as applicants. Any other existing or future
entity that subsequently relies on the order will comply with the
terms [and conditions] of the application.
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Applicants' Legal Analysis
1. Applicants request an order under sections 6(c), 12(d)(1)(J),
57(c) and 57(i) of the Act and rule 17d-1 under the Act granting
exemptions from sections 12(d)(1), 18(a), 21(b), 57(a)(1), 57(a)(2),
57(a)(3), 57(a)(4), and 61(a) of the Act to permit Rand, Rand SBIC and
any Future Subsidiary to engage in certain transactions that otherwise
would be permitted if Rand and its Subsidiaries were one company and to
permit Rand to adhere to a modified asset coverage requirement.
Applicants also request an exemption under section 12(h) of the
Exchange Act for an exemption from section 13(a) of the Exchange Act.
2. Section 12(d)(1)(A) of the Act, made applicable to BDCs by
section 60 of the Act, limits the amount of securities a registered
investment company or BDC may hold of other investment companies.
Section 12(d)(1)(C) of the Act limits the amount of securities of a
closed-end investment company that may be acquired by an investment
company. Rule 60a-1 exempts a BDC's acquisition of the securities of a
wholly-owned SBIC subsidiary from sections 12(d)(1)(A) and (C).
Accordingly, the acquisition of Rand SBIC securities by Rand will be
exempt from the provisions of sections 12(d)(1)(A) and 12(d)(1)(C) by
virtue of rule 60a-1.
3. Applicants state that section 12(d)(1) would prohibit the
acquisition by Rand of the debt or equity securities of, or the making
of loans by Rand to, Future Subsidiaries that are not SBICs. Applicants
state that section 12(d)(1) would also prohibit the acquisition of debt
securities of Rand by any such Future Subsidiary since they would each
be a BDC and an entity controlled by a BDC. Thus, the making of loans
or advances by Rand SBIC or a Future Subsidiary to Rand might be deemed
to violate section 12(d)(1) if the loans or
[[Page 6158]]
advances are construed as purchases by the Subsidiary of the securities
of Rand.
4. Applicants request an exemption under section 12(d)(1)(J) from
section 12(d)(1) to permit: (1) The purchase of debt or equity
securities of, or a contribution to capital to, a Future Subsidiary
that is not an SBIC by Rand, (ii) the making of loans or advances by
any Subsidiary to Rand or to any other Subsidiary, and (iii) the
acquisition by the Subsidiaries of any securities of Rand representing
indebtedness or any securities representing indebtedness issued by any
of the other Subsidiaries. Section 12(d)(1)(J) of the Act provides that
the Commission may exempt persons or transactions from any provision of
section 12(d)(1) if and to the extent such exception is consistent with
the public interest and the protection of investors. Applicants state
that the requested relief meets this standard because the Subsidiaries
are wholly-owned and this status and the consolidated financial
reporting with Rand will eliminate the possibility of overreaching and
prevent confusion as to the financial status of Rand to Rand's
shareholders, who are the investors that the Act is intended to
protect.
5. Section 18(a) prohibits a registered closed-end investment
company from issuing any class of senior security or selling any such
security of which it is the issuer unless the company complies with the
asset coverage requirements set forth in that section. Section 61(a) of
the Act makes section 18 applicable to BDCs, with certain
modifications. Section 18(k) exempts an investment company operating as
an SBIC from the asset coverage requirements of section 18(a)(1)(A) and
(B) (with respect to senior securities representing indebtedness).
6. Applicants state that a question exists as to whether Rand must
comply with the asset coverage requirements of section 18(a) (as
modified by section 61(a)) on a consolidated basis because Rand may be
deemed to be an indirect issuer of any class of senior security
representing indebtedness issued by any Subsidiary. For Rand to comply
with these asset coverage requirements would mean that, with certain
exceptions, Rand would treat as its own all assets held directly by
Rand and the Subsidiaries and any liabilities of the Subsidiaries,
including liabilities of the Subsidiaries with respect to senior
securities as to which any of the Subsidiaries is exempt from the asset
coverage requirements of section 18(a)(1)(A) and (B) by virtue of
section 18(k). Accordingly, applicants request relief under section
6(c) of the Act from sections 18(a) and 61(a) to permit Rand to exclude
from its consolidated asset coverage ratio any SBA preferred stock
interest in any of the Subsidiaries (if applicable) and any senior
security representing indebtedness issued by any Subsidiary.
7. Section 6(c) of the Act, in relevant part, permits the
Commission to exempt any transaction or class of transactions from any
provision of the Act 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. Applicants state that the requested relief
satisfies the section 6(c) standards. Applicants state that, without
the requested relief from sections 18(a) and 61(a), the ability of an
SBIC Subsidiary to obtain the kind of financing that would be available
to Rand if it were to conduct the SBIC operations itself would be
restricted. Moreover, the exclusion by Rand from its consolidated asset
coverage ratio of any senior security representing indebtedness that is
issued by an SBIC Subsidiary would not harm the public interest because
the SBA regulates the leverage and capital structure of the SBIC
Subsidiaries.
8. Sections 57(a)(1) and (2) of the Act generally prohibit, with
certain exceptions, sales or purchases of any security or other
property between BDCs and certain of their affiliates as described in
section 57(b) of the Act. Section 57(b) includes a person, directly or
indirectly, either controlling, controlled by or under common control
with the BDC. Applicants state that Rand directly owns all of each
Subsidiary's outstanding voting stock. Applicants further state that
each of the Subsidiaries and Rand may be deemed to be under the common
control of the Rand Board and the Principal Officers. Accordingly, Rand
and the Subsidiaries are related to each other in the manner described
in section 57(b). In addition, each Subsidiary would also be a person
related to each other Subsidiary in a manner described in section 57(b)
as long as they remain under the common control of Rand.
9. Applicants state that there may be circumstances when it is in
the interest of Rand and its shareholders that one or more of the
Subsidiaries invest in securities of an issuer that may be deemed to be
a controlled portfolio affiliate of Rand or another Subsidiary or that
Rand invest in securities of an issuer that may be deemed to be a
controlled portfolio affiliate of a Subsidiary. Applicants therefore
request an exemption from sections 57(a)(1) and 57(a)(2) of the Act to
permit any transaction between Rand and any Subsidiary, and any
transaction between a Subsidiary and any other Subsidiary, with respect
to the purchase or sale of securities or other property. Applicants
also seek an exemption from these provisions to allow any purchase or
sale transaction between Rand and a controlled portfolio affiliate of
any Subsidiary, and a purchase or sale transaction between a Subsidiary
and a controlled portfolio affiliate of Rand or another Subsidiary.
Applicants state that the requested relief is intended only to permit
Rand and the Subsidiaries to do that which they otherwise would be
permitted to do if they were one company.
10. Section 57(c) provides that the Commission will exempt a
proposed transaction from the provisions of section 57(a)(1) and (2) of
the Act if the terms of the proposed transaction, including the
consideration to be paid or received, are reasonable and fair and do
not involve overreaching of any person concerned, and the proposed
transaction is consistent with the policy of the BDC concerned and the
general purposes of the Act.
11. Applicants submit that the requested relief from section
57(a)(1) and (2) meets this standard. Applicants represent that the
proposed operations as one company will enhance efficient operations of
Rand and its wholly owned Subsidiaries, and allow them to deal with
portfolio companies as if Rand and such Subsidiaries were one company.
Applicants contend that the terms of the proposed transactions are
reasonable and fair and do not involve overreaching of Rand or its
stockholders or its stockholders by any person, and that the requested
order would permit Rand and the Subsidiaries to carry out more
effectively their purposes and objectives of investing primarily in
small business concerns. Finally, applicants note that the proposed
transactions are consistent with the policies of Rand and Rand SBIC as
specified in filings with the Commission and Rand's reports to
shareholders, as well as consistent with the policies and provisions of
the Act.
12. Section 57(a)(3) of the Act makes it unlawful for certain
affiliated persons of a BDC, and certain affiliated persons of those
persons, to borrow money or other property from such BDC or from any
company controlled by the BDC, except as permitted by section 21(b) or
section 62. Section 21(b) of the Act (made applicable to BDCs by
section 62) provides that it shall be unlawful for a BDC to lend any
money or property, directly or indirectly, to any person that controls
or is under common control
[[Page 6159]]
with the BDC, except for loans to any company that owns all of the
outstanding securities of the BDC (other than directors' qualifying
shares).
13. Rand is an affiliated person of each of the Subsidiaries by
reason of its direct ownership of all of the outstanding voting capital
stock of the Subsidiaries. Each of the Subsidiaries is an affiliated
person of Rand because they are deemed to be under the control of Rand.
Each of the Subsidiaries is an affiliated person of each other
Subsidiary because they are deemed to be under the common control of
Rand. In addition, each of the directors and Principal Officers of Rand
are also or will be the directors and principal officers of Rand SBIC
and the Future Subsidiaries, so that Rand and the Subsidiaries may be
deemed to be under common control.
14. Applicants state that there may be instances when it would be
in the best interests of Rand and its shareholders for Rand to make
loans to one of more of the Subsidiaries or for the Subsidiaries to
make loans to Rand or each other. Applicants note that, in the case of
loans from Rand to the Subsidiaries or loans from the Subsidiaries to
each other, the loans may be prohibited by section 21(b) because Rand
and the Subsidiaries may be deemed to be under common control.
Applicants state that in the case of loans from a Subsidiary to Rand,
the loans would be prohibited by section 21(b) and section 57(a)(3)
because the borrower controls the lender and the lender may have
outstanding securities not owned by the borrower.
15. Accordingly, applicants request an order under section 6(c) to
exempt from the provisions of section 21(b) the lending of money or
other property by Rand to the Subsidiaries and by the Subsidiaries to
Rand or another Subsidiary. Applicants argue that because these
transactions are solely between Rand and its wholly-owned Subsidiaries,
they will have no substantive economic effect and there will be no
basis for overreaching or harm to the public interest. Applicants also
request an order under section 57(c) to exempt the borrowing of money
or other property by Rand or a Subsidiary from any other Subsidiary
from the provisions of section 57(a)(3). Applicants submit that the
requested relief meets the standards of section 6(c) and 57(c).
16. Applicants also request relief from section 21(b) under section
6(c) to exempt any lending of money or other property by Rand or a
Subsidiary to portfolio companies of any Subsidiary controlled by the
Subsidiary or portfolio companies of Rand controlled by Rand. The
requested exemption is intended to permit Rand and the Subsidiaries to
do that which they otherwise would be permitted to do if they were one
company, as opposed to each of the Subsidiaries being a wholly-owned
Subsidiary of Rand.
17. Section 17(d) of the Act and rule 17d-1 under the Act (made
applicable to BDCs by section 57(i)) prohibit affiliated persons of a
registered investment company, or an affiliated person of such person,
acting as principal, from participating in any joint transaction or
arrangement in which the registered company or a company it controls is
a participant, unless the Commission has issued an order authorizing
the arrangement. Section 57(a)(4) of the Act imposes substantially the
same prohibitions on joint transactions involving any BDC and an
affiliated person of such BDC, or an affiliated person of such
affiliated person, as specified in section 57(b) of the Act. Section
57(i) of the Act provides that rules and regulations under section
17(d) of the Act will apply to transactions subject to section 57(a)(4)
in the absence of rules under that section. The Commission has not
adopted rules under section 57(a)(4) with respect to joint transactions
and, accordingly, the standards set forth in rule 17d-1 govern
applicants' request for relief.
18. Applicants request relief under section 57(i) and rule 17d-1 to
permit any joint transaction that would otherwise be prohibited by
section 57(a)(4), in which a Subsidiary and Rand or another Subsidiary
participate, but only to the extent that the transaction would not be
prohibited if the Subsidiaries were deemed to be a part of Rand and not
separate companies.
19. In determining whether to grant an order under section 57(i)
and rule 17d-1, the Commission considers whether the participation of
the BDC in the joint transaction is consistent with the provisions,
policies, and purposes of the Act, and the extent to which such
participation is on a basis different from or less advantageous than
that of other participants. Applicants note that the proposed
transactions are consistent with the policy and provisions of the Act
and will enhance the interests of Rand and its stockholders while
retaining the important protections afforded by the Act. In addition,
because the joint participants will conduct their operations as though
they comprise one company, the participation of one will not be on a
basis different from or less advantageous than the others. Accordingly,
applicants believe that the standard for relief under section 57(i) and
rule 17d-1 is satisfied.
20. Section 54 of the Act provides that a closed-end company may
elect BDC treatment under the Act if the company has either a class of
equity securities registered under section 12 of the Exchange Act or
has filed a registration statement pursuant to section 12 of the
Exchange Act for a class of its equity securities. Section 12(g) of the
Exchange Act requires issuers with specified assets and a specified
number of security holders to register under the Exchange Act. Rand has
elected to be regulated as a BDC and its common stock is deemed
registered under section 12(g)(1) of the Exchange Act. Rand SBIC will
elect to be regulated as a BDC under the Act prior to relying on the
order, and such election will cause Rand SBIC's common stock to be
registered under the Exchange Act by operation of rule 12g-2 under the
Exchange Act.
21. By filing a registration statement under section 12 of the
Exchange Act, absent an exemption, Rand SBIC and each Future Subsidiary
would be required by section 13(a) of the Exchange Act to file
periodically with the Commission, even though their sole shareholder
will be Rand. Accordingly, applicants request an order under section
12(h) of the Exchange Act exempting Rand SBIC and each Future
Subsidiary from the reporting requirements of section 13(a) of the
Exchange Act to permit the filing of consolidated reports with Rand.
22. Section 12(h) of the Exchange Act provides that the Commission
may exempt an issuer from section 13 of the Exchange Act if the
Commission finds that by reason of the number of public investors,
amount of trading interest in the securities, the nature and extent of
the activities of the issuer, income or assets of the issuer, or
otherwise, that such action is not inconsistent with the public
interest or the protection of investors. Each of the Subsidiaries will
have only one investor, which is itself a reporting company, and no
public investors. There will be no trading in the Subsidiaries
securities, so no public interest or investor protective purpose will
be served by separate Subsidiary reporting. Further, applicants state
that the nature and extent of the Subsidiaries' activities are such
that their activities will be fully reported through consolidated
reporting in accordance with normal accounting rules. Accordingly,
applicants believe that the requested exemption meets the standards of
section 12(h) of the Exchange Act.
[[Page 6160]]
Applicants' Conditions
Applicants agree that the requested order will be subject to the
following conditions:
1. Rand will at all times own and hold, beneficially and of record,
all of the outstanding voting capital stock of each of the
Subsidiaries.
2. The Subsidiaries will have investment policies not inconsistent
with those of Rand, as set forth in Rand's registration statement.
3. No person shall serve as investment adviser or principal
underwriter to Rand SBIC or any Subsidiary unless the Rand Board and
the shareholders of Rand shall have taken the same action with respect
thereto also required to be taken by the board of directors and the
sole shareholder of such Subsidiary.
4. Rand will not itself issue or sell any senior security, and Rand
will not cause or permit any Subsidiary to issue or sell any senior
security of which Rand or such Subsidiary is the issuer except to the
extent permitted by section 18 (as modified for BDCs by section 61) of
the Act; provided that immediately after the issuance or sale of any
such senior security by either Rand or any Subsidiary, Rand and its
Subsidiaries on a consolidated basis, and Rand individually, shall have
the asset coverage required by section 18(a) (as modified for BDCs by
section 61(a)), except that, in determining whether Rand and its
Subsidiaries on a consolidated basis have the asset coverage required
by section 61(a), any SBA preferred stock interest in any SBIC
Subsidiary and any borrowings by any SBIC Subsidiary shall not be
considered senior securities and, for purposes of the definition of
``asset coverage'' in section 18(h), shall be treated as indebtedness
not represented by senior securities.
5. No person shall serve as a member of any board of directors of
any Subsidiary unless such person shall also serve as a member of the
Rand Board. The board of directors of any Subsidiary will be elected by
Rand as the sole shareholder of such Subsidiary.
6. Rand and any Subsidiary will acquire securities representing
indebtedness of Rand SBIC or any SBIC Subsidiary only if, in each case,
the prior approval of the SBA has been obtained. In addition, the SBIC
Subsidiaries, on the one hand, and Rand or any other Subsidiary on the
other hand, will purchase and sell portfolio securities between
themselves only if, in each case, the prior approval of the SBA has
been obtained.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-2670 Filed 2-6-12; 8:45 am]
BILLING CODE 8011-01-P