[Federal Register Volume 78, Number 192 (Thursday, October 3, 2013)]
[Notices]
[Pages 61404-61407]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-24239]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-30739; File No. 812-14061]
Stellus Capital Investment Corporation, et al.; Notice of
Application
September 30, 2013.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of application for an order under section 57(a)(4) and
57(i) of the Investment Company Act of 1940 (the ``Act'') and rule 17d-
1 under the Act to permit certain joint transactions otherwise
prohibited by section 57(a)(4) of the Act.
-----------------------------------------------------------------------
Summary of Application: Applicants request an order to permit a
business development company (``BDC'') to co-invest with certain
affiliated investment funds in portfolio companies.
Applicants: Stellus Capital Investment Corporation (the ``Company''),
Stellus Credit Fund I, LP (the ``Existing Fund''), Stellus Credit Fund
GP, LLC (the ``Fund GP'') and Stellus Capital Management, LLC (the
``Adviser'').
DATES: Filing Dates: The application was filed on July 20, 2012, and
amended on January 10, 2013, May 22, 2013, September 20, 2013, and
September 26, 2013.
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 October 22, 2013 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: Elizabeth M. Murphy, Secretary, U.S. Securities and Exchange
Commission, 100 F St. NE., Washington, DC 20549-1090. Applicants:
Robert T. Ladd, Stellus Capital Investment Corporation, 4400 Post Oak
Parkway, Suite 2200, Houston, TX 77027.
FOR FURTHER INFORMATION CONTACT: Barbara T. Heussler, Senior Counsel,
at (202) 551-6990, or Jennifer L. Sawin, Branch Chief, at (202) 551-
6821 (Exemptive Applications Office, Division of Investment
Management).
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 is an externally managed, non-diversified, closed-
end management investment company that has elected to be regulated as a
BDC under the Act.\1\ The Company's investment objective is to maximize
total return to its stockholders in the form of current income and
capital appreciation by primarily investing in private middle-market
companies (typically with $5 million to $50 million of EBITDA) through
first lien, second lien, unitranche and mezzanine debt financing and
corresponding equity investments. The Company's board of directors
currently consists of seven members (the ``Board''), four of whom are
not ``interested persons'' of the Company within the meaning of section
2(a)(19) of the Act (the ``Independent Directors'').
---------------------------------------------------------------------------
\1\ Section 2(a)(48) 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.
---------------------------------------------------------------------------
2. The Adviser is registered as an investment adviser under the
Investment Advisers Act of 1940 (the ``Advisers Act''). The Adviser
serves as investment adviser to the Company pursuant to an investment
advisory agreement and also serves as investment adviser to each
Fund.\2\
---------------------------------------------------------------------------
\2\ ``Fund'' means (i) the Existing Fund and (ii) any Future
Fund. Future Fund means an entity (i) whose investment adviser is
the Adviser; and (ii) that would be an investment company but for
section 3(c)(1) or 3(c)(7) of the Act.
---------------------------------------------------------------------------
3. The Existing Fund was formed as a Delaware limited partnership.
In reliance on the exclusion from the definition of ``investment
company'' provided by section 3(c)(1) or 3(c)(7) of the Act, none of
the Funds will be registered under the Act. The Existing Fund and any
Future Fund that co-invests with the Company has, or will have,
investment objectives and strategies that are identical to the
Company's Objectives and Strategies.\3\
---------------------------------------------------------------------------
\3\ ``Objectives and Strategies'' means the Company's investment
objectives and strategies, as described in the Company's
registration statement on Form N-2, other filings the Company has
made with the Commission under the Securities Act of 1933, as
amended (the ``1933 Act'') or under the Securities Exchange Act of
1934, as amended, and the Company's reports to stockholders.
---------------------------------------------------------------------------
[[Page 61405]]
4. Applicants request relief permitting the Company, on the one
hand, and one or more Funds, on the other hand, to participate in the
same investment opportunities through a proposed co-investment program
where such participation would otherwise be prohibited under section
57(a)(4) and the rules under the Act (the ``Co-Investment
Program'').\4\ For purposes of the application, a ``Co-Investment
Transaction'' means any transaction in which the Company or a Wholly-
Owned Investment Sub (as defined below) participated together with one
or more Funds in reliance on the requested order (the ``Order'').
``Potential Co-Investment Transaction'' means any investment
opportunity in which the Company or a Wholly-Owned Investment Sub could
not participate together with one or more Funds without obtaining and
relying on the Order.
---------------------------------------------------------------------------
\4\ All existing entities that currently intend to rely on the
Order (as defined below) have been named as applicants and any
entities that may rely on the Order in the future will comply with
the terms and conditions of the application.
---------------------------------------------------------------------------
5. The Company may, from time to time, form one or more Wholly-
Owned Investment Subs.\5\ Such a subsidiary would be prohibited from
investing in a Co-Investment Transaction with any Fund because it would
be a company controlled by the Company for purposes of section 57(a)(4)
and rule 17d-1. Applicants request that each Wholly-Owned Investment
Sub be permitted to participate in Co-Investment Transactions in lieu
of the Company and that the Wholly-Owned Investment Sub's participation
in any such transaction be treated, for purposes of the Order, as
though the Company were participating directly. Applicants represent
that this treatment is justified because a Wholly-Owned Investment Sub
would have no purpose other than serving as a holding vehicle for the
Company's investments and, therefore, no conflicts of interest could
arise between the Company and the Wholly-Owned Investment Sub. The
Board would make all relevant determinations under the conditions with
regard to a Wholly-Owned Investment Sub's participation in a Co-
Investment Transaction, and the Board would be informed of, and take
into consideration, any proposed use of a Wholly-Owned Investment Sub
in the Company's place. If the Company proposes to participate in the
same Co-Investment Transaction with any of its Wholly-Owned Investment
Subs, the Board will also be informed of, and take into consideration,
the relative participation of the Company and the Wholly-Owned
Investment Sub.
---------------------------------------------------------------------------
\5\ The term ``Wholly-Owned Investment Sub'' means an entity (a)
whose sole business purpose is to hold one or more investment on
behalf of the Company (and, in the case of an SBIC Subsidiary (as
defined below), maintain a license under the SBA Act (as defined
below) and issue debentures guaranteed by the SBA (as defined
below)), (b) that is wholly-owned by the Company (with the Company
at all times holding, beneficially and of record, 100% of the voting
and economic interests), (c) with respect to which the Board has the
sole authority to make all determinations with respect to the
entity's participation under the conditions to the application, and
(d) that would be an investment company but for section 3(c)(1) or
3(c)(7) of the Act. All subsidiaries of the Company participating in
Co-Investment Transactions will be Wholly-Owned Investment Subs and
will have Objectives and Strategies that are either the same as, or
a subset of, the Company's Objectives and Strategies. The term
``SBIC Subsidiary'' means a Wholly-Owned Subsidiary that is licensed
by the Small Business Administration (the ``SBA'') to operate under
the Small Business Investment Act of 1958, as amended, (the ``SBA
Act'') as a small business investment company (an ``SBIC'').
---------------------------------------------------------------------------
6. Each Potential Co-Investment Transaction would be allocated
among the Company, on the one hand, and the Funds, on the other hand.
In selecting investments for the Company, the Adviser will consider
only the investment objective, investment policies, investment
position, capital available for investment, and other pertinent factors
applicable to the Company. Likewise, when selecting investments for the
Funds, the Adviser will select investments considering, in each case,
only the investment objective, investment policies, investment
position, capital available for investment, and other pertinent factors
applicable to that particular investing entity. However, as described
herein, each of the Funds has, or will have, investment objectives and
strategies that are identical to the Company's Objectives and
Strategies. Therefore, for each investment that falls within the
Objectives and Strategies and is a Potential Co-Investment Transaction,
the Company intends to co-invest with the Funds, with certain
exceptions based on available capital or diversification. Each
Potential Co-Investment Transaction and the proposed allocation of each
investment opportunity would be approved prior to the actual investment
by the Required Majority.\6\
---------------------------------------------------------------------------
\6\ ``Required Majority'' has the meaning provided in section
57(o) of the Act. The term ``Eligible Directors'' means the
directors who are eligible to vote under section 57(o).
---------------------------------------------------------------------------
7. All subsequent activity (i.e. to sell, exchange or otherwise
dispose of an investment or to complete a Follow-On Investment (as
defined below) in respect of an investment acquired in a Co-Investment
Transaction will also be made in accordance with the terms and
conditions set forth in the application.\7\ The Company may participate
in a pro rata disposition or Follow-On Investment without obtaining
prior approval of the Required Majority, if, among other things: (i)
The proposed participation of each Fund and the Company in such
disposition or Follow-On Investment is proportionate to its outstanding
investments in the issuer immediately preceding the disposition or
Follow-On Investment, as the case may be; and (ii) the Board has
approved the Company's participation in pro rata dispositions and
Follow-On Investments as being in the best interests of the Company. In
addition, no Independent Director will have any direct or indirect
financial interest in any Co-Investment Transaction or any interest in
any portfolio company, other than through an interest (if any) in the
securities of the Company.
---------------------------------------------------------------------------
\7\ ``Follow-On Investment'' means any additional investment in
an existing portfolio company, including the exercise of warrants,
conversion privileges or other similar rights to acquire additional
securities of the portfolio company.
---------------------------------------------------------------------------
Applicants' Legal Analysis:
1. Section 57(a)(4) of the Act prohibits certain affiliated persons
of a BDC from participating in joint transactions with the BDC in
contravention of rules as prescribed by the Commission. Under section
57(b)(2) of the Act, any person who is directly or indirectly
controlling, controlled by, or under common control with a BDC is
subject to section 57(a)(4). Applicants submit that each of the Funds
could be deemed to be a person related to the Company in a manner
described by section 57(b) by virtue of being under common control with
the Company.
2. Section 57(i) of the Act provides that, until the Commission
prescribes rules under section 57(a)(4), the Commission's rules under
section 17(d) of the Act applicable to registered closed-end investment
companies will be deemed to apply to BDCs. Because the Commission has
not adopted any rules under section 57(a)(4), rule 17d-1 applies.
3. Section 17(d) of the Act and rule 17d-1 under the Act prohibit
affiliated persons of a registered investment company from
participating in joint transactions with the company unless the
Commission has granted an order permitting such transactions. Rule 17d-
1, as made applicable to BDCs by section 57(i), prohibits any person
who is related to a BDC in a manner described in section 57(b), acting
as principal, from participating in, or effecting any transaction in
connection with, any joint enterprise or other joint arrangement or
profit-sharing plan in
[[Page 61406]]
which the BDC is a participant, absent an order from the Commission. In
passing upon applications under rule 17d-1, the Commission considers
whether the company's participation 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.
4. Applicants state that they expect that co-investment in
portfolio companies by the Company and the Funds will increase the
number of favorable investment opportunities for the Company and that
the Co-Investment Program will be implemented only if the Required
Majority approves it.
5. Applicants submit that the Required Majority's approval of each
Co-Investment Transaction before investment, and other protective
conditions set forth in the application, will ensure that the Company
will be treated fairly. Applicants state that the Company's
participation in the Co-Investment Transactions will be consistent with
the provisions, policies, and purposes of the Act and on a basis that
is not different from or less advantageous than that of other
participants.
Applicants' Conditions:
Applicants agree that any order granting the requested relief will
be subject to the following conditions:
1. Each time the Adviser considers a Potential Co-Investment
Transaction for a Fund that falls within the Company's then current
Objectives and Strategies, the Adviser will make an independent
determination of the appropriateness of the investment for the Company
in light of the Company's then-current circumstances.
2. (a) If the Adviser deems the Company's participation in any
Potential Co-Investment Transaction to be appropriate for the Company,
it will then determine an appropriate level of investment for the
Company.
(b) If the aggregate amount recommended by the Adviser to be
invested in the Potential Co-Investment Transaction by the Company,
together with the amount proposed to be invested by the Funds,
collectively, in the same transaction, exceeds the amount of the
investment opportunity, the amount proposed to be invested by each
party will be allocated among them pro rata based on each party's total
assets, up to the amount proposed to be invested by each. The Adviser
will provide the Eligible Directors with information concerning each
participating Fund's total assets to assist the Eligible Directors with
their review of the Company's investments for compliance with these
allocation procedures.
(c) After making the determinations required in conditions 1 and
2(a), the Adviser will distribute written information concerning the
Potential Co-Investment Transaction, (including the amount proposed to
be invested by each Fund), to the Eligible Directors for their
consideration. The Company will co-invest with one or more Funds only
if, prior to participating in the Potential Co-Investment Transaction,
a Required Majority concludes that:
(i) The terms of the transaction, including the consideration to be
paid, are reasonable and fair to the Company and its shareholders and
do not involve overreaching in respect of the Company or its
shareholders on the part of any person concerned;
(ii) the transaction is consistent with
(A) the interests of the shareholders of the Company; and
(B) the Company's then-current Objectives and Strategies;
(iii) the investment by the Funds would not disadvantage the
Company, and participation by the Company would not be on a basis
different from or less advantageous than that of the Funds; provided,
that, if any Fund, but not the Company itself, gains the right to
nominate a director for election to a portfolio company's board of
directors or the right to have a board observer or any similar right to
participate in the governance or management of the portfolio company,
such event shall not be interpreted to prohibit the Required Majority
from reaching the conclusions required by this condition (2)(c)(iii),
if
(A) the Eligible Directors will have the right to ratify the
selection of such director or board observer, if any;
(B) the Adviser agrees to, and does, provide periodic reports to
the Board with respect to the actions of the director or the
information received by the board observer or obtained through the
exercise of any similar right to participate in the governance or
management of the portfolio company; and
(C) any fees or other compensation that any Fund or any affiliated
person of any Fund receives in connection with the right of the Fund to
nominate a director or appoint a board observer or otherwise to
participate in the governance or management of the portfolio company
will be shared proportionately among the participating Funds (who may,
in turn, share their portion with their affiliated persons) and the
Company in accordance with the amount of each party's investment; and
(iv) the proposed investment by the Company will not benefit the
Adviser or the Funds or any affiliated person of any of them (other
than the parties to the Co-Investment Transaction), except (A) to the
extent permitted by condition 13, (B) to the extent permitted by
section 17(e) or 57(k) of the Act, as applicable, (C) indirectly, as a
result of an interest in securities issued by one of the parties to the
Co-Investment Transaction, or (D) in the case of fees or other
compensation described in condition 2(c)(iii)(C).
3. The Company has the right to decline to participate in any
Potential Co-Investment Transaction or to invest less than the amount
proposed.
4. The Adviser will present to the Board, on a quarterly basis, a
record of all investments in Potential Co-Investment Transactions made
by the Funds during the preceding quarter that fell within the
Company's then-current Objectives and Strategies that were not made
available to the Company, and an explanation of why the investment
opportunities were not offered to the Company. All information
presented to the Board pursuant to this condition will be kept for the
life of the Company and at least two years thereafter, and will be
subject to examination by the Commission and its staff.
5. Except for Follow-On Investments made in accordance with
condition 8, the Company will not invest in reliance on the Order in
any issuer in which any Fund or any affiliated person of the Funds is
an existing investor.
6. The Company will not participate in any Potential Co-Investment
Transaction unless the terms, conditions, price, class of securities to
be purchased, settlement date, and registration rights will be the same
for the Company as for each participating Fund. The grant to a Fund,
but not the Company, of the right to nominate a director for election
to a portfolio company's board of directors, the right to have an
observer on the board of directors or similar rights to participate in
the governance or management of the portfolio company will not be
interpreted so as to violate this condition 6, if conditions
2(c)(iii)(A), (B) and (C) are met.
7. (a) If any Fund elects to sell, exchange, or otherwise dispose
of an interest in a security that was acquired in a Co-Investment
Transaction, the Adviser will:
(i) Notify the Company of the proposed disposition at the earliest
practical time; and
[[Page 61407]]
(ii) formulate a recommendation as to participation by the Company
in the disposition.
(b) The Company will have the right to participate in such
disposition on a proportionate basis, at the same price and on the same
terms and conditions as those applicable to the participating Funds.
(c) The Company may participate in such disposition without
obtaining prior approval of the Required Majority if: (i) The proposed
participation of the Company and each Fund in such disposition is
proportionate to its outstanding investment in the issuer immediately
preceding the disposition; (ii) the Board has approved as being in the
best interests of the Company the ability to participate in such
dispositions on a pro rata basis (as described in greater detail in the
application); and (iii) the Board is provided on a quarterly basis with
a list of all dispositions made in accordance with this condition. In
all other cases, the Adviser will provide its written recommendation as
to the Company's participation to the Eligible Directors, and the
Company will participate in such disposition solely to the extent that
a Required Majority determines that it is in the Company's best
interests.
(d) The Company and each participating Fund will bear its own
expenses in connection with any such disposition.
8. (a) If any Fund desires to make a Follow-On Investment in a
portfolio company whose securities were acquired in a Co-Investment
Transaction, the Adviser will:
(i) Notify the Company of the proposed transaction at the earliest
practical time; and
(ii) formulate a recommendation as to the proposed participation,
including the amount of the proposed Follow-On Investment, by the
Company.
(b) The Company may participate in such Follow-On Investment
without obtaining prior approval of the Required Majority if: (i) The
proposed participation of the Company and each Fund in such investment
is proportionate to its outstanding investments in the issuer
immediately preceding the Follow-On Investment; and (ii) the Board has
approved as being in the best interests of the Company the ability to
participate in Follow-On Investments on a pro rata basis (as described
in greater detail in this application). In all other cases, the Adviser
will provide its written recommendation as to the Company's
participation to the Eligible Directors, and the Company will
participate in such Follow-On Investment solely to the extent that a
Required Majority determines that it is in the Company's best
interests.
(c) If, with respect to any Follow-On Investment:
(i) The amount of the opportunity is not based on the Company's and
the Funds' outstanding investments immediately preceding the Follow-On
Investment; and
(ii) the aggregate amount recommended by the Adviser to be invested
by the Company in the Follow-On Investment, together with the amount
proposed to be invested by the participating Funds in the same
transaction, exceeds the amount of the opportunity;
then the amount invested by each such party will be allocated among
them pro rata based on each party's total assets, up to the amount
proposed to be invested by each.
(d) The acquisition of Follow-On Investments as permitted by this
condition will be considered a Co-Investment Transaction for all
purposes and subject to the other conditions set forth in the
application.
9. The Independent Directors will be provided quarterly for review
all information concerning Potential Co-Investment Transactions and Co-
Investment Transactions, including investments made by the Funds that
the Company considered but declined to participate in, so that the
Independent Directors may determine whether all investments made during
the preceding quarter, including those investments that the Company
considered but declined to participate in, comply with the conditions
of the order. In addition, the Independent Directors will consider at
least annually the continued appropriateness for the Company of
participating in new and existing Co-Investment Transactions.
10. The Company will maintain the records required by section
57(f)(3) of the Act as if each of the investments permitted under these
conditions were approved by the Required Majority under section 57(f).
11. No Independent Director will also be a director, general
partner, managing member or principal, or otherwise an ``affiliated
person'' (as defined in the Act), of any of the Funds.
12. The expenses, if any, associated with acquiring, holding or
disposing of any securities acquired in a Co-Investment Transaction
(including, without limitation, the expenses of the distribution of any
such securities registered for sale under the 1933 Act) will, to the
extent not payable by the Adviser under its respective investment
advisory agreements with the Company and the Funds, be shared by the
Company and the Funds in proportion to the relative amounts of the
securities held or being acquired or disposed of, as the case may be.
13. Any transaction fee (including break-up or commitment fees but
excluding broker's fees contemplated by section 17(e) or 57(k), as
applicable) received in connection with a Co-Investment Transaction
will be distributed to the Company and the participating Funds on a pro
rata basis based on the amounts they invested or committed, as the case
may be, in such Co-Investment Transaction. If any transaction fee is to
be held by the Adviser pending consummation of the transaction, the fee
will be deposited into an account maintained by the Adviser at a bank
or banks having the qualifications prescribed in section 26(a)(1), and
the account will earn a competitive rate of interest that will also be
divided pro rata among the Company and the participating Funds based on
the amounts they invest in such Co-Investment Transaction. None of the
Adviser, the Funds nor any affiliated person of the Company will
receive additional compensation or remuneration of any kind as a result
of or in connection with a Co-Investment Transaction (other than (a) in
the case of the Company and the participating Funds, the pro rata
transaction fees described above and fees or other compensation
described in condition 2(c)(iii)(C), and (b) in the case of the
Adviser, investment advisory fees paid in accordance with the
respective agreements between the Adviser and the Company or the
Funds).
For the Commission, by the Division of Investment Management,
under delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-24239 Filed 10-2-13; 8:45 am]
BILLING CODE 8011-01-P