[House Report 114-508]
[From the U.S. Government Publishing Office]
114th Congress } { Report
HOUSE OF REPRESENTATIVES
2d Session } { 114-508
======================================================================
SMALL BUSINESS CREDIT AVAILABILITY ACT
_______
April 19, 2016.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Hensarling, from the Committee on Financial Services, submitted the
following
R E P O R T
[To accompany H.R. 3868]
[Including cost estimate of the Congressional Budget Office]
The Committee on Financial Services, to whom was referred
the bill (H.R. 3868) to amend the Investment Company Act of
1940 to remove certain restrictions on the ability of business
development companies to own securities of investment advisers
and certain financial companies, to change certain requirements
relating to the capital structure of business development
companies, to direct the Securities and Exchange Commission to
revise certain rules relating to business development
companies, and for other purposes, having considered the same,
report favorably thereon with an amendment and recommend that
the bill as amended do pass.
The amendment is as follows:
Strike all after the enacting clause and insert the
following:
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Small Business Credit Availability
Act''.
SEC. 2. BUSINESS DEVELOPMENT COMPANY OWNERSHIP OF SECURITIES OF
INVESTMENT ADVISERS AND CERTAIN FINANCIAL
COMPANIES.
(a) In General.--
(1) In general.--Not later than 1 year after the date of
enactment of this Act, the Securities and Exchange Commission
shall promulgate regulations to codify the order in Investment
Company Act Release No. 30024, dated March 30, 2012. If the
Commission fails to complete the regulations as required by
this subsection, a business development company shall be
entitled to treat such regulations as having been completed in
accordance with the actions required to be taken by the
Commission until such time as such regulations are completed by
the Commission.
(2) Rule of construction.--Nothing in this subsection shall
prevent the Commission from issuing rules to address potential
conflicts of interest between business development companies
and investment advisers.
(b) Permissible Assets of an Eligible Portfolio Company.--Section 55
of the Investment Company Act of 1940 (15 U.S.C. 80a-54) is amended by
adding at the end the following:
``(c) Securities Deemed To Be Permissible Assets.--Notwithstanding
subsection (a), securities that would be described in paragraphs (1)
through (6) of such subsection except that the issuer is a company
described in paragraph (2), (3), (4), (5), (6), or (9) of section 3(c)
may be deemed to be assets described in paragraphs (1) through (6) of
subsection (a) to the extent necessary for the sum of the assets to
equal 70 percent of the value of a business development company's total
assets (other than assets described in paragraph (7) of subsection
(a)), provided that the aggregate value of such securities counting
toward such 70 percent shall not exceed 20 percent of the value of the
business development company's total assets.''.
SEC. 3. EXPANDING ACCESS TO CAPITAL FOR BUSINESS DEVELOPMENT COMPANIES.
(a) In General.--Section 61(a) of the Investment Company Act of 1940
(15 U.S.C. 80a-60(a)) is amended--
(1) by redesignating paragraphs (2) through (4) as paragraphs
(3) through (5), respectively;
(2) by striking paragraph (1) and inserting the following:
``(1) Except as provided in paragraph (2), the asset coverage
requirements of subparagraphs (A) and (B) of section 18(a)(1)
(and any related rule promulgated under this Act) applicable to
business development companies shall be 200 percent.
``(2) The asset coverage requirements of subparagraphs (A)
and (B) of section 18(a)(1) and of subparagraphs (A) and (B) of
section 18(a)(2) (and any related rule promulgated under this
Act) applicable to a business development company shall be 150
percent if--
``(A) within five business days of the approval of
the adoption of the asset coverage requirements
described in clause (ii), the business development
company discloses such approval and the date of its
effectiveness in a Form 8-K filed with the Commission
and in a notice on its website and discloses in its
periodic filings made under section 13 of the
Securities Exchange Act of 1934 (15 U.S.C. 78m)--
``(i) the aggregate value of the senior
securities issued by such company and the asset
coverage percentage as of the date of such
company's most recent financial statements; and
``(ii) that such company has adopted the
asset coverage requirements of this
subparagraph and the effective date of such
requirements;
``(B) with respect to a business development company
that issues equity securities that are registered on a
national securities exchange, the periodic filings of
the company under section 13(a) of the Securities
Exchange Act of 1934 (15 U.S.C. 78m) include
disclosures reasonably designed to ensure that
shareholders are informed of--
``(i) the amount of indebtedness and asset
coverage ratio of the company, determined as of
the date of the financial statements of the
company dated on or most recently before the
date of such filing; and
``(ii) the principal risk factors associated
with such indebtedness, to the extent such risk
is incurred by the company; and
``(C)(i) the application of this paragraph to the
company is approved by the required majority (as
defined in section 57(o)) of the directors of or
general partners of such company who are not interested
persons of the business development company, which
application shall become effective on the date that is
1 year after the date of the approval, and, with
respect to a business development company that issues
equity securities that are not registered on a national
securities exchange, the company extends, to each
person who is a shareholder as of the date of the
approval, an offer to repurchase the equity securities
held by such person as of such approval date, with 25
percent of such securities to be repurchased in each of
the four quarters following such approval date; or
``(ii) the company obtains, at a special or annual
meeting of shareholders or partners at which a quorum
is present, the approval of more than 50 percent of the
votes cast of the application of this paragraph to the
company, which application shall become effective on
the date immediately after the date of the approval.'';
(3) in paragraph (3) (as redesignated), by inserting ``or
which is a stock, provided that all such stock is issued in
accordance with paragraph (6)'' after ``indebtedness'';
(4) in subparagraph (A) of paragraph (4) (as redesignated)--
(A) in the matter preceding clause (i), by striking
``voting''; and
(B) by amending clause (iii) to read as follows:
``(iii) the exercise or conversion price at
the date of issuance of such warrants, options,
or rights is not less than--
``(I) the market value of the
securities issuable upon the exercise
of such warrants, options, or rights at
the date of issuance of such warrants,
options, or rights; or
``(II) if no such market value
exists, the net asset value of the
securities issuable upon the exercise
of such warrants, options, or rights at
the date of issuance of such warrants,
options, or rights; and''; and
(5) by adding at the end the following:
``(6)(A) Qualified institutional buyer.--Except as provided
in subparagraph (B), the following shall not apply to a senior
security which is a stock and which is issued to and held by a
qualified institutional buyer (as defined in section 3(a)(64)
of the Securities Exchange Act of 1934):
``(i) Subparagraphs (C) and (D) of section 18(a)(2).
``(ii) Subparagraph (E) of section 18(a)(2), to the
extent such subparagraph requires any priority over any
other class of stock as to distribution of assets upon
liquidation.
``(iii) With respect to a senior security which is a
stock, subsections (c) and (i) of section 18.
``(B) Individual investors who are not qualified
institutional buyers.--Subparagraph (A) shall not apply with
respect to a senior security which is a stock and which is
issued to a person who is not known by the business development
company to be a qualified institutional buyer (as defined in
section 3(a) of the Securities Exchange Act of 1934).
``(7) Rule of construction.--Notwithstanding any other
provision of law, any additional class of stock issued pursuant
to this section must be issued in accordance with all investor
protections contained in all applicable federal securities laws
administered by the Commission.''.
(b) Conforming Amendments.--The Investment Company Act of 1940 (15
U.S.C. 80a-1 et seq.) is amended--
(1) in section 57--
(A) in subsection (j)(1), by striking ``section
61(a)(3)(B)'' and inserting ``section 61(a)(4)(B)'';
and
(B) in subsection (n)(2), by striking ``section
61(a)(3)(B)'' and inserting ``section 61(a)(4)(B)'';
and
(2) in section 63(3), by striking ``section 61(a)(3)'' and
inserting ``section 61(a)(4)''.
SEC. 4. PARITY FOR BUSINESS DEVELOPMENT COMPANIES REGARDING OFFERING
AND PROXY RULES.
(a) Revision to Rules.--Not later than 1 year after the date of
enactment of this Act, the Securities and Exchange Commission shall
revise any rules to the extent necessary to allow a business
development company that has filed an election pursuant to section 54
of the Investment Company Act of 1940 (15 U.S.C. 80a-53) to use the
securities offering and proxy rules that are available to other issuers
that are required to file reports under section 13 or section 15(d) of
the Securities Exchange Act of 1934 (15 U.S.C. 78m; 78o(d)). Any action
that the Commission takes pursuant to this subsection shall include the
following:
(1) The Commission shall revise rule 405 under the Securities
Act of 1933 (17 C.F.R. 230.405)--
(A) to remove the exclusion of a business development
company from the definition of a well-known seasoned
issuer provided by that rule; and
(B) to add registration statements filed on Form N-2
to the definition of automatic shelf registration
statement provided by that rule.
(2) The Commission shall revise rules 168 and 169 under the
Securities Act of 1933 (17 C.F.R. 230.168 and 230.169) to
remove the exclusion of a business development company from an
issuer that can use the exemptions provided by those rules.
(3) The Commission shall revise rules 163 and 163A under the
Securities Act of 1933 (17 C.F.R. 230.163 and 230.163A) to
remove a business development company from the list of issuers
that are ineligible to use the exemptions provided by those
rules.
(4) The Commission shall revise rule 134 under the Securities
Act of 1933 (17 C.F.R. 230.134) to remove the exclusion of a
business development company from that rule.
(5) The Commission shall revise rules 138 and 139 under the
Securities Act of 1933 (17 C.F.R. 230.138 and 230.139) to
specifically include a business development company as an
issuer to which those rules apply.
(6) The Commission shall revise rule 164 under the Securities
Act of 1933 (17 C.F.R. 230.164) to remove a business
development company from the list of issuers that are excluded
from that rule.
(7) The Commission shall revise rule 433 under the Securities
Act of 1933 (17 C.F.R. 230.433) to specifically include a
business development company that is a well-known seasoned
issuer as an issuer to which that rule applies.
(8) The Commission shall revise rule 415 under the Securities
Act of 1933 (17 C.F.R. 230.415)--
(A) to state that the registration for securities
provided by that rule includes securities registered by
a business development company on Form N-2; and
(B) to provide an exception for a business
development company from the requirement that a Form N-
2 registrant must furnish the undertakings required by
item 34.4 of Form N-2.
(9) The Commission shall revise rule 497 under the Securities
Act of 1933 (17 C.F.R. 230.497) to include a process for a
business development company to file a form of prospectus that
is parallel to the process for filing a form of prospectus
under rule 424(b).
(10) The Commission shall revise rules 172 and 173 under the
Securities Act of 1933 (17 C.F.R. 230.172 and 230.173) to
remove the exclusion of an offering of a business development
company from those rules.
(11) The Commission shall revise rule 418 under the
Securities Act of 1933 (17 C.F.R. 230.418) to provide that a
business development company that would otherwise meet the
eligibility requirements of General Instruction I.A of Form S-3
shall be exempt from paragraph (a)(3) of that rule.
(12) The Commission shall revise rule 14a-101 under the
Securities Exchange Act of 1934 (17 C.F.R. 240.14a-101) to
provide that a business development company that would
otherwise meet the requirements of General Instruction I.A of
Form S-3 shall be deemed to meet the requirements of Form S-3
for purposes of Schedule 14A.
(13) The Commission shall revise rule 103 under Regulation FD
(17 C.F.R. 243.103) to provide that paragraph (a) of that rule
applies for purposes of Form N-2.
(b) Revision to Form N-2.--Not later than 1 year after the date of
enactment of this Act, the Commission shall revise Form N-2--
(1) to include an item or instruction that is similar to item
12 on Form S-3 to provide that a business development company
that would otherwise meet the requirements of Form S-3 shall
incorporate by reference its reports and documents filed under
the Securities Exchange Act of 1934 into its registration
statement filed on Form N-2; and
(2) to include an item or instruction that is similar to the
instruction regarding automatic shelf offerings by well-known
seasoned issuers on Form S-3 to provide that a business
development company that is a well-known seasoned issuer may
file automatic shelf offerings on Form N-2.
(c) Treatment if Revisions Not Completed in Timely Manner.--If the
Commission fails to complete the revisions required by subsections (a)
and (b) by the time required by such subsections, a business
development company shall be entitled to treat such revisions as having
been completed in accordance with the actions required to be taken by
the Commission by such subsections until such time as such revisions
are completed by the Commission.
(d) Rule of Construction.--Any reference in this section to a rule or
form means such rule or form or any successor rule or form.
Purpose and Summary
Introduced by Representative Mick Mulvaney on November 2,
2015, H.R. 3868, the Small Business Credit Availability Act,
amends the Investment Company Act of 1940 to modernize the
regulatory regime for Business Development Companies (BDCs).
BDCs are investment vehicles designed to facilitate capital
formation for small and middle-market companies. The
legislation streamlines the offering, filing, and registration
processes for BDCs with the Securities and Exchange Commission
(SEC) in order to:
eliminate significant regulatory burdens;
increase a BDC's ability to deploy capital
to businesses by reducing its asset coverage ratio, or
required ratio of assets to debt, from 200% to 150% if
certain requirements are met;
inform shareholders of a decision by the BDC
to avail itself of the 150% asset coverage ratio; and
provide liquidity to investors if a BDC or
its funds are not publicly traded.
The legislation also directs the SEC, within one year, to
codify an order to govern a BDC's relationship with an
investment adviser and revise its rules to allow BDCs to use
the streamlined securities offering provisions available to
other registrants under the Securities Act of 1933 such as the
ability to be a Well Known Seasoned Issuer (``WKSI''), use
shelf offerings, and communicate directly with shareholders. If
the SEC does not act within one year to codify its order or
update its rules, the provisions of H.R. 3868 shall take effect
and shall remain effective until the SEC acts.
Background and Need for Legislation
In 1980, Congress amended the Investment Company Act of
1940 to authorize the creation of BDCs in order to facilitate
private finance investment in small and middle market
businesses. By 1980, many banks had pulled back from lending to
small businesses after the banks suffered significant losses
related to oil and real estate in the 1970s. Private equity and
venture capital firms represented an alternative source of
credit to small businesses, but they could not provide this
credit to small, growing businesses because the Investment
Company Act prohibited their securities from being owned by
more than 100 persons.
BDCs are closed-end funds that make investments in small
and developing businesses and financially troubled firms.\1\ By
law, BDCs must invest at least 70 percent of their assets in
so-called ``eligible assets.'' The most common ``eligible
assets'' are private and small public companies in the U.S.
with $5 million to $150 million in annual revenues. This so-
called middle market sector of the economy is responsible for
one-third of the private sector GDP and these businesses
produce $10 billion in revenues annually. These investments
must be privately negotiated, and the BDC is required to offer
managerial assistance to these companies to meet specific
business challenges. BDCs have greater flexibility than other
investment companies in dealing with the businesses in which
they have invested; they also have greater flexibility than
other investment companies in issuing securities and
compensating their managers. In addition, BDCs need not
register as investment companies; they are, however, required
to register their securities under the Securities Exchange Act
of 1934.
---------------------------------------------------------------------------
\1\Small Business Investment Incentive Act of 1980 (P.L. 96-477).
---------------------------------------------------------------------------
BDCs have recently invested in small and medium-size
companies that provide vital services to the American public,
including companies involved in disease treatment and
prevention, education, information technology security,
agriculture, and construction. Many BDCs specialize in
financing acquisitions made by private equity firms. While
there is a wide variation among BDCs in the size of their
investments, the companies they invest in, and the industries
in which they concentrate, they all share a common investment
objective of making it easier for small and medium-sized
companies to obtain access to capital.
Funding from BDCs has become more important for small
businesses as the stifling regulatory regime enacted following
the 2008 financial crisis has restricted bank and other
traditional financing options for these companies. As a result,
for the first time since the U.S. Census Bureau began keeping
data on the subject, the number of smaller companies--i.e.,
those with less than 500 employees--has declined over the five
years since the financial crisis.\2\ As lending to small and
medium-sized companies from commercial banks has fallen off due
to the regulatory constraints and compliance burdens imposed by
the Dodd-Frank Act, BDCs now find themselves in a position
similar to the one at their creation over 30 years ago--
addressing the unmet capital needs of small business.\3\ There
are currently over 80 BDCs in existence in the U.S. with over
$70 billion in outstanding loans to middle market
businesses.\4\ Of the 80 BDCs, 57 are publicly traded BDCs,
allowing retail investors a chance to purchase shares in the
growth of middle market America.\5\
---------------------------------------------------------------------------
\2\Kate Davidson, ``Two-Speed Recovery: Small firms Lag Big
Business,'' The Wall Street Journal (Apr. 27, 2015) available at http:/
/blogs.wsj.com/economics/2015/04/27/two-speed-recovery-small-firms-lag-
big-business/.
\3\Testimony of Michael J. Arougheti, Chief Executive Officer, Ares
Capital Corporation, before the Subcommittee on Capital Markets and
Government Sponsored Enterprises, ``Legislation to Further Reduce
Impediments to Capital Formation'' (Oct. 23, 2013), available at http:/
/financialservices.house.gov/uploadedfiles/hhrg-113-ba16-
wstatemarougheti-20131023.pdf.
\4\Small Business Investor Alliance, ``BDC Modernization Agenda:
Legislative Recommendations for Members of the 114th Congress,''
available at: http://c.ymcdn.com/sites/www.sbia.org/resource/resmgr/
Government_Relations/2015_SBIA_BDC_Agenda_Web.pdf.
\5\Id.
---------------------------------------------------------------------------
Despite the important role that BDCs play in helping to
fund small and medium-sized businesses, the BDC regulatory
regime has prevented BDCs from playing as large a role as they
might otherwise. The BDCs regulatory regime has not been
significantly updated in over 30 years since Congress
authorized the creation of BDCs in 1980. Currently, BDCs are
limited in the amount they can borrow, as their debt to equity
ratio is capped at 1 to 1. A modest increase in the leverage
ratio, though still below that of other financial institutions,
would enable BDCs to deploy significantly more capital to small
and mid-sized businesses and still generate returns to their
shareholders.
BDCs are also prohibited from investing in registered
investment advisers unless the SEC uses its exemptive relief
authority to allow BDCs to own registered investment advisers.
Removing the exemptive relief requirement will level the
playing field for all BDCs and avoid the legal costs of seeking
relief as well as eliminate the lengthy time period that it
takes the SEC to approve such requests.
Like other companies that regularly raise capital through
securities issuances, BDCs rely on pre-filed ``shelf
registration'' statements, which are securities filings that
allow companies to position themselves to issue additional
securities. Because shelf registrations contain financial
information that becomes outdated as companies publicly report
more recent financial information, most companies incorporate
subsequent financial reports in their shelf registrations by
reference. BDCs, however, are prohibited from incorporating
subsequent financial information by reference. Instead, BDCs
must manually update their shelf registration statements each
time they report new quarterly information, which slows a BDC's
ability to issue additional securities and makes it more
expensive by requiring a BDC to hire lawyers, accountants, and
printers to continually update its shelf-registration
statements. H.R. 3868 will streamline disclosure requirements
and reduce burdensome, duplicative regulatory paperwork for
BDCs, while still ensuring investors would receive relevant and
necessary disclosures.
Finally, to date BDCs have been barred from the benefits
associated with being a WKSI, which includes taking advantage
of more flexible rules relating to communications with
investors and the registration process.\6\ These changes will
allow eligible BDCs more flexibility and efficiency while
seeking to raise capital in the public market by allowing them
to time offerings for when they will best be received by the
market.
---------------------------------------------------------------------------
\6\A WKSI is an issuer that is required to file reports under the
Securities Exchange Act of 1934 (the Exchange Act); is a ``primary
eligible'' issuer; and has a worldwide market capitalization of at
least $700 million or has issued at least $1 billion of non-convertible
securities in registered primary offerings for cash in the last three
years. WKSIs benefit from a more flexible automatic securities
registration process including, but not limited to, the ability to have
their registration statements be deemed by the SEC as immediately
effective upon filing. In addition, WKSIs can (i) register unspecified
amounts of different types of securities; (ii) register additional
classes of securities and eligible majority-owned subsidiaries as
additional registrants after effectiveness by filing a post-effective
amendment that also will be automatically effective upon filing; (iii)
exclude certain additional information from a base prospectus; (iv) pay
filing fees on a ``pay-as-you-go'' basis at the time of each takedown;
and (v) use ``free writing prospectuses'' relating to an offering
before the registration statement is filed. WKSIs ``are frequent
issuers in the public markets and have significant market capital size.
Generally, WKSIs can take advantage of new, liberalized rules relating
to communications with investors and the registration process. However,
BDCs were explicitly excluded from the definition of WKSI by the SEC
without any explanation or rationale.
---------------------------------------------------------------------------
Modernizing the regulatory regime for BDCs will allow them
to amplify financing for small and medium-size businesses at a
time when these companies are struggling to access capital to
support growth and job creation. As Michael Gerber, Executive
Vice President of Franklin Square Holdings, testified at a June
16, 2015, Capital Markets and Government Sponsored Enterprises
Subcommittee hearing, the Small Business Credit Availability
Act will:
enable BDCs to provide even more capital to small and
middle-market U.S. companies, and do so in a manner
that could increase returns and decrease risk for
investors, all while maintaining the strong regulatory
regime and transparency that separates BDCs from many
of the other non-bank lenders in the marketplace. The
Great Recession changed many dynamics in the capital
markets, as have new and more robust regulatory
requirements. Small and mid-size U.S. businesses have
struggled to access previously available sources of
capital. Several non-bank lenders have emerged as
significant providers of capital, but none as
transparent and heavily regulated as BDCs. Franklin
Square believes that the ``Small Business Credit
Availability Act,'' if enacted into law, would allow
BDCs to play an even greater role in supporting the
capital markets and more effectively fill the existing
capital void that has hampered businesses and job
growth.
While H.R. 3868 does direct the SEC to revise nineteen
rules, the Committee expects that the SEC would combine many of
these rulemakings as the majority of the directives apply to
the BDCs' ability to use offering provisions found in the
Securities Act of 1933.
Hearings
The Committee on Financial Services' Subcommittee on
Capital Markets and Government Sponsored Enterprises held a
hearing examining a discussion draft of H.R. 3868 on June 16,
2015.
Committee Consideration
The Committee on Financial Services met in open session on
November 3, 2015, and adopted by voice vote an amendment to
H.R. 3868 offered by Representative Velazquez. Amendments
offered by Representatives Himes and Moore were each withdrawn.
The Committee ordered H.R. 3868 to be reported favorably to the
House as amended by a recorded vote of 53 yeas to 4 nays
(recorded vote no. FC-72), a quorum being present.
Committee Votes
Clause 3(b) of rule XIII of the Rules of the House of
Representatives requires the Committee to list the record votes
on the motion to report legislation and amendments thereto. The
sole recorded vote in Committee was a motion by Chairman
Hensarling to report the bill favorably to the House as
amended. That motion was agreed to by a recorded vote of 53
yeas to 4 nays (recorded vote no. FC-72), a quorum being
present.
Committee Oversight Findings
Pursuant to clause 3(c)(1) of rule XIII of the Rules of the
House of Representatives, the findings and recommendations of
the Committee based on oversight activities under clause
2(b)(1) of rule X of the Rules of the House of Representatives,
are incorporated in the descriptive portions of this report.
Performance Goals and Objectives
Pursuant to clause 3(c)(4) of rule XIII of the Rules of the
House of Representatives, the Committee states that H.R. 3868
will help address the unmet capital needs of small businesses
by modernizing the regulatory regime for business development
companies.
New Budget Authority, Entitlement Authority, and Tax Expenditures
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee adopts as its
own the estimate of new budget authority, entitlement
authority, or tax expenditures or revenues contained in the
cost estimate prepared by the Director of the Congressional
Budget Office pursuant to section 402 of the Congressional
Budget Act of 1974.
Committee Cost Estimate
The Committee adopts as its own the cost estimate prepared
by the Director of the Congressional Budget Office pursuant to
section 402 of the Congressional Budget Act of 1974.
Congressional Budget Office Estimates
Pursuant to clause 3(c)(3) of rule XIII of the Rules of the
House of Representatives, the following is the cost estimate
provided by the Congressional Budget Office pursuant to section
402 of the Congressional Budget Act of 1974:
March 17, 2016.
Hon. Jeb Hensarling,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 3868, the Small
Business Credit Availability Act.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Kim Cawley.
Sincerely,
Robert A. Sunshine
(For Keith Hall, Director).
Enclosure.
H.R. 3868--Small Business Credit Availability Act
Summary: H.R. 3868 would direct the Securities and Exchange
Commission (SEC) to amend certain regulations that affect
business development companies (BDCs)--companies that operate
like a mutual fund to invest in the stocks of small, private
companies and offer significant managerial assistance to the
issuer. H.R. 3868 would allow BDCs to invest in advisors to
investment companies and would raise the limits on the amount
of leverage allowed to a BDC.
The staff of the Joint Committee on Taxation (JCT)
estimates that enacting H.R. 3868 would reduce federal revenues
by $95 million over the 2016-2026 period; therefore, pay-as-
you-go procedures apply. CBO estimates that enacting H.R. 3868
would not affect direct spending.
CBO estimates that implementing H.R. 3868 would increase
spending by the SEC by less than $500,000 per year to amend
certain regulations affecting BDCs. However, the SEC is
authorized to collect fees sufficient to offset its annual
appropriation; therefore, CBO estimates that the net effect on
discretionary spending would be negligible.
CBO and JCT estimate that enacting the legislation would
not increase net direct spending or on-budget deficits by more
than $5 billion in any of the four consecutive 10-year periods
beginning in 2027.
H.R. 3868 contains no intergovernmental or private-sector
mandates as defined in the Unfunded Mandates Reform Act (UMRA)
and would not affect the budgets of state, local, or tribal
governments.
Estimated cost to the Federal Government: The estimated
budgetary effect of H.R. 3868 is shown in the following table.
The costs of this legislation fall within budget function 370
(commerce and housing credit).
CBO ESTIMATE OF PAY-AS-YOU-GO EFFECTS FOR H.R. 3868, AS ORDERED REPORTED BY THE HOUSE COMMITTEE ON FINANCIAL SERVICES ON NOVEMBER 4, 2015
--------------------------------------------------------------------------------------------------------------------------------------------------------
By fiscal year, in millions of dollars--
-------------------------------------------------------------------------------------------------------
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2016-2021 2016-2026
--------------------------------------------------------------------------------------------------------------------------------------------------------
CHANGES IN REVENUESa
Estimated Revenues.............................. * -1 -4 -6 -8 -9 -11 -12 -13 -14 -16 -29 -95
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notes: Details do not add to totals because of rounding; * = between zero and -$500,000
aNegative numbers denote decreases in revenues.
Basis of estimate: For this estimate, CBO assumes that the
bill will be enacted late in fiscal year 2016, the necessary
amounts will be appropriated near the start of each year, and
spending will follow historical patterns for the SEC.
Revenues
JCT estimates that revenue losses under H.R. 3868 would
result from a shift in business lending and taxable income from
C corporations to BDCs, which are pass-through entities for tax
purposes. Specifically, H.R. 3868 would allow BDCs to take on
additional debt, increasing the amount they can borrow to a
maximum of $4 dollars for every $6 dollars they hold in assets;
under current law, they can borrow up to $3 for every $6 they
hold in assets. The bill also would allow BDCs to issue
preferred stock, and BDCs would be able to invest in securities
issued by certain financial institutions and by registered
investment advisors.
Generally, the income of interests in pass-through entities
(like BDCs) that are owned by individual taxpayers is treated
as personal income; such income is subject only to the
individual income tax, and is taxed at the personal income tax
rates of the businesses' owners. In contrast, taxable income
from C corporations is subject to the corporate income tax, and
that income can be taxed again at the individual tax level
after it is distributed to shareholders or investors. JCT
estimates that, by shifting income from C corporations to BDCs,
this legislation would reduce tax revenues by $95 million over
the 2016-2026 period.
Spending subject to appropriation
Based on information from the SEC, CBO expects that the
agency would need the equivalent of two additional staff
positions to meet the bill's deadline for issuing new
regulations and to monitor compliance with those regulations
once finalized. CBO estimates that implementing the provisions
of H.R. 3868 would cost less than $500,000 per year. Because
the SEC is authorized to collect fees sufficient to offset its
appropriation each year, CBO estimates that implementing H.R.
3868 would have a negligible effect on net outlays each year,
assuming appropriation actions consistent with the agency's
authority.
Pay-As-You-Go considerations: The Statutory Pay-As-You-Go
Act of 2010 establishes budget-reporting and enforcement
procedures for legislation affecting direct spending or
revenues. The net changes in revenues that are subject to those
pay-as-you-go procedures are shown in the following table.
--------------------------------------------------------------------------------------------------------------------------------------------------------
By fiscal year, in millions of dollars--
--------------------------------------------------------------------------------------------------
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2016-2021 2016-2026
--------------------------------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN THE DEFICIT
Statutory Pay-As-You-Go Impact....................... 0 1 4 6 8 9 11 12 13 14 16 29 95
--------------------------------------------------------------------------------------------------------------------------------------------------------
Increase in long-term direct spending and deficits: CBO and
JCT estimate that enacting the legislation would not increase
net direct spending or on-budget deficits by more than $5
billion in any of the four consecutive 10-year periods
beginning in 2027.
Intergovernmental and private-sector impact: H.R. 3868
contains no intergovernmental or private-sector mandates as
defined in UMRA and would not affect the budgets of state,
local, or tribal governments.
Estimate prepared by: Federal spending: Kim Cawley; Federal
revenues: Staff of the Joint Committee on Taxation; Impact on
state, local, and tribal governments: Leo Lex; Impact on the
private sector: Logan Smith.
Estimate approved by: H. Samuel Papenfuss, Deputy Assistant
Director for Budget Analysis.
Federal Mandates Statement
The Committee adopts as its own the estimate of Federal
mandates prepared by the Director of the Congressional Budget
Office pursuant to section 423 of the Unfunded Mandates Reform
Act.
Advisory Committee Statement
No advisory committees within the meaning of section 5(b)
of the Federal Advisory Committee Act were created by this
legislation.
Applicability to Legislative Branch
The Committee finds that the legislation does not relate to
the terms and conditions of employment or access to public
services or accommodations within the meaning of the section
102(b)(3) of the Congressional Accountability Act.
Earmark Identification
H.R. 3868 does not contain any congressional earmarks,
limited tax benefits, or limited tariff benefits as defined in
clause 9 of rule XXI.
Duplication of Federal Programs
Pursuant to section 3(g) of H. Res. 5, 114th Cong. (2015),
the Committee states that no provision of H.R. 3868 establishes
or reauthorizes a program of the Federal Government known to be
duplicative of another Federal program, a program that was
included in any report from the Government Accountability
Office to Congress pursuant to section 21 of Public Law 111-
139, or a program related to a program identified in the most
recent Catalog of Federal Domestic Assistance.
Disclosure of Directed Rulemaking
Pursuant to section 3(i) of H. Res. 5, 114th Cong. (2015),
the Committee states that H.R. 3868 contains nineteen directed
rulemakings.
Section-by-Section Analysis of the Legislation
Section 1. Short title
This section cites H.R. 3868 as the ``Small Business Credit
Availability Act.''
Section 2. Business development company ownership of securities of
investment advisers and certain financial companies
This section requires the Securities and Exchange
Commission (SEC) to promulgate regulations to codify the order
in Investment Company Act Release No. 30024. It also amends the
Investment Company Act of 1940 to expand the definition of
permissible assets of an eligible portfolio company.
Section 3. Expanding access to capital for business development
companies
This section provides for an increase in business
development companies' (BDCs') ability to deploy capital to
businesses by reducing their asset coverage ratio, or required
ratio of assets to debt, from 200% to 150% if certain
requirements are met. To address concerns raised by SEC Chair
White regarding investors in a non-traded BDC, after a board or
general partner vote to take advantage of the new asset
coverage ratio, the non-traded BDC must provide its
shareholders with the ability to redeem 100% of their shares
over the course of the year (25% per quarter). Alternatively,
both traded and non-traded BDCs can immediately reduce their
asset coverage ratio after a majority shareholder vote.
Section 4. Parity for business development companies regarding offering
and proxy rules
This section requires the SEC to revise its rules to allow
BDCs to use the streamlined securities offering provisions
available to other registrants under the Securities Act of 1933
such as the ability to be a WKSI, use shelf offerings, and
communicate directly with shareholders. If the SEC does not act
within one year to codify its order or update its rules, the
provisions shall take effect and shall remain effective until
the SEC acts.
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italic, and existing law in which no
change is proposed is shown in roman):
INVESTMENT COMPANY ACT OF 1940
TITLE I--INVESTMENT COMPANIES
* * * * * * *
functions and activities of business development companies
Sec. 55. (a) It shall be unlawful for a business development
company to acquire any assets (other than those described in
paragraphs (1) through (7) of this subsection) unless, at the
time the acquisition is made, assets described in paragraphs
(1) through (6) below represent at least 70 per centum of the
value of its total assets (other than assets described in
paragraph (7) below):
(1) securities purchased, in transactions not
involving any public offering or in such other
transactions as the Commission may, by rule, prescribe
if it finds that enforcement of this title and of the
Securities Act of 1933 with respect to such
transactions is not necessary in the public interest or
for the protection of investors by reason of the small
amount, or the limited nature of the public offering,
involved in such transactions--
(A) from the issuer of such securities, which
issuer is an eligible portfolio company, from
any person who is, or who within the preceding
thirteen months has been, an affiliated person
of such eligible portfolio company, or from any
other person, subject to such rules and
regulations as the Commission may prescribe as
necessary or appropriate in the public interest
or for the protection of investors; or
(B) from the issuer of such securities, which
issuer is described in section 2(a)(46) (A) and
(B) but is not an eligible portfolio company
because it has issued a class of securities
with respect to which a member of a national
securities exchange, broker, or dealer may
extend or maintain credit to or for a customer
pursuant to rules or regulations adopted by the
Board of Governors of the Federal Reserve
System under section 7 of the Securities
Exchange Act of 1934, or from any person who is
an officer or employee of such issuer, if--
(i) at the time of the purchase, the
business development company owns at
least 50 per centum of--
(I) the greatest number of
equity securities of such
issuer and securities
convertible into or
exchangeable for such
securities; and
(II) the greatest amount of
debt securities of such issuer,
held by such business development
company at any point in time during the
period when such issuer was an eligible
portfolio company, except that options,
warrants, and similar securities which
have by their terms expired and debt
securities which have been converted,
or repaid or prepaid in the ordinary
course of business or incident to a
public offering of securities of such
issuer, shall not be considered to have
been held by such business development
company for purposes of this
requirement; and
(ii) the business development company
is one of the 20 largest holders of
record of such issuer's outstanding
voting securities;
(2) securities of any eligible portfolio company with
respect to which the business development company
satisfies the requirements of section 2(a)(46)(C)(ii);
(3) securities purchased in transactions not
involving any public offering from an issuer described
in sections 2(a)(46) (A) and (B) or from a person who
is, or who within the preceding thirteen months has
been, an affiliated person of such issuer, or from any
person in transactions incident thereto, if such
securities were--
(A) issued by an issuer that is, or was
immediately prior to the purchase of its
securities by the business development company,
in bankruptcy proceedings, subject to
reorganization under the supervision of a court
of competent jurisdiction, or subject to a plan
or arrangement resulting from such bankruptcy
proceedings or reorganization;
(B) issued by an issuer pursuant to or in
consummation of such a plan or arrangement; or
(C) issued by an issuer that, immediately
prior to the purchase of such issuer's
securities by the business development company,
was not in bankruptcy proceedings but was
unable to meet its obligations as they came due
without material assistance other than
conventional lending or financing arrangements;
(4) securities of eligible portfolio companies
purchased from any person in transactions not involving
any public offering, if there is no ready market for
such securities and if immediately prior to such
purchase the business development company owns at least
60 per centum of the outstanding equity securities of
such issuer (giving effect to all securities presently
convertible into or exchangeable for equity securities
of such issuer as if such securities were so converted
or exchanged);
(5) securities received in exchange for or
distributed on or with respect to securities described
in paragraphs (1) through (4) of this subsection, or
pursuant to the exercise of options, warrants, or
rights relating to securities described in such
paragraphs;
(6) cash, cash items, Government securities, or high
quality debt securities maturing in one year or less
from the time of investment in such high quality debt
securities; and
(7) office furniture and equipment, interests in real
estate and leasehold improvements and facilities
maintained to conduct the business operations of the
business development company, deferred organization and
operating expenses, and other noninvestment assets
necessary and appropriate to its operations as a
business development company, including notes of
indebtedness of directors, officers, employees, and
general partners held by a business development company
as payment for securities of such company issued in
connection with an executive compensation plan
described in section 57(j).
(b) For purposes of this section, the value of a business
development company's assets shall be determined as of the date
of the most recent financial statements filed by such company
with the Commission pursuant to section 13 of the Securities
Exchange Act of 1934, and shall be determined no less
frequently than annually.
(c) Securities Deemed To Be Permissible Assets.--
Notwithstanding subsection (a), securities that would be
described in paragraphs (1) through (6) of such subsection
except that the issuer is a company described in paragraph (2),
(3), (4), (5), (6), or (9) of section 3(c) may be deemed to be
assets described in paragraphs (1) through (6) of subsection
(a) to the extent necessary for the sum of the assets to equal
70 percent of the value of a business development company's
total assets (other than assets described in paragraph (7) of
subsection (a)), provided that the aggregate value of such
securities counting toward such 70 percent shall not exceed 20
percent of the value of the business development company's
total assets.
* * * * * * *
transactions with certain affiliates
Sec. 57. (a) It shall be unlawful for any person who is
related to a business development company in a manner described
in subsection (b) of this section, acting as principal--
(1) knowingly to sell any security or other property
to such business development company or to any company
controlled by such business development company, unless
such sale involves solely (A) securities of which the
buyer is the issuer, or (B) securities of which the
seller is the issuer and which are part of a general
offering to the holders of a class of its securities;
(2) knowingly to purchase from such business
development company or from any company controlled by
such business development company, any security or
other property (except securities of which the seller
is the issuer);
(3) knowingly to borrow money or other property from
such business development company or from any company
controlled by such business development company (unless
the borrower is controlled by the lender), except as
permitted in section 21(b) or section 62; or
(4) knowingly to effect any transaction in which such
business development company or a company controlled by
such business development company is a joint or a joint
and several participant with such person in
contravention of such rules and regulations as the
Commission may prescribe for the purpose of limiting or
preventing participation by such business development
company or controlled company on a basis less
advantageous than that of such person, except that
nothing contained in this paragraph shall be deemed to
preclude any person from acting as manager of any
underwriting syndicate or other group in which such
business development company or controlled company is a
participant and receiving compensation therefor.
(b) The provisions of subsection (a) of this section shall
apply to the following persons:
(1) Any director, officer, employee, or member of an
advisory board of a business development company or any
person (other than the business development company
itself) who is, within the meaning of section
2(a)(3)(C) of this title, an affiliated person of any
such person specified in this paragraph.
(2) Any investment adviser or promoter of, general
partner in, principal underwriter for, or person
directly or indirectly either controlling, controlled
by, or under common control with, a business
development company (except the business development
company itself and any person who, if it were not
directly or indirectly controlled by the business
development company, would not be directly or
indirectly under the control of a person who controls
the business development company), or any person who
is, within the meaning of section 2(a)(3) (C) or (D),
an affiliated person of any such person specified in
this paragraph.
(c) Notwithstanding paragraphs (1), (2), and (3) of
subsection (a), any person may file with the Commission an
application for an order exempting a proposed transaction of
the applicant from one or more provisions of such paragraphs.
The Commission shall grant such application and issue such
order of exemption if evidence establishes that--
(1) the terms of the proposed transaction, including
the consideration to be paid or received, are
reasonable and fair and do not involve overreaching of
the business development company or its shareholders or
partners on the part of any person concerned;
(2) the proposed transaction is consistent with the
policy of the business development company as recited
in the filings made by such company with the Commission
under the Securities Act of 1933, its registration
statement and reports filed under the Securities
Exchange Act of 1934, and its reports to shareholders
or partners; and
(3) the proposed transaction is consistent with the
general purposes of this title.
(d) It shall be unlawful for any person who is related to a
business development company in the manner described in
subsection (e) of this section and who is not subject to the
prohibitions of subsection (a) of this section, acting as
principal--
(1) knowingly to sell any security or other property
to such business development company or to any company
controlled by such business development company, unless
such sale involves solely (A) securities of which the
buyer is the issuer, or (B) securities of which the
seller is the issuer and which are part of a general
offering to the holders of a class of its securities;
(2) knowingly to purchase from such business
development company or from any company controlled by
such business development company, any security or
other property (except securities of which the seller
is the issuer);
(3) knowingly to borrow money or other property from
such business development company or from any company
controlled by such business development company (unless
the borrower is controlled by the lender), except as
permitted in section 21(b); or
(4) knowingly to effect any transaction in which such
business development company or a company controlled by
such business development company is a joint or a joint
and several participant with such affiliated person in
contravention of such rules and regulations as the
Commission may prescribe for the purpose of limiting or
preventing participation by such business development
company or controlled company on a basis less
advantageous than that of such affiliated person,
except that nothing contained in this paragraph shall
be deemed to preclude any person from acting as manager
of any underwriting syndicate or other group in which
such business development company or controlled company
is a participant and receiving compensation therefor.
(e) The provisions of subsection (d) of this section shall
apply to the following persons:
(1) Any person (A) who is, within the meaning of
section 2(a)(3)(A), an affiliated person of a business
development company, (B) who is an executive officer or
a director of, or general partner in, any such
affiliated person, or (C) who directly or indirectly
either controls, is controlled by, or is under common
control with, such affiliated person.
(2) Any person who is an affiliated person of a
director, officer, employee, investment adviser, member
of an advisory board or promoter of, principal
underwriter for, general partner in, or an affiliated
person of any person directly or indirectly either
controlling or under common control with a business
development company (except the business development
company itself and any person who, if it were not
directly or indirectly controlled by the business
development company, would not be directly or
indirectly under the control of a person who controls
the business development company).
For purposes of this subsection, the term ``executive officer''
means the president, secretary, treasurer, any vice president
in charge of a principal business function, and any other
person who performs similar policymaking functions.
(f) Notwithstanding subsection (d) of this section, a person
described in subsection (e) may engage in a proposed
transaction described in subsection (d) if such proposed
transaction is approved by the required majority (as defined in
subsection (o)) of the directors of or general partners in the
business development company on the basis that--
(1) the terms thereof, including the consideration to
be paid or received, are reasonable and fair to the
shareholders or partners of the business development
company and do not involve overreaching of such company
or its shareholders or partners on the part of any
person concerned;
(2) the proposed transaction is consistent with the
interests of the shareholders or partners of the
business development company and is consistent with the
policy of such company as recited in filings made by
such company with the Commission under the Securities
Act of 1933, its registration statement and reports
filed under the Securities Exchange Act of 1934, and
its reports to shareholders or partners; and
(3) the directors or general partners record in their
minutes and preserve in their records, for such periods
as if such records were required to be maintained
pursuant to section 31(a), a description of such
transaction, their findings, the information or
materials upon which their findings were based, and the
basis therefor.
(g) Notwithstanding subsection (a) or (d), a person may, in
the ordinary course of business, sell to or purchase from any
company merchandise or may enter into a lessor-lessee
relationship with any person and furnish the services incident
thereto.
(h) The directors of or general partners in any business
development company shall adopt, and periodically review and
update as appropriate, procedures reasonably designed to ensure
that reasonable inquiry is made, prior to the consummation of
any transaction in which such business development company or a
company controlled by such business development company
proposes to participate, with respect to the possible
involvement in the transaction of persons described in
subsections (b) and (e) of this section.
(i) Until the adoption by the Commission of rules or
regulations under subsections (a) and (d) of this section, the
rules and regulations of the Commission under subsections (a)
and (d) of section 17 applicable to registered closed-end
investment companies shall be deemed to apply to transactions
subject to subsections (a) and (d) of this section. Any rules
or regulations adopted by the Commission to implement this
section shall be no more restrictive than the rules or
regulations adopted by the Commission under subsections (a) and
(d) of section 17 that are applicable to all registered closed-
end investment companies.
(j) Notwithstanding subsections (a) and (d) of this section,
any director, officer, or employee of, or general partner in, a
business development company may--
(1) acquire warrants, options, and rights to purchase
voting securities of such business development company,
and securities issued upon the exercise or conversion
thereof, pursuant to an executive compensation plan
offered by such company which meets the requirements of
[section 61(a)(3)(B)] section 61(a)(4)(B); and
(2) borrow money from such business development
company for the purpose of purchasing securities issued
by such company pursuant to an executive compensation
plan, if each such loan--
(A) has a term of not more than ten years;
(B) becomes due within a reasonable time, not
to exceed sixty days, after the termination of
such person's employment or service;
(C) bears interest at no less than the
prevailing rate applicable to 90-day United
States Treasury bills at the time the loan is
made;
(D) at all times is fully collateralized
(such collateral may include any securities
issued by such business development company);
and
(E)(i) in the case of a loan to any officer
or employee of such business development
company (including any officer or employee who
is also a director of such company), is
approved by the required majority (as defined
in subsection (o)) of the directors of or
general partners in such company on the basis
that the loan is in the best interests of such
company and its shareholders or partners; or
(ii) in the case of a loan to any director of
such business development company who is not
also an officer or employee of such company, or
to any general partner in such company, is
approved by order of the Commission, upon
application, on the basis that the terms of the
loan are fair and reasonable and do not involve
overreaching of such company or its
shareholders or partners.
(k) It shall be unlawful for any person described in
subsection (l)--
(1) acting as agent, to accept from any source any
compensation (other than a regular salary or wages from
the business development company) for the purchase or
sale of any property to or for such business
development company or any controlled company thereof,
except in the course of such person's business as an
underwriter or broker; or
(2) acting as broker, in connection with the sale of
securities to or by the business development company or
any controlled company thereof, to receive from any
source a commission, fee, or other remuneration for
effecting such transaction which exceeds--
(A) the usual and customary broker's
commission if the sale is effected on a
securities exchange;
(B) 2 per centum of the sales price if the
sale is effected in connection with a secondary
distribution of such securities; or
(C) 1 per centum of the purchase or sale
price of such securities if the sale is
otherwise effected,
unless the Commission, by rules and regulations or order in the
public interest and consistent with the protection of
investors, permits a larger commission.
(l) The provisions of subsection (k) of this section shall
apply to the following persons:
(1) Any affiliated person of a business development
company.
(2)(A) Any person who is, within the meaning of
section 2(a)(3) (B), (C), or (D), an affiliated person
of any director, officer, employee, or member of an
advisory board of the business development company.
(B) Any person who is, within the meaning of section
2(a)(3) (A), (B), (C), or (D), an affiliated person of
any investment adviser of, general partner in, or
person directly or indirectly either controlling,
controlled by, or under common control with, the
business development company.
(C) Any person who is, within the meaning of section
2(a)(3)(C), an affiliated person of any person who is
an affiliated person of the business development
company within the meaning of section 2(a)(3)(A).
(m) For purposes of subsections (a) and (d), a person who is
a director, officer, or employee of a party to a transaction
and who receives his usual and ordinary fee or salary for usual
and customary services as a director, officer, or employee from
such party shall not be deemed to have a financial interest or
to participate in the transaction solely by reason of his
receipt of such fee or salary.
(n)(1) Notwithstanding subsection (a)(4) of this section, a
business development company may establish and maintain a
profit-sharing plan for its directors, officers, employees, and
general partners and such directors, officers, employees, and
general partners may participate in such profit-sharing plan,
if--
(A)(i) in the case of a profit-sharing plan for
officers and employees of the business development
company (including any officer or employee who is also
a director of such company), such profit-sharing plan
is approved by the required majority (as defined in
subsection (o)) of the directors of or general partners
in such company on the basis that such plan is
reasonable and fair to the shareholders or partners of
such company, does not involve overreaching of such
company or its shareholders or partners on the part of
any person concerned, and is consistent with the
interests of the shareholders or partners of such
company; or
(ii) in the case of a profit-sharing plan which
includes one or more directors of the business
development company who are not also officers or
employees of such company, or one or more general
partners in such company, such profit-sharing plan is
approved by order of the Commission, upon application,
on the basis that such plan is reasonable and fair to
the shareholders or partners of such company, does not
involve overreaching of such company or its
shareholders or partners on the part of any person
concerned, and is consistent with the interests of the
shareholders or partners of such company; and
(B) the aggregate amount of benefits which would be
paid or accrued under such plan shall not exceed 20 per
centum of the business development company's net income
after taxes in any fiscal year.
(2) This subsection may not be used where the business
development company has outstanding any stock option, warrant,
or right issued as part of an executive compensation plan,
including a plan pursuant to [section 61(a)(3)(B)] section
61(a)(4)(B), or has an investment adviser registered or
required to be registered under title II of this Act.
(o) The term ``required majority'', when used with respect to
the approval of a proposed transaction, plan, or arrangement,
means both a majority of a business development company's
directors or general partners who have no financial interest in
such transaction, plan, or arrangement and a majority of such
directors or general partners who are not interested persons of
such company.
* * * * * * *
capital structure
Sec. 61. (a) Notwithstanding the exemption set forth in
section 6(f), section 18 shall apply to a business development
company to the same extent as if it were a registered closed-
end investment company, except as follows:
[(1) The asset coverage requirements of section
18(a)(1) (A) and (B) applicable to business development
companies shall be 200 per centum.]
(1) Except as provided in paragraph (2), the asset
coverage requirements of subparagraphs (A) and (B) of
section 18(a)(1) (and any related rule promulgated
under this Act) applicable to business development
companies shall be 200 percent.
(2) The asset coverage requirements of subparagraphs
(A) and (B) of section 18(a)(1) and of subparagraphs
(A) and (B) of section 18(a)(2) (and any related rule
promulgated under this Act) applicable to a business
development company shall be 150 percent if--
(A) within five business days of the approval
of the adoption of the asset coverage
requirements described in clause (ii), the
business development company discloses such
approval and the date of its effectiveness in a
Form 8-K filed with the Commission and in a
notice on its website and discloses in its
periodic filings made under section 13 of the
Securities Exchange Act of 1934 (15 U.S.C.
78m)--
(i) the aggregate value of the senior
securities issued by such company and
the asset coverage percentage as of the
date of such company's most recent
financial statements; and
(ii) that such company has adopted
the asset coverage requirements of this
subparagraph and the effective date of
such requirements;
(B) with respect to a business development
company that issues equity securities that are
registered on a national securities exchange,
the periodic filings of the company under
section 13(a) of the Securities Exchange Act of
1934 (15 U.S.C. 78m) include disclosures
reasonably designed to ensure that shareholders
are informed of--
(i) the amount of indebtedness and
asset coverage ratio of the company,
determined as of the date of the
financial statements of the company
dated on or most recently before the
date of such filing; and
(ii) the principal risk factors
associated with such indebtedness, to
the extent such risk is incurred by the
company; and
(C)(i) the application of this paragraph to
the company is approved by the required
majority (as defined in section 57(o)) of the
directors of or general partners of such
company who are not interested persons of the
business development company, which application
shall become effective on the date that is 1
year after the date of the approval, and, with
respect to a business development company that
issues equity securities that are not
registered on a national securities exchange,
the company extends, to each person who is a
shareholder as of the date of the approval, an
offer to repurchase the equity securities held
by such person as of such approval date, with
25 percent of such securities to be repurchased
in each of the four quarters following such
approval date; or
(ii) the company obtains, at a special or
annual meeting of shareholders or partners at
which a quorum is present, the approval of more
than 50 percent of the votes cast of the
application of this paragraph to the company,
which application shall become effective on the
date immediately after the date of the
approval.
[(2)] (3) Notwithstanding section 18(c), a business
development company may issue more than one class of
senior security representing indebtedness or which is a
stock, provided that all such stock is issued in
accordance with paragraph (6).
[(3)] (4) Notwithstanding section 18(d)--
(A) a business development company may issue
warrants, options, or rights to subscribe or
convert to [voting] securities of such company,
accompanied by securities, if--
(i) such warrants, options, or rights
expire by their terms within ten years;
(ii) such warrants, options, or
rights are not separately transferable
unless no class of such warrants,
options, or rights and the securities
accompanying them has been publicly
distributed;
[(iii) the exercise or conversion
price is not less than the current
market value at the date of issuance,
or if no such market value exists, the
current net asset value of such voting
securities; and]
(iii) the exercise or conversion
price at the date of issuance of such
warrants, options, or rights is not
less than--
(I) the market value of the
securities issuable upon the
exercise of such warrants,
options, or rights at the date
of issuance of such warrants,
options, or rights; or
(II) if no such market value
exists, the net asset value of
the securities issuable upon
the exercise of such warrants,
options, or rights at the date
of issuance of such warrants,
options, or rights; and
(iv) the proposal to issue such
securities is authorized by the
shareholders or partners of such
business development company, and such
issuance is approved by the required
majority (as defined in section 57(o))
of the directors of or general partners
in such company on the basis that such
issuance is in the best interests of
such company and its shareholders or
partners;
(B) a business development company may issue,
to its directors, officers, employees, and
general partners, warrants, options, and rights
to purchase voting securities of such company
pursuant to an executive compensation plan,
if--
(i)(I) in the case of warrants,
options, or rights issued to any
officer or employee of such business
development company (including any
officer or employee who is also a
director of such company), such
securities satisfy the conditions in
clauses (i), (iii), and (iv) of
subparagraph (A); or (II) in the case
of warrants, options, or rights issued
to any director of such business
development company who is not also an
officer or employee of such company, or
to any general partner in such company,
the proposal to issue such securities
satisfies the conditions in clauses (i)
and (iii) of subparagraph (A), is
authorized by the shareholders or
partners of such company, and is
approved by order of the Commission,
upon application, on the basis that the
terms of the proposal are fair and
reasonable and do not involve
overreaching of such company or its
shareholders or partners;
(ii) such securities are not
transferable except for disposition by
gift, will, or intestacy;
(iii) no investment adviser of such
business development company receives
any compensation described in section
205(a)(1) of title II of this Act,
except to the extent permitted by
paragraph (1) or (2) of section 205(b);
and
(iv) such business development
company does not have a profit-sharing
plan described in section 57(n); and
(C) a business development company may issue
warrants, options, or rights to subscribe to,
convert to, or purchase voting securities not
accompanied by securities, if--
(i) such warrants, options, or rights
satisfy the conditions in clauses (i)
and (iii) of subparagraph (A); and
(ii) the proposal to issue such
warrants, options, or rights is
authorized by the shareholders or
partners of such business development
company, and such issuance is approved
by the required majority (as defined in
section 57(o)) of the directors of or
general partners in such company on the
basis that such issuance is in the best
interests of the company and its
shareholders or partners.
Notwithstanding this paragraph, the amount of voting
securities that would result from the exercise of all
outstanding warrants, options, and rights at the time
of issuance shall not exceed 25 per centum of the
outstanding voting securities of the business
development company, except that if the amount of
voting securities that would result from the exercise
of all outstanding warrants, options, and rights issued
to such company's directors, officers, employees, and
general partners pursuant to any executive compensation
plan meeting the requirements of subparagraph (B) of
this paragraph would exceed 15 per centum of the
outstanding voting securities of such company, then the
total amount of voting securities that would result
from the exercise of all outstanding warrants, options,
and rights at the time of issuance shall not exceed 20
per centum of the outstanding voting securities of such
company.
[(4)] (5) For purposes of measuring the asset
coverage requirements of section 18(a), a senior
security created by the guarantee by a business
development company of indebtedness issued by another
company shall be the amount of the maximum potential
liability less the fair market value of the net
unencumbered assets (plus the indebtedness which has
been guaranteed) available in the borrowing company
whose debts have been guaranteed, except that a
guarantee issued by a business development company of
indebtedness issued by a company which is a wholly-
owned subsidiary of the business development company
and is licensed as a small business investment company
under the Small Business Investment Act of 1958 shall
not be deemed to be a senior security of such business
development company for purposes of section 18(a) if
the amount of the indebtedness at the time of its
issuance by the borrowing company is itself taken fully
into account as a liability by such business
development company, as if it were issued by such
business development company, in determining whether
such business development company, at that time,
satisfies the asset coverage requirements of section
18(a).
(6)(A) Qualified institutional buyer.--Except as
provided in subparagraph (B), the following shall not
apply to a senior security which is a stock and which
is issued to and held by a qualified institutional
buyer (as defined in section 3(a)(64) of the Securities
Exchange Act of 1934):
(i) Subparagraphs (C) and (D) of section
18(a)(2).
(ii) Subparagraph (E) of section 18(a)(2), to
the extent such subparagraph requires any
priority over any other class of stock as to
distribution of assets upon liquidation.
(iii) With respect to a senior security which
is a stock, subsections (c) and (i) of section
18.
(B) Individual investors who are not qualified
institutional buyers.--Subparagraph (A) shall not apply
with respect to a senior security which is a stock and
which is issued to a person who is not known by the
business development company to be a qualified
institutional buyer (as defined in section 3(a) of the
Securities Exchange Act of 1934).
(7) Rule of construction.--Notwithstanding any other
provision of law, any additional class of stock issued
pursuant to this section must be issued in accordance
with all investor protections contained in all
applicable federal securities laws administered by the
Commission.
(b) A business development company shall comply with the
provisions of this section at the time it becomes subject to
sections 55 through 65, as if it were issuing a security of
each class which it has outstanding at such time.
* * * * * * *
distribution and repurchase of securities
Sec. 63. Notwithstanding the exemption set forth in section
6(f), section 23 shall apply to a business development company
to the same extent as if it were a registered closed-end
investment company, except as follows:
(1) The prohibitions of section 23(a)(2) shall not
apply to any company which (A) is a wholly-owned
subsidiary of, or directly or indirectly controlled by,
a business development company, and (B) immediately
after the issuance of any of its securities for
property other than cash or securities, will not be an
investment company within the meaning of section 3(a).
(2) Notwithstanding the provisions of section 23(b),
a business development company may sell any common
stock of which it is the issuer at a price below the
current net asset value of such stock, and may sell
warrants, options, or rights to acquire any such common
stock at a price below the current net asset value of
such stock, if--
(A) the holders of a majority of such
business development company's outstanding
voting securities, and the holders of a
majority of such company's outstanding voting
securities that are not affiliated persons of
such company, approved such company's policy
and practice of making such sales of securities
at the last annual meeting of shareholders or
partners within one year immediately prior to
any such sale, except that the shareholder
approval requirements of this subparagraph
shall not apply to the initial public offering
by a business development company of its
securities;
(B) a required majority (as defined in
section 57(o)) of the directors of or general
partners in such business development company
have determined that any such sale would be in
the best interests of such company and its
shareholders or partners; and
(C) a required majority (as defined in
section 57(o)) of the directors of or general
partners in such business development company,
in consultation with the underwriter or
underwriters of the offering if it is to be
underwritten, have determined in good faith,
and as of a time immediately prior to the first
solicitation by or on behalf of such company of
firm commitments to purchase such securities or
immediately prior to the issuance of such
securities, that the price at which such
securities are to be sold is not less than a
price which closely approximates the market
value of those securities, less any
distributing commission or discount.
(3) A business development company may sell any
common stock of which it is the issuer at a price below
the current net asset value of such stock upon the
exercise of any warrant, option, or right issued in
accordance with [section 61(a)(3)] section 61(a)(4).
* * * * * * *