[Federal Register Volume 62, Number 207 (Monday, October 27, 1997)]
[Notices]
[Pages 55660-55663]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-28365]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22846; 812-10544]
Brantley Capital Corporation, et al.; Notice of Application
October 21, 1997.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of application for an order under sections 6(c) and
57(i) of the Investment Company Act of 1940 (the ``Act''), and under
rule 17d-1 under the Act permitting certain joint transactions
otherwise prohibited by section 57(a)(4) of the Act.
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SUMMARY: Applicants request an order to permit a business development
company to co-invest with certain affiliates in portfolio companies.
APPLICANTS: Brantley Capital Corporation (the ``Company''), Brantley
Capital Management, LLC (the ``Investment Adviser''), Brantley Venture
Partners II, LP (``BVP II''), Brantley Venture Partners III, LP (``BVP
III'') (BVP II and BVP III, the ``BVP entities''), and any entities
currently or in the future advised by the Investment Adviser or by
entities controlling, controlled by, or under common control with the
Investment Adviser (together with the BVP entities, ``Company
Affiliates'').\1\
\1\ All existing entities that currently intend to rely on the
order have been named as applicants, and any other existing or
future entities that subsequently rely on the order will comply with
the terms and conditions in the application.
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Filing Dates: The application was filed on March 6, 1997 and amended on
August 26, 1997, and on October 10, 1997. Hearing or Notification of
Hearing: An order granting the application will be issued unless the
SEC orders a hearing.
Interested persons may request a hearing by writing to the SEC's
Secretary and serving applicants with a copy of the request, personally
or by mail. Hearing requests should be received by the SEC by 5:30 p.m.
on November 17, 1997, 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 SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, DC
20549. Applicants, 20600 Chagrin Blvd., Suite 1150, Cleveland, OH
44122.
FOR FURTHER INFORMATION CONTACT:
Lisa McCrea, Attorney Adviser (202) 942-0562, or Mercer E. Bullard,
Branch Chief, (202) 942-0564 (Office of Investment Company Regulation,
Division of Investment Management).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained for a fee at the
SEC's Public Reference Branch, 450 5th Street N.W., Washington, DC
20549 (tel. 202-942-8090).
Applicants' Representations
1. The Company, a Maryland corporation, is a non-diversified
closed-end investment company that has elected to be regulated as a
business development company (a ``BDC'') under the Act.\2\ The Company
filed a registration statement on Form N-2 that became effective on
November 26, 1996.
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\2\ Section 2(a) (48) provides that a business development
company is any closed-end company which is operated for the purpose
of making investments in securities described in section 55(a) of
the Act and makes available significant managerial assistance with
respect to the issuers of these securities, and which elects BDC
status under section 54(a).
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2. The Company was formed to invest primarily in the equity
securities and
[[Page 55661]]
equity-linked debt securities of private companies, and makes available
significant managerial assistance to the issuers of such securities.
The Company seeks to enable its stockholders to participate in
investments not typically available to the public due to the private
nature of a substantial majority of the Company's portfolio companies,
the size of the financial commitment often required in order to
participate in such investments, or the experience, skill and time
commitment required to identify and take advantage of these investment
opportunities.
3. At June 30, 1997, the Company had total assets valued at $40
million, which was primarily invested in short-term U.S. government
securities pending investment in portfolio companies. The Company
intends to invest a portion of its assets in equity securities of post-
venture small-cap public companies. A post-venture company is a company
that has received venture capital or private equity financing either
(a) during the early stages of the company's business or the early
stages of the development of a new product or service, or (b) as part
of a restructuring or recapitalization of the company. The Company
intends to limit its post-venture investments to companies which within
the prior 10 years have received an investment of venture or private
equity capital, have sold or distributed securities to venture or
private equity capital investors, or have completed an initial public
offering of equity securities.
4. The Company's investment objective is the realization of long-
term capital appreciation in the value of its investments. In addition,
whenever feasible in light of market conditions and the cash flow
characteristics of the issuers of the securities in which it invests
(collectively, the ``portfolio companies''), the Company will seek to
provide an element of current income primarily from interest, dividends
and fees paid by its portfolio companies.
5. The BVP entities are venture capital limited partnerships not
registered under the Act in reliance on sections 3(c)(1) and/or 3(c)(7)
of the Act. The BVP entities, during the period from 1981 through 1996,
in the aggregate have made investments in 32 small businesses, each
with up to $20 million in annual revenue, either as part of early-stage
financings, expansion financings, acquisition or buyout financings or
special situations. The BVP entities generally have made venture
capital investments similar to the investments to be made by the
Company in private companies.
6. BVP II, a Delaware limited partnership, has committed capital of
approximately $30 million from 14 limited partners representing
primarily corporate and public pension funds which has been fully
invested in 15 portfolio companies. Although its committed capital is
fully invested, BVP II may elect to reinvest from time to time, rather
than to distribute immediately, the cash proceeds from the harvest of
existing investments prior to its scheduled final distribution in April
2000. The sole general partner of the controlling general partner and
two other general partners of the Delaware limited partnership which is
BVP II's managing general partner are executive officers of the Company
and are principals of the Investment Adviser.
7. BVP III, a Delaware limited partnership, has committed capital
of approximately $60 million from 16 limited partners representing
primarily corporate and public pension funds. The committed capital
currently is less than 40% invested in 9 portfolio companies. BVP III
is not scheduled for final distribution until December 2003. The sole
general partner of the controlling general partner and two other
general partners of the Delaware limited partnership which is BVP III's
managing general partner are executive officers of the Company and
principals of the Investment Adviser.
8. The Investment Adviser is registered with the SEC as an
investment adviser under the Investment Advisers Act of 1940. The
Investment Adviser was named originally as ``Brantley Capital
Management, Ltd.'', and organized originally as a Delaware corporation
on February 9, 1995. The Investment Adviser was reorganized as a
Delaware limited liability company on November 25, 1996. The Investment
Adviser is privately owned by its members, including certain executive
officers of the Company who are principals of the Investment Adviser.
The Investment Adviser currently provides investment advisory services
solely to the Company. However, certain of the Investment Adviser's
principals are also principals of several management companies
organized as limited partnerships, each of which is the managing
general partner in one of the BVP entities.
9. Applicants request an order under section 57(i) of the Act and
under rule 17d-1 to permit the Company and Company Affiliates to co-
invest in portfolio companies.
Applicants' Legal Analysis
1. Section 57(a)(4) of the Act prohibits certain affiliated persons
from participating in a joint transaction with a BDC in contravention
of rules as prescribed by the SEC. Under section 57(b)(1) of the Act,
persons who are affiliated persons of the directors or officers of a
BDC within the meaning of section 2(a)(3)(C) of the Act are subject to
section 57(a)(4). Under section 2(a)(3)(C), an affiliated person of
another person includes any person directly or indirectly controlled by
such other person.
2. Section 57(i) of the Act provides that, until the SEC prescribes
rules under section 57(a)(4), the SEC's rules under sections 17(a) and
17(d) of the Act applicable to closed-end investment companies shall be
deemed to apply to sections 57(a) and 57(d). Because the SEC has not
adopted any rules under section 57(a)(4), rule 17d-1 applies.
3. Rule 17d-1 under the Act generally prohibits affiliated persons
of an investment company from entering into joint transactions with the
company without prior SEC authorization. In passing upon applications
under rule 17d-1(b), the SEC will consider whether the participation by
the BDC in such 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, because the BVP entities may be deemed to
be under common control with the Investment Adviser through the common
ownership of the BVP entities' respective managing general partners
with the Investment Adviser and also through the common identity of
certain principals of the BVP entities' managing general partners and
the Investment Adviser, the BVP entities may be persons affiliated with
the Company under section 57(b) of the Act and therefore may be
prohibited by section 57(a)(4) of the Act and rule 17d-1 from
participating in the proposed co-investment program without exemptive
relief.
5. Applicants expect that co-investment in portfolio companies by
the Company and Company Affiliates will increase favorable investment
opportunities for the Company. Applicants state that an investment
company that makes venture capital investments typically limits its
participation in any one transaction to a specific dollar amount.
Applicants state that, when the Investment identifies venture capital
investment opportunities requiring larger capital commitments, it must
seek the participation of other venture capital entities. Applicants
believe that the availability of the Company Affiliates as investing
partners of the Company may
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alleviate that necessity in certain circumstances.
6. The Investment Adviser believes that it will be advantageous for
the Company to co-invest with the investment objectives, policies, and
restrictions of the Company. The Investment Adviser also believes that
co-investment by the Company and the Company Affiliates will provide
the opportunity for achieving greater diversification and exercising
greater influence on the portfolio companies in which the Company and
Company Affiliates co-invest.
7. Applicants submit that the formula for the allocation of co-
investment opportunities among the Company on the one hand and the
Company Affiliates on the other and the advance approvals of the
required majority (within the meaning of section 57(o) of the Act) of
directors of the Company, as provided in condition 1 below, will ensure
that the Company will be treated fairly. Applicants also contend that
the conditions to which the requested relief will be subject are
designed to ensure that principals of the Investment Adviser would not
be able to favor the Company Affiliates over the Company through the
allocation of investment opportunities among them.
Applicants' Conditions
Applicants agree that the requested order shall be subject to the
following conditions:
1. (a) To the extent that the Company is considering new
investments, the Investment Adviser will review investment
opportunities on behalf of the Company, including investments being
considered on behalf of any Company Affiliate. The Investment Adviser
will determine whether an investment being considered on behalf of a
Company Affiliate (``Company Affiliate Investment'') is eligible for
investment by the Company.
(b) If the Investment Adviser deems a Company Affiliate Investment
eligible for the Company (a ``co-investment opportunity''), the
Investment Adviser will determine what it considers to be an
appropriate amount that the Company should invest. When the aggregate
amount recommended for the Company and that sought by a Company
Affiliate exceeds the amount of the co-investment opportunity, the
amount invested by the Company shall be based on the ratio of the net
assets of the Company to the aggregate net assets of the Company and
the Company Affiliate seeking to make the investment.
(c) Following the making of the determinations referred to in (a)
and (b), the Investment Adviser will distribute written information
concerning all co-investment opportunities to the Company's directors
who are not ``interested persons'' as defined under section 2(a) (19)
of the Act (``Independent Directors''). The information will include
the amount the Company Affiliate proposes to invest.
(d) Information regarding the Investment Adviser's preliminary
determinations will be reviewed by the Company's Independent Directors.
The Company will co-invest with a Company Affiliate only if a required
majority (as defined in section 57(o) of the Act) (``Required
Majority'') of the Company's Independent Directors conclude, prior to
the acquisition of the investment, that:
(i) The terms of the transaction, including the consideration to be
paid, are reasonable and fair to the shareholders of the Company and do
not involve overreaching of the Company or such shareholders on the
part of any person concerned;
(ii) The transaction is consistent with the interests of
shareholders of the Company and is consistent with the Company's
investment objectives and policies as recited in filings made by the
Company under the Securities Act of 1933, as amended, its registration
statement and reports filed under the Securities Exchange Act of 1934,
as amended, and its reports to shareholders;
(iii) The investment by the Company Affiliate would not
disadvantage the Company, and that participation by the Company would
not be on a basis different from or less advantageous than that of the
Company Affiliate; and
(iv) The proposed investment by the Company will not benefit the
Investment Adviser or any affiliated entity thereof, other than the
Company Affiliate making the coinvestment, except to the extent
permitted pursuant to sections 17(e) and 57(k) of the Act.
(e) The Company has the right to decline to participate in the co-
investment opportunity or purchase less than its full allocation.
2. The Company will not make an investment for is portfolio if any
Company Affiliate, the Investment for its portfolio if any Company
Affiliate, the Investment Adviser, or a person controlling, controlled
by, or under common control with the Investment Adviser is an existing
investor in such issuer, with the exception of a follow-on investment
that complies with condition number 5.
3. For any purchase of securities by the Company in which a Company
Affiliate is a joint participant, the terms, conditions, price, class
of securities, settlement date, and registration right shall be the
same for the Company and the Company Affiliate.
4. If a Company Affiliate elects to sell, exchange, or otherwise
dispose of an interest in a security that is also held by the Company,
the Investment Adviser will notify the Company of the proposed
disposition at the earliest practical time and the Company will be
given the opportunity to participate in the disposition on a
proportionate basis, at the same price and on the same terms and
conditions as those applicable to the Company Affiliate. The Investment
Adviser will formulate a recommendation as to participation by the
Company in the proposed disposition, and provide a written
recommendation to the Company's Independent Directors. The Company will
participate in the disposition to the extent that a Required Majority
of its Independent Directors determine that it is in the Company's best
interest. Each of the Company and the Company Affiliate will bear its
own expenses associated with any such disposition of a portfolio
security.
5. If a Company Affiliate desires to make a ``follow-on''
investment (i.e., an additional investment in the same entity) in a
portfolio company whose securities are held by the Company or to
exercise warrants or other rights to purchase securities of the issuer,
the Investment Adviser will notify the Company of the proposed
transaction at the earliest practical time. The Investment Adviser will
formulate a recommendation as to the proposed participation by the
Company in a follow-on investment and provide the recommendation to the
Company's Independent Directors along with notice of the total amount
of the follow-on investment. The Company's Independent Directors will
make their own determination with respect to follow-on investment. To
the extent that the amount of a follow-on investment opportunity is not
based on the amount of the Company's and the Company Affiliate's
initial investments, the relative amount of investment by the Company
Affiliate and the Company will be based on the ratio of the Company's
remaining funds available for investment to the aggregate of the
Company's and the Company Affiliate's remaining funds available for
investment. The Company will participate in the investment to the
extent that a Required Majority of its Independent Directors determine
that it is in the Company's best interest. The acquisition of follow-on
investments as permitted by this condition will be
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subject to the other conditions in the application.
6. The Company's Independent Directors will review quarterly all
information concerning co-investment opportunities during the preceding
quarter to determine whether the conditions in the application were
complied with.
7. 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 Company's Independent Directors under
section 57(f).
8. No Independent Director of the Company will be a director or
general partner of any Company Affiliate with which the Company co-
invests.
For the SEC, by the Division of Investment Management, under
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-28365 Filed 10-24-97; 8:45 am]
BILLING CODE 8010-01-M