SEC Provides Temporary and Conditional Relief for Business Development Companies

Exemptions from Requirements of the Investment Company Act

 
On April 8, 2020, the SEC issued an order (Order) providing exemptions from certain provisions of the Investment Company Act for closed-end investment companies that are regulated as Business Development Companies (BDC). As many smaller domestic operating companies (portfolio companies) have limited access to the capital markets, the BDCs provide access to capital to portfolio companies through the issuance or sale of securities. The Investment Company Act imposes several requirements on the issuance or sale of those securities including an asset coverage requirement and limitations on the participation of affiliates of the BDCs in investments in the portfolio companies. The SEC’s Order thus provides temporary exemptions or changes to those requirements.
 
For BDC’s to issue or sell senior securities (of their portfolio companies (that represent indebtedness or stock), during the period of relief, the BDCs are required to:

• At the time of issuance or sale of a senior security, calculate the asset coverage ratio in accordance with the relief provided in the Order;
• File a Form 8-K to indicate election of reliance on the Order. Prior to such election, a majority of the members of the Board of Directors of the BDC (Board) will determine that the issuance or sale of the senior securities is permitted under the Order and prior to each issuance or sale of senior securities that such action is in the best interests of the BDC and its shareholders;
• Make no initial investment in a portfolio company in which the BDC is not already invested in for 90 days from the date of election under the Order;
• Require the Board of the BDC to review monthly reports from the investment advisor regarding the status of achieving compliance with the asset coverage ratio;
• Maintain minutes of the meetings of the Board of the BDC related to the Order; and
• Ensure that affiliates of the BDC do not charge transaction fees to a portfolio company in which the BDC invests, except for certain investment advisory fees.

 
The Order also allows for certain follow-on investments in the portfolio companies by entities affiliated with the BDC, if certain conditions are met. The relief provided in the Order is limited to and including the date of the Order (April 8, 2020) and the earlier of and including December 31, 2020 or the date the BDC ceases to rely on the Order.