The Securities and Exchange Commission has proposed rule amendments to improve access to capital and facilitate investor communications by business development companies and registered closed-end funds. Business development companies (BDCs) are a type of closed-end fund established by Congress that primarily invest in small and developing companies.
The amendments implement certain provisions of the Small Business Credit Availability Act and the Economic Growth, Regulatory Relief, and Consumer Protection Act.
“This congressional mandate recognizes the importance of an efficient and cost-effective approach for these funds to raise capital in our public markets, which should ultimately benefit investors in these funds, including Main Street investors,” SEC Chairman Jay Clayton said in a statement. “Moreover, the proposed changes should provide business development companies and registered closed-end funds with a more flexible offering process and facilitate capital formation in our public markets.”
Streamlined registration process
The proposed amendments would modify the registration, communications, and offering processes available to BDCs and registered closed-end funds, building on offering practices that operating companies currently use. Eligible and affected funds would be able to engage in a more streamlined registration process to sell securities “off the shelf” in response to market opportunities through the use of a new short-form registration statement. Like operating companies, an affected fund would generally be eligible to use the short-form registration statement if it meets certain filing and reporting history requirements and has a public float of $75 million or more.
Eligible affected funds would also be able to qualify for well-known seasoned issuer (WKSI) status and benefit from the same flexibility available to operating companies that qualify as such. These include a more flexible registration process and greater latitude to communicate with the market. Like operating companies, an affected fund would qualify as a WKSI if it meets certain filing and reporting history requirements and has a public float of $700 million or more.
‘Free writing prospectus’
Affected funds would be able to use many of the communication rules currently available to operating companies, including the use of a “free writing prospectus,” certain factual business information, forward-looking statements, and certain broker-dealer research reports. Like operating companies, affected funds would be able to satisfy their final prospectus delivery obligations by filing the prospectus with the Commission.
Instead of registering a specific amount of shares and paying registration fees at the time of filing, under the proposal closed-end funds that operate as “interval funds” would register an indefinite number of shares and pay registration fees based on net issuance of shares, similar to what mutual funds and exchange-traded funds are currently permitted to do.
Under the proposal, covered funds would be required to use Inline XBRL to tag registration statement information, similar to current tagging requirements for mutual funds and exchange-traded funds. Business development companies also would need to submit financial statement information using Inline XBRL, as operating companies currently do.
Funds that file Form 24F-2 in connection with paying their registration fees, including mutual funds and exchange-traded funds (as well as interval funds under the proposed amendments), would be required to submit the form in XML format.
To support the proposed short-form registration statement framework, affected funds filing a short-form registration statement would be required to include certain key prospectus disclosures in their annual reports, as well as material unresolved staff comments. Also, registered closed-end funds would have to provide management’s discussion of fund performance (MDFP) in their annual reports, similar to requirements that currently apply to mutual funds, exchange-traded funds, and business development companies.
Current reporting requirements
Under the proposed amendments, registered closed-end funds would be required to file current reports on Form 8-K as operating companies and business development companies are required to do. To better tailor Form 8-K disclosures to affected funds, and to enhance parity with operating companies, all affected funds would be subject to two new Form 8-K reporting events regarding material changes to investment objectives or policies and material write-downs of significant investments.
Incorporation by reference changes
The registration form for affected funds currently requires a fund to provide new purchasers with a copy of all previously filed materials that are incorporated by reference into the registration statement. The proposal would eliminate this requirement and instead require affected funds to make incorporated materials readily available on a website.
The proposal will have a 60-day public comment period following its publication in the Federal Register.