On March 20, 2019, the Securities and Exchange Commission (the "SEC") voted to propose rule amendments to implement certain provisions of the Small Business Credit Availability Act and the Economic Growth, Regulatory Relief, and Consumer Protection Act (the "Proposed Amendments").1 The goal of the Proposed Amendments is to modify the registration, offering and communication processes available to business development companies ("BDCs") and other registered closed-end funds ("CEFs" and together with BDCs, "Affected Funds"). The Proposed Amendments would allow Affected Funds to use certain securities offering rules currently available to operating companies in an effort to further the congressionally mandated goal of harmonizing their respective disclosure and regulatory frameworks in order to help investors better assess Affected Funds and their offerings. The proposal will have a 60-day public comment period following its publication in the Federal Register.
The Proposed Amendments focus on two areas: (1) updates to the registration and offering process for Affected Funds and (2) updates to the disclosure requirements for Affected Funds.
Registration and Offering Process Changes
The Proposed Amendments seek to streamline the registration and offering process, permitting Affected Funds to be more flexible. Such changes include:
Shelf-Offering and Short-Form Registration Statements
Affected Funds register their securities offerings using Form N-2 under the Investment Company Act of 1940, as amended, and the Securities Act of 1933, as amended (the "1933 Act"). Both Affected Funds and operating companies have the option to register securities offerings on Form S-3 under the 1933 Act if certain other reporting requirements are met. Under the current rules, the process for operating companies is more streamlined than the process for N-2 filers. Under the Proposed Amendments, this streamlined offering process (known as a "shelf offering"), utilizing a short-form registration statement, would be made available to Affected Funds as well. Affected Funds would generally be eligible to undertake shelf offerings if they met certain filing and reporting history requirements and had a public float of $75 million or more.
Well-Known Seasoned Issuer Status
In 2005 the SEC created a new category of issuer, known as a Well-Known Seasoned Issuer ("WKSI"). WKSIs are issuers that meet certain standards of longevity, reporting consistency and asset levels and therefore receive certain registration and disclosure benefits. The Proposed Amendments would provide a process for Affected Funds to qualify as WKSIs and provide conforming regulations for qualification and disqualification relevant to funds.
Final Prospectus Delivery and Communication Reform
Under the current regulatory regime, operating companies meet the requirements for issuing a final prospectus by filing such prospectus with the SEC. Currently, Affected Funds are prohibited from using filing with the SEC as a means to meet the final delivery requirement. The Proposed Amendments would remove that prohibition and allow Affected Funds to follow the same procedure as operating companies. Similarly, Affected Funds would be permitted to follow many of the more streamlined requirements for communication that are available to operating companies regarding issues such as factual business information, forward-looking statements and broker-dealer research reports.
New Payment Method for Interval Funds
A further change contemplated by the Proposed Amendments is to allow an additional method for the payment of registration fees by interval funds, a segment of CEFs that provides liquidity to its shareholders by conducting periodic self-tender offers. The Proposed Amendments would allow interval funds to utilize similar registration fee payment mechanics to those currently used by mutual funds and exchange-traded funds. Whereas currently interval funds are required to register a specific number of shares in an offering, the Proposed Amendments would allow for registering an indefinite number of shares in an offering, with fees paid on the issuance of such shares.
Disclosure Requirement Changes
The Proposed Amendments seek to update the disclosure and regulatory framework applicable to Affected Funds, in order to align with the proposed updated registration requirements. Some specific updates include:
Under the Proposed Amendments, Affected Funds (including interval funds in certain scenarios) would be required to utilize XBRL or XML data formats for certain filed information, similar to the current requirements for operating companies, exchange-traded funds and mutual funds.
Periodic and Current Reporting
As a complement to the added flexibility of permitting additional availability of short-form registrations, Affected Funds would be required to meet certain additional periodic and current reporting requirements. Such requirements would include providing certain prospectus information in annual reports. Additionally, CEFs would be required to file current reports on Form 8-K for certain material changes which were previously only required by BDCs and operating companies.
Incorporation by Reference Changes
The Proposed Amendments would permit all Affected Funds to incorporate financial information by reference, the delivery of which had previously been required to all new investors. This reform is predicated on the enhanced availability of past information for investors.
The Proposed Amendments are an effort by the SEC to improve access to capital by Affected Funds while also simplifying the communication process between such funds and the Main Street investors that have been the focus of much recent SEC regulation. The Proposed Amendments would also further align the regulatory requirements for funds and operating companies.
1 Securities Offering Reform for Closed-End Investment Companies (https://www.sec.gov/rules/proposed/2019/33-10619.pdf)
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