By John M. Jascob, J.D., LL.M.
By a three-to-one vote, the SEC has approved rule and form amendments modifying the registration, communications, and offering processes available to business development companies (BDCs) and registered closed-end funds. The amendments, which implement certain provisions of the Small Business Credit Availability Act and the Economic Growth, Regulatory Relief, and Consumer Protection Act, seek to increase the availability of funding to small- and mid-sized private companies and harmonize the treatment of BDCs and most registered closed-end funds with that of operating companies. Among other things, the new rules permit eligible funds to engage in a more streamlined registration process and use communications and prospectus delivery rules currently available to operating companies while providing for new reporting and structured data requirements (Securities Offering Reform for Closed-End Investment Companies, Release No. 33–10771, April 8, 2020).
“The amendments we are adopting will modernize the offering process for eligible funds in a way that, as borne out by our experience with operating companies, will benefit both investors in these funds and the companies in which they invest,” said SEC Chairman Jay Clayton in a news release. “This is another example of our staff’s laudable efforts to modernize our rules in a manner that furthers all aspects of our mission."
Commissioner Allison Herren Lee was the lone dissenter, expressing concerns over both the timing and the substance of the rule amendments. In her view, the amendments drop important investor protection features that had been included in the SEC’s original proposal in 2019 while also reducing the Commission’s oversight of material changes to existing funds.
Shelf offerings and new short-form registration statement. Under the amended rules, eligible BDCs and closed-end funds (“affected funds”) will be able to engage in a streamlined registration process, allowing them to sell securities “off the shelf” more quickly and efficiently in order to take advantage of market opportunities. Similar to operating companies, affected funds will generally be eligible to use the new short-form registration statement if they meet certain filing and reporting history requirements and have a public float of $75 million or more.
WKSI status. Like operating companies, eligible affected funds will now be able to qualify as Well-Known Seasoned Issuers (WKSIs) in order to benefit from a more flexible registration process and greater latitude to communicate with the market. Affected funds will qualify as WKSIs if they meet certain filing and reporting history requirements and have a public float of $700 million or more
Communications and reporting. In further measures to harmonize the communication rules applicable to BDCs and closed-end funds with those that apply to operating companies, the amendments allow affected funds to use a “free writing prospectus,” certain factual business information, forward-looking statements, and certain broker-dealer research reports. Also like operating companies, affected funds will be able to satisfy their final prospectus delivery obligations by filing their prospectuses with the SEC.
To support the short-form registration statement framework, affected funds filing a short-form registration statement will be required to include certain key prospectus disclosures in their annual reports. In addition, affected funds filing a short-form registration statement will be required to disclose material unresolved staff comments. Registered closed-end funds also will be required 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 BDCs.
Effective dates. Most of the rule and form amendments will become effective on August 1, 2020. The amendments related to registration fee payments by interval funds and certain exchange-traded products, which will become effective on August 1, 2021.
Virtual open meeting. The session marked the first time that the SEC has ever held an open meeting using a virtual format and was the first open meeting held by the Commission in any form since the onset of the crisis resulting from the rapid spread of the coronavirus in the United States. Each of the four commissioners thanked the SEC staff for their dedication and commitment despite the uncertainties caused by COVID-19, which has resulted in staff working in a largely teleworking environment for the past month. “In the face of the uncertainties caused by COVID-19 and circumstances in which we all must prioritize health and safety, they have remained committed to our mission, focusing on the interests of our long-term Main Street investors and the integrity of our markets,” said Chairman Clayton.
The release is No. 33–10771.