SEC Adopts Offering Reforms for BDCs and Registered Closed-End Funds
The SEC has voted to adopt rule amendments to allow business development companies and registered closed-end funds to use the registration, offering, and communications rules that are already available to operating companies.
The SEC has voted to adopt rule amendments to allow business development companies and registered closed-end funds to use the registration, offering, and communications rules that are already available to operating companies. Most of the amendments will become effective on August 1, 2020.
Business development companies—or BDCs—are a type of closed-end fund that primarily invest in small and developing companies.
The amendments are designed to reduce regulatory costs and facilitate capital formation, particularly for small and mid-sized businesses, while modernizing disclosures to streamline the way funds provide information to investors. In 2018, Congress passed two laws (the Small Business Credit Availability Act and the Economic Growth, Regulatory Relief, and Consumer Protection Act) directing the SEC to adopt many of these changes.
“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. “It is my hope, particularly when many of our small and medium sized businesses are facing profound challenges not of their own making, that these and other modernization efforts will provide those businesses more efficient access to financing.”
Highlights Include:
Shelf Offering Process and New Short-Form Registration Statement
Eligible affected funds will be able to engage in a streamlined registration process to sell securities “off the shelf” by using a new short-form registration statement. Like operating companies, affected funds will generally be eligible to use the short form if they meet certain filing and reporting history requirements and have a public float of $75 million or more.
Ability to Qualify for Well-Known Seasoned Issuer (WKSI) Status
Eligible affected funds will be able to qualify as WKSIs and benefit from the same processes available to operating companies that qualify. These include a more flexible registration process and greater latitude to communicate with the market. Like operating companies, affected funds will qualify if they meet certain filing and reporting history requirements and have a public float of $700 million or more.
Immediate or Automatic Effectiveness of Certain Filings
The amendments will expand the scope of rule 486 under the Securities Act of 1933 to registered closed-end funds or BDCs that conduct continuous offerings of securities. The amendments will permit funds to make certain changes to their registration statements on an immediately-effective basis or on an automatically effective basis. Rule 486 currently applies only to closed-end funds that operate as “interval funds,” and the amendments will include other non-listed closed-end funds.
Communications and Prospectus Delivery Reforms
Funds will 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 will be able to satisfy their final prospectus delivery obligations by filing their prospectuses with the SEC.
New Method for Interval Funds and Certain Exchange-Traded Products to Pay Registration Fees
Instead of registering a specific amount of shares and paying registration fees at the time of filing, closed-end funds that operate as “interval funds” will register an indefinite number of shares and pay registration fees based on net issuance of shares. This approach is similar to that permitted for mutual funds and exchange-traded funds. The amendments also will allow continuously offered exchange-traded products that are not registered under the Investment Company Act to use a similar approach.
Periodic Reporting Requirements
To support the short-form registration statement framework, affected funds filing a short-form registration statement will be required to include certain key prospectus disclosure in their annual reports. In addition, 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 in their annual reports, similar to requirements that currently apply to mutual funds, exchange-traded funds, and BDCs.
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 amendments will eliminate this requirement and instead require affected funds to make incorporated materials readily available on a website.
Structured Data Requirements
Affected funds will be required to tag certain registration statement information, similar to current tagging requirements for mutual funds and exchange-traded funds. BDCs also will be required to submit financial statement information, 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 amendments), will be required to submit the form in XML format.
