SEC Proposes Offering Reforms for BDCs and Registered Closed-End Funds
The Securities and Exchange Commission voted to propose certain rule amendments to improve access to capital and facilitate investor communications by business development companies and registered closed-end funds.
The Securities and Exchange Commission voted to propose certain rule amendments to improve access to capital and facilitate investor communications by business development companies and registered closed-end funds. Business development companies—or BDCs—are a type of closed-end fund established by Congress that primarily invest in small and developing companies. The proposal will have a 60-day public comment period following its publication in the Federal Register.
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.
“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,” said SEC chairman Jay Clayton. “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.”
The SEC’s proposal would allow eligible funds to engage in a more streamlined registration process to sell securities in response to market opportunities. The proposed amendments also would allow BDCs and registered closed-end funds to use communications and prospectus delivery rules currently available to operating companies.
The proposal includes additional amendments designed to help implement the congressionally-mandated amendments by further harmonizing the disclosure and regulatory framework for these funds with that of operating companies and by providing tools to help investors assess these funds and their offerings.
These proposed amendments include new periodic and current reporting requirements and new structured data requirements. The SEC is also proposing a modernized approach to registration fee payments for closed-end funds that operate as “interval funds.”
Proposal highlights include allowing eligible funds 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, a 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 funds would be able to qualify as a “well-known seasoned issuer” 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, a 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.
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.
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 proposed amendments, registered closed-end funds would be required to file current reports on Form 8-K, like operating companies and business development companies are currently required to do. The 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.
The registration form 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.
