Business Development Companies (BDCs) are an increasingly important source of funding for small and mid-sized U.S. companies with limited access to traditional capital markets. On June 8, 2012, Representative Michael M. Grimm (R-N.Y.) joined Representative Nydia Velazquez (D-NY) in introducing the Next Steps for Credit Availability Act (H.R. 5929). The bipartisan bill aims to increase the availability of funding to small to mid-level companies and startups by increasing the capital available to BDCs and reducing certain regulatory burdens on BDCs. By “modernizing the BDC regulatory framework,” Representatives Grimm and Velazquez hope to “provide financial fuel for young, rapidly growing companies.” H.R. 5929 currently sits in the House Committee on Financial Services awaiting a favorable report.
BDCs are closed-end investment companies designed to facilitate capital raising by small and mid-sized U.S. businesses. They are subject to requirements under the Investment Company Act of 1940, as amended (the 1940 Act) that are, in many cases, less onerous than the provisions of the 1940 Act applicable to traditional closed-end investment companies. Nevertheless, certain aspects of the regulatory scheme governing BDCs limit their ability to invest efficiently in small and mid-sized companies. In particular, 1940 Act limitations on borrowings and other forms of leverage and a prohibition on investing in a registered investment adviser have been seen to have impeded BDCs from more extensive invest-ments in small and mid-size businesses. In addition, unlike traditional closed-end funds, BDCs are required to register under the Securities Act of 1933, as amended (the 1933 Act) as well as the 1940 Act. As such, they are subject to registration and related requirements under the 1933 Act as well as reporting requirements under the Securities Exchange Act of 1934, as amended (the 1934 Act). Currently, certain 1933 Act rules that facilitate capital raising by operating companies are not availa ble to BDCs or are applied to BDCs in a less favorable manner than to other 1933 Act registrants.
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