A Flexible Capital Raise: Shelf Registration Statements For Closed-End Funds

by Dechert LLP

Exchange-listed closed-end investment companies (closed-end funds) have historically faced challenges in raising additional capital after their initial public offering (IPO) due to the structure of such funds and certain limitations imposed by the Investment Company Act of 1940, as amended (1940 Act). There are a greater number of options for raising capital available to closed-end funds that trade at a premium to their net asset value (NAV), as discussed further below. However, maintaining a trading premium is far from straightforward, and is often beyond the fund manager’s control. The discrepancy between NAV and market price can fluctuate widely in volatile markets, and is also influenced by investor sentiment and interest in the asset class in which the closed-end fund invests. Many closed-end funds go from a trading premium to a trading discount in a short period of time. Given these challenges, closed-end fund managers must act strategically to take advantage of trading premiums when they occur.

One option a closed-end fund can use to raise capital is a shelf registration statement. A shelf registration statement enables a closed-end fund to flexibly offer additional shares to the public from time to time, as market conditions permit. A shelf registration statement, once it has been declared effective by the Securities and Exchange Commission (SEC), enables a closed-end fund to conduct a variety of different types of securities offerings and to take advantage of favorable market opportunities. Closed-end funds are showing increased interest in shelf registrations. During calendar-year 2013, 79 closed-end funds maintained or filed new shelf registration statements, compared with 51 closed-end funds in calendar-year 2012 and 33 closed-end funds in calendar-year 2011.1

In this article, we first review the reasons why closed-end funds may face challenges in raising capital, and how a shelf registration might alleviate those challenges. Second, we discuss the process of registering shares of a closed-end fund “for the shelf.” Third, we discuss the types of offerings available to closed-end funds with an effective shelf registration statement. Finally, we describe the ongoing maintenance of the shelf registration statement, and related disclosure and compliance obligations.

Rationale for Shelf Registration

Closed-end funds raising capital following their IPO are constrained if the fund’s shares are trading at a discount to NAV. Specifically, Section 23(b) of the 1940 Act provides in relevant part:

No closed-end investment company may issue its shares at a price below net asset value, exclusive of any distribution commission or discount ... except (1) in connection with an offering to the holders of one or more classes of its capital stock; (2) with consent of a majority of its common stockholders ... ; or (5) under such other circumstances as the Commission may permit by rule and regulations or orders for the protection of investors.

The practical effect of Section 23(b) is that if a closed-end fund is trading at a discount, its sole means of raising additional equity capital is a rights offering to existing shareholders under Section 23(b)(1)—that is, an offering to existing fund shareholders entitling them to exercise rights to purchase newly issued shares.2 Participating shareholders can exercise their rights to purchase the additional shares at a discounted price that is a percentage of the fund’s market price or NAV on the expiration date for the offering. A rights offering to existing shareholders is the only mechanism by which the fund can issue shares at a price below NAV, other than in certain limited circumstances.3

However, the SEC Staff has noted the potentially dilutive effect of offerings below NAV on the assets, earnings and relative voting power of fund shareholders who do not participate in the offering.4 Shareholders who do not participate in the offering will own a smaller proportional interest in the closed-end fund at the conclusion of the offering. Given this concern, the SEC Staff has expressed the view that offerings below NAV “are designed for exceptional, and not routine instances."5 In considering a rights offering, the board of directors or trustees of the fund must make a determination that the potential benefits of the offering outweigh the potential dilution. Another aspect of rights offerings (whether conducted at a trading discount or premium) is that due to the discounted price at which participating shareholders can exercise their rights to purchase the additional shares, the fund’s trading discount may decline during the course of the offering only to increase again after the offering has closed. In light of potential dilution and increased trading discounts, many activist institutional investors in closed-end funds have been vocal in their opposition to rights offerings.6

As an alternative to one or several rights offerings, some closed-end funds have elected to use a shelf registration statement in order to best preserve and maximize the opportunities for capital raising. As discussed below, the shelf registration statement can be implemented and maintained while the fund is trading at a discount and can then be used to conduct a variety of different types of offerings when market conditions become favorable and the fund begins to trade at NAV or a premium to NAV.7

An effective shelf registration statement enables a closed-end fund to offer shares to the general public at a price above or at NAV when the fund is trading at a premium. The fund can use different methods of distribution for its newly issued shares, depending on what is appropriate in the market at any given time (including rights offerings). The terms of each offering are finalized at the time of the offering and disclosed in a prospectus supplement. Upon the effectiveness of the shelf registration, the fund can complete “takedowns” that require no additional SEC review and can be marketed and priced quickly. This is particularly useful to closed-end funds that trade at a premium to NAV for only a narrow window of time (and are prohibited under Section 23(b) of the 1940 Act from selling shares at a price that is below NAV, other than through rights offerings.)

Implementing a Shelf Registration Statement

Reliance on Rule 415 under the Securities Act of 1933

Under the shelf registration process, fund shares are registered on Form N-2 on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 (1933 Act). Closed-end funds can rely on Rule 415 in two circumstances. First, closed-end funds that engage in periodic repurchase offers pursuant to a fundamental policy as permitted under Rule 23c-3 under the 1940 Act—known as “interval funds”—can rely on the direct language of Rule 415(a)(1)(xi) to register shares for the shelf.

Second, closed-end funds that are not interval funds can rely on certain SEC no-action relief that has been given to closed-end funds to register shares for the shelf under Rule 415(a)(1)(x). Rule 415(a)(1)(x) under the 1933 Act provides that an issuer may undertake a shelf registration for “securities registered (or qualified to be registered) on Form S-3 or Form F-3.” Although closed-end funds are not eligible to register securities on Form S-3, the SEC Staff has indicated in a pair of no-action letters that a closed-end fund can rely on Rule 415(a)(1)(x).8 The registration requirements of Form S-3 are as follows:

  • That the fund be organized under the laws of the United States or any state or territory or the District of Columbia and have its principal business operations in the United States or its territories;
  • That the fund have a class of shares that is required to be registered pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934 (1934 Act), or that the fund be subject to the reporting requirements of Section 15(d) of the 1934 Act; That the fund be subject to the requirements of Section 12 or 15(d) of the 1934 Act and have filed all material required to be filed pursuant to Section 13, 14 or 15(d) for a period of at least 12 calendar months prior to the filing of the Form S-3; and
  • That the fund has filed in a timely manner all reports required to be filed during that period and any portion of a month prior to the filing of the Form S-3 (other than certain Form 8-K reports).

Closed-end funds are generally organized under the laws of the states of Delaware, Maryland, or Massachusetts. Closed-end funds that are listed on a national securities exchange have shares that are required to be registered pursuant to Section 12(b) of the 1934 Act. Closed-end funds are subject to the reporting requirements of Section 13 of the 1934 Act.9 Finally, listed closed-end funds are also subject to the requirements of Section 14 of the 1934 Act, by virtue of having to hold annual meetings (as required by the rules of most securities exchanges) and to thereby solicit proxies on an annual basis. Accordingly, so long as a listed closed-end fund has filed in a timely manner, for a period of at least 12 months, the reports required by the rules promulgated under Section 30 of the 1940 Act (that is, its annual and semi-annual reports and quarterly portfolio holdings on Form N-Q) and its annual proxy statements, it will satisfy the Form S-3 registration requirements.

Form S-3 also requires that a fund shall not have, since the end of the last fiscal year for which certified financial statements of the fund were included in a report filed pursuant to Sections 13 or 15(d) of the 1934 Act, (a) failed to pay any dividend or sinking fund installment on preferred stock, or (b) defaulted (i) on any installment for indebtedness for borrowed money or (ii) on any rental on long term leases, which defaults are material to the financial position of the fund. These conditions are satisfied by most closed-end funds.

Finally, Form S-3 requires that the securities offering to be registered must be for cash by or on behalf of a fund, and that the aggregate market value of the voting and non-voting common equity held by non-affiliates of a fund be $75 million or more. Generally, closed-end funds have a public float exceeding that threshold amount.

If a fund satisfies these requirements of Form S-3, it can rely on the no-action relief granted to Pilgrim and Nuveen.

Filing a Shelf Registration with the SEC

The first step in implementing a shelf registration statement is to file it with the SEC on Form N-2, as would be done for any registration of new shares, indicating on the Form that the fund is relying on Rule 415 under the 1933 Act. The registration statement should set forth the various types of offerings that the fund may contemplate doing; however, the registration statement need not identify any particular underwriter or selling agent. The SEC review process for an initial shelf registration statement takes approximately 30-45 days. The SEC Staff at that point provides initial comments on the fund’s initial filing, and the fund must respond to those comments in writing and file a pre-effective amendment to the registration statement. When all comments have been satisfactorily resolved, the fund submits a request for acceleration of the effective date of the registration statement pursuant to Rule 461 under the 1933 Act, and the SEC Staff declares the shelf registration effective.10

Determining How Many Shares and/or Aggregate Dollar Amount to Register

Pursuant to Rule 415(a)(5) under the 1933 Act, a shelf registration statement has a maximum lifespan of three years from the initial date of its effectiveness. Accordingly, a closed-end fund should consider the number of shares or aggregate dollar amount that may reasonably be offered and sold within that time frame, and then register that number of shares or aggregate dollar amount in the initial shelf registration statement. It is important to monitor how many of the shares initially registered on the shelf registration statement have been offered and sold, to be sure that sales do not exceed the amount registered.11

Filing a Shelf Registration with FINRA

Following the initial SEC filing, the shelf registration statement should also be filed with the Corporate Financing Department of the Financial Industry Regulatory Authority (FINRA), pursuant to FINRA Rule 5110.12 While the FINRA filing is technically an obligation of a FINRA member (and not of the fund itself), funds often take this step even before the shelf registration statement is effective and an underwriter is engaged to conduct any offerings, in order to expedite the process. As the initial registration statement is unlikely to contain any information regarding compensation to FINRA members, the fund will receive a conditional “no objections” letter from FINRA on the shelf registration statement, stating that FINRA will not object to any of the information provided in the registration statement so long as (i) to the extent that a FINRA member participates in a takedown offering in the future, such takedown will need to receive a separate no objections letter and (ii) any amendments and modifications to the registration statement must be filed with FINRA, and any changes to offering terms or arrangements in such amendments may change FINRA’s opinion. The fund would then also file any amendments to the shelf registration statement with FINRA. The fund may be able to take advantage of FINRA’s same-day clearance or immediate clearance procedures for either the base shelf registration statement or any takedown offering, depending on the circumstances.

Options for Raising Capital

Once a closed-end fund’s shelf registration statement is effective (or in anticipation of its effectiveness), the fund’s board and management can consider the types of offerings that would be most appropriate for the fund. This article discusses two types of offerings which can be considered either individually or at the same time, depending on market conditions: (1) at-the-market (ATM) offerings, and (2) traditional follow-on offerings. A closed-end fund that is contemplating various options for raising capital can consider both of these offerings at the same time, engaging in simultaneous board approval of both programs and then subsequently launching one or both offerings in tandem or sequentially, as market conditions permit.

At-The-Market Offerings

General. ATM offerings are offerings of securities that are made into an existing trading market for outstanding shares of the same class at a price other than a fixed or negotiated price.13 Shares are sold on a daily basis, with the intent of having minimal impact to the fund’s market price. The price at which shares are sold is based on the publicly available bid price of the shares in the market and is no lower than the sum of the Fund’s NAV plus the per share commission charged by the broker-dealer that is effecting the sales (as discussed further, below). Sales of shares take place in ordinary brokers’ transactions on the principal exchange on which fund shares trade, but depending on the terms of the equity distribution agreement governing the offering, can also occur on other exchanges. The number of shares sold per day varies depending on the fund’s market price and trading volume, and is agreed upon by the fund and the selling broker-dealer on a daily basis.

The advantages of ATM offerings are that they provide a means of raising capital quickly, with limited advanced disclosure to the public. ATM offerings provide a means of meeting existing demand in the market for closed-end fund shares. For a fund that is trading at a narrow premium and is believed to be at risk of possibly returning to a discount, the minimal market impact is a positive feature of the offering, given the narrow window of opportunity for capital raising. In addition, ATM offerings are less costly than follow-on offerings in terms of commissions paid to the broker-dealer effecting the transactions—around 1-3 percent of the gross offering proceeds for any shares sold through the sales agent. The disadvantages of ATM offerings are they tend to raise less money than traditional follow-on offerings, and the amount raised at any given time fluctuates depending on the market price of a fund’s shares relative to its NAV. Additionally, if the fund’s trading premium narrows too significantly and the fund can no longer satisfy the requirements of Section 23(b) of the 1940 Act, the fund must suspend additional sales of shares until such time as the premium returns to a sufficiently high level.

Retention of Broker-Dealer to Conduct ATM Offering. To conduct an ATM offering, a closed-end fund retains a broker-dealer to act either on a principal or agency basis in offering fund shares into the market, known as an “equity distribution program.” When acting as an agent, the broker-dealer will place shares on a “best efforts” basis. When acting as a principal, the broker-dealer will commit to purchasing the shares for its own account with a view to reselling the shares, as if it were an underwriter in a follow-on offering. The activities of the broker-dealer will generally resemble ordinary dealer activities, rather than underwriting activities. The broker-dealer usually engages in no special selling efforts such as a “roadshow” or other solicitation. However, the broker-dealer is still subject to liability under Section 11 of the 1933 Act with respect to material misstatements or omissions in the shelf registration statement, which means that the broker-dealer will conduct a similar type of due diligence with respect to the fund as would be the case in a traditional follow-on offering. The broker-dealer also relies on an exemption from the prospectus delivery requirements provided by Rule 153 under the 1933 Act when effecting ATM offerings on an exchange.14

Board Approval of Equity Distribution Agreement. A broker-dealer offering and selling fund shares in an ATM offering will be considered a “principal underwriter” under Section 2(a)(29) of the 1940 Act.15 Accordingly, the equity distribution agreement between the fund and the broker-dealer is subject to the requirements of Section 15(c) of the 1940 Act, and as such, must be approved at an in-person board meeting, called for the purpose of voting on such agreement, by a majority of the directors of the fund who are not parties to the agreement or interested persons of any party. The equity distribution agreement sets forth the terms and conditions upon which fund shares will be sold into the market. It is similar to a traditional underwriting agreement, but provides for both agency and principal transactions as discussed above. As with a traditional underwriting agreement, the equity distribution agreement requires the exchange, at closing, of opinions of counsel to the fund and to the investment adviser, officers’ certificates and a comfort letter from the fund’s independent registered public accounting firm (auditor).

Prospectus Supplement; Post-Effective Amendment to Shelf Registration Statement. At the time that the ATM offering commences, the fund will file a supplement pursuant to Rule 497 under the 1933 Act, which will set forth the terms of the offering, including the name of the broker-dealer that is acting as sales agent in the offering.16 The fund will also file a post-effective amendment to its shelf registration statement for the purpose of filing the equity distribution agreement.17 If the fund previously filed with the shelf registration statement a qualified opinion as to the legality of shares,18 an unqualified opinion would then be filed with an automatically effective post-effective amendment.

FINRA Approval. After a broker-dealer is engaged to conduct a takedown, the broker-dealer (and not the fund itself) will handle FINRA clearance of any subsequent prospectus supplement filed in connection with a given offering. Each prospectus supplement is required to be separately reviewed and approved by FINRA. The broker-dealer may be able to take advantage of FINRA's same-day or immediate clearance procedure for these filings.

Exchange Listing Application. Depending on the exchange on which the closed-end fund’s shares are listed, the fund will likely need to file a supplemental listing application. In the case of shares listed on the New York Stock Exchange (NYSE), the NYSE generally asks to review the prospectus supplement, the equity distribution agreement, and a certificate of good standing for the fund. The NYSE also requires an executed version of the agreement before it will approve the listing application. The NYSE may also ask the fund to confirm that the ATM offering will be made in compliance with the provisions of Section 312.03 of the NYSE Listed Company Manual, which requires shareholder approval for certain issuances of shares to “related parties” of the fund.19

Ongoing Disclosure and Oversight Obligations. If a closed-end fund is engaged in an ATM offering, the equity distribution agreement may require that, so long as there have not been any fundamental changes to the information contained in the prospectus supplement or base prospectus currently being used with respect to the offering, the fund file an updated prospectus supplement on a quarterly basis pursuant to Rule 497 under the 1933 Act, containing certain information regarding the number of fund shares sold through the sales agent, the net proceeds to the fund, and the compensation paid by the fund with respect to such sales. The fund is also required to include the same information in its annual and semi-annual reports filed on Form N-CSR, and with its quarterly portfolio holdings reports on Form N-Q. The fund will also be required, each time that the fund files a post-effective amendment to its registration statement, to provide the sales agent with opinions of counsel, a comfort letter from the fund’s auditor, and officers’ certificates that are similar to those provided at the initial closing.

Due to the ongoing issuance of fund shares in an ATM offering, the board of directors of the fund should receive regular information from the investment adviser regarding the number of shares sold, the dollar amounts raised in the offering, the proceeds to the fund, and the impact on the fund’s performance and trading volume. The board should oversee all of these elements and satisfy itself that the relationship with the broker-dealer and share sales under the ATM offering continue to be in the best interests of the fund and its shareholders.

Traditional Follow-On Offerings

In a traditional follow-on offering, fund shares are sold all at once in a single offering on a principal basis by a syndicate of underwriters. The timing and size of the issuance is based on demand from the syndicate. The price at which fund shares are sold is a fixed price, which is at a four percent to seven percent discount from the fund’s closing market price on the pricing date plus offering expenses, thereby requiring that the fund trade at a premium sufficient to cover the pricing discount and the costs of the offering. In order to limit the impact on the market price of the fund’s shares, the offering is usually structured as an “overnight” offering; it commences after the market closes, at which point the underwriter or underwriters engage in abbreviated marketing to solicit potential investors. The offering price is determined on the following morning prior to the opening of the market. As a result of the marketing efforts undertaken by the underwriters, these types of offerings attract greater attention in the market than ATM offerings. In addition, compared with the ATM offering, the commission to be paid to the lead underwriter is usually higher, between three percent to four percent of the gross offering proceeds for any shares sold during the offering.

The advantage of a traditional follow-on offering is that the fund is able to raise substantially more money than in an ATM offering, and capital is raised all at once, rather than in small increments over time. The disadvantages of a traditional follow-on offering are the relatively higher cost, the more public nature of the offering, and the possible consequence that buyers of fund shares in the follow-on offering could engage in “flip” sales of the shares into the market following the closing of the offering, which could drive the fund’s market price down, possibly narrowing or eliminating the trading premium.20

The steps necessary to do a traditional follow-on offering are similar to those involved in an ATM offering set forth above, namely:

  • The retention of a broker-dealer to serve as a lead underwriter for the offering (although in the case of a traditional follow-on offering, there will likely be a syndicate of underwriters participating, rather than a single broker-dealer for an ATM offering);
  • Due diligence to be conducted by the underwriter with respect to the fund;
  • The approval by the fund’s board of an underwriting agreement at an in-person meeting pursuant to Section 15(c) of the 1940 Act (which will be similar in most respects to the equity distribution agreement other than the manner in which fund shares are offered and sold—that is, through an underwriting syndicate rather than in ordinary brokers’ transactions);21
  • The filing of a prospectus supplement pursuant to Rule 497 under the 1933 Act setting forth the terms of the offering;
  • FINRA and exchange approval; and
  • At closing, the exchange of opinions from counsel to the fund and the investment adviser, officers’ certificates and a comfort letter from the fund’s auditor.

Maintaining a Shelf Registration Statement

There are several requirements associated with the ongoing maintenance of a shelf registration statement, which is intended to be “evergreen” unlike typical registration statements for closed-end funds.

Updating Financial Statements and Non-Material Changes

Rule 415(a)(3) under the 1933 Act requires an investment company filing on Form N-2 to furnish, in its shelf registration statement, the undertakings required by Item 34.4 of Form N-2. Item 34.4.a of Form N-2 requires a closed-end fund to undertake “to file, during any period in which offers or sales are being made, a post-effective amendment to the registration statement ... to include any prospectus required by Section 10(a)(3) of the 1933 Act.” Section 10(a)(3) of the 1933 Act requires that a fund’s prospectus, if used for a period of longer than nine months after the effective date of the registration statement, cannot contain information that is as of a date that is more than sixteen months old.22 Closed-end funds that rely on the Pilgrim and Nuveen Letters are not ordinarily able to satisfy this requirement, nor make non-material updates to the registration statement, by filing a post-effective amendment that becomes automatically effective. Such closed-end funds are not able to rely on any of the 1933 Act rules that provide for automatic effectiveness, such as Rule 485 for open-end funds or Rule 486 for interval funds. Accordingly, absent relief from the SEC, such closed-end funds would be required to satisfy the Item 34.4.a undertaking in Form N-2 by filing a post-effective amendment pursuant to Section 8(c) of the 1933 Act, which does not provide a mechanism for automatic effectiveness. The SEC Staff would need to review and declare the post-effective amendment effective.

The consequence of not being able to file post-effective amendments that become automatically effective is that if SEC Staff review is not completed and the post-effective amendment is not declared effective by the time that the financial statements included in the registration statement become “stale,” the closed-end fund will have to suspend offerings for a period of time pending completion of SEC Staff review. This can deny the fund the opportunity to take advantage of market conditions and have deleterious consequences for capital raising. As a result, closed-end funds seek SEC no-action relief to rely on Rule 486 under the 1933 Act,23 in order to allow a post-effective amendment to the shelf registration statement to go immediately effective on the date it is filed, or on a later date designated by the fund that is no more than 30 days after the filing is made. In granting this no-action relief to closed-end funds, the SEC Staff has stated that in light of the fact-specific nature of the request, the positions expressed in those no-action letters apply only to those funds, and no other closed-end funds may rely on the position articulated by the SEC Staff without themselves seeking no-action relief.24

Fundamental Changes to Registration Statement

A closed-end fund is required to file a post-effective amendment to its shelf registration statement to reflect in the prospectus any facts or events after the effective date of the registration statement (or the most recent post-effective amendment) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement.25 These types of changes would be required to be made by filing a post-effective amendment pursuant to Section 8(c) of the 1933 Act, which would be subject to SEC Staff review and required to be declared effective.

Registering Additional Shares After Effectiveness

Ideally a closed-end fund will register the amount of shares that it expects to offer and sell during the three year lifespan of the shelf registration statement. However, if the number of shares being offered is at risk of exceeding the number of shares registered, the fund can, pursuant to Rule 462(b) under the 1933 Act, file an upsizing amendment after the effectiveness of the original shelf registration statement to register additional shares in an amount and at a price that together represents no more than 20 percent of the maximum offering price of the shares remaining on the shelf registration statement. This option is available to the fund just once with respect to a given registration statement (that is, at the time of the final takedown on a potential shelf registration statement). Outside of Rule 462(b), there is no general ability to increase the amount of securities registered unless a new shelf registration statement is filed.26

Lifespan of the Shelf Registration Statement

As noted above, a shelf registration statement expires three years from the initial date of its effectiveness. Accordingly, it is necessary to file a new shelf registration statement on Form N-2 prior to the expiration of the three year period, which would be subject to SEC Staff review and would be required to be declared effective. The fund can carry over any unsold securities, and the related portion of SEC fees, from the old registration to the new registration statement, and can keep selling shares under the old registration statement for up to six months or until the new registration statement is effective (whichever is earlier).27


While the requirements of implementing and maintaining a shelf registration statement may appear technical, the benefits of a shelf registration to closed-end funds trading at a premium are significant, enabling such funds to quickly take advantage of market conditions to engage in capital raising once the shelf registration statement is effective. Notably, the trading premium does not have to be significant to engage in an ATM offering. More closed-end funds should seriously consider shelf registration as a viable, strategic option for raising capital.

This article originally appeared in the March 2014 issue of The Investment Lawyer. Download PDF

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Thomas J. Herzfeld Advisors Inc.’s The Investors Guide to Closed-End Funds.


Section 23(b)(2) of the 1940 Act permits a closed-end fund to make an offering at a price below the fund’s current NAV if the offering is proposed to and approved by fund stockholders at an annual or special stockholders’ meeting; however, this provision is rarely, if ever, utilized by closed-end funds (other than certain business development companies).


A closed-end fund trading at a discount is permitted to pay a stock dividend distribution in shares of the fund that are issued at a price below NAV. See Baker, Fentress & Company, SEC Staff No-Action Letter (pub. avail. October 27, 1975).


There are transferable and non-transferable rights offerings. In a non-transferable rights offering, which can be conducted at any ratio of new shares to rights held, the only possible purchaser of shares at a price below NAV will be the fund shareholders who receive the rights. The disadvantage of a non-transferable rights offering is that a shareholder that is unwilling or unable to exercise the non-transferable right receives no compensation for the amount of dilution he or she is likely to experience when other shareholders exercise their non-transferable rights and purchase shares at a price below the current NAV. By contrast, if a shareholder receives a transferable right, that right may be sold by the shareholder unwilling or unable to exercise the transferable right issued to him or her, and the proceeds from the sale of a transferable right should compensate the shareholder for part of the dilution of his or her interest in the fund. For this reason, it is a generally held view that a transferable rights offering may be less dilutive than a non-transferable rights offering. The SEC Staff takes the view that a transferable rights offering complies with Section 23(b)(1) of the 1940 Act where (1) the offering fully protects shareholders’ preemptive rights and does not discriminate among shareholders (except the possible de minimis effect of not offering fractional rights); (2) management uses its best efforts to ensure an adequate trading market in the rights for use by shareholders who do not exercise such rights; and (3) the ratio of the offering does not exceed one new share for each three rights held. See Ass’n of Publicly Traded Investment Funds, SEC Staff No-Action Letter (pub. avail. Aug. 2, 1985) and Pilgrim Regional Bank Shares, Incorporated, SEC Staff No-Action Letter (pub. avail. Dec. 11, 1991).


Investment Company Act Release No. 9932 (Sept. 15, 1977).


For example, City of London Investment Management Company Limited, a well-known closed-end fund investor, has asserted in its Statement on Corporate Governance and Voting Policy for Closed-End Funds that “a rights offering should not be authorized at a substantial discount to NAV.” Statement on Corporate Governance and Voting Policy for Closed-End Funds, Ninth Edition (November 2013).


A closed-end fund should review any existing SEC exemptive orders or no-action letters received by the fund that may impose conditions or restrictions on secondary offerings at a premium. Closed-end funds that have SEC exemptive relief from Section 19(b) of the 1940 Act to distribute capital gains and returns of capital more than once annually, for example, may be limited in the types of offerings they are allowed to conduct when trading at a premium to NAV.


See Pilgrim America Prime Rate Trust, SEC Staff No-Action Letter (May 1, 1998) and Nuveen Virginia Premium Income Municipal Fund, SEC Staff No-Action Letter (October 6, 2006) (together, the Pilgrim and Nuveen Letters).


The Section 13 reporting requirements are satisfied by filing the reports required by the 1940 Act. Section 30(d) of the 1940 Act provides that the SEC can issue rules and regulations permitting a fund to file periodic reports required by the 1940 Act in lieu of any reports required by Sections 13 or 15(d) of the 1934 Act. These include the fund’s filings of annual and semi-annual shareholder reports on Form N-CSR and quarterly portfolio holdings information on Form N-Q. In the Nuveen Letter, the SEC Staff took the position that these filings are sufficient to provide the market with a “steady stream of high quality information” about a closed-end fund sufficient to justify its reliance on Rule 415(a)(1)(x).


The SEC Staff has stated that a shelf registration statement under Rule 415 cannot be declared effective without an opinion of counsel as to the legality of the shares to be issued from time to time under the shelf registration statement, even if no immediate sales are being contemplated. Where sales are not expected in the near future, the SEC Staff will accept a qualified opinion of counsel, subject to the understanding that an unqualified opinion will be filed prior to the time any sales are made under the registration statement. SEC Division of Corporation Finance, Manual of Publicly Available Telephone Interpretations, No.11. It should also be noted that an underwriter need not join in the registrant's request for acceleration when the registration statement is a delayed-offering shelf filing.


If the number of shares being offered is at risk of exceeding the number of shares registered, the fund can, pursuant to Rule 462(b) under the 1933 Act, file an immediately effective post-effective amendment to register additional shares in an amount and at a price that together represents no more than 20 percent of the maximum offering price of the shares on the shelf registration statement that remain unsold immediately prior to the filing of such post-effective amendment.


Interval funds that register shares for the shelf pursuant to Rule 415(a)(1)(xi) under the 1933 Act are exempt from the filing requirements of FINRA Rule 5110. FINRA Rule 5110(b)(8)(C).


See Rule 415(a)(4) under the 1933 Act.


Rule 153 provides that any requirement of a broker or dealer to deliver a prospectus for ordinary brokers’ transactions on a national securities exchange is satisfied if (1) securities of the same class as those that are the subject of the transaction are trading on that exchange; (2) the registration statement relating to the offering is effective and is not the subject of any pending proceeding or examination under Section 8(d) or 8(e) of the 1933 Act; (3) neither the fund nor any underwriter or participating dealer is the subject of a pending proceeding under Section 8A of the 1933 Act in connection with the offering; and (4) the fund has filed or will file with the SEC a prospectus that satisfies the requirements of Section 10(a) of the 1933 Act.


Section 2(a)(29) of the 1940 Act provides in relevant part that a “principal underwriter of or for a closed-end company ... means any underwriter who, in connection with a primary distribution of securities, (A) is in privity of contract with the issuer or an affiliated person of the issuer; (B) acting alone or in concert with one or more other persons, initiates or directs the formation of an underwriting syndicate; or (C) is allowed a rate of gross commission, spread or other profit greater than the rate allowed another underwriter participating in the distribution.” In the case of a broker-dealer effecting ATM offerings, subsection (A) is satisfied, though the other two subsections are not.


Section 11 liability for material misstatements and omissions in the registration statement also attaches to the prospectus supplement pursuant to Rule 430C under the 1933 Act. This is also the case for any prospectus supplement that is filed other than in connection with a takedown of securities from the shelf.


A post-effective amendment to the registration statement solely to add exhibits will become effective upon filing with the SEC pursuant to Rule 462 under the 1933 Act.


See supra, n.10.


See Section 312.03 of the NYSE Listed Company Manual. If the fund is trading at a premium to NAV and thereby issuing new shares in connection with its dividend reinvestment plan, the fund may also wish to consider covering those share issuances in the supplemental listing application.


This “flip risk” may be mitigated by stabilization efforts on the part of the underwriters, including sales of shares of the fund to investors in excess of the amount the underwriter is required to purchase from the fund in the offering (including any amount represented by an overallotment option in the underwriting agreement). These “short sales” may be covered by the underwriter by purchasing fund shares in the open market, as a way to mitigate any downward pressure on the market price of the shares.


There will be other differences between an underwriting agreement for a traditional follow-on offering and an equity distribution agreement for an ATM offering, including the definition and duties of the broker-dealer that is serving as an intermediary, and the related representations, warranties and indemnifications made by the parties to the agreement.


See Section 10(a)(3) of the 1933 Act.


Rule 486(b) provides that a post-effective amendment to an effective registration statement or a registration statement for additional shares of common stock filed by an interval fund shall become immediately effective on the date it is filed, or on a later date designated by the registrant that is no more than 30 days after the filing is made, provided that the post-effective amendment or registration statement is filed solely: (i) to register additional shares of common stock for which a registration statement filed on Form N-2 is effective, (ii) to bring the financial statements up to date under section 10(a)(3) of the Securities Act or Rule 3-18 of Regulation S-X, (iii) to designate a new effective date for a previously filed post-effective amendment or registration statement for additional shares under Rule 486(a), which has not yet become effective, (iv) to disclose or update the information required by Item 9c of Form N-2, (v) to make any non-material changes the registrant deems appropriate, and (vi) for any other purpose the SEC shall approve.


See Nuveen Municipal High Income Opportunity Fund, SEC Staff No-Action Letter (Nov. 9, 2010); Calamos Convertible Opportunities and Income Fund, SEC Staff No-Action Letter (Feb. 14, 2011); Aberdeen Australia Equity Fund, Inc., SEC Staff No-Action Letter (April 12, 2012) and Aberdeen Asia-Pacific Income Fund, Inc., SEC Staff No-Action Letter (June 26, 2013), The Mexico Fund, Inc., SEC Staff No-Action Letter (December 31, 2013).


See Item 34.4 of Form N-2.


Rule 413(a) under the 1933 Act provides that where a registration statement is already in effect, the registration of additional securities shall only be effected through a separate registration statement relating to the additional securities.


See Rule 415(a)(6) under the 1933 Act.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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