April 17, 2020

In harmony at last: SEC passes securities offering reform for BDCs and registered closed-end funds

Kristin Hespos Burns, Cynthia Krus, Sara Sabour

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Eversheds Sutherland (US) LLP On April 8, 2020, the Securities and Exchange Commission (the SEC) voted, at its first virtual meeting, to adopt rule amendments to implement certain provisions of the Small Business Credit Availability Act (the BDC Act) and the Economic Growth, Regulatory Relief, and Consumer Protection Act (the Registered CEF Act) relating to business development companies (BDCs) and closed-end funds registered under the Investment Company Act¹ (Registered CEFs, and together with BDCs, the Affected Funds), respectively (the Final Rules).² The Final Rules, among other things, modify the registration, offering, and communications processes available to Affected Funds, building on the practices that operating companies currently use, relating to:

the shelf offering process to permit the use of short-form registration statements on Form N-2 (short form N-2) and incorporation by reference;
the ability to qualify for Well-Known Seasoned Issuer (WKSI) status;
the immediate or automatic effectiveness of certain filings made in connection with continuous public offerings; and
communication and prospectus delivery.

In addition, the Final Rules provide a new method for interval funds to pay registration fees, require Affected Funds to comply with certain structured data and inline XBRL requirements, and modify certain periodic reporting requirements.

The Final Rules give certain Affected Funds the ability to update their registration statements through incorporation by reference. As a result, these Affected Funds may quickly access the capital markets, when conditions are favorable to do so, without the expense and delay of filing a post-effective amendment. The communication reforms provide Affected Funds with additional flexibility to facilitate investor communications. Together, these provisions allow certain Affected Funds to access the capital markets and communicate with investors to the same extent and with the same degree of flexibility as their operating company counterparts.

SEC Chairman Jay Clayton highlighted that “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.”

Background

In 2005, the SEC adopted offering reforms to modernize the securities offering and communications process for operating companies and, at the time, the SEC specifically excluded Affected Funds from the scope of the reforms. However, the BDC Act and the Registered CEF Act were signed into law on March 23, 2018 and May 24, 2018, respectively, and, among other things, instructed the SEC to implement rules and/or amendments to existing rules that would allow BDCs and certain Registered CEFs to use the same securities offering and proxy rules that are available to operating companies.³ Notably, the rules and amendments specified by the BDC Act became self-implementing on March 24, 2019 and those specified by the Registered CEF Act will become self-implementing on May 24, 2020.

On March 20, 2019, the SEC proposed rules and amendments to implement Congress’s mandate as well as additional changes and disclosure requirements that were designed to further harmonize the BDC and Registered CEF disclosure and regulatory framework with that of operating companies (the Proposed Rules). The SEC provided a 60-day public comment period on the Proposed Rules that ended on June 10, 2019.

As described below, the SEC adopted the Final Rules with certain modifications to the Proposal Rules. In addition, the SEC adopted amendments to Rule 486, which was not included in the Proposed Rules, and released an amended registration statement on Form N-2 (the Amended Form N-2) that will become effective on August 1, 2020.

Effective and Compliance Dates

As noted above, the rules and amendments specified by BDC Act became self-implementing on March 24, 2019, and those specified by the Registered CEF Act will become self-implementing on May 24, 2020. The Final Rules will become effective on August 1, 2020, except as set forth below:

Structured data reporting requirements:
- Affected Funds eligible to file a short-form N-2 must comply with the Inline XBRL structured data requirements for the financial statements, registration statement cover page, and certain prospectus information by August 1, 2022
- Filers of Form 24-2 relating to interval funds deemed to have registered an indefinite amount of securities will be required to file reports in an XML structured data format by February 1, 2022
- All other Affected Funds must comply by February 1, 2023
Amended requirement that subjects interval funds to the registration fee payment system based on annual net sales rather than the amount of securities registered (Rules 23c-3 and 24f-2, and Form 24F-2) becomes effective August 1, 2021
Registered CEFs must comply with the new management’s discussion of fund performance disclosure requirements by August 1, 2021

Scope of the Final Rules

While the BDC Act applies to all BDCs, including those listed on a securities exchange and those that are unlisted, the Registered CEFs Act applies to all Registered CEFs listed on a securities exchange and those operating as interval funds, but excluded other unlisted Registered CEFs. As proposed, the Final Rules, however, apply to all BDCs and Registered CEFs, with certain conditions and exceptions as described below.

Summary of the Final Rules Relating to Registration, Offering, and Communications Processes

The chart below summarizes the Final Rules that modify the registration, offering, and communications processes currently applicable to Affected Funds. The Final Rules apply to different categories of Affected Funds with, for instance, some provisions applying to all Affected Funds, some applying only to listed Affected Funds that have at least $75 million in “public float”, and some applying only to Affected Funds that qualify as WKSIs.

Current Law	Final Rules	Impact on BDCs and Registered CEFs
Registration Process
Shelf Offering Process – Securities Act⁴ – Rules 415 and 418 Rule 415 provides the basis for shelf registration, and specifically lists the types of shelf offerings that may be effected on an immediate, delayed, or continuous basis. Rule 415 permits certain Affected Funds to register an unallocated dollar amount of securities for sale at a later time if they meet the eligibility requirements of Form S-3 (even though Affected Funds register securities offerings on Form N-2). However, because of differences between registration statements on Form S-3 and Form N-2, Affected Funds filing on Form N-2 are required to include significantly more information than a similarly situated operating company would be required to include on Form S-3. For registration statements not filed on Form S-3, Rule 415 limits the amount of securities that can be registered for a continuous offering to an amount that could be offered or sold within two years from the date the registration statement became effective. Rule 418(a)(3) exempts registrants filing on Form S-3 from having to provide certain supplemental engineering, management or other similar reports relating to the broad aspects of the business or operations of the registrants to the SEC upon request, on the basis that they are already registered and have complied with the requirements in General Instruction IA of Form S-3.	Affected Funds may rely on the new General Instruction A.2 in the Amended Form N-2 to file a short-form N-2, which will function like a registration statement on Form S-3 if the Affected Fund meets certain requirements (as set forth below). Affected Funds may rely on the new instruction to register a shelf offering under Rule 415(a)(1)(x) as well as any of the securities offerings that operating companies are permitted to register on Form S-3. The exemption in Rule 418(a)(3) will apply to Affected Funds eligible to file a short-form N-2 to the same extent as operating companies filing on Form S-3. Interval funds will be required to pay securities registration fees using the same method that mutual funds and exchange-traded funds use today.⁵ *Eligibility*: Affected Funds that: (i) meet registrant and transaction requirements of Form S-3, and (ii) with respect to Registered CEFs, are registered under the Investment Company Act for at least 12 calendar months immediately preceding the filing of the registration statement and have timely filed all reports required to be filed under Section 30 of the Investment Company Act. Because an Affected Fund must satisfy the registrant and transaction requirements of Form S-3,⁶ eligibility for primary offerings of common stock will be limited to listed Affected Funds with a “public float” of at least $75 million that have been current with certain of their Exchange Act⁷ or their Investment Company Act reporting, as applicable, for the 12 calendar months immediately preceding the filing of the registration statement.⁸ An Affected Fund without a “public float” that meets the registrant requirements may register non-convertible debt securities if it has issued at least $1 billion of non-convertible debt securities over the past three years or has outstanding $750 million of non-convertible debt securities registered under the Securities Act.	Eligible Affected Funds will be permitted to file a short-form N-2 and to satisfy Form N-2’s disclosure requirements by incorporating by reference information from certain past and future Exchange Act reports (as described in the “Incorporation by Reference” column below) and complying with a new disclosure requirement.⁹
Incorporation by Reference Operating companies that are qualified to register securities offerings on Form S-3 may incorporate information into their prospectuses by reference to earlier or subsequently filed Exchange Act reports. Affected Funds are required to register their securities offerings on Form N-2 and Form N-2 does not allow incorporation by reference. For registration statements on Form N-2, Rule 415 requires registrants to provide an undertaking (set forth in Item 34.4 of Form N-2) “to file, during any period in which offers or sales are being made, a post-effective amendment to the registration statement: (1) to include any prospectus required by Section 10(a)(3) of the [Securities] Act.” Form N-14 may be used by Registered CEFs and BDCs to register securities to be issued in certain types of extraordinary transactions, such as a transaction involving a reclassification of securities, mergers, consolidations and acquisitions of assets. While Form N-14 allows Registered CEFs to incorporate by reference, BDCs are not permitted to do so. Schedule 14A allows Form S-3 registrants to incorporate previously filed financial reports by reference in any proxy statement for the authorization or issuance of securities other than for exchange or for the modification or exchange of securities.	Affected Funds eligible to file a short-form N-2, may rely on new General Instructions F.3.a-b of the Amended Form N-2 to incorporate by reference to earlier or subsequently filed Exchange Act reports. The Amended Form N-2 includes changes to the undertakings for eligible Affected Funds filing a short-form N-2 that will allow the information required by Section 10(a)(3) of the Securities Act to be incorporated by reference to past or future Exchange Act reports. The instruction governing incorporation by reference on Form N-14 will be amended to include BDCs. As amended, Rule 14a-101 allows Affected Funds to incorporate certain previously filed financial reports by reference in certain proxy statements to the same extent as operating companies. *Other Highlights*: The SEC did not adopt the proposed new instruction to Form N-2 that would have required an Affected Fund to include a statement in its periodic reports identifying any information in its periodic report that is not otherwise required but was added to update the short-form N-2.	An Affected Fund filing a short-form N-2 will be required to satisfy its disclosure requirements for its prospectus by incorporating the information by reference to Exchange Act reports and state that all documents subsequently filed prior to the termination of the offering will be deemed incorporated by reference into the prospectus. BDCs will be allowed to incorporate by reference into Form N-14 to the same extent as Registered CEFs. Affected Funds meeting the requirements for a short-form N-2 may now incorporate certain previously filed financial reports by reference in certain proxy statements to the same extent as operating companies.
Automatic Shelf Registration Statements – Securities Act – Rule 405 SEC rules allow WKSIs to benefit from a more flexible registration process that includes, among other things, automatic effectiveness of a WKSI’s registration statement, and reduced information included in the registration statement. Affected Funds are excluded from the definition of WKSIs and, as a result, may not file automatically effective shelf registration statements (which applies only to Form S-3).	Amended Rule 405 will delete the exclusion of Affected Funds from the definition of WKSI. The “ineligible issuer” definition under Rule 405 will apply to Affected Funds to the same extent as operating companies, as well as tailor the “ineligible issuer” definition to apply specifically to Affected Funds. General Instruction B of the Amended Form N-2 will permit Affected Funds that qualify as WKSIs to file automatic shelf registration statements and extend the same benefits currently applicable to operating companies. *Eligibility: To qualify as a WKSI, an Affected Fund must have at least $700 million in “public float.” An Affected Fund is not eligible for WKSI status if, among other things: (i) it is not current and timely in its Exchange Act or Investment Company Act reports, as applicable, during the preceding 12 months, (ii) it is the subject of a judicial or administrative decree or order arising out of a governmental action involving violations of the anti-fraud provisions of the federal securities laws, or (iii) its investment adviser, including any sub-adviser, was the subject of any judicial or administrative decree or order arising out of a governmental action that determines that the investment adviser aided or abetted or caused the Affected Fund to have violated the anti-fraud provisions of the federal securities laws. Other Highlights*: The SEC declined to eliminate or modify the “public float” requirement applicable to operating companies, or permit an Affected Fund to qualify as a WKSI based on its aggregate net asset value.	An Affected Fund that qualifies as a WKSI is afforded the greatest degree of benefits under the Final Rules. An Affected Fund that qualifies as a WKSI may file a shelf registration statement that will be effective immediately upon filing (including any amendments). In addition, as a WKSI, an Affected Fund will be able to: (i) register an unspecified amount of different types or classes of securities on an automatic shelf registration, and (ii) pay the filing fee any time in advance of a shelf takedown or on a “pay-as-you-go” basis at the time of each shelf takedown in an amount calculated at such time. WKSIs also benefit from increased flexibility with respect to communications made before or after a registration statement is filed (as described in the “Communication Reforms” column below).
Omitting Information from a Base Prospectus and Prospectus Supplements – Securities Act – Rules 424 and 497 Rule 424(b), which is applicable to operating companies, permits filing prospectus supplements to update, or to include information omitted from, a prospectus to satisfy the requirements of Section 10(a)(3) of the Securities Act or in connection with a shelf takedown. Rule 424(b) permits an operating company to file a prospectus that contains only substantive changes from, or additions to, previously filed prospectuses, no later than the second business day following the earlier of the date of the offering price determination or the date the prospectus is first used after effectiveness in connection with a public offering or sales. Rule 424(b) does not apply to Affected Funds pursuant to Rule 424(f). Rule 497, which is applicable to Affected Funds, requires filing every prospectus that varies from any previously filed prospectus with the SEC before using it.	As amended, Rule 424(f) will allow Affected Funds to file a prospectus under Rule 424. Rule 497 will be amended to provide that Rule 424 will be the exclusive rule for Affected Funds to file a prospectus supplement other than an advertisement that is deemed to be a prospectus under Rule 482.	Affected Funds will be permitted to omit required information in their base prospectus by providing the information through Exchange Act filings that are incorporated by reference. Filing under Rule 424 will provide Affected Funds more time to file a prospectus. Under Rule 424, Affected Funds will be required to file a prospectus when they make changes from or additions to a previously filed prospectus that are substantive, whereas Rule 497 requires Affected Funds to file every prospectus that varies from any previously filed prospectus.
Conducting Certain Continous Offerings
Securities Act – Rule 486 Only Affected Funds that are interval funds may rely on Rule 486. Rule 486(a) provides that a post-effective amendment to a registration statement, or a registration statement filed for the purpose of registering additional shares of common stock for which a registration statement on Form N-2 is already effective, filed by an interval fund, shall become effective on the 60^th day after filing. Rule 486(b) provides that a post-effective amendment to a registration statement, or a registration statement filed for the purpose of registering additional shares of common stock for which a registration statement on Form N-2 is already effective, filed by an interval fund, shall be immediately effective if it is only filed to: (1) register additional shares of common stock; (2) bring financial statements up-to-date as required by Section 10(a)(3) of the Securities Act; (3) designate a new effective date for a previously filed post-effective amendment or registration statement for additional shares; (4) disclose or update certain information relating to portfolio management; and (5) make other non-material changes.	All Affected Funds conducting continuous public offerings pursuant to Rule 415(a)(1)(ix) under the Securities Act may rely on amended Rule 486 to file certain registration statements or post-effective amendments to registration statements that are either immediately effective or automatically effective 60 days after filing. In addition, registration statements that are filed by Affected Funds after three years to comply with Rules 415(a)(5) and (a)(6) of the Securities Act will be immediately or automatically effective depending on the substance thereof. *Eligibility*: All Affected Funds that conduct continuous public offerings pursuant to Rule 415(a)(1)(ix) under the Securities Act may rely on the Rule 486.	All Affected Funds conducting continuous public offerings pursuant to Rule 415(a)(1)(ix) under the Securities Act will be able to more efficiently maintain effective registration statements. Specifically, post-effective amendments filed to, among other things, add additional shares, bring financial statements up to date pursuant to Section 10(a)(3) of the Securities Act, or make non-material amendments, will be automatically effective.
Final Prospectus Delivery Reforms
Securities Act – Rules 172 and 173 Affected Funds are prohibited from relying on Rules 172 and 173. Rule 172 exempts an issuer or broker-dealer from delivering a prospectus in connection with a registered offering, so long as the final prospectus is filed with the SEC. Rule 173 requires that each underwriter or dealer participating in a registered offering must provide to each purchaser a copy of the final prospectus or, in lieu of the final prospectus, a notice that the sale was made pursuant to a registration statement, within two business days following the completion of such sale.	Affected Funds may rely on amended Rules 172 and 173 to the same extent as operating companies. *Eligibility*: Affected Funds	Affected Funds will be able to satisfy their prospectus delivery requirements by filing a final prospectus with the SEC. In addition, underwriters and dealers participating in a registered offering with respect to an Affected Fund will be able to satisfy their prospectus delivery obligations by providing a notice that the sale was made pursuant to a registration statement. As amended, Rules 172 and 173 will allow Affected Funds to reduce their printing and delivery obligations and costs and provide further parity with operating companies.
Communication Reforms
Securities Act – Rules 134, 163A, 163, 164, 168, 169 and 433 (collectively, the Communication Rules) Affected Funds are prohibited from relying on the Communication Rules. Rule 134 provides a safe harbor that allows issuers to make certain written statements regarding an offer after a prospectus is filed, provided certain conditions are met. Rule 163A provides a safe harbor from the gun-jumping provisions for communications that do not reference an offering and that are made more than 30 days before a registration statement is filed, provided certain conditions are met. Rule 163 is a safe harbor from the gun-jumping provisions that allows WKSIs to engage in unrestricted oral and written offers before filing a registration statement, provided certain conditions are met. Rules 164 and 433 provide for the use of free writing prospectuses once a registration is filed, provided certain conditions are met. Rules 168 and 169 provide a safe harbor for the regular release of factual business information or forward-looking information, provided certain conditions are met.	Affected Funds may rely on amended Rules 134, 163A, 164, 433, 168 and 169 to the same extent as operating companies. Affected Funds that are WKSIs may rely on amended Rule 163 to the same extent as operating companies. *Eligibility*: Affected Funds may rely on the amended Communication Rules, except that only Affected Funds that qualify as WKSIs may rely on amended Rule 163.	Affected Funds may rely on the following amended rules: (1) Rule 134 to publish factual information about the issuer or the offering (including “tombstone ads”); (2) Rule 163A safe-harbors to communicate with potential investors without violating the gun-jumping rules; (3) Rules 164 and 433 to use free writing prospectuses; and (4) Rules 168 and 169 to communicate the regular release of factual business information. In addition, Affected Funds that qualify as WKSIs will be able to engage, at any time, in oral and written communications. As amended, the Communication Rules, increase the ability of Affected Funds to communicate with investors and the market.
Broker-Dealer Research Reports – Securities Act – Rules 138 and 139 Rules 138 and 139 do not apply to distributions pursuant to registration statements on Form N-2. Rule 138 permits a broker-dealer participating in a distribution of an issuer’s common stock or similar securities to publish research reports about the issuer’s fixed income securities and a broker-dealer participating in a distribution of an issuer’s fixed income securities to publish research reports about the issuer’s common stock or similar securities, if certain conditions are met. Rule 139 permits a broker-dealer participating in a distribution of securities of an issuer to publish research reports concerning that issuer or any class of its securities, if certain conditions are met. Research reports permitted by Rules 138 and 139 will not be considered general advertising or solicitation for purposes of Rule 144A offerings.	Broker-dealers participating in a distribution of securities pursuant to registration statement on Form N-2 may rely on amended Rule 138 to publish research reports about certain classes of an issuer’s securities. In addition, the requirement that issuers covered in a research report in reliance on Rule 138 must file periodic reports and be current in their Form 10-K and Form 10-Q reporting obligations for the past 12 months is amended to include references to periodic reports that Registered CEFs are required to file. *Eligibility: Affected Funds. Other Highlights*: No changes are being made to Rule 139.	As amended, Rule 138 allows broker-dealers participating in the registered offering of an Affected Fund’s common stock or similar securities may publish research reports about the Affected Fund’s fixed income securities and a broker-dealer participating in a distribution of an Affected Fund’s fixed income securities to publish research reports about the Affected Fund’s common stock or similar securities.

Current Law

Final Rules

Impact on BDCs and Registered CEFs

Registration Process

Shelf Offering Process – Securities Act⁴ – Rules 415 and 418

Rule 415 provides the basis for shelf registration, and specifically lists the types of shelf offerings that may be effected on an immediate, delayed, or continuous basis. Rule 415 permits certain Affected Funds to register an unallocated dollar amount of securities for sale at a later time if they meet the eligibility requirements of Form S-3 (even though Affected Funds register securities offerings on Form N-2). However, because of differences between registration statements on Form S-3 and Form N-2, Affected Funds filing on Form N-2 are required to include significantly more information than a similarly situated operating company would be required to include on Form S-3.
For registration statements not filed on Form S-3, Rule 415 limits the amount of securities that can be registered for a continuous offering to an amount that could be offered or sold within two years from the date the registration statement became effective. Rule 418(a)(3) exempts registrants filing on Form S-3 from having to provide certain supplemental engineering, management or other similar reports relating to the broad aspects of the business or operations of the registrants to the SEC upon request, on the basis that they are already registered and have complied with the requirements in General Instruction IA of Form S-3.

Affected Funds may rely on the new General Instruction A.2 in the Amended Form N-2 to file a short-form N-2, which will function like a registration statement on Form S-3 if the Affected Fund meets certain requirements (as set forth below). Affected Funds may rely on the new instruction to register a shelf offering under Rule 415(a)(1)(x) as well as any of the securities offerings that operating companies are permitted to register on Form S-3.
The exemption in Rule 418(a)(3) will apply to Affected Funds eligible to file a short-form N-2 to the same extent as operating companies filing on Form S-3.
Interval funds will be required to pay securities registration fees using the same method that mutual funds and exchange-traded funds use today.⁵

Eligibility: Affected Funds that: (i) meet registrant and transaction requirements of Form S-3, and (ii) with respect to Registered CEFs, are registered under the Investment Company Act for at least 12 calendar months immediately preceding the filing of the registration statement and have timely filed all reports required to be filed under Section 30 of the Investment Company Act. Because an Affected Fund must satisfy the registrant and transaction requirements of Form S-3,⁶ eligibility for primary offerings of common stock will be limited to listed Affected Funds with a “public float” of at least $75 million that have been current with certain of their Exchange Act⁷ or their Investment Company Act reporting, as applicable, for the 12 calendar months immediately preceding the filing of the registration statement.⁸ An Affected Fund without a “public float” that meets the registrant requirements may register non-convertible debt securities if it has issued at least $1 billion of non-convertible debt securities over the past three years or has outstanding $750 million of non-convertible debt securities registered under the Securities Act.

Eligible Affected Funds will be permitted to file a short-form N-2 and to satisfy Form N-2’s disclosure requirements by incorporating by reference information from certain past and future Exchange Act reports (as described in the “Incorporation by Reference” column below) and complying with a new disclosure requirement.⁹

Incorporation by Reference

Operating companies that are qualified to register securities offerings on Form S-3 may incorporate information into their prospectuses by reference to earlier or subsequently filed Exchange Act reports. Affected Funds are required to register their securities offerings on Form N-2 and Form N-2 does not allow incorporation by reference. For registration statements on Form N-2, Rule 415 requires registrants to provide an undertaking (set forth in Item 34.4 of Form N-2) “to file, during any period in which offers or sales are being made, a post-effective amendment to the registration statement: (1) to include any prospectus required by Section 10(a)(3) of the [Securities] Act.”
Form N-14 may be used by Registered CEFs and BDCs to register securities to be issued in certain types of extraordinary transactions, such as a transaction involving a reclassification of securities, mergers, consolidations and acquisitions of assets. While Form N-14 allows Registered CEFs to incorporate by reference, BDCs are not permitted to do so.
Schedule 14A allows Form S-3 registrants to incorporate previously filed financial reports by reference in any proxy statement for the authorization or issuance of securities other than for exchange or for the modification or exchange of securities.

Affected Funds eligible to file a short-form N-2, may rely on new General Instructions F.3.a-b of the Amended Form N-2 to incorporate by reference to earlier or subsequently filed Exchange Act reports. The Amended Form N-2 includes changes to the undertakings for eligible Affected Funds filing a short-form N-2 that will allow the information required by Section 10(a)(3) of the Securities Act to be incorporated by reference to past or future Exchange Act reports.
The instruction governing incorporation by reference on Form N-14 will be amended to include BDCs.
As amended, Rule 14a-101 allows Affected Funds to incorporate certain previously filed financial reports by reference in certain proxy statements to the same extent as operating companies.

Other Highlights: The SEC did not adopt the proposed new instruction to Form N-2 that would have required an Affected Fund to include a statement in its periodic reports identifying any information in its periodic report that is not otherwise required but was added to update the short-form N-2.

An Affected Fund filing a short-form N-2 will be required to satisfy its disclosure requirements for its prospectus by incorporating the information by reference to Exchange Act reports and state that all documents subsequently filed prior to the termination of the offering will be deemed incorporated by reference into the prospectus.
BDCs will be allowed to incorporate by reference into Form N-14 to the same extent as Registered CEFs.
Affected Funds meeting the requirements for a short-form N-2 may now incorporate certain previously filed financial reports by reference in certain proxy statements to the same extent as operating companies.

Automatic Shelf Registration Statements – Securities Act – Rule 405

SEC rules allow WKSIs to benefit from a more flexible registration process that includes, among other things, automatic effectiveness of a WKSI’s registration statement, and reduced information included in the registration statement. Affected Funds are excluded from the definition of WKSIs and, as a result, may not file automatically effective shelf registration statements (which applies only to Form S-3).

Amended Rule 405 will delete the exclusion of Affected Funds from the definition of WKSI. The “ineligible issuer” definition under Rule 405 will apply to Affected Funds to the same extent as operating companies, as well as tailor the “ineligible issuer” definition to apply specifically to Affected Funds.
General Instruction B of the Amended Form N-2 will permit Affected Funds that qualify as WKSIs to file automatic shelf registration statements and extend the same benefits currently applicable to operating companies.

Eligibility: To qualify as a WKSI, an Affected Fund must have at least $700 million in “public float.” An Affected Fund is not eligible for WKSI status if, among other things: (i) it is not current and timely in its Exchange Act or Investment Company Act reports, as applicable, during the preceding 12 months, (ii) it is the subject of a judicial or administrative decree or order arising out of a governmental action involving violations of the anti-fraud provisions of the federal securities laws, or (iii) its investment adviser, including any sub-adviser, was the subject of any judicial or administrative decree or order arising out of a governmental action that determines that the investment adviser aided or abetted or caused the Affected Fund to have violated the anti-fraud provisions of the federal securities laws.

Other Highlights: The SEC declined to eliminate or modify the “public float” requirement applicable to operating companies, or permit an Affected Fund to qualify as a WKSI based on its aggregate net asset value.

An Affected Fund that qualifies as a WKSI is afforded the greatest degree of benefits under the Final Rules. An Affected Fund that qualifies as a WKSI may file a shelf registration statement that will be effective immediately upon filing (including any amendments). In addition, as a WKSI, an Affected Fund will be able to: (i) register an unspecified amount of different types or classes of securities on an automatic shelf registration, and (ii) pay the filing fee any time in advance of a shelf takedown or on a “pay-as-you-go” basis at the time of each shelf takedown in an amount calculated at such time. WKSIs also benefit from increased flexibility with respect to communications made before or after a registration statement is filed (as described in the “Communication Reforms” column below).

Omitting Information from a Base Prospectus and Prospectus Supplements – Securities Act – Rules 424 and 497

Rule 424(b), which is applicable to operating companies, permits filing prospectus supplements to update, or to include information omitted from, a prospectus to satisfy the requirements of Section 10(a)(3) of the Securities Act or in connection with a shelf takedown. Rule 424(b) permits an operating company to file a prospectus that contains only substantive changes from, or additions to, previously filed prospectuses, no later than the second business day following the earlier of the date of the offering price determination or the date the prospectus is first used after effectiveness in connection with a public offering or sales. Rule 424(b) does not apply to Affected Funds pursuant to Rule 424(f).
Rule 497, which is applicable to Affected Funds, requires filing every prospectus that varies from any previously filed prospectus with the SEC before using it.

As amended, Rule 424(f) will allow Affected Funds to file a prospectus under Rule 424. Rule 497 will be amended to provide that Rule 424 will be the exclusive rule for Affected Funds to file a prospectus supplement other than an advertisement that is deemed to be a prospectus under Rule 482.

Affected Funds will be permitted to omit required information in their base prospectus by providing the information through Exchange Act filings that are incorporated by reference. Filing under Rule 424 will provide Affected Funds more time to file a prospectus. Under Rule 424, Affected Funds will be required to file a prospectus when they make changes from or additions to a previously filed prospectus that are substantive, whereas Rule 497 requires Affected Funds to file every prospectus that varies from any previously filed prospectus.

Conducting Certain Continous Offerings

Securities Act – Rule 486

Only Affected Funds that are interval funds may rely on Rule 486.

Rule 486(a) provides that a post-effective amendment to a registration statement, or a registration statement filed for the purpose of registering additional shares of common stock for which a registration statement on Form N-2 is already effective, filed by an interval fund, shall become effective on the 60^th day after filing.
Rule 486(b) provides that a post-effective amendment to a registration statement, or a registration statement filed for the purpose of registering additional shares of common stock for which a registration statement on Form N-2 is already effective, filed by an interval fund, shall be immediately effective if it is only filed to: (1) register additional shares of common stock; (2) bring financial statements up-to-date as required by Section 10(a)(3) of the Securities Act; (3) designate a new effective date for a previously filed post-effective amendment or registration statement for additional shares; (4) disclose or update certain information relating to portfolio management; and (5) make other non-material changes.

All Affected Funds conducting continuous public offerings pursuant to Rule 415(a)(1)(ix) under the Securities Act may rely on amended Rule 486 to file certain registration statements or post-effective amendments to registration statements that are either immediately effective or automatically effective 60 days after filing. In addition, registration statements that are filed by Affected Funds after three years to comply with Rules 415(a)(5) and (a)(6) of the Securities Act will be immediately or automatically effective depending on the substance thereof.

Eligibility: All Affected Funds that conduct continuous public offerings pursuant to Rule 415(a)(1)(ix) under the Securities Act may rely on the Rule 486.

All Affected Funds conducting continuous public offerings pursuant to Rule 415(a)(1)(ix) under the Securities Act will be able to more efficiently maintain effective registration statements. Specifically, post-effective amendments filed to, among other things, add additional shares, bring financial statements up to date pursuant to Section 10(a)(3) of the Securities Act, or make non-material amendments, will be automatically effective.

Final Prospectus Delivery Reforms

Securities Act – Rules 172 and 173

Affected Funds are prohibited from relying on Rules 172 and 173.

Rule 172 exempts an issuer or broker-dealer from delivering a prospectus in connection with a registered offering, so long as the final prospectus is filed with the SEC.
Rule 173 requires that each underwriter or dealer participating in a registered offering must provide to each purchaser a copy of the final prospectus or, in lieu of the final prospectus, a notice that the sale was made pursuant to a registration statement, within two business days following the completion of such sale.

Affected Funds may rely on amended Rules 172 and 173 to the same extent as operating companies.

Eligibility: Affected Funds

Affected Funds will be able to satisfy their prospectus delivery requirements by filing a final prospectus with the SEC. In addition, underwriters and dealers participating in a registered offering with respect to an Affected Fund will be able to satisfy their prospectus delivery obligations by providing a notice that the sale was made pursuant to a registration statement.

As amended, Rules 172 and 173 will allow Affected Funds to reduce their printing and delivery obligations and costs and provide further parity with operating companies.

Communication Reforms

Securities Act – Rules 134, 163A, 163, 164, 168, 169 and 433 (collectively, the Communication Rules)

Affected Funds are prohibited from relying on the Communication Rules.

Rule 134 provides a safe harbor that allows issuers to make certain written statements regarding an offer after a prospectus is filed, provided certain conditions are met.
Rule 163A provides a safe harbor from the gun-jumping provisions for communications that do not reference an offering and that are made more than 30 days before a registration statement is filed, provided certain conditions are met.
Rule 163 is a safe harbor from the gun-jumping provisions that allows WKSIs to engage in unrestricted oral and written offers before filing a registration statement, provided certain conditions are met.
Rules 164 and 433 provide for the use of free writing prospectuses once a registration is filed, provided certain conditions are met.
Rules 168 and 169 provide a safe harbor for the regular release of factual business information or forward-looking information, provided certain conditions are met.

Affected Funds may rely on amended Rules 134, 163A, 164, 433, 168 and 169 to the same extent as operating companies.
Affected Funds that are WKSIs may rely on amended Rule 163 to the same extent as operating companies.

Eligibility: Affected Funds may rely on the amended Communication Rules, except that only Affected Funds that qualify as WKSIs may rely on amended Rule 163.

Affected Funds may rely on the following amended rules: (1) Rule 134 to publish factual information about the issuer or the offering (including “tombstone ads”); (2) Rule 163A safe-harbors to communicate with potential investors without violating the gun-jumping rules; (3) Rules 164 and 433 to use free writing prospectuses; and (4) Rules 168 and 169 to communicate the regular release of factual business information. In addition, Affected Funds that qualify as WKSIs will be able to engage, at any time, in oral and written communications.

As amended, the Communication Rules, increase the ability of Affected Funds to communicate with investors and the market.

Broker-Dealer Research Reports – Securities Act – Rules 138 and 139

Rules 138 and 139 do not apply to distributions pursuant to registration statements on Form N-2.

Rule 138 permits a broker-dealer participating in a distribution of an issuer’s common stock or similar securities to publish research reports about the issuer’s fixed income securities and a broker-dealer participating in a distribution of an issuer’s fixed income securities to publish research reports about the issuer’s common stock or similar securities, if certain conditions are met.
Rule 139 permits a broker-dealer participating in a distribution of securities of an issuer to publish research reports concerning that issuer or any class of its securities, if certain conditions are met.
Research reports permitted by Rules 138 and 139 will not be considered general advertising or solicitation for purposes of Rule 144A offerings.

Broker-dealers participating in a distribution of securities pursuant to registration statement on Form N-2 may rely on amended Rule 138 to publish research reports about certain classes of an issuer’s securities.
In addition, the requirement that issuers covered in a research report in reliance on Rule 138 must file periodic reports and be current in their Form 10-K and Form 10-Q reporting obligations for the past 12 months is amended to include references to periodic reports that Registered CEFs are required to file.

Eligibility: Affected Funds.

Other Highlights: No changes are being made to Rule 139.

As amended, Rule 138 allows broker-dealers participating in the registered offering of an Affected Fund’s common stock or similar securities may publish research reports about the Affected Fund’s fixed income securities and a broker-dealer participating in a distribution of an Affected Fund’s fixed income securities to publish research reports about the Affected Fund’s common stock or similar securities.

Summary of the Final Rules Relating to the New Regulatory and Disclosure Parity Requirements

In the Final Rules, the SEC adopted certain amendments to rules and forms, substantially as proposed, to harmonize the disclosure and regulatory framework between Affected Funds and operating companies, expanding upon the offering reform mandated by Congress.

Structured Data Requirements

Once effective, the Final Rules will require:

BDCs to submit financial statement information using Inline XBRL format;¹⁰
Affected Funds to include structured cover page information in their Registration Statements on Form N-2 using Inline XBRL format¹¹ and to tag certain prospectus items using Inline XBRL format;¹² and
Filings on Form 24F-2, which are filed by interval funds deemed to have registered an indefinite amount of securities, to be submitted in eXtensible Markup Language format.

Periodic Reporting Requirements

The SEC noted that, as eligible Affected Funds file short-form N-2s that forward incorporate certain Exchange Act or Investment Company Act reports, as applicable, annual reports are expected to take on greater prominence with investors. As a result, the Final Rules require the following additional information to be included in annual reports on Form 10-K or Form N-CSR, as applicable:

Fees and expense table;
Share price data including information about the share price and any premium or discount to net asset value; and
Senior securities table.

In addition, the Final Rules extend the management’s discussion of fund performance requirement to all Registered CEFs.

The Final Rules will amend Form N-2 to require BDCs, like Registered CEFs, to include financial highlights disclosure summarizing its financial statements in its registration statements and annual reports.¹³

Current Reporting Requirements

The SEC proposed to require Registered CEFs to report promptly on Form 8-K, like operating companies and BDCs, and to amend Form 8-K to add two new reporting items for Affected Funds relating to material changes to investment objectives or policies and material write-downs of significant investments. The SEC, however, did not adopt these proposed rules and noted that the SEC will continue to consider current reporting obligations in connection with its broader, systematic review of Affected Funds’ disclosure.

What Now?

Affected Funds will be placed on equal footing with operating companies to be able to access the capital markets more promptly and facilitate investor communications. SEC Chairman Clayton commented that these reforms “will benefit both investors in these funds and the companies in which they invest.” The Final Rules also increase the legal and compliance burden of Affected Funds. Preparing to comply with the certain aspects of the Final Rules will be a lengthy and involved process that Affected Funds should begin by taking the following steps:

Gain a better understanding of the Final Rules to assess the scope of the additional information required to be disclosed, which will vary depending on an Affected Fund’s contemplated registration and offering process. For instance, if an eligible Affected Fund is filing a short-form N-2, such Affected Fund must ensure that certain information is included in its annual report on Form 10-K or Form N-CSR, as applicable;
Assess the Final Rules to determine the applicability to it of the registration and offering reforms; and
Determine to what extent current systems, whether at the Affected Fund or at service providers, will be able to meet the new structured data requirements and whether such systems will need to be modified or developed to comply with the new structured data requirements.

¹The term “Investment Company Act” refers to the Investment Company Act of 1940, as amended.
²The full text of the adopting release for the Final Rules can be found here.
³For a summary of the BDC Act, please refer to this previous Eversheds Sutherland legal alert. Unlike the BDC Act, the Registered CEF Act does not include specific instructions on the amendments that are required.
⁴The term “Securities Act” refers to the Securities Act of 1933, as amended.
⁵Currently, interval funds are required to pay a registration fee at the time they register securities, regardless of when, or if, they sell the securities. The Final Rule provides that interval funds can register an indefinite amount of securities upon the registration statement being declared effective and will require interval funds to pay registration fees based on their net issuance of shares, no later than 90 days after the interval fund’s fiscal year end. Under amended Rule 24f-2 under the Investment Company Act, if interval funds are deemed to have registered an indefinite amount of securities, they would be required to file Form 24F-2 no later than 90 days after the end of any fiscal year during which they have offered such securities.
⁶For a full list of the registrant and transaction requirements, see General Instruction I.A (registrant requirements) and General Instruction I.B (transaction requirements) of Form S-3.
⁷The term “Exchange Act” refers to the Securities Exchange Act of 1934, as amended.
⁸Rule 103(a) provides that a failure to make public disclosure under Regulation FD shall not affect whether an issuer, for the purposes of Forms S-2, S-3, S-8 and SF-3, is deemed to have filed all material required to be filed pursuant to Sections 13 or 15(d) of the Exchange Act. The Final Rules will amend Rule 103(a) of Regulation FD to cover Affected Funds filing under short-form on Form N-2.
⁹New Instruction 4.h.(4) to Item 24 of the Amended Form N-2 will require Affected Funds filing a short-form N-2 to disclose outstanding staff comments that remain unresolved for a substantial period of time and that the Affected Fund believes are material.
¹⁰Item 601(b)(101)(i) of Regulation S-K currently excludes all registrants that prepare financial statements in accordance with Article 6 of Regulation S-X (i.e., BDCs and Registered CEFs) from the Inline XBRL financial statement tagging requirements. Amended Item 601(b)(101)(i)-(ii) of Regulation S-K will only exclude Registered CEFs from the tagging requirement.
¹¹The Amended Form N-2 will add new check boxes to its cover page that would require an Affected Fund, among other things, to indicate that is relying on short-form N-2 and that it is a WKSI filing an automatic shelf registration statement. New General Instruction I.1 of the Amended Form N-2 will require Affected Funds to tag all of the data points that appear on the cover page on Form N-2, except the Calculation of Registration Fee table, using Inline XBRL format.
¹²New General Instruction I.2 and I.3 of the Amended Form N-2 will require all Affected Funds to tag the following prospectus disclosure items in registration statements or post-effective amendments filed on Form N-2, any form of prospectus filed pursuant to Rule 424 under the Securities Act, and any Exchange Act or Investment Company Act reports filed by an eligible Affected Fund that is filing a short-form N-2: (i) fee table; (ii) senior securities table; (iii) investment objectives and policies; (iv) certain risk factors; (v) share price data; and (vi) capital stock, long-term debt, and other securities. Affected Funds will be required to submit “Interactive Data Files” (i.e., machine-readable computer code that presents information in XBRL format) as follows: (i) for any registration statements and post-effective amendments, Interactive Data Files must be filed either concurrently with the filing or in a subsequent amendment that is filed on or before the date of the registration statement or post-effective amendment that contains the related information becomes effective; (ii) for any prospectus filed pursuant to Rule 424, Interactive Data Files must be submitted concurrently with the filing; and (iii) for any Exchange Act report or Investment Company Act, as applicable, that an Affected Fund filing a short-form N-2, Interactive Data Files must be submitted concurrently with the filing.
¹³This amendment will be effectuated by removing Instruction 1 to Item 4 and adding new Instruction 10 to Item 24 of the Amended Form N-2.

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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.