Overview -

Business development companies (“BDCs”) are U.S. publicly held investment funds that invest primarily in private and thinly traded public U.S. businesses. BDCs have generally faced capital raising challenges when seeking to issue new securities after their initial public offerings due to regulatory constraints imposed upon them by the Investment Company Act of 1940, as amended (the “1940 Act”). Unlike many other issuers of common stock, a BDC is not generally able to issue and sell shares of its common stock at a price below its net asset value (“NAV”) per share unless it has received prior approval from its shareholders. Historically, shares of common stock of BDCs frequently trade at a discount to NAV, thereby limiting the ability of BDCs to raise capital by issuing shares of common stock. Additionally, any debt or senior security issued by a BDC must have asset coverage of at least 200%. The 1940 Act currently treats preferred stock similarly to other types of senior securities and imposes a number of restrictions on the issuance of preferred stock and similar securities in addition to the asset coverage test.

Notwithstanding the aforementioned regulatory constraints, a shelf registration statement can help a BDC overcome capital raising challenges that are related to the timing and certainty of a securities offering. A BDC can use a shelf registration statement on Form N-2 to register multiple offerings of securities in order to raise capital. An effective shelf registration statement enables a BDC to quickly access capital markets when needed or when market conditions are optimal. The shelf registration statement can be filed with the Securities and Exchange Commission (the “SEC”) and reviewed by the SEC staff while the BDC is trading at a discount to its NAV and then can be used to conduct an offering of the BDC’s shares of common stock when market conditions permit. Takedowns from an effective shelf registration can then be consummated without SEC staff review or delay. As a result, an effective shelf registration statement permits a BDC to offer its shares of common stock to the general public at a price above or at NAV when the BDC is trading at a sufficient premium. This is particularly useful for BDCs seeking to raise capital that trade at a premium to NAV for only a short and typically unpredictable period of time.