SEC Adopts Offering Reforms for Business Development Companies and Registered Closed-End Investment Companies

Nelson Mullins Riley & Scarborough LLP

On April 8, 2020, the Securities and Exchange Commission (SEC) adopted final rules to implement certain provisions of the Small Business Credit Availability Act and the Economic Growth, Regulatory Relief, and Consumer Protection Act.  The rules will allow business development companies (BDCs) and registered closed-end investment companies, including interval funds (collectively, “affected funds”) to use the registration, offering, and communications rules that are currently available to operating companies.  Below is a summary of the major reforms:

New Short-Form Registration Statement

BDCs and closed-end investment companies will be able to use a new short-form registration statement on Form N-2, which will function like the registration statement filed on Form S-3 available for operating companies. The new short-form registration statement will allow capital to be raised more efficiently and cost-effectively. This new short-form registration statement on Form N-2 will permit BDCs and closed-end investment companies to:

  • Incorporate certain past and future Exchange Act reports by reference;
  • Rely on rule 430B to omit information from their base prospectuses, and to use the process operating companies follow to file prospectus supplements;
  • Register any of the securities offerings that operating companies are permitted to register on Form S-3; and
  • Include additional information in periodic reports to update their registration statements.

The new short-form registration statement is available to BDCs and closed-end investment companies if they meet the filing and reporting history requirements and transaction requirements of Form S-3. Additionally, closed-end investment companies must also have been registered under the Investment Company Act for at least 12 calendar months immediately preceding the filing and have timely filed all reports required to be filed under Section 30 of the Investment Company Act during that time. A BDC or closed-end investment company generally will meet the registrant requirements of Form S-3 if it has timely filed all reports and other materials required under the Exchange Act during the prior year and has a public float of $75 million or more. Most interval funds, however, do not list their securities on an exchange and thus do not have a public float to satisfy the transaction requirement necessary to file a short-form registration statement. 

Ability to Qualify for Well-Known Seasoned Issuer (WKSI) Status

The final rules amend Rule 405 under the Securities Act to delete the exclusion of affected funds from the definition of WKSI.  Affected funds may qualify as a WKSI if they meet the new short-form registration statement requirements under Form N-2 and satisfy the same $700 million public float requirement that applies to operating companies.  Affected funds with WKSI status will now be able to take advantage of the flexible registration process and greater latitude to communicate with the market that has traditionally been awarded to operating companies with WKSI status.  

Immediate or Automatic Effectiveness of Certain Filings

Rule 486 under the Securities Act will be amended to permit any registered closed-end fund or BDC that conducts continuous offerings under Rule 415(a)(1)(ix), to file post-effective amendments and registration statements that become either effective immediately upon filing under Rule 486(b) or automatically effective after 60 days under Rule 486(a).

Communications Reform

The final rules will:

  • Permit affected funds to rely on Rule 164 and Rule 433 under the Securities Act to use a free writing prospectus;
  • Permit affected funds to use rule 134 to publish factual information about the issuer or the offering, including “tombstone ads”;
  • Permit affected funds to rely on the Rule 163A safe harbor to avoid violating the gun-jumping rules; and
  • Permit affected funds that are reporting companies to rely on Rule 168 to publish or disseminate regularly released factual business information and forward-looking information at any time.

Final Prospectus Delivery Reforms

The final rules amend Rule 172 and Rule 173 under the Securities Act to remove the exclusion for offerings of all affected funds.  Affected funds will be able to satisfy their final prospectus delivery obligations by filing their prospectuses with the SEC.

New Method for Paying Registration Fees for Interval Funds and Certain Exchange-Traded Products

Closed-end funds that operate as “interval funds” will be able to register an indefinite number of shares and pay registration fees based on net issuance of shares. This approach is similar to that permitted for mutual funds and exchange-traded funds. A similar method will be available for continuously offered exchange-traded products that are not registered under the Investment Company Act.

Periodic Reporting Requirements

Affected funds filing a short-form registration statement on Form N-2 will be required to disclose material unresolved staff comments.  Additionally, registered closed-end investment companies must provide management’s discussion of fund performance in their annual reports to shareholders and BDCs must provide financial highlights in their registration statements and annual reports.

Incorporation by Reference Changes

The final rules amend Form N-2’s General Instruction for Incorporation by Reference. The new general instruction will allow affected funds to make incorporated materials readily available on a website, instead of providing new purchasers with a copy of all previously-filed materials that are incorporated by reference into their registration statement, as previously required. Additionally, affected funds will be required to provide incorporated materials upon request free of charge.

Structured Data Requirements

Affected funds will be required to tag certain registration statement information and BDCs will be required to submit financial statement information. Funds that file Form 24F-2 in connection with paying their registration fees, including mutual funds and exchange-traded funds (as well as interval funds under the new amendments), will be required to submit the form in XML format.

These reforms will become effective on August 1, 2020, with the exception of the amendments related to registration fee payments, which will become effective on August 1, 2021.

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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