Business development companies (BDCs), which provide a growing and important alternative source of capital to smaller companies, face challenges raising money due to a quirk in the federal securities laws that limits how much mutual funds can invest in them. But if BDCs, mutual funds, ETFs, and other participants in the capital markets raise their voices, there is some hope that the Securities and Exchange Commission can ease the restriction so that BDCs can fulfill their statutory mission of raising capital for smaller companies that cannot otherwise find bank financing.

As investment companies, BDCs are subject to certain provisions of the Investment Company Act of 1940 (the “1940 Act”) including the limitations in Section 12(d)(1) of the 1940 Act. Among other things, this section limits the ability of other registered investment companies (including exchange-traded funds (ETFs) to acquire more than three percent of a BDC’s total outstanding stock. Given the relatively small size of many BDCs, this meaningfully restricts their ability to raise money from key institutional investors. Unfortunately, the trickle-down effect of this restriction limits the ability of BDCs to use their capital to provide small and middle market businesses the ability to continue to develop and grow.