On March 2, 2021, the Securities and Exchange Commission (the SEC) updated its Frequently Asked Questions relating to the targeted co-investment relief that the SEC previously had granted in an effort to assist business development companies (BDCs) throughout the global COVID-19 pandemic (the Updated Guidance). The Updated Guidance extends until March 31, 2022 the position of the SEC’s Division of Investment Management (the Division) that it will not recommend enforcement action to the SEC to the extent BDCs with effective co-investment orders participate in a Follow-On Investment,¹ in compliance with the previously granted relief, with an Affiliated Fund² that is not already invested in the issuer.

The Updated Guidance follows a series of earlier SEC actions regarding this same relief:

• On April 8, 2020, the SEC issued an exemptive order (the April 2020 Order) that, among other things, provided immediate temporary flexibility for BDCs with effective co-investment orders to participate in a Follow-On Investment with an Affiliated Fund that is not already invested in the issuer. Such relief was temporary, and only available from the date of the April 2020 Order (April 8, 2020) to the earlier of December 31, 2020, or the date on which a BDC ceased to rely on the April 2020 Order.
• As described in our prior alert, the SEC issued a Public Statement on January 5, 2021 (the January Relief Statement) providing that the Division would not recommend enforcement action to the SEC to the extent BDCs with effective co-investment orders participate in a Follow-On Investment with an Affiliated Fund that is not already invested in the issuer (in compliance with the April 2020 Order) through March 31, 2021.
• The Updated Guidance updates the January Relief Statement to extend the expiration date of the Division’s no-action position by one year to March 31, 2022.

Specifically, the Updated Guidance provides that, until March 31, 2022, the Division will not recommend enforcement action to the SEC to the extent BDCs with effective co-investment orders participate in a Follow-On Investment with an Affiliated Fund that is not already invested in the issuer (i.e., BDCs with effective co-investment orders may continue to engage in transactions described in Section III of the April 2020 Order until March 31, 2022). The Updated Guidance also reaffirms that while the April 2020 Order still has not technically been extended, the SEC will continue to consider requests from individual firms for similar exemptive relief pertaining to existing co-investment orders.

As described in our prior alert, without the April 2020 Order, a BDC is generally only permitted to complete Follow-On Investments under its existing co-investment order with Affiliated Funds and Regulated Funds³ that acquired securities of the issuer in a co-investment transaction with the BDC. The April 2020 Order expands the sources of capital available to a BDC’s portfolio company by permitting Affiliated Funds that are not already invested in the issuer to participate in Follow-On Investments with the BDC. Any such Follow-On Investment must otherwise be completed in compliance with the conditions of the BDC’s existing co-investment order. When a BDC’s board of directors is approving a Follow-On Investment in reliance on the April 2020 Order, the April 2020 Order requires the BDC’s board of directors, including a Required Majority,⁴ to consider the proposed Follow-On Investment both on a stand-alone basis and in relation to the total economic exposure of the BDC to the issuer.

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^{1    The term “Follow-On Investment” generally means an additional investment in the same issuer,}

^{including, but not limited to, through the exercise of warrants, conversion privileges or other rights to}

^{purchase securities of the issuer.}

^{2 The term “Affiliated Fund” has the meaning ascribed in each BDC’s specific co-investment order,}

^{but generally refers to a private fund under common control with the BDC that would be an}

^{investment company but for Sections 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940, as}

^{amended (the 1940 Act).}

^{3 The term “Regulated Fund” generally means a BDC and/or investment company registered under}

^{the 1940 Act that is under common control with the BDC.}

^{4 The term “Required Majority” includes a majority of the BDC’s board of directors, and a majority}

^{of directors who are not “interested persons” of the BDC as defined in Section 2(a)(19) of the 1940 Act.}

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