On March 23, 2018, President Donald Trump signed the Consolidated Appropriations Act of 2018, which includes the Small Business Credit Availability Act (the SBCAA). The SBCAA permits, subject to certain requirements, a business development company (a BDC) to significantly increase the amount of debt it incurs. In addition, it mandates that the Securities and Exchange Commission (the Commission) revise, not later than one year after the date of its enactment, certain applicable securities offering and proxy rules in order to reduce disparities in registration and reporting requirements for BDCs as compared to other issuers.
1. Reduction of Asset Coverage Requirement
The SBCAA amends Section 61(a) of the Investment Company Act of 1940 (the 1940 Act) to reduce the asset coverage requirement applicable to BDCs from 200 percent to 150 percent if certain approval and disclosure requirements are met.
New Section 61(a)(2)(D) contemplates that the approval requirement can be met in one of two ways:
Approval by the Board. By a vote of the “required majority”1 approving the reduction, which approval shall become effective on the date that is one year after the date of the approval.
Approval by Shareholders. By a vote of the BDC’s shareholders of more than 50 percent of the votes cast approving the reduction at a special or annual meeting at which a quorum is present, which approval shall become effective on the first day after the date of the approval.
New Sections 61(a)(2)(A), (B) and (C) include the following disclosure requirements:
Disclosure of Approval. New Section 61(a)(2)(A) requires that not later than five business days after the date on which the reduced asset coverage requirement is approved, the BDC disclose such approval and its effective date in (i) any filing submitted to the Commission under Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the 1934 Act) and (ii) a notice on the BDC’s website.
Disclosure in Periodic Filings. New Section 61(a)(2)(B) requires that the BDC disclose, in each periodic filing required under Section 13(a) of the 1934 Act, (i) the aggregate outstanding principal amount or liquidation preference, as applicable, of the senior securities2 issued by the BDC and the asset coverage percentage as of the date of the BDC’s most recent financial statements included in such periodic filing, (ii) that the BDC has approved the asset coverage requirement and (iii) the effective date of the approval.
Disclosure With Respect to BDCs That Are Issuers of Common Equity Securities. New Section 61(a)(2)(C) requires, with respect to a BDC that is an issuer of common equity securities, that each periodic filing of such BDC required under Section 13(a) of the 1934 Act include disclosure as to (i) the amount of senior securities (and the associated asset coverage ratios) of the BDC, determined as of the date of the most recent financial statements of the BDC included in that filing, and (ii) the principal risk factors associated with such senior securities to the extent that risk is incurred by the BDC.
2. Repurchase Requirement for Non-Traded BDCs
If a BDC does not list its common equity securities on a national securities exchange (a non-traded BDC), it is subject to an additional requirement after obtaining approval of asset coverage reduction. The non-traded BDC must extend to each person who is a shareholder as of the date of the approval of the asset coverage reduction the opportunity (which may include a tender offer) to sell the securities held by that shareholder as of the approval date, with 25 percent of those securities to be repurchased in each of the four calendar quarters following the calendar quarter in which that approval date falls. The SBCAA does not specify the purchase price for BDCs to repurchase such shares.
3. Registration and Reporting Parity
The SBCAA instructs the Commission to amend certain rules and forms to streamline the registration and reporting process for BDCs, reducing disparities in treatment for BDCs as compared to other registrants under the Securities Act of 1933 (the 1933 Act).
Some highlights of the changes:
WKSIs. BDCs will no longer be excluded from qualifying as “well-known seasoned issuers” (WKSIs), which face fewer communication restraints and more convenient offering procedures. Under the amendments, if a BDC qualifies as a WKSI, it will be able to file automatic shelf registration statements, eliminating potential delays in the offering process due to review by the Commission.
Free Writing Prospectuses. The amendments will also provide BDCs eligible as WKSIs with greater flexibility in communication by allowing them to use free writing prospectuses, for offerings, even before filing a registration statement. Qualifying BDCs will also be able to use free writing prospectuses after filing a registration statement that includes a preliminary or base prospectus.
Incorporation by Reference. The SBCAA also instructs the Commission to revise Form N-2 to provide that any BDC that meets the requirements for use of Form S-3 may incorporate by reference its reports and documents filed under the 1934 Act into its registration statement filed on Form N-2. These changes permit BDCs to incorporate information that they already file into registration statements under the 1933 Act, thereby reducing the length of offering documents. Allowing incorporation by reference of the 1934 Act disclosures facilitates delayed and continuous offerings by removing the need to amend the registration statement to update required information.
The SBCAA requires other amendments intended to place BDCs on parity with other issuers and provides that if the Commission fails to complete these specified revisions within one year following the date of enactment of the SBCAA, a BDC may deem those revisions to have been completed in accordance with the actions required to be taken by the Commission, until such time as the Commission makes the revisions.