At the September BDC Roundtable we discussed the progress of our discussions with the staff of the Division of Investment Management of the U.S. Securities and Exchange Commission (the Staff) regarding the ability of a business development company (BDC) to offer shares of common stock off of a shelf registration statement at a price below its current net asset value (NAV). At that time, the Staff’s position was that in order for a BDC to offer shares of its common stock at a price below NAV off of a shelf registration statement, a BDC would have to file a post-effective amendment prior to each takedown offering.
Since the BDC Roundtable, we have continued our discussions with the Staff on this issue and, as a result of our efforts, the Staff has reconsidered their position and cleared a procedure that will allow a BDC to conduct offerings of shares of its common stock at a price below NAV off of an existing or new shelf registration statement. Pursuant to the new procedure, a BDC can file a single post-effective amendment (or a new shelf registration statement), which must include certain required disclosure as set forth below. A BDC can rely on this new process in order to complete offerings of its common stock at a price below NAV off of its shelf registration statement provided that the BDC has not exceeded a specific level of dilution. Because this process does not require any additional action or approval from the Staff with respect to the contemplated offering of securities, the process provides BDCs with much-needed flexibility in their capital-raising activities.
- The Staff has imposed a limit on the cumulative dilution to a BDC’s NAV per share that a BDC may incur while using a shelf registration statement to sell shares of its common stock at a price below NAV. A BDC can complete multiple offerings off of an effective registration statement only to the extent that the cumulative dilution to the BDC’s NAV per share does not exceed 15%. Once the cumulative dilution to the BDC’s NAV per share from multiple offerings off of a particular registration statement exceeds 15%, the BDC must file a new post-effective amendment or registration statement, which must again be declared effective by the Staff.
- For example, if a BDC’s most recently determined NAV at the time of its first offering off of its shelf registration statement is $15.00 and it has 30 million shares outstanding, the sale of 6 million shares at net proceeds to the BDC of $7.50 per share (a 50% discount) would produce dilution of 8.33%. If the BDC subsequently determined that its NAV per share increased to $15.75 on the then 36 million shares outstanding and the BDC then made an additional offering, it could, for example, sell approximately 7.2 million additional shares at net proceeds to the BDC of $9.45 per share, which would produce dilution of 6.66%, before the BDC would reach the aggregate 15% limit. If the BDC were to file a new post-effective amendment, the threshold would reset.
- The amount of dilution incurred will be measured separately for each offering pursuant to a post-effective amendment by calculating the percentage dilution or accretion to aggregate NAV from that offering and then summing the percentage from each offering. A BDC must include these limitations in its post-effective amendment or registration statement and in each prospectus supplement.
- A BDC must include specific dilution tables demonstrating the various dilutive or accretive effects the offering will have on different types of investors, including:
- The level of dilution that existing stockholders who do not participate in the offering would experience based on the offering size and discount to NAV;
- The level of dilution and accretion that existing stockholders who participate in the offering would experience based on their level of participation in the offering; and
- The level of dilution or accretion that new investors would experience based on the offering size and the discount to NAV.
- The prospectus supplement pursuant to which any offering of shares of common stock at a price below NAV is made should include a chart based on the number of shares offered and the discount to the most recently determined NAV. These new requirements are in addition to the standard Investment Company Act of 1940 (the 1940 Act) requirements regarding stockholder and disinterested director approval prior to conducting any offering below NAV.
- The Staff has requested that a form of prospectus supplement be filed along with the registration statement.
- A BDC must include an additional undertaking (either in its post-effective amendment or shelf registration statement) stating that it will file a new post-effective amendment in the event its common stock is trading below NAV and it either: (i) receives, or is advised by its independent registered accounting firm that it will receive, an audit report reflecting substantial doubt regarding its ability to continue as a going concern; or (ii) concludes that a material adverse change has occurred in its financial position or results of operations that has caused the financial statements and other disclosures on the basis of which the offering would be made to be materially misleading.