On March 23, 2018, President Trump signed into legislation the Consolidated Appropriations Act of 2018, also known as the “omnibus spending package.” Included in Title VIII therein is legislation titled the Small Business Credit Availability Act (SBCAA) that includes certain regulations under the federal securities laws impacting business development companies (BDCs). Among other items, the SBCAA allows BDCs to incur significantly more debt and rely on relaxed SEC communication and offering rules that were previously available to operating companies.
Specifically, the SBCAA permits BDCs, subject to meeting certain conditions, the ability to decrease the required minimum asset coverage ratio required under the 1940 Act from two times to 1.5 times. The asset coverage ratio generally refers to the BDC’s (x) total assets, less liabilities other than current debt to (y) total outstanding debt. This will enable BDCs to make more investments in their portfolio companies. Further, BDCs will now be able to utilize offering and SEC communications concessions including incorporation by reference and undertakings in their Form N-2 registration statements that match those of certain operating companies, along with more lenient communication to the market without violating gun-jumping provisions
The industry has been introducing legislation with respect to increased leverage for more than five years. The SBCAA specifies conditions and approvals the BDC must meet prior to utilizing the increased leverage.