Staff Responds To Questions About Non-Traded Bdcs And Section 61(A) Of The 1940 Act

On October 17, 2019, the SEC's Division of Investment Management published Staff Responses to Inquiries Regarding Business Development Companies and Section 61(a) of the Investment Company Act of 1940 (the “Publication”) concerning compliance by business development companies (each, a “BDC”) whose common shares are not exchange listed (a “non-traded BDC”) with the repurchase-offer requirements within recently amended Section 61(a).

Background. As described in an earlier Ropes & Gray Investment Management Update, the Small Business Credit Availability Act, enacted in March 2018, amended Section 61(a) of the 1940 Act to change the minimum asset coverage requirement for a BDC from 200% to 150% - effectively doubling the amount of leverage that a BDC may employ. Before a BDC can rely on the 150% asset coverage requirement (the “150% Minimum”), the BDC must obtain approval of its shareholders or of its board of directors. With shareholder approval, the 150% Minimum may be relied upon the day after approval but, with approval from a BDC's board of directors, the 150% Minimum may be relied upon beginning one year after the date of board approval.

Amended Section 61(a) contains an additional condition applicable to non-traded BDCs. Specifically, a non-traded BDC that seeks to rely on the 150% Minimum must offer to repurchase shares belonging to shareholders as of the date of shareholder or board approval of the 150% Minimum, with 25% of the shares to be repurchased in each of the four calendar quarters following the calendar quarter in which the approval occurred (the “Repurchase Condition”).1

The Publication. Following the amendments to Section 61(a), the SEC staff received inquiries regarding the Repurchase Condition. These inquiries and the SEC staff responses, as set forth in the Publication, are summarized below.

Q1. With its repurchase offer, may a non-traded BDC provide the following (and, if so, at what price):

(i) a single offer to repurchase all the securities held by all shareholders as of the date of an approval, with the repurchase of 25% of the securities of such shareholders who accept the offer to be effected quarterly, or

(ii) four separate, quarterly offers to repurchase 25% of the securities held by all shareholders as of the date of an approval, with the repurchase of the securities of such shareholders who accept each offer to be effected in the same quarter as the offer?

A1. The SEC staff stated that the relevant text of...