Securities Regulation Daily SEC proposes offering reforms for BDCs and closed-end funds
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Thursday, March 21, 2019

SEC proposes offering reforms for BDCs and closed-end funds

By Amy Leisinger, J.D.

The proposed changes to registration, reporting, and communication provisions are designed to improve access to capital for, and facilitate investor communications by, business development companies and registered closed-end funds.

The SEC has voted to propose rule amendments to modify the offering, registration, and communication processes available to business development companies and registered closed-end funds. Implementing certain provisions of the Small Business Credit Availability Act and the Economic Growth, Regulatory Relief, and Consumer Protection Act, the Commission’s proposal would allow eligible funds to engage in a more streamlined registration process to sell securities and use communications and prospectus delivery rules currently available to operating companies. The proposal also would harmonize the disclosure and regulatory framework for BDCs and closed-end funds with that applicable to operating companies and would provide new reporting and structured data requirements (Securities Offering Reform for Closed-End Investment CompaniesRelease No. 33-10619, March 20, 2019).

"This congressional mandate recognizes the importance of an efficient and cost-effective approach for these funds to raise capital in our public markets, which should ultimately benefit investors in these funds, including Main Street investors," said SEC Chairman Jay Clayton.

Registration. Under the proposal, eligible BDCs and closed-end funds would be permitted to use a more streamlined registration process to sell securities "off the shelf" through the use of a new short-form registration statement. As is the case for operating companies, a BDC or closed-end fund would be able to use the new form if it has a public float of $75 million or more and meets certain filing and reporting history requirements. The proposal also would allow eligible funds to qualify as "well-known seasoned issuers" and benefit from the same registration and communication flexibility available to qualifying operating companies. A BDC or closed-end fund would qualify as a WKSI if it meets certain filing and reporting history requirements and has a public float of $700 million or more.

In addition, instead of registering a specific amount of shares and paying registration fees at the time of filing, the proposal would allow closed-end funds operating as "interval funds" to register an indefinite number of shares and pay registration fees based on net issuance of shares, as is the case for mutual funds. Under the proposal, entities would be required to use Inline XBRL to tag certain registration statement information, and BDCs also would be required to submit financial statement information using Inline XBRL. Entities that file Form 24F-2 in connection with paying registration fees would be required to submit the form in XML format.

Reporting. The proposed changes also include new periodic and current reporting requirements and new structured data requirements. Affected funds filing a short-form registration statement would be required to include certain key prospectus disclosures and disclosures of material unresolved staff comments in their annual reports, and registered closed-end funds would have to provide management’s discussion of fund performance in their annual reports, similar to mutual funds, ETFs, and BDCs. Under the proposal, closed-end funds would be required to begin to file current reports on Form 8-K, and Form 8-K would be amended to add two new reporting events for BDCs and closed-end funds: (1) material changes to investment objectives or policies; and (2) material write-downs of significant investments.

Communications. Under the proposal, BDCs and closed-end funds would be able to make use of many of the communication rules currently available to operating companies, including the use of "free writing prospectuses." In addition, affected funds could use certain communications prescribed by Securities Act Rule 134 to publish factual information about the issuer or the offering, including "tombstone ads," and rely on Rule 163A, which provides issuers with 30 days prior to filing a registration statement during which they may communicate without risk of violating the "gun-jumping" provisions. BDCs and closed-end funds that are reporting companies would also be permitted to publish or disseminate regularly released factual business information and forward-looking information at any time, including around the time of a registered offering.

Comments on the proposal are due within 60 days of publication in the Federal Register.

The release is No. 33-10619.

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