SEC Adopts Reforms for BDCs and Closed-End Funds
On April 8, 2020, the SEC voted to adopt rule amendments to implement certain provisions relating to business development companies (“BDCs”) and other closed-end funds. The new rules will allow BDCs and other closed-end funds to use the securities offering rules that are already available to operating companies, including modernized communications and prospectus delivery procedures and requirements. The amendments are designed to streamline the registration, offering, and investor communication processes while also providing important benefits to market participants and investors.
“The amendments we are adopting will modernize the offering process for eligible funds in a way that, as borne out by our experience with operating companies, will benefit both investors in these funds and the companies in which they invest,” said SEC Chairman Jay Clayton. “This is another example of our staff’s laudable efforts to modernize our rules in a manner that furthers all aspects of our mission. It is my hope, particularly when many of our small and medium sized businesses are facing profound challenges not of their own making, that these and other modernization efforts will provide those businesses more efficient access to financing.”
The changes are designed to better align the modern immediately-effective or automatically effective offering process with the structures of newly eligible funds. The reforms will also include disclosure requirements and new structured data requirements that will make it easier for investors and others to analyze fund data. Highlights of the changes include the following:
Shelf Offering Process and New Short-Form Registration Statement
Eligible funds will be able to engage in a streamlined registration process to sell securities “off the shelf” more quickly and efficiently in response to market opportunities through the use of a new short-form registration statement. Funds will generally be eligible if they meet certain filing and reporting history requirements and have a public float of $75 million or more. These amendments are designed to allow affected funds to raise capital more efficiently and cost-effectively while also providing greater flexibility to manage the timing of their offerings.
Ability to Qualify for Well-Known Seasoned Issuer (WKSI) Status
Eligible funds will be able to qualify as WKSIs, giving them a more flexible registration process and greater latitude to communicate with the market. Funds will qualify as WKSIs if they meet certain filing and reporting history requirements and have a public float of $700 million or more. This will provide funds the ability to promptly tap favorable conditions in the public market and may facilitate both capital formation and a reduction in the cost of capital for these funds.
Immediate or Automatic Effectiveness of Certain Filings
The amendments will expand the scope of rule 486 under the Securities Act of 1933 to registered closed-end funds or BDCs that conduct continuous offerings of securities. The amendments will permit funds to make certain changes to their registration statements on an immediately-effective basis or on an automatically effective basis a set period of time after filing. Rule 486 currently applies only to funds that operate as interval funds and these amendments will provide parity for other non-listed closed-end funds.
Communications and Prospectus Delivery Reforms
Affected funds will be able to use many of the communication rules currently available to operating companies, including the use of a “free writing prospectus,” certain factual business information, forward-looking statements, and certain broker-dealer research reports. These amendments are designed to reduce regulatory costs while providing more timely information to investors.
New Method for Interval Funds and Certain Exchange-Traded Products to Pay Registration Fees
Instead of registering a specific amount of shares and paying registration fees at the time of filing, the amendments will allow funds that operate as interval funds the ability to register an indefinite number of shares and pay registration fees based on net issuance of shares, an approach similar to that permitted for mutual funds and exchange-traded funds. The amendments will also allow continuously offered exchange-traded products that are not registered under the Investment Company Act to use a similar approach.
Periodic Reporting Requirements
Affected funds filing a short-form registration statement will be required to include certain key prospectus disclosures in their annual reports. Affected funds will also be required to disclose material unresolved staff comments. Registered closed-end funds also will be required to provide management’s discussion of fund performance in their annual reports, similar to requirements that currently apply to mutual funds, exchange-traded funds, and BDCs.
Incorporation by Reference Changes
The registration form for affected funds currently requires a fund to provide new purchasers with a copy of all previously filed materials that are incorporated by reference into the registration statement. The amendments will eliminate this requirement and instead require affected funds to make incorporated materials readily available on a website.
Structured Data Requirements
Affected funds will be required to tag certain registration statement information, similar to current tagging requirements for mutual funds and exchange-traded funds. BDCs will also be required to submit financial statement information. Funds that file Form 24F-2 in connection with paying their registration fees will be required to submit the form in XML format.
The rule and form amendments will become effective on August 1, 2020, with the exception of the amendments related to registration fee payments by interval funds and certain exchange-traded products, which will be come effective on August 1, 2021.
Source: SEC
