In the current economic environment of low interest

The Investment Lawyer Covering Legal and Regulatory Issues of Asset Management VOL. 21, NO. 7 JULY 2014 Trends in BDC Formation Transactions By Jonathan H. Talcott and Janis F. Kerns In the current economic environment of low interest rates, investors have been actively seeking alternative methods of achieving higher levels of current income. One method that has proven successful is investment in the publicly traded passthrough entities known as business development companies (BDCs). BDCs are a publicly traded form of small business investing created by the Small Business Investment Incentive Act of 1980. 1 BDCs make loans to lower middle-market issuers and receive pass-through tax treatment provided they distribute at least 90 percent of their income to shareholders. By investing in promising younger and growing private companies that may have risk profiles outside the limits of traditional banking, BDCs earn income at a level that allows them to produce average yields of eight to nine percent for investors. Congress created BDCs to fill the financing gap created by underserved sectors of the capital markets. 2 BDCs are not traditional investment companies, but elect to be regulated under a separate portion 3 of the Investment Company Act of 1940 (1940 Act). As a result, BDCs must maintain at least 70 percent of their invested assets in the securities of lower middle-market issuers or they lose the ability to make new (and follow-on) investments. BDCs are subject to a 1:1 asset coverage test limiting leverage and other substantive restrictions on their operation in exchange for access to permanent capital in the marketplace. In the recovery from the financial crisis, BDCs have been successful in attracting increased attention from retail and institutional investors alike. The increasing appetite for these yield products has allowed underwriters to successfully conduct an increasing number of initial public offerings (IPOs) for BDCs. In just the past two years, 26 new funds have filed BDC elections with the Securities and Exchange Commission (SEC). Of those 26, 20 have commenced operations 13 are currently actively trading on NASDAQ or the NYSE, four are trading over-the-counter, and at least three are operating but are not publicly traded. BDCs have also been receiving increased attention from fund managers. Managing a permanent capital vehicle such as a BDC can be very attractive. However, accessing the public markets to raise capital can require careful structuring. Since BDCs have entered the marketplace, generally four different approaches have been successfully employed in launching them: Raising money in a blind pool offering; Taking an existing private fund public; Having an affiliated fund contribute assets in exchange for an equity stake in the BDC; and Having the newly formed BDC borrow money from a bank or an affiliate to purchase assets immediately prior to going public. These trends in BDC formation transactions have emerged as dominant themes as asset

2 THE INVESTMENT LAWYER managers seek to add one or more BDCs to their platforms. This article reviews each type of transaction in turn, and focuses particularly on the strategic and regulatory hurdles faced when a BDC is acquiring identified pools of assets in the formation transaction. Blind Pool Offerings Before the financial crisis, blind pools launched by proven management teams were among the options readily available to specialty financiers. During the late 80s and 90s through the run-up to the financial crisis, blind pools and special purpose acquisition companies known as SPACs were popular and relatively easy to bring to market. In a typical initial public offering, a management team with a reputation and proven track record could raise a pool of capital on a pledge to find a suitable investment target or develop an appropriate investment portfolio within a fixed period of time, usually not exceeding 24-36 months, but sometimes over as long as five years. If the management team was unsuccessful, investor monies would be returned and the company would wind down. The tightening of the credit markets in the wake of the financial crisis appears to have foreclosed the blind pool option for BDC initial public offerings. Underwriters in the current market environment are favoring the use of fully formed asset pools that can be thoroughly evaluated and then marketed appropriately in an IPO. Recently, the closest offerings to such true blind pools have been BDCs that are not publicly traded and have been launched exclusively with insider contributions of capital. Carlyle GMS Finance Inc. (GMS Finance) and NF Investment Corp. (NFIC) are examples of such offerings, and were launched and are operated by management within The Carlyle Group. The KKR-sponsored continuous offering BDC, Corporate Capital Trust, is another example of such offerings. GMS Finance and NFIC are both BDCs that commenced operations in 2013 as private equity-sponsored enterprises. Management of The Carlyle Group launched both BDCs as their exclusive platform for deploying capital in U.S. middlemarket debt investments. In its formation transaction, GMS Finance formed a wholly-owned borrower subsidiary, Carlyle GMS Finance SPV LLC, through which the BDC established its initial portfolio of investments. Shortly after the formation transactions, the borrower subsidiary closed a revolving credit facility that made available up to $500 million once the borrower subsidiary held a minimum of $30 million in equity assets. NFIC similarly established a whollyowned borrower subsidiary with a line of credit. GMS Finance commenced operations on May 2, 2013, and NFIC commenced operations on August 21, 2013, by closing private placements of committed and contributed capital from the investment adviser, members of senior management, and certain employees, partners, and affiliates of the investment adviser. Companies targeted for investment by GMS Finance and NFIC are in many cases controlled by private equity investment firms. For the fiscal year ended December 31, 2013, GMS Finance disclosed in its most recently filed Form 10-K that it held a portfolio of investments valued at $212.8 million in exclusively controlled and/or affiliated investments. GMS Finance has indicated that if it does not complete an initial public offering that results in at least 15 percent unaffiliated public float (based on its aggregate capital commitments at the time of the offering) of the BDC by May 2, 2018 (approximately five years after the fund s inception), it will wind down and/or liquidate and dissolve. NFIC has not made a similar commitment, but disclosed that its investors will be released from any further obligation to purchase additional shares of common stock, subject to certain exceptions, upon the earlier of August 6, 2018 (approximately five years after the fund s inception), or the completion of an IPO by GMS Finance. NFIC disclosed in its most recently filed Form 10-K that as of December 31, 2013, approximately 93.7 percent of its net assets were owned by two stockholders.

VOL. 21, NO. 7 JULY 2014 3 The KKR-sponsored continuous offering BDC, Corporate Capital Trust, is another example of such offerings. Launched in 2010, the company commenced business operations on June 17, 2011 and investment operations on July 1, 2011. It is notable that Corporate Capital Trust continuously offers its shares opportunistically into the marketplace, and currently manages over $2 billion in total assets. Existing SBIC or Other Fund Acquisition Acquiring an existing private fund can be a very effective way to launch a BDC. Small business investment companies (SBICs) are particularly well-suited to establishing a base portfolio in a BDC formation transaction, due to their similarly aligned investment objectives and targeted segment of the capital markets. However, any private fund with a portfolio of debt securities that would meet the BDC s required criteria of eligible portfolio company investments would also be very attractive for a formation transaction. Taking an existing partnership public can present a variety of logistical and regulatory issues. Among them: The partners must vote to agree to the conversion from partnership form to corporate form; The valuation of assets in the partnership must be deemed acceptable to the current partners and must be acceptable to new investors; A general partner may need to be recast as an external manager; and An SBIC fund will require approval from the Small Business Administration (SBA) to participate in the transaction. In recent years, several SBICs have elected to convert from private partnerships to publicly traded BDCs. Fidus Investment Corporation, Capitala Finance Corp., Triangle Capital Corporation, and Main Street Capital Corporation fall within this category. SBICs operate pursuant to a license granted by the SBA that allows the SBIC to borrow up to $150 million from the U.S. government in the form of SBA debentures (up to $225 million for a family of SBICs) for investment in the debt of small business issuers. SBA regulations permit licensed SBICs to make long-term loans to small businesses, to invest in the equity of such businesses and to provide managerial assistance in the form of consulting and advisory services. The mandate and investment activities of SBICs strongly align with the mandate and investment activities of BDCs. The 1940 Act permits BDCs to wholly own and operate SBICs, and to exclude the SBIC s leverage from their own leverage calculations upon obtaining exemptive relief from the SEC. 4 The SBIC model is attractive in the specialty finance space in part because SBIC debentures are offered at interest rates advantageously lower than are otherwise generally available in the credit markets. BDCs can access this lower-cost capital by operating one or more SBICs up to the available capital limits set by the SBA. Currently those limits are $150 million of SBA debentures for a single SBIC, and up to $225 million for related SBICs. SBICs are permitted leverage of up to 300 percent of net assets, whereas BDCs are limited to leverage of up to 200 percent of net assets. For BDCs, with appropriate exemptive relief from the SEC, SBA debentures are not included as senior securities for purposes of the BDC asset coverage test. Although the capital available through SBA debentures is capped, less equity is required to obtain it and the borrowing costs are lower. These limitations and features combine to make SBICs an attractive partner for launching the BDC and for continuing the SBIC s business inside the BDC investment vehicle. Fidus Investment Corporation (Fidus) is a good example of an existing partnership that was previously operated as an SBIC being converted into a BDC. Fidus was formed as a Maryland Corporation to acquire all of the equity interests of Fidus Mezzanine

4 THE INVESTMENT LAWYER Capital, L.P. (Fidus SBIC), an SBIC licensed by the SBA, and its general partner, Fidus Mezzanine Capital GP, LLC (Fidus SBIC GP). Fidus acquired both entities using the proceeds of its June 20, 2011 initial public offering. The limited partners held 91.3 percent of the partnership interests of Fidus SBIC. In exchange for their partnership interests, Fidus issued 3,702,778 shares of common stock, at the initial offering price of $15.00 per share, to the limited partners of Fidus SBIC, having an aggregate value of $55.5 million (which represented the limited partners share of the net asset value of Fidus SBIC as of the most recent quarter end, plus any additional cash contributions to Fidus SBIC by the limited partners following such quarter end, but prior to the closing of the merger, less any cash distributions to the limited partners following such quarter end but prior to the closing of the merger). Fidus also acquired 100 percent of the equity interests in Fidus SBIC GP from the members of Fidus SBIC GP through the merger of Fidus SBIC GP with and into Fidus Investment GP, LLC (Fidus BDC SBIC GP), a wholly-owned subsidiary of the BDC. As a result, Fidus acquired 100 percent of the general partnership interest in Fidus SBIC GP. Fidus directly held 91.3 percent of the SBIC s interests, and indirectly held the remaining 8.7 percent of the partnership interests through its 100 percent ownership of Fidus BDC SBIC GP. In exchange for its partnership interests in Fidus Mezzanine Capital, L.P., Fidus issued 353,743 shares of common stock, at the initial offering price of $15.00 per share, to Fidus Mezzanine Capital GP, LLC having an aggregate value of $5.3 million (which consideration was calculated on the same basis as the consideration paid to the limited partners of Fidus Mezzanine Capital, L.P. described above). Such shares were distributed to the members of Fidus Mezzanine Capital GP, LLC in exchange for their equity interest in Fidus Mezzanine Capital GP, LLC. The members of Fidus Mezzanine Capital GP, LLC did not receive any consideration in exchange for their carried interest in Fidus Mezzanine Capital, L.P. Fidus Mezzanine Capital GP, LLC and the limited partners of Fidus Mezzanine Capital, L.P. each approved the formation transactions. Prior to consummation of the formation transactions, Fidus had to receive the approval of the SBA. Upon consummation of the formation transactions, Fidus Mezzanine Capital, L.P. terminated its management services agreement with Fidus Capital, LLC, and entered into the Investment Advisory Agreement with Fidus Investment Advisors, LLC, the BDC s investment advisor. Capitala Finance Corp. (Capitala) followed Fidus s lead less than one year ago. Capitala was formed to acquire all of the equity interests of four related private funds, two of which operated as SBICs. Similar to the Fidus formation transaction, the two SBICs retained their licenses and continued operation as wholly-owned SBIC subsidiaries. The other private funds also continued operation as wholly-owned subsidiaries of the BDC. Capitala noted in its disclosures that the BDC investment vehicle allowed it to continue and expand the business of the four legacy funds. Capitala acquired the four legacy funds and their related managers using the proceeds of its September 30, 2013 initial public offering. Triangle Capital Corporation, an internally managed BDC, also took an SBIC public through formation of a BDC. Triangle Capital Corporation was formed in October 2006 for the purpose of acquiring 100 percent of the equity interests in an SBIC fund and its general partner, raising capital, and thereafter operating as an internally managed BDC. At the time of the closing of its IPO, Triangle Capital Corporation acquired 100 percent of the equity interests in each existing entity in exchange for stock in the BDC. Main Street Capital Corporation (Main Street) is yet another example of this strategic move. Immediately prior to the IPO, newly formed Main Street merged with and into Main Street Mezzanine

VOL. 21, NO. 7 JULY 2014 5 Fund, LP (the Fund), an SBIC with 98 limited partners and one general partner, pursuant to a merger agreement approved by the general partner and 95 percent of the limited partners. The shares granted to the limited partner received a valuation at a 54.4 percent premium over the capital contributions made by them to the Fund, as a result of cumulative retained earnings as well as unrealized appreciation in the assets of the Fund. The general partner of the Fund received a premium for its interests in the Fund to include estimated present value of a 20 percent carried interest in the Fund. Main Street also acquired interests from the members of the investment advisor of the Fund for shares of Main Street s common stock. Purchasing Assets from Affiliated Funds for Cash Another possible formation transaction involves the sale of assets to the BDC by one or more affiliated funds in exchange for cash. This option permits a management group to add a BDC to its platform while retaining the current assets under management and continuing to grow them in the public marketplace. The assets form the BDC s initial portfolio and usually must be sold at or close to fair market value to meet fiduciary obligations to shareholders, and other obligations, such as credit facility terms. Because this type of formation transaction involves affiliated entities, the formation documents or management agreement governing the operation of the affiliated transaction will often require that the sale of assets be for cash and not for an equity stake in the BDC to avoid certain affiliated transaction prohibitions once the BDC election is made. A particular challenge in these affiliated formation transactions is how to finance them. Once a BDC elects to be regulated as such under the 1940 Act, certain affiliated transaction prohibitions apply, which would require an order from the SEC to overcome. As a result, certain transactions must be completed in advance of the BDC s IPO and its election pursuant to Section 54 under the 1940 Act to be regulated as a BDC. This raises the issue of how to obtain the funding for the transaction. A few BDCs have solved this problem by setting up a line of credit with a bank or other independent financial institutions. Because the bank may be in the syndicate underwriting the IPO of the BDC, the lending institution may even be characterized as an affiliate of the BDC. The fund selling the assets would definitely be characterized as an affiliate, as that term is defined under Section 2(a)(3) of the 1940 Act. As an affiliate of a BDC, the fund selling the assets would clearly be prohibited from selling the assets to the BDC pursuant to the prohibitions under Section 57(a) of the 1940 Act. To solve this problem, the assets must be sold to the newly formed BDC just prior to its election to be treated as a BDC. As a consequence, the lending institution must be persuaded to risk lending money to an entity that is newly formed and that has no other assets. This has been accomplished using bridge financing where a limited purpose term loan or credit facility is established for a term commencing just prior to the IPO and ending within a period of days after the transaction. The financing may combine a term loan with a longer term credit facility that is used to extinguish the term loan after the IPO. In such formation transactions, the sale of assets is consummated with funds from the bridge financing, however structured. The BDC election is made by filing the Form N-54A. The registration statement on Form N-2 is declared effective and the deal is then priced. Four days later (pursuant to T+3 settlement procedures), the IPO is closed and the funds are used to pay down the financing. Monroe Capital Corporation (Monroe) is an example of such a formation transaction. Monroe was formed for the purpose of going public as a BDC but had no prior operations. Monroe Capital BDC Advisors, LLC (Monroe Capital) was established and registered with the SEC to manage Monroe s assets. On the date of pricing, Monroe purchased its initial portfolio of loans for $67.5 million from MC Funding, Ltd.

6 THE INVESTMENT LAWYER and Monroe Capital SBIC LP, each affiliated funds managed by entities affiliated with Monroe Capital. On the date of purchase, the portfolio was comprised of 16 loans that were either senior, unitranche or junior secured debt obligations of various companies. The day before pricing, Monroe entered into a credit facility with ING Capital LLC. The credit facility was comprised of a $67.5 million term loan, which Monroe used to complete the acquisition of its initial portfolio, and a revolving line of credit initially equal to $25 million and up to $100 million pursuant to an accordion feature. On the pricing date, immediately following the acquisition of the initial portfolio, Monroe had $67.5 million outstanding under the term loan portion of the credit facility. Both the term loan and revolving loan were secured by a lien on all of Monroe s assets, including its initial portfolio of loans and all other assets, including cash on hand. In connection with the credit facility, Monroe also agreed in the future to pledge any portfolio investments that they made after the consummation of the IPO. Pursuant to the terms of the term loan, Monroe agreed to use a portion of the net proceeds from the offering to pay the outstanding principal of, and accrued and unpaid interest on, the term loan as well as to pay the reasonable transaction cost incurred by Monroe and the lender in establishing the full credit facility. The material terms of the term loan were: (1) total borrowing capacity of up to the purchase price of the initial portfolio, of which $67.5 million was drawn under the facility as of the date of the pricing prospectus; and (2) interest accrues at a rate equal to 2.75 percent per annum plus greater of the prime interest rate, the federal funds rate plus 0.5 percent or three-month London Interbank Offered Rate, or LIBOR, plus 1.0 percent. The term loan matured upon the earlier of four days following the pricing of the IPO and the data on which cash proceeds from this IPO are received. Upon payment in full of the term loan credit facility and consummation of the IPO, $25 million of the revolving loan portion of the credit facility (and up to $100 million pursuant to an accordion feature) remained available to Monroe for a period of four years. Alcentra Capital Corporation (Alcentra) took an approach similar to Monroe. Immediately prior to the election by Alcentra to be regulated as a BDC, it purchased a portfolio of $155.9 million in debt and equity investments from BNY Mellon-Alcentra Mezzanine III, L.P. for $64.4 million in cash and $91.5 million in shares of common stock at the IPO price. Alcentra also acquired $29 million of debt and equity investments from BNY Alcentra Group Holdings, Inc., which were purchased under a warehouse facility in anticipation of Alcentra s IPO. Alcentra entered into a senior secured term loan agreement with ING Capital LLC as lender to fund the purchase of the warehouse portfolio and to fund the cash portion of the consideration paid to BNY Mellon-Alcentra Mezzanine III, L.P. The bridge facility was repaid in full using the proceeds of Alcentra s IPO. TriplePoint Venture Growth BDC Corp. (TriplePoint) also used a credit facility as bridge financing in its formation transaction. TriplePoint acquired its initial portfolio shortly before electing to be regulated as a BDC for approximately $102.5 million in cash using borrowings under a $200 million short-term credit facility with Deutsche Bank AG, New York Branch. The bridge facility was repaid in full with proceeds with TriplePoint s IPO. Borrowing from an Affiliate Other BDCs have been formed by borrowing money from an affiliate in connection with the formation transaction. Both CM Finance Inc. and American Capital Senior Floating, Ltd. used this approach. CM Finance Inc. (CMF) was originally capitalized with a capital commitment of $50.0 million from funds managed by Cyrus Capital (the Cyrus Funds) in an initial private placement. Immediately prior to the pricing of CMF s IPO and prior to the time it elected to be regulated as a BDC, CM Finance LLC merged with and into CMF (the CM Finance Merger). In connection with the CM Finance Merger, CMF issued six million shares of

VOL. 21, NO. 7 JULY 2014 7 common stock to the Cyrus Funds at the IPO price and approximately $39.8 million in debt (the Cyrus Funds Debt), having an aggregate value of approximately $129.8 million. A portion of the proceeds of the IPO was used to repay the Cyrus Funds Debt. Stifel Venture Corp. also made a capital contribution of $32.7 million which was used to repurchase $32.7 million of the Cyrus Funds interest in CMF immediately after the CM Finance Merger and prior to the BDC election and IPO. At the time of the IPO, Stifel Venture Corp. owned 17.2 percent of the total outstanding common stock in CMF and the Cyrus Funds owned 30.1 percent. American Capital Senior Floating, Ltd. (ACSF) was initially capitalized with a $1,000 contribution by American Capital, Ltd. Eight months later, American Capital, Ltd. contributed its stock in ACSF to its wholly-owned portfolio company, American Capital Asset Management, LLC (ACAM). At the same time, ACSF entered into a $200 million revolving credit facility with ACAM to finance investments. This facility was repaid with proceeds from the IPO and terminated. A Contribution of Assets in Exchange for Equity Another approach used in BDC formation transactions is the contribution of assets from affiliated funds to the newly formed BDC in exchange for equity interests in the BDC. This was the approach taken in the WhiteHorse Finance, Inc. IPO and also the approach taken in the Golub Capital BDC, Inc. and Garrison Capital Inc. IPOs. WhiteHorse Finance, Inc. was formed and commenced operations as H.I.G. WhiteHorse Holdings, LLC, a Delaware limited liability company. It changed its name to WhiteHorse Finance, LLC. The members, two private funds affiliated with H.I.G. Capital, contributed assets with a fair value of $176.3 million in exchange for units in WhiteHorse Finance, LLC. These assets were contributed far in advance of the IPO in exchange for 11,752,383 units in WhiteHorse Finance, LLC. For the initial formation transaction, an independent, third-party valuation firm determined the fair value of the contributed assets as of the date of contribution. Immediately prior to the pricing of the IPO, WhiteHorse Finance, LLC converted into a Delaware corporation, WhiteHorse Finance, Inc., and all of the outstanding units in WhiteHorse Finance, LLC were converted into shares of common stock in WhiteHorse Finance, Inc. As part of the BDC conversion, the members received an aggregate of 7,826,284 shares of WhiteHorse Finance, Inc. common stock in exchange for the 23,983,856 units owned as of the date of the BDC conversion, representing an equivalent price of $15.96 per share based on the fair value of the assets contributed by members in connection with its formation, as determined by the BDC s board of directors. Golub Capital BDC, Inc. took a similar approach. Affiliates of GC Advisors LLC, an SEC-registered investment adviser, owned membership interests in the issuer s predecessor, Golub Capital Master Funding LLC. In 2009, they contributed these interests into the newly formed Golub Capital BDC LLC for proportionate interests in Golub Capital BDC LLC. Upon the conversion of Golub Capital BDC LLC into a corporation immediately prior to its IPO, such affiliates received shares in the issuer equivalent to $15.18 per share, based on the value of the contributed assets as determined by the investment advisor of Golub Capital Master Funding LLC at the time of the original contribution. In addition, at the time of the conversion into a corporation, GEMS Fund, L.P. received shares in the issuer equivalent to $14.27 per share based on the $25 million cash investment made by it in a private placement two months prior. Garrison Capital Inc. is another example of this method of formation. Garrison Capital LLC, the BDC s predecessor entity, was formed in November 2010. Shortly thereafter, Garrison Funding 2010-1 LLC (GF 2010-1) completed a $300 million debt securitization (the Debt Securitization). Immediately following completion of the Debt Securitization, Garrison Capital CLO Ltd. owned all of the

8 THE INVESTMENT LAWYER subordinated notes of the Debt Securitization. In December 2010, Garrison Capital LLC completed an $80 million private placement, using the proceeds to invest in U.S. middle-market companies. Subsequently, certain open-ended funds affiliated with Garrison Capital LLC s investment adviser contributed 100 percent of the stock of Garrison Capital CLO Ltd. to Garrison Capital LLC in exchange for $80.6 million in fair value of Garrison Capital LLC units. As a result, Garrison Capital LLC indirectly held all of the subordinated notes in GF 2010-1. In May 2012, Garrison Capital Funding 2012-1 LLC (GF 2012-1), a newly formed wholly-owned indirect subsidiary, entered into a $150 million credit facility with Natixis, New York Branch, as administrative agent. Proceeds from the initial draw of $125 million together with cash on hand were used to redeem the secured notes and subordinated notes of the Debt Securitization. In connection with the execution of the credit facility, a majority of the loans and other assets held by GF 2010-1 were sold or contributed to GF 2012-1, and following the closing of the credit facility, no assets remained in Garrison Capital CLO Ltd. or GF 2010-1. GF 2012-1 Manager, a direct subsidiary of Garrison Capital LLC, owned 100 percent of the LLC interests of GF 2012-1. In October 2012, Garrison Capital LLC converted into Garrison Capital Inc. All of the outstanding units in Garrison Capital LLC were converted into an aggregate of 10,707,221 shares of common stock in Garrison Capital Inc. Of those shares, 5,440,554 shares were issued to eight funds affiliated with the investment adviser in exchange for their units in Garrison Capital LLC. Conclusion BDCs continue to trend upward in popularity as increasing numbers of investors discover the yield potential in these investment products. Fund managers are becoming increasingly comfortable with the variety of approaches available in bringing them to market, and as a result, have been adding BDCs to their platforms of investment offerings with increasing frequency. Managers in search of new sources of assets are increasingly turning to BDCs as an investment vehicle to attract those assets, recognizing the flexibility available in bringing them to the public markets, and as an option that appeals to retail and institutional investors alike. Jonathan H. Talcott is a partner and Co-Chair of the Securities Practice Group at Nelson Mullins Riley and Scarborough, LLP (Nelson Mullins). He has represented BDCs as issuer s and underwriter s counsel for over 12 years. Janis F. Kerns is Of Counsel at Nelson Mullins and has represented BDC interests since 2006. The Nelson Mullins BDC practice has been involved in BDC IPOs, follow-on offerings, shelf registrations, and strategic portfolio-related transactions for more than a decade. The authors acknowledge with appreciation the assistance of E. Peter Strand and Michael K. Bradshaw, Jr., associates of the firm, in the preparation of this article. NOTES 1 Public Law 96-477, 96th Congress (Oct. 21, 1980). 2 H.R. Rep. No. 96-1341, at p. 2 under Need for the Legislation (Sept. 17, 1980). 3 See 54-65 of the 1940 Act. 4 Rule 60a-1 under the 1940 Act permits BDCs to wholly own SBICs. The relief granted by the SEC exempts a BDC from the leverage calculation provisions of Section 18(a) of the 1940 Act, as modified by Section 61(a) of the 1940 Act, such that any senior securities (SBA debentures) issued by a wholly owned SBIC subsidiary that would be excluded from its individual asset coverage ratio by Section 18(k) if it were itself a BDC would also be excluded from the BDC s consolidated asset coverage ratio. Because the SBIC subsidiary would be entitled to rely on Section 18(k) if it were a BDC, applicants for the exemptive relief assert that there is no policy reason to deny the benefit of that exemption

VOL. 21, NO. 7 JULY 2014 9 to the BDC. See, e.g., OFS Capital Corporation, File No. 812-14185, IC-30771 (Oct. 30, 2013) [notice] and IC-30812 (Nov. 26, 2013) [order]; Medley Capital Corporation, File No. 812-14019, IC-30234 (Oct. 16, 2012) [notice] and IC-30262 (November 14, 2012) [order]; Horizon Technology Finance Corporation, File No. 812-13876, IC-29777 (August 31, 2011) [notice] and IC29821 (Sept. 27, 2011) [order]; Golub Capital BDC, Inc., File No. 812-13794, IC-29756 (Aug. 16, 2011) [notice] and IC29786 (Sept. 13, 2011) [order]; and PennantPark Investment Corporation, et al., File No. 812-13772, IC-29665 (May 6, 2011) [notice] and IC-29686 (June 1, 2011) [order]. Copyright 2014 CCH Incorporated. All Rights Reserved Reprinted from The Investment Lawyer July 2014, Volume 21, Number 7, pages 14 21, with permission from Aspen Publishers, Wolters Kluwer Law & Business, New York, NY, 1-800-638-8437, www.aspenpublishers.com