Monday, April 13. 2020
In 1980, Congress established BDCs for the purpose of making capital more readily available to small, developing and financially-troubled companies. These companies may not have ready access to the public capital markets or other forms of conventional financing. Congress further directed the SEC in 2018 through the BDC Act and the Registered CEF Act to adopt rules that allow BDCs and other closed-end investment companies to use the securities offering rules that are already available to operating companies. The reforms also include other amendments designed to help implement the congressionally-mandated amendments by further harmonizing the disclosure and regulatory framework for these funds with that of operating companies.
Among other topics, the amendments address the following:
Shelf Offering Process and New Short-Form Registration Statement
Through the use of a new short-form registration statement, eligible BDCs and affected funds will now be able to engage in a streamlined registration process to sell securities “off the shelf” more quickly in response to market opportunities. Like operating companies, BDCs and affected funds will generally be eligible to use the short-form registration statement if they meet certain filing and reporting history requirements with the additional requirement of possessing a public float of $75 million or more. The amendments are designed to allow BDCs and affected funds to raise capital more efficiently and cost-effectively and provide greater flexibility to manage the timing of their offerings in response to market opportunities.
Ability to Qualify for Well-Known Seasoned Issuer (WKSI) Status
Eligible affected funds will be able to qualify as WKSIs, which permits them to benefit from the same processes available to operating companies that qualify as WKSIs. Those benefits include a more flexible registration process and greater latitude to communicate with the market. Like operating companies, BDCs and affected funds will qualify as WKSIs if they meet certain filing and reporting history requirements. Again, they must also have a minimum public float, in this case of $700 million or more. Allowing eligible BDCs and affected funds to qualify for WKSI status will provide flexibility, including the ability to promptly tap favorable conditions in the public market which 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 (as defined under SEC rules). These funds will be permitted 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. As it currently is written, Rule 486 applies only to closed-end funds that operate as “interval funds.” These amendments will provide parity for other non-listed closed-end funds.
Communications and Prospectus Delivery Notifications Forms
With the amendments, affected funds will be able to use many of the communication rules currently available to operating companies. This includes the use of a “free writing prospectus,” certain factual business information, forward-looking statements, and some broker-dealer research reports. Affected funds will be able to satisfy their final prospectus delivery obligations by filing their prospectuses with the SEC as operating companies currently do.
New Method for Interval Funds and Certain Exchange-Traded Products to Pay Registration Fees
Currently closed-end funds that operate as “interval funds” pay registration fees at the time of filing when registering a specific amount of shares. Under the amendments, these closed-end funds will register an indefinite number of shares and pay registration fees based on net issuance of shares. This approach is similar to that for mutual funds and exchange-traded funds. The amendments also allow continuously offered exchange-traded products that are not registered under the Investment Company Act to use a similar approach.
Periodic Reporting Requirements
To support the short-form registration statement framework, BDCs and affected funds filing a short-form registration statement will now be required to include certain key prospectus disclosure in their annual reports. In addition, affected funds filing a short-form registration statement will be required to disclose material unresolved staff comments. Registered closed-end funds also will be required to provide management’s discussion of fund performance (or MDFP) in their annual reports. These requirements are similar to those 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 eliminate this mandate and instead require affected funds and BDCs to make incorporated materials readily available on a website.
Structured Data Requirements
Affected funds will be required to tag certain registration statement information in XML, similar to current tagging requirements for mutual funds and exchange-traded funds. BDCs also will be required to submit financial statement information, as operating companies currently do. Funds that file Form 24F-2 in connection with paying their registration fees, including mutual funds and exchange-traded funds (as well as interval funds under the news amendments), will be required to submit the form in XML format.
Effectiveness and Compliance Dates
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. These will become effective on August 1, 2021. The SEC is also adopting compliance dates for certain requirements under the amendments to provide a transition period after the effective date of the final rule:
- The requirement for registered closed-end funds to provide MDFP in their annual reports to shareholders will have a compliance date of August 1, 2021.
- Inline XBRL structured data reporting requirements for financial statement, registration statement information, and prospectus information will have a compliance date of August 1, 2022 for affected funds that are eligible to file a short-form registration statement. For all other affected funds subject to these structured data reporting requirements, the compliance date is February 1, 2023.
- The requirement that Form 24F-2 filers (including existing filers) file reports on Form 24F-2 in an XML structured data format will have a compliance date of February 1, 2022.