This guide covers all related information that a securities practitioner needs when working with a Business Development Company (BDC). It provides an overview of the industry and covers applicable securities laws and regulations, securities offering process, disclosure and corporate governance obligations, stock exchange requirements, commercial and regulatory trends, and practical tips for counsel.
Overview of BDCs
BDCs are closed-end investment management companies that are specially regulated by the Investment Company Act of 1940, as amended (the 1940 Act). To be regulated as a BDC, a company must elect to be subject to the provisions of Sections 55 through 65 of the 1940 Act. BDCs provide capital to, and invest in, small and middle-market companies in the United States. As a result of this special investment purpose, BDCs are exempt from certain regulatory constraints imposed by the 1940 Act on traditional investment companies and generally benefit from pass through tax treatment (i.e., where the entity is not taxed, and the tax is passed on to the owners of the entity). Given the limited access to, and availability of, financing from traditional bank lenders, BDCs have recently played an important and increasing role as a crucial source of capital and liquidity to small and mid-sized companies that may not be able to otherwise obtain financing or do so at attractive rates.
While the majority of BDCs have a class of equity securities that is listed on a national securities exchange, many have elected to remain private. A private BDC is one that offers and sells its securities in a private placement to accredited third-party investors without registering the offer of its securities under the Securities Act of 1933, as amended (the Securities Act). More than ten private BDCs have been brought to market since 2016. Private BDCs are usually sponsored or formed by parent private equity firms or financial institutions that already have the necessary pre-existing relationships with accredited investors. Notwithstanding the absence of a public securities offering, the private BDC must still comply with the Securities Exchange Act of 1934, as amended (the Exchange Act), reporting requirements similar to its public company BDC peers because it is required to register under the 1940 Act.
The BDC industry has a number of major players. The BDC with the largest market capitalization and total assets is Ares Capital Corporation, a Nasdaq-listed BDC that helps finance middle-market companies in a variety of industries, including healthcare, restaurants, power and real estate. FS KKR Capital Corp. is another BDC with large market capitalization and total assets; it provides financing to private middlemarket companies in the United States and its common stock is traded on the NYSE. Apollo Investment Corporation (Apollo) has a $2.31 billion investment portfolio and its common stock is traded on Nasdaq. Approximately 20% of Apollo's portfolio is invested in the aviation and consumer transport industries.
For further information on BDCs, see Business Development Companies, Top 10 Practice Tips: Business Development Companies and Market Trends 2018/19: Business Development Companies.
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Originally publish by Lexis Practice Advisor®
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