Business Development Companies and Closed-End Funds Reform

Business Development Companies and Closed-End Funds Reform

As directed by Congress, on April 8, 2020 the Securities and Exchange Commission (SEC) adopted rules that will modify the registration, communication, and offering process for business development companies (BDCs) and registered closed-end investment companies (CEFs), as well as interval funds. The rules expand upon the definition of “well-known seasoned issuer” to allow closed-end investment companies to qualify for reforms currently available to operating companies under the Investment Company Act


In 2005, the SEC adopted reforms to modernize the security offerings and communication process for operating companies; however, all investment companies - including BDCs and CEFs - were excluded. The SEC will now incorporate the Small Business Credit Availability Act (“BDC Act”) to allow BDCs the use of securities offering rules and regulations available to operating companies.  The SEC will also integrate The Economic Growth, Regulatory Relief, and Consumer Protection Act (“Registered CEF Act“), which provided relief of certain banking regulations and access to capital markets and went into effect in 2018. 


The adoption of these amendments will have the following effects:


  • Shelf Offering: Streamline the registration process to allow eligible funds to use a short-form shelf registration statement to sell securities “off the shelf” to take advantage of market opportunities
  • WKSI Qualification: Allow affected funds to qualify as “well-known seasoned issuers” or “WKSIs” under rule 405 of the Securities Act
  • Communication Reform: Allow the affected funds to practice communication safe harbors for material containing factual business information and forward-looking information as well as broker-dealer research reports
  • Continuous Filings: Allow for changes to registration on an immediately-effective basis for continuously-offered affected funds
  • Data Disclosure Reform: The rule will also include structured data requirements to make it easier for investors and interested parties to analyze fund data. The rule will require the affected funds to provide annual reports and require interval funds to pay securities registration fees using the same method as mutual funds and exchange-traded funds (ETFs). 
    • BDCs must submit financial statements using Inline XBRL (iXBRL) format.
    • Registered CEFs and BDCs must tag the cover page information, excluding Calculation of Registration Fee Table, on Form N-2 in iXBRL. 
    • Filings of Forms 24F-2 must be submitted in eXtensible Markup Language (XML). 

A detailed description of the different impacts this rule will have can be found in Section II.I of the Final Rule


Although some of the provisions will apply to all of the affected funds, many of the provisions will only apply to “seasoned funds”. This only includes affected funds that are current on their reporting and eligible to file a short-form registration statement given they have at least $75 million in public float. The rule requires seasoned funds to tag the Fee Table, Senior Securities Table, Investment Objectives and Policies, Risk Factors, Share Price Data, Capital Stock, Long-Term Debt, and Other Securities using iXBRL. 


The adoption of these rules also allows affected funds to take advantage of the cost-effective registration process that operating companies currently use. Under these provisions, eligible funds will see reduced costs associated with updating their prospectuses. Furthermore, the reform streamlines the registration process, preventing inconvenient suspensions of offerings; eligible funds are now less likely to experience gaps between the expiration of a registration statement and the effect of a new shelf registration statement. Additionally, affected funds that are qualified to file Form S-3 may participate in primary “off-the-shelf” offerings and then take down securities “off the shelf” for sale in public offerings as market opportunities arise. However, unlike operating companies, the sale of securities as part of an “off-the-shelf” offering must be included in its registration statement. The reform will permit eligible affected funds to file short-form shelf registration statements on Form N-2 to quickly process “off the shelf” security sales. 


The Final Rules adopted the majority of the amendments proposed by the SEC in March 2019; however, some were not adopted. For example, the Final Rule does not adopt the proposed amendment of requiring CEFs to file Form 8-K. Instead, the SEC believes that these funds can disclose information through other measures such as prospectus supplements, post-effective amendment, and press releases.


These amendments took effect on August 1, 2020, excluding the amendments related to registration fee payments by interval funds and other exchange-traded products, which will take effect on August 1, 2021. For affected funds who are eligible to file a short-form registration statement, iXBRL compliance is required 24 months after the effective date. All others are required to comply by February 1, 2023. This gives you time to contact one of our experts at CompSci to see how we can address your SEC compliance needs. 


Entity Description


Entity

Summary Definition

Affected funds

Affected funds include all BDCs and registered CEFs, including interval funds.

Seasoned funds

Seasoned funds are affected funds that are current and timely in their reporting and therefore generally eligible to file a short-form registration statement if they have at least $75 million in “public float.”

Well-Known Seasoned Issuers (WKSIs)

WKSIs are seasoned funds that generally have at least $700 million in “public float."

Exchange-Traded Products (ETPs)

ETPs are issuers that are not registered investment companies and whose assets consist primarily of commodities, currencies, or derivative instruments that reference commodities or currencies; whose securities are listed for trading on a national securities exchange; and that purchase or redeem securities for a ratable share of their assets at NAV.