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SEC Adopts New Rules For Business Development CompaniesThe Securities and Exchange Commission yesterday adopted new rules under the Investment Company Act that more closely align the permissible investment activities of business development companies (BDCs) with the purpose that Congress intended when it established BDCs. The Commission also reproposed for comment an additional definition of eligible portfolio company. These new rules will facilitate small business capital formation by providing added flexibility for BDCs to invest larger amounts in more types of smaller companies, consistent with the purpose of the Investment Company Act.
In 1980, Congress established BDCs as a new type of closed-end investment company for the purpose of making capital more readily available to small, developing, and financially troubled companies that do not have ready access to the public capital markets or other forms of conventional financing. To encourage investment in these smaller companies, the Investment Company Act requires BDCs to have at least 70% of their portfolio invested in certain assets, including securities of "eligible portfolio companies," at the time they make any new investments.
The Investment Company Act defines eligible portfolio company to include domestic operating companies that, among other things, do not have any class of securities that are marginable under rules promulgated by the Federal Reserve Board. In 1998, for reasons unrelated to small business capital formation, the Federal Reserve Board expanded its definition of margin security to include all publicly traded equity securities and most debt securities. These 1998 amendments had the unintended effect of reducing the number of companies that met the definition of eligible portfolio company. Read more at sec.gov
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