[Federal Register Volume 60, Number 12 (Thursday, January 19, 1995)]
[Notices]
[Pages 3900-3904]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-1289]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20831; 34-35225; 812-9028]
MACC Private Equities Inc., et al.; Notice of Application
January 12, 1995.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of Application for Exemption under the Investment
Company Act of 1940 (the ``Investment Company Act'') and the Securities
Exchange Act of 1934 (the ``Exchange Act'').
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APPLICANTS: MACC Private Equities Inc. (``Private Equities''),
MorAmerica Capital Corporation (``MorAmerica Capital''), and
InvestAmerica Investment Advisors, Inc. (``InvestAmerica'').
RELEVANT ACT SECTIONS: Order requested under sections 17(d) and
57(a)(4) of the Investment Company Act and rule 17d-1 thereunder
authorizing certain joint transactions, under section 57(c) of the Act
for an exemption from sections 57(a) (1), (2), and (3) of the Act, and
under section 6(c) of the Act for an exemption from sections 12(d),
18(a), and 61(a) of the Act. Order also requested under section 12(h)
of the Exchange Act for an exemption from section 13(a) of the Exchange
Act.
SUMMARY OF APPLICATION: Applicants request an order to permit Private
Equities to engage in certain transactions with its wholly-owned
subsidiary, MorAmerica Capital. The order also would permit modified
asset coverage requirements for Private Equities and MorAmerica
Capital, and permit Private Equities and MorAmerica Capital to co-
invest with certain affiliated entities. In addition, the order would
permit Private Equities and MorAmerica Capital to file certain Exchange
Act reports on a consolidated basis.
FILING DATE: The application was filed on May 31, 1994 and amended on
August 8, 1994, and November 9, 1994. Applicants have agreed to file an
additional amendment, the substance of which is incorporated herein,
during the notice period.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the SEC orders a hearing. Interested persons may
request a hearing by writing to the SEC's Secretary and serving
applicants with a copy of the request, personally or by mail. Hearing
requests should be received by the SEC by 5:30 p.m. on February 6,
1995, and should be accompanied by proof of service on applicants, in
the form of an affidavit or, for lawyers, a certificate of service.
Hearing requests should state the nature of the writer's interest, the
reason for the request, and the issues contested. Persons may request
notification of a hearing by writing to the SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 5th Street N.W., Washington, D.C. 20549.
Applicants, Suite 310, 101 Second Street S.E., Cedar Rapids, Iowa
52401.
FOR FURTHER INFORMATION CONTACT:
Elaine M. Boggs, Staff Attorney, at (202) 942-0576, or Robert A.
Robertson, Branch Chief, at (202) 942-0564 (Division of Investment
Management, Office of Investment Company Regulation).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained for a fee at the
SEC's Public Reference Branch.
Applicants' Representations
1. Private Equities and its wholly-owned subsidiary, MorAmerica
Capital, intend to register under the Investment Company Act as
business development companies (``BDCs''). The investment objective of
Private Equities is long-term capital appreciation through venture
capital investments in small companies (``Portfolio Companies'').
MorAmerica Capital is licensed to operate as a small business
investment company (``SBIC'') under the Small Business Investment Act
of 1958. Applicants chose a two-tier structure so that Private Equities
could hold certain assets that a SBIC is not permitted to hold.
2. Private Equities has been formed pursuant to a plan of
reorganization (the ``Plan'') for the MorAmerica Financial Corporation
(``MFC``) and Morris Plan Liquidation Company (``Morris Plan''). Under
the Plan, Private Equities will be the successor by merger to MFC,
Morris Plan, and certain affiliates. In addition to cash and
miscellaneous assets, many of which are being held for sale, Private
Equities' primary asset will be all of the issued and outstanding
common stock of MorAmerica Capital.
3. InvestAmerica is the investment adviser for both Private
Equities and MorAmerica Capital. The principals of InvestAmerica are
the founders and principals of InvestAmerica Venture Group, Inc.
(``Venture Group'') (collectively with InvestAmerica, the
``InvestAmerica Companies''). The Venture Group manages the Iowa
Venture Capital Fund L.P. (the ``Iowa Fund''), which is a venture
capital fund that is exempt from the Investment Company Act pursuant to
section 3(c)(1) of the Act. The Iowa Fund is not presently making any
new investments but is making distributions to partners as investments
mature or are sold. The Iowa Fund and MorAmerica Capital presently are
co-invested in the securities of five Portfolio Companies.
4. The requested order would permit Private Equities and MorAmerica
Capital to operate effectively as one company. Specifically, the
requested relief would permit MorAmerica Capital and Private Equities
to (a) engage in transactions with each other, (b) engage in
transactions with Portfolio Companies that would not otherwise be
prohibited if MorAmerica Capital and Private Equities were one company,
and (c) allow MorAmerica Capital to have the maximum amount of
borrowing permitted by the Small Business Investment Act of 1958 and
the Investment Company Act. The order also would permit MorAmerica
Capital and/or Private Equities to co-invest with
[[Page 3901]]
certain affiliated companies. In addition, the order would permit
Private Equities and MorAmerica Capital to file certain reports
required by the Exchange Act on a consolidated basis.
Applicants' Legal Analysis
Capital Structure
1. Section 12(d) of the Investment Company Act
a. Section 12(d)(1) of the Investment Company Act, made applicable
to BDC's by section 60, limits the amount of securities a registered
investment company may hold of other investment companies. Rule 60a-1
exempts a BDC's acquisition of the securities of a wholly-owned SBIC
from sections 12(d)(1) (A) and (C). Thus, the transfer of assets from
Private Equities to MorAmerica Capital is exempt from these provisions.
Section 12(d)(1), however, also applies to the activities of MorAmerica
Capital, and loans made by Private Equities to MorAmerica Capital may
violate section 12(d)(1) if such loans were considered purchases by
MorAmerica Capital of the securities of Private Equities. Accordingly,
applicants request an exemption from section 12(d)(1) to permit
MorAmerica Capital's acquisition of those securities of Private
Equities representing indebtedness.
2. Sections 57(a) (1), (2), and (3)
a. Sections 57(a) (1), (2), and (3) of the Investment Company Act
prohibit certain affiliated persons of a BDC from engaging in certain
transactions with the BDC. Such affiliated persons include, with
limited exceptions not relevant here, entities which control, are
controlled by, or under common control with the BDC. Because Private
Equities is the sole equity holder of MorAmerica Capital, Private
Equities and MorAmerica Capital are affiliated persons of each other.
Thus, applicants request an exemption from sections 57(a) (1), (2), and
(3) for any transaction solely between Private Equities and MorAmerica
Capital.
b. In addition, Private Equities and/or MorAmerica Capital may wish
to invest in certain Portfolio Companies that may be considered
affiliates of the other investing company as a result of the other's
ownership of five percent or more of the Portfolio Company's stock.
Applicants will not in all instances be able to rely on rule 57b-1,
which exempts from section 57(a) transactions between BDC's and
specific downstream affiliates. Thus, applicants request an order to
exempt any transaction from section 57(a) involving Private Equities
and/or MorAmerica Capital and any Portfolio Company affiliated with
either or both, but only to the extent that any such transaction would
not be prohibited if MorAmerica Capital and Private Equities were not
separate companies.
3. Sections 18 and 61 of the Investment Company Act
a. Section 18(a) of the Investment Company Act prohibits a
registered closed-end investment company from issuing any class of
senior security unless the company complies with the asset coverage
requirements set forth in the section. ``Asset coverage'' is defined in
section 18(h) to mean the ratio which the value of the total assets of
an issuer, less all liabilities not represented by senior securities,
bears to the aggregate amount of senior securities of such issuer.
Section 61 makes section 18, with certain modifications, applicable to
a BDC. Private Equities may be required to comply with the asset
coverage requirements of section 18 on a consolidated basis because it
may be an indirect issuer of senior securities with respect to
MorAmerica Capital's indebtedness. Accordingly, applicants request
relief exempting Private Equities and MorAmerica Capital from section
18(a) and 61(a) to permit the following transactions: (a) Private
Equities and MorAmerica Capital to issue and sell to banks, insurance
companies, and other financial institutions their secured or unsecured
promissory notes, or other evidences of indebtedness in consideration
of any loan, or any extension or renewal thereof made by private
arrangement; (b) MorAmerica Capital to obtain financing that the Small
Business Administration permits for SBIC's; (c) MorAmerica Capital to
borrow from Private Equities and Private Equities to borrow from
MorAmerica Capital; and (d) Private Equities to guarantee any
borrowings by MorAmerica Capital.
4. Sections 57 (a)(4) and (d) of the Investment Company Act and Rule
17d-1 Thereunder
a. Sections 57 (a)(4) and (d) of the Investment Company Act
prohibit certain affiliated persons specified in section 57 (b) and
(e), respectively, from participating in joint transactions with a BDC
in contravention of rules and regulations prescribed by the SEC. Rule
17d-1 under the Act applies to transactions prohibited under sections
57 (a)(4) and (d) through section 57(i). Rule 17d-1 prohibits
affiliated persons of a registered investment company from entering
into joint transactions with the investment company unless the SEC has
granted an order permitting such transaction.
b. Applicants request an order under sections 57 (a)(4) and (d) and
rule 17d-1 to permit Private Equities or MorAmerica Capital to invest
in Portfolio Companies in which the other is or proposes to be an
investor, but only to the extent that such transaction would not be
prohibited if MorAmerica Capital were deemed to be part of Private
Equities and not a separate company.
Co-Investing
1. Section 57(a)(4) of the Investment Company Act and Rule 17d-1
Thereunder
a. Applicants request an order to permit Private Equities and/or
MorAmerica Capital to co-invest with companies managed by InvestAmerica
and the Venture Group, including the Iowa Fund (``Managed Affiliates'')
now or in the future. Because InvestAmerica and the Venture Group are
under common control, a Managed Affiliate also would be under common
control with Private Equities and MorAmerica Capital. Thus, a Managed
Affiliate would be affiliated with Private Equities and MorAmerica
Capital under section 2(a)(3) of the Investment Company Act.
Accordingly, applicants and the Managed Affiliates, absent an exemptive
order, would be prohibited under section 57(a)(4) of the Investment
Company Act from engaging in co-investment transactions.
Consolidated Reporting
1. Section 54 of the Investment Company Act and Section 12 of the
Exchange Act
a. Section 54 of the Investment Company Act provides that a closed-
end company may elect BDC treatment under the Investment Company Act,
if the company has either a class of equity securities registered under
section 12 of the Exchange Act or has filed a registration statement
pursuant to section 12 of the Exchange Act for a class of its equity
securities. Section 12(g) of the Exchange Act requires certain issuers
to register under the Exchange Act. Private Equities will have
securities registered under section 12 of the Exchange Act. In order to
elect BDC treatment, MorAmerica Capital must register its securities
under the Exchange Act, even though it is not required to do so by
section 12(g) of the Exchange Act.
b. By filing a registration statement under section 12 of the
Exchange Act, absent an exemption, MorAmerica Capital would be required
by section 13(a) of the Exchange Act to file periodically with the SEC,
even though
[[Page 3902]]
MorAmerica Capital will have only one equity holder. Accordingly,
applicants request an order under the Exchange Act exempting MorAmerica
Capital from the reporting requirements of section 13(a) of the
Exchange Act to permit it to file consolidated reports with Private
Equities.
Standards for Relief
1. Section 6(c) of the Investment Company Act permits the SEC to
exempt any person or transaction from any provision of the Act, if such
exemption is necessary or appropriate in the public interest and
consistent with the protection of investors and the purposes fairly
intended by the policy of the Act. Applicants state that the operation
of Private Equities as a BDC with a wholly-owned SBIC subsidiary is
intended to permit Private Equities to expand the scope of its
operations beyond that which would be permitted to it as an SBIC.
Applicants further state that the requested exemptions would permit
Private Equities and MorAmerica Capital to operate effectively as one
company even though they will be divided into two legal entities.
Accordingly, applicants believe that the requested exemptions from
sections 12(d), 18(a), and 61(a) meet the section 6(c) standards.
2. Section 57(c) permits the SEC to grant an order permitting a
transaction otherwise prohibited by sections 57(a)(1), (2), and (3) if
it finds that the participation of such investment company is
consistent with the provisions, policies, and purposes of the Act and
the extent to which such participation is on a basis different from or
less advantageous than that of other participants. Applicants believe
that the requested exemptions meet these standards.
3. Section 57(i) of the Investment Company Act provides that the
rules and regulations of the SEC under sections 17 (a) and (d)
applicable to registered closed-end investment companies shall apply to
transactions subject to sections 57(a) and (d) in the absence of rules
under sections 57(a) and (d). No rules with respect to joint
transactions have been adopted under sections 57(a) and (d). Rule 17d-1
under the Act prohibits affiliated persons of a registered investment
company from entering into joint transactions with the investment
company unless the SEC has granted an order permitting the transaction.
Applicants believe that the requested authorization under sections
57(a)(4) and (d) and rule 17d-1 is appropriate.
4. Section 12(h) of the Exchange Act provides that the SEC may
exempt an issuer from section 13 of the Exchange Act if the SEC finds
that by reason of the number of public investors, amount of trading
interest in the securities, the nature and extent of the activities of
the issuer, income or assets of the issuer, or otherwise, that such
action is not inconsistent with the public interest or the protection
of investors. Private Equities is the sole equity holder of MorAmerica
Capital and applicants represent that there will be no trading in
MorAmerica securities. Further, applicants state that the nature and
extent of MorAmerica Capital's activities are such that its activities
will be fully reported through consolidated reporting in accordance
with normal accounting rules. Accordingly, applicants believe that the
requested exemption meets the Exchange Act's section 12(h) standards.
Applicants' Conditions
Applicants agree that the following conditions will govern
transactions under the requested order:
Capital Structure Conditions
1. Private Equities will at all times own and hold beneficially and
of record all of the outstanding capital stock of MorAmerica Capital.
2. MorAmerica Capital will have the same fundamental investment
policies as Private Equities, as set forth in Private Equities'
registration statement; MorAmerica Capital will not engage in any other
activities described in section 13(a) of the Investment Company Act,
except in each case as authorized by the vote of a majority of the
outstanding voting securities of Private Equities.
3. No person shall serve or act as investment adviser to MorAmerica
Capital unless the directors and shareholders of Private Equities shall
have taken the action with respect thereto also required to be taken by
the directors and shareholders of MorAmerica Capital.
4. No person shall serve as a director of MorAmerica Capital unless
elected as a director of Private Equities at its most recent annual
meeting, as contemplated by section 16(a) of the Investment Company
Act. Vacancies on Private Equities' board of directors will be filled
in the manner provided for in section 16(a). Notwithstanding the
foregoing, the board of directors of MorAmerica Capital will be elected
by Private Equities as the sole shareholder of MorAmerica Capital, and
such board will be composed of the same persons that serve as directors
of Private Equities.
5. Private Equities will not itself issue or sell any senior
security and Private Equities will not cause or permit MorAmerica
Capital to issue or sell any senior security of which Private Equities
or MorAmerica Capital is the issuer except to the extent permitted by
section 18 (as modified for BDCs by section 61) of the Investment
Company Act; provided that immediately after the issuance or sale of
any such notes or evidences of indebtedness by either Private Equities
or MorAmerica Capital, Private Equities and MorAmerica Capital on a
consolidated basis, and Private Equities individually, shall have the
required asset coverage, except that, in determining whether Private
Equities and MorAmerica Capital on a consolidated basis have the asset
coverage required by section 61(a), any borrowings by MorAmerica
Capital from Private Equities, for purposes of the definition of
``asset coverage'' in section 18(h), shall be treated as indebtedness
not represented by senior securities.
6. Private Equities will acquire securities of MorAmerica Capital
representing indebtedness only if, in each case, the prior approval of
the SBA has been obtained. In addition, Private Equities and MorAmerica
Capital will purchase and sell portfolio securities between themselves
only if, in each case, the prior approval of the SBA has been obtained.
Co-Investing Conditions
1. a. To the extent that Private Equities and MorAmerica Capital
are considering new investments, InvestAmerica will review investment
opportunities on their behalf, including investments being considered
on behalf of the Managed Affiliates. InvestAmerica will determine
whether a particular investment is eligible for investment by Private
Equities and/or MorAmerica, as the case may be.
b. If InvestAmerica deems an investment eligible for investment by
Private Equities and/or MorAmerica Capital (the ``Investing Company''),
InvestAmerica will determine what it considers to be an appropriate
amount that the Investing Company should invest in the particular
investment. Where the aggregate amount recommended for the Investing
Company and that sought by the Managed Affiliates is greater than the
amount available for investment, the amount available for purchase by
the Investing Company shall be determined on a pro rata basis
determined by dividing the net assets of the Investing Company by the
sum of the net assets of the Investing Company and each of the Managed
Affiliates seeking to make the investment.
[[Page 3903]]
c. Following the making of the determinations referred to in (a)
and (b), InvestAmerica will distribute written information concerning
all eligible investments to the Investing Company's non-interested
directors. Such information will include the name of each Managed
Affiliate that proposes to make the investment and the amount of each
proposed investment.
d. Information regarding InvestAmerica's preliminary determinations
will be reviewed by the Investing Company's non-interested directors.
The Investing Company will only make a joint investment with a Managed
Affiliate if a required majority (as defined in section 57(o) of the
investment Company Act) (``Required Majority'') of the Investing
Company's non-interested directors conclude, prior to the acquisition
of the investment, that:
i. the terms of the transaction, including the consideration to be
paid, are reasonable and fair to the shareholders of Private Equities
and do not involve overreaching of the Investing Company or such
shareholders on the part of any person concerned;
ii. the transaction is consistent with the interests of the
shareholders of Private Equities and is consistent with the Investing
Company's investment objectives and policies as recited in filings made
by the Investing Company under the Securities Act of 1933, as amended,
its registration statement and reports filed under the Exchange Act, as
amended, and its reports to shareholders;
iii. the investments by the Managed Affiliates would not
disadvantage the Investing Company and that participation by the
Investing Company would not be on a basis different from or less
advantageous than that of Managed Affiliates; and
iv. the proposed investment by the Investing Company will not
benefit InvestAmerica or any affiliated entity, other than the Managed
Affiliates making the proposed joint investment, except to the extent
permitted pursuant to sections 17(e) and 57(k) of the Investment
Company Act.
e. An Investing Company may decline to participate in the co-
investment, or may purchase less than its full allocation.
2. The Investing Company will not make an investment for its
portfolio if a Managed Affiliate or InvestAmerica or a person
controlling, controlled by, or under common control with InvestAmerica
is an existing investor in such company; with the exception of the five
present co-investments of MorAmerica Capital and the Iowa Fund.
3. All purchases of securities by the Investing Company effected
with a Managed Affiliate as a joint participant shall consist of the
same class of securities, including the same registration rights (if
any), and other rights related thereto, at the same price and on the
same terms and conditions, and the settlement dates will be the same.
4. If one or more Managed Affiliates elect to sell, exchange, or
otherwise dispose of a security that is also held by the Investing
Company, InvestAmerica will notify the Investing Company of the
proposed disposition at the earliest practical time and the Investing
Company will be given the opportunity to participate in such sale on a
proportionate basis, at the same price and on the same terms and
conditions as those applicable to Managed Affiliates. InvestAmerica
will formulate a recommendation as to participation by the Investing
Company in such a disposition, and provide a written recommendation to
the Investing Company's non-interested directors. The Investing Company
will participate in such disposition to the extent that a Required
Majority of its non-interested directors determine that it is in the
Investing Company's best interest. The Investing Company and each
Managed Affiliate will bear its own expenses associated with the
disposition of a portfolio security.
5. If a Managed Affiliate desires to make a ``follow-on''
investment (i.e., an additional investment in the same entity) in a
particular portfolio company whose securities are held by the Investing
Company or to exercise warrants or other rights to purchase securities
of such an issuer, InvestAmerica will notify the Investing Company of
the proposed transaction at the earliest practical time. InvestAmerica
will formulate a recommendation as to the proposed participation by the
Investing Company in a follow-on investment, and provide the
recommendation to the Investing Company's non-interested directors
along with notice of the total amount of the follow-on investment. The
Investing Company's non-interested directors will make their own
determination with respect to follow-on investments. To the extent that
the amount of a follow-on investment available to a Managed Affiliate
and the Investing Company is not based on the amount of their initial
investment, the relative amount of investment by each Managed Affiliate
participating in a follow-on investment and the Investing Company will
be based on a ratio derived by comparing the remaining funds available
for investment by the Investing Company and each such Managed Affiliate
with the total amount of the follow-on investment. The Investing
Company will participate in such investment to the extent that a
Required Majority of its non-interested directors determine that it is
in the Investing Company's best interest. The acquisition of follow-on
investments as permitted by this condition will be subject to the other
conditions set forth in the application.
6. The Investing Company's non-interested directors will review
quarterly all information concerning co-investments made by the
Investing Company, including co-investments in which one or more
Managed Affiliates declined to participate, so that they may determine
whether all investments made during the preceding quarter, including
those investments they declined, complied with the conditions set forth
above.
7. The Investing Company will maintain the records required by
section 57(f)(3) of the Investment Company Act as if each of the
transactions permitted under these conditions were approved by the
Investing Company's non-interested directors under section 57(f).
8. No non-interested director of the Investing Companies will be a
non-interested director of a Managed Affiliate with which the Investing
Company co-invests.
Consolidated Reporting Conditions
1. Private Equities will (a) file with the SEC on behalf of itself
and MorAmerica Capital, all information and reports required to be
filed with the SEC under the Exchange Act and other federal securities
laws, including financial statements prepared solely on a consolidated
basis as to Private Equities and MorAmerica Capital, such information
and reports to be in satisfaction of the separate filing obligations of
MorAmerica Capital; and (b) provide to its shareholders such
information and reports required to be disseminated to Private
Equities' shareholders, including financial statements prepared solely
on a consolidated basis as to Private Equities and MorAmerica Capital,
such reports to be in satisfaction of the separate filing obligations
of Private Equities. Notwithstanding anything in this condition,
Private Equities will not be relieved of any of its reporting
obligations including, but not limited to, any consolidating statement
setting forth the individual statement of MorAmerica Capital required
by rule 6-03(c) of Regulation S-X.
[[Page 3904]]
2. Private Equities and MorAmerica Capital may file on a
consolidated basis pursuant to the above condition only so long as the
amount of Private Equities' total consolidated assets invested in
assets other than (a) securities issued by MorAmerica Capital or (b)
securities similar to those in which MorAmerica Capital invests, does
not exceed 10%.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-1289 Filed 1-18-95; 8:45 am]
BILLING CODE 8010-01-M
