[Federal Register Volume 62, Number 230 (Monday, December 1, 1997)]
[Notices]
[Pages 63568-63574]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-31395]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22902; 812-10870]
Allied Capital Corporation, et al.; Notice of Application
November 21, 1997.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of application for exemption under sections 6(c),
12(d)(1)(J), 17(b), 57(c), and 57(i) of the Investment Company Act of
1940 (the ``Act'') and rule 17d-1 under the Act, and under section
12(h) of the Securities Exchange Act of 1934 (the ``Exchange Act'').
-----------------------------------------------------------------------
Summary of Application: The order would permit two business
development companies (``BDCs''), a real estate investment trust, and
the investment adviser to these entities, to merge into a third BDC. In
addition, the order would permit the surviving BDC and its wholly-owned
subsidiaries to file reports on a consolidated basis and to engage in
certain transactions that would otherwise be permitted if the BDC and
its subsidiaries were one company. The order also would permit asset
coverage requirements for senior securities issued by the BDC and its
BDC subsidiaries to apply on a consolidated basis. Further, the order
would permit certain joint transactions between two of the BDC's
subsidiaries and two private venture capital partnerships. The
requested order would supersede any exemption granted to any applicant
from provisions of the Act and the Exchange Act, effective as of the
date of the merger.
Applicants: Allied Capital Corporation (``Allied I''), Allied
Investment Corporation (``Investment I''), Allied Capital Financial
Corporation (``Financial I''), Allied Capital Corporation II (``Allied
II''), Allied Investment Corporation II (``Investment II''), Allied
Financial Corporation II (``Financial II''), Allied Capital Lending
Corporation (``Allied Lending''), Allied Capital SBLC Corporation
(``Allied SBLC''), Allied Capital Advisers, Inc. (``Advisers''), and
Allied Capital Commercial Corporation (``Allied Commercial'').
FILING DATE: The application was filed on November 21, 1997.
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 December
15, 1997, 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 who wish to
be notified of a hearing may request notification by writing to the
SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 5th Street, NW., Washington, DC 20549.
Applicants, 1666 K Street, NW., 9th Floor, Washington, DC 20006-2803.
FOR FURTHER INFORMATION CONTACT:
Elaine M. Boggs, Senior Counsel, at (202) 942-0572, or Mercer E.
Bullard, Branch Chief, at (202) 942-0564 (Office of Investment Company
Regulation, Division of Investment Management).
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, 450 5th Street, NW., Washington, DC
20549 (telephone (202) 942-8090).
Applicants' Representations
1. Applicants are all Maryland corporations. Stock of Allied I,
Allied II, Allied Lending, Allied Commercial, and Advisers (the
``Participating Companies'') trades over-the-counter on the Nasdaq
Stock Market's National Market. Allied I, Allied II, and Allied Lending
have each elected to be regulated as a BDC, as defined under section
2(a)(48) of the Act.\1\ Allied Development Corporation
(``Development''), Investment I, and Financial I are wholly-owned
subsidiaries of Allied I and Investment II and Financial II are wholly-
owned subsidiaries of Allied II. Development, Investment I and II, and
Financial I and II are registered under the Act as closed-end
management investment companies. Development is currently inactive.
Investment I and II are licensed small business investment companies
(``SBICs'') under the Small Business Investment Act of 1958 (the ``1958
Act''). Financial I and II are specialized small business investment
companies (``SSBICs'') under the 1958 Act. Allied Lending participates
in the Small Business Administration's (``SBA'') general business loan
program pursuant to section 7(a) of the Small Business Act. Allied SBLC
and Allied Capital Credit Corporation (``Allied Credit'') are wholly-
owned subsidiaries of Allied Lending. Allied SBLC is a BDC and a small
business lending company (``SBLC'') participating in the general
business loan program pursuant to section 7(a) of the Small Business
Act. Allied Credit is currently inactive. Allied Commercial is a real
estate investment trust (``REIT'') with three subsidiaries. Advisers is
registered as an investment adviser under the Investment Advisers Act
of 1940 (the ``Advisers Act'') and serves as the investment adviser to
the other Participating Companies. Advisers has one wholly-owned
subsidiary established for the purpose of holding an office building
which it plans to sell.
---------------------------------------------------------------------------
\1\ Section 2(a)(48) generally defines a BDC to be any closed-
end investment company that operates for the purpose of making
investments in securities described in sections 55(a) (1) through
(3) of the Act and makes available significant managerial assistance
with respect to the issuers of such securities. Such issuers are
small companies whose securities typically are illiquid.
---------------------------------------------------------------------------
2. Applicants have proposed a reorganization in which Allied I,
Allied II, Allied Commercial, and Advisers (collectively, the
``Acquired Companies'') will merge into Allied Lending and become
``ACC'' (the ``Consolidation''). ACC will be an adviser registered
under the Advisers Act and will operate as an internally managed BDC.
Investment I and Financial I will merge with Investment II and
Financial II, with Investment I and Financial I as the surviving
entities (respectively, the ``Surviving SBIC Subsidiary'' and the
``Surviving SSBIC Subsidiary''). As part of the Consolidation, the SBLC
Subsidiary will
[[Page 63569]]
become the ``Surviving SBLC Subsidiary.'' Prior to the Consolidation,
Development will be merged with Allied I and Allied Credit will be
merged into Allied Lending. In addition, prior to the Consolidation,
Allied Commercial's three subsidiaries will be merged into ``Equity
Holdings LLC'' and ``Acceptance LLC,'' Allied Lending will establish a
REIT subsidiary that will become a subsidiary of ACC following the
Consolidation (the ``Surviving REIT Subsidiary''), and Advisers'
wholly-owned subsidiary will be liquidated or merged into ``Property
LLC,'' which will become a subsidiary of ACC following the
Consolidation.
3. Following the Consolidation, ACC will have seven wholly-owned
subsidiaries (the ``Surviving Subsidiaries''): Equity Holdings LLC,
Acceptance LLC, and Property LLC, and the Surviving SBLC, SBIC, SSBIC,
and REIT Subsidiaries. Following the Consolidation, Surviving SBIC and
SSBIC Subsidiaries will elect BDC status and will no longer operate as
registered investment companies. Therefore, the Surviving SBIC, SSBIC,
and SBLC Subsidiaries will all be BDCs (the ``Surviving BDC
Subsidiaries''). The Surviving REIT Subsidiary, Equity Holdings LLC,
Acceptance LLC, and Property LLC will not be BDCs or registered
investment companies. In addition, ACC may in the future create
additional wholly-owned subsidiaries (the ``Future Subsidiaries'')
which in some cases may be BDCs (the ``Future BDC Subsidiaries'').
4. The Consolidation will be effected pursuant to a merger
agreement dated August 14, 1997, and amended and restated on September
19, 1997 (the ``Merger Agreement''). The merger is anticipated to occur
on December 31, 1997 (the ``Effective Date''). On the Effective Date,
each share of common stock of the Acquired Companies will be converted
into shares of Allied Lending in the following amounts: (a) Each share
of Allied I will be converted into 1.07 shares of Allied Lending; (b)
each share of Allied II will be converted into 1.40 shares of Allied
Lending; (c) each share of Allied Commercial will be converted into
1.60 shares of Allied Lending; and (d) each share of Advisers will be
converted into 0.31 shares of Allied Lending (collectively, the
``Exchange Ratios''). The Exchange Ratios were based on the relative
market prices of the Participating Companies' stock, as discussed
below. The exchange agent for the Consolidation will request that, as
soon as possible after the Effective Date, shareholders of the Acquired
Companies surrender their respective shares. Upon the surrender, the
exchange agent will mail the shareholders a confirmation of ownership
of ACC common stock. Shares of ACC common stock will be issued in book
entry form.
5. The Consolidation will be conditioned on each Participating
Company receiving a tax opinion from counsel stating that the
Consolidation will be a tax-free event under the Internal Revenue Code
of 1986, as amended (the ``Code''). Each Participating Company will be
responsible for a pro rata portion of expenses related to the
Consolidation, based on each Company's total market capitalization as
of August 13, 1997, except that each Company will pay the fees and
expenses of the financial adviser it engaged to assist it with the
Consolidation. Estimated total expenses in connection with the
Consolidation are $672,000 for Allied I, $907,000 for Allied II, and
$458,000 for Allied Lending. In addition, each of Allied I, Allied II,
and Allied Lending have paid $120,000 for the services of its
respective independent financial adviser.
6. In June 1997, Morgan Stanley & Co. Incorporated (``Morgan
Stanley'') was retained by each of the Participating Companies as the
financial adviser to provide advice and assistance with respect to
defining objectives, performing valuation analysis, structuring and
planning the Consolidation. In addition, each Participating Company
retained an independent financial adviser to render an opinion as to
the fairness of the Exchange Ratios. Each Participating Company also
obtained independent legal counsel to provide that Company's board of
directors with legal advice concerning the directors' duties with
respect to the consideration of the Consolidation.
7. In determining the relative value of each Participating Company,
Morgan Stanley approached the Consolidation as a ``merger of equals.''
In preparing its analysis, Morgan Stanley, among other things, reviewed
the strategic rationale for the Consolidation; conducted due diligence
sessions with the management of Advisers; developed an independent
valuation model for each of the Participating Companies; developed
stand-alone valuations of each of the Participating Companies using,
among other things, market valuation parameters, discounted cash flow
analysis of projected cash flows and analysis of each Participating
Company's contribution to ACC; and analyzed the pro forma impact of the
Consolidation on each Participating Company and its stockholders in
terms of contributable earnings and market value.
8. Morgan Stanley also compared the historical price movement of
the Participating Companies' stock from June 22, 1994 through July 18,
1997. Morgan Stanley advised the management of Advisers and the board
of each of the Participating Companies that the thirty-day period from
June 16, 1997 to July 15, 1997 was the most appropriate period over
which to measure market value for purposes of developing the Exchange
Ratios for each of the Participating Companies. Morgan Stanley
considered that during this period, no unusual events had occurred that
could have influenced the movement of the Participating Companies'
stock prices. In addition, July 15, 1997 was chosen as the ending date
because on July 16, 1997 management of Advisers began to contact the
independent financial advisers, which increased the number of persons
with knowledge of the proposed transaction. The market prices for the
stock of the Participating Companies from June 16, 1997 to July 15,
1997 formed the basis for Morgan Stanley's recommendation on valuation.
9. During the period beginning on July 30 and ending on August 5,
1997, each of the Participating Companies held its regular quarterly
board of directors meeting, including a session devoted exclusively to
the Consolidation. At those meetings, the management of Advisers
provided the reasons for the Consolidation and the business plan for
ACC. In addition, Morgan Stanley gave its report on its valuation
analysis. Following the Morgan Stanley presentation, the respective
Participating Company's independent financial adviser indicated that,
based on available information provided through that date and subject
to further analyses and review, the applicable Exchange Ratio appeared
to be fair to the shareholders from a financial point of view. Further,
the respective Participating Company's independent legal counsel made a
presentation concerning the duties of the board of directors to the
applicable Participating Company and its shareholders in connection
with the consideration of the Consolidation. No formal action on the
merger proposal was sought or taken at these board meetings.
10. Between August 11 and 14, 1997, each Participating Company's
board of directors met again to consider and approve the Merger
Agreement. Each meeting was attended by the respective independent
financial adviser and legal counsel for that Participating Company. The
independent financial advisers
[[Page 63570]]
presented their opinions that the Exchange Ratio was fair, from a
financial point of view, to the shareholders of the respective
Participating Company. After considering the presentation of the
respective independent financial adviser and after discussion, each of
the boards, including the directors who are not interested persons of
the Company under section 2(a)(19) of the Act or officers of or
otherwise affiliated with any of the other Participating Companies
(``Independent Directors''), unanimously approved its Participating
Company's participation in the Consolidation and agreed to the terms of
the Merger Agreement.
11. The boards of directors considered, among other things: (a)
Information concerning the financial performance and condition,
business operations, capital levels, asset quality and prospects of
each Participating Company, and its projected future financial
performance as a separate entity and on a combined basis; (b) current
industry, economic, and market conditions and trends; (c) the
importance of economies of scale to competing effectively; (d) the
Consolidation's structure as a tax-free merger of equals; (e) the
possibility that achieving cost savings and operating efficiencies as a
result of the Consolidation might not be the same for each
Participating Company; (f) the terms and conditions of the Merger
Agreement; (g) the current and historical market prices of the common
stock of each Participating Company; (h) the opinions of the respective
independent financial adviser as to the fairness, from a financial
point of view, of the respective Exchange Ratios; (i) the portfolio
holdings, liabilities, management, strategic objectives, competitive
positions, and prospects of the respective Participating Company; and
(j) the impact of the Consolidation on the shareholders and portfolios
of each Participating Company and on the employees of Advisers.
12. A proxy statement was filed with the Commission on September
26, 1997. Proxy statements were mailed to shareholders on October 14,
1997, and shareholder meetings are scheduled for November 26, 1997. At
least two-thirds of the voting shares of each Participating Company
will be required to approve the Consolidation.
13. Applicants request an order to permit the Consolidation. In
addition, applicants request an order to permit ACC and its Surviving
and Future BDC Subsidiaries (the ``BDC Subsidiaries'') to file reports
on a consolidated basis and to engage in certain transactions that
would otherwise be permitted if ACC and its BDC Subsidiaries were one
company. The order also would permit modified asset coverage
requirements for ACC and its BDC Subsidiaries on a consolidated basis
and for the Surviving SBLC Subsidiary individually. Further, the order
would permit certain joint transactions between the Surviving SBIC and
SSBIC Subsidiaries and two private venture capital partnerships.
14. ACC will own all of the outstanding common voting stock or
membership interests of the Surviving and Future Subsidiaries (the
``Subsidiaries''). In addition, the following types of transactions may
occur among ACC and the Subsidiaries:
(a) ACC may make additional investments in a Subsidiary, as a
contribution to capital, purchase of additional stock, or loan.
(b) A Subsidiary may pay dividends and make other distributions to
ACC. Each BDC Subsidiary and the Surviving REIT Subsidiary intend to
qualify as a regulated investment company and a real estate investment
trust, respectively, pursuant to Subchapter M of the Code. As such,
each BDC Subsidiary and the Surviving REIT Subsidiary will be required
to pay to ACC substantially all of its income in the form of a dividend
in order not to incur any Federal income tax.
(c) A Subsidiary may make loans or other advances to ACC or another
Subsidiary. None of the Subsidiaries will purchase or otherwise acquire
any of the capital stock of ACC.
(d) One or more of ACC and the Subsidiaries may invest in the
securities of the same unaffiliated issuer, together or at different
times, and deal with such investments separately or jointly. In
addition, ACC and the BDC Subsidiaries may engage in purchase or sale
transactions with controlled portfolio affiliates of one another.
(e) ACC may purchase all or some of a portfolio investment held by
a Subsidiary. Similarly, a Subsidiary may purchase all or some of a
portfolio investment held by ACC or another Subsidiary.
(f) One or more of ACC and the Subsidiaries may enter into a
financial arrangement with a third-party financial institution in which
one or more of ACC and the Subsidiaries are co-borrowers or guarantors.
Applicants' Legal Analysis
A. The Consolidation
1. Section 57(a) generally prohibits, with certain exceptions,
sales or purchases of securities between BDCs and certain of their
affiliates as described in section 57(b) of the Act. Section 57(b)
includes the investment adviser to, and any person under common control
with, the BDC. Allied I, Allied II, and Commercial could be deemed to
be affiliates of Allied Lending under section 57(b) because all are
under common control by virtue of having a common investment adviser.
2. Section 17(a) of the Act generally prohibits sales or purchases
of securities between a registered investment company and certain
affiliated persons of the company as described in section 2(a)(3) of
the Act. Affiliated persons under section 2(a)(3)(C) include persons
under common control with the investment company. When the assets of
Investment II and Financial II are transferred to Investment I and
Financial I, respectively, all four investment companies will be under
the common control of ACC.
3. Sections 57(c) and 17(b) of the Act provide that the SEC will
exempt a proposed transaction from sections 57(a) and 17(a),
respectively, if the terms of the proposed transaction, including the
consideration to be paid or received, are reasonable and fair and do
not involve overreaching on the part of any person concerned; and the
proposed transaction is consistent with the policy of each registered
investment company concerned and consistent with the general purposes
of the Act. Applicants believe that the requested relief from sections
57(a) and 17(a) meets these standards for the reasons discussed below.
4. Applicants believe that the Consolidation will benefit
shareholders of the Participating Companies. Applicants state that
ACC's increased size, increased portfolio diversity, and mix of current
and capital gain income will provide increased benefits for all
shareholders. Applicants state that ACC will have the ability to
diversify into larger and varied transactions, and that ACC's greater
size will provide opportunity for lower-cost debt capital and
institutional ownership of its common stock. In addition, applicants
believe that the Consolidation will eliminate the need for costly
duplication of efforts related to maintaining and reporting for five
separate public entities. Applicants further believe that the mergers
of Investment II and Financial II into Investment I and Financial I,
respectively, will result in similar benefits.
5. Applicants assert that the role of the Independent Directors of
Allied I and II and Allied Lending, Morgan Stanley's valuation
analysis, the fairness opinions given by each independent
[[Page 63571]]
financial adviser, and the representation by separate independent
counsel of Allied I and II and Allied Lending ensure that no
overreaching on the part of any person will occur in connection with
the Consolidation. Applicants state that the Consolidation will be
consistent with the public disclosures of each of the Participating
Companies and with the general purposes of the Act, as will be the
merger of Investment II and Financial II into Investment I and
Financial I, respectively. Further, applicants state that the board of
directors of each Participating Company has approved the transaction as
being in the best interests of the Company.
6. Applicants note that during the process of considering and
approving the Consolidation, the board of directors of each
Participating Company specifically considered the participation of
Advisers in the Consolidation. Applicants state that each board of
directors concluded that ACC would be a better business model than a
Participating Company would be individually, in part because ACC will
be internally managed. Applicants note that with external management,
Advisers must not only cover its costs, but must earn a profit for its
shareholders and pay a corporate level income tax. Applicants also note
that external management creates perceived conflicts of interest
because the goals of an external adviser may conflict with the goals of
the fund. Applicants state that the directors concluded that Advisers'
participation in the Consolidation was fair from a financial point of
view and that the management of Advisers will receive no financial
benefit from the consolidation to the detriment of any of the other
Participating Companies or their shareholders.
B. Operation as One Company
1. Section 12(d)(1)
a. Section 12(d)(1)(A) of the Act, made applicable to BDCs by
section 60 of the Act, limits the amount of securities a registered
investment company or BDC (or company controlled by the registered
investment company or BDC) may hold of other investment companies.
Section 12(d)(1)(C) limits the amount of securities of a closed-end
investment company that may be acquired by an investment company.
Applicants state that any purchase of the voting stock of the Surviving
SBLC Subsidiary or a Future BDC Subsidiary by ACC, or a contribution to
capital of the Surviving SBLC Subsidiary or of a Future BDC Subsidiary
by ACC, may violate section 12(d)(1).\2\ In addition, applicants state
that section 12(d)(1) may apply to each of the Subsidiaries with
respect to their purchase or acquisition of debt securities issued by
ACC or each other because each will be a BDC or an entity controlled by
a BDC. Further, applicants state that the making of loans or advances
by any of the Subsidiaries to ACC or to each other may violate section
12(d)(1).
---------------------------------------------------------------------------
\2\ Rule 60a-1 under the Act exempts from sections 12(d)(1)(A)
and (C) the acquisition by a BDC of the securities of a small
business investment company licensed under the 1958 Act which is
operated as a wholly-owned subsidiary of the BDC. Applicants state
that, because the Surviving SBIC and SSBIC Subsidiaries are small
business investment companies licensed under the 1958 Act, ACC's
acquisition of shares of the Surviving SBIC and SSBIC Subsidiaries
will be exempt from sections 12 (d)(1)(A) and (C) under rule 60a-1
under the Act. Applicants state that sections 12(d)(1)(A) and (C) do
not apply to the non-BDC Subsidiaries because they are not
investment companies.
---------------------------------------------------------------------------
b. Applicants request an exemption from sections 12(d)(1)(A) and
(C) to permit: (a) the acquisition by ACC of any securities of the
Surviving SBLC Subsidiary and the future BDC Subsidiaries; and (b) the
acquisition by any of the Subsidiaries of any securities representing
indebtedness of ACC or of any securities representing indebtedness
issued by any of the other Subsidiaries. Applicants request the
exemptions to the extent that the transactions would not be prohibited
if each Subsidiary were deemed to be part of ACC and not a separate
company.
c. Section 12(d)(1)(J) provides that the SEC may exempt persons or
transactions from any provision of section 12(d)(1) if the exemption is
consistent with the public interest and the protection of investors.
For the following reasons, applicants believe that the proposal meets
this standard.
d. Applicants assert that section 12(d)(1) is intended to prevent
certain abuses associated with the pyramiding of investment companies,
and that the holding company structure will not entail these types of
abuses. Applicants state that these abuses include the investing fund
exercising undue influence over the underlying funds, the layering of
fees, and the creation of overly complex and confusing structures.
e. Applicants believe that ACC, as the sole shareholder of the
Subsidiaries, will have no incentive to act contrary to the interests
of a Subsidiary. Applicants also contend that the Consolidation will
not result in investors incurring duplicative sales charges or advisory
fees, and will result in a structure that is less complex than the
current structure. Applicants also note that the parent/subsidiaries
structure that will result from the Consolidation will serve a valid
business purpose by facilitating more efficient public investment in
the alternative asset class of small business debt securities.
2. Section 12(d)(3)
a. Section 12(d)(3) of the Act, made applicable to BDCs by section
60, generally makes it unlawful for any registered investment company
to purchase any security issued by an investment adviser to an
investment company. Applicants state that the Consolidation could be
deemed to involve the purchase or acquisition by Allied I or II, Allied
Lending, or ACC of securities issued by Advisers. Applicants request an
exemption to permit the purchase of Advisers in connection with the
Consolidation.
b. Section 6(c) of the Act permits the SEC to exempt any person or
transaction from any provision of the Act, if the exemption is
appropriate in the public interest and consistent with the protection
of investors and the purposes fairly intended by the policy and
provisions of the Act. Applicants believe that the requested relief
meets the section 6(c) standard for the reasons discussed below.
c. Applicants state that section 12(d)(3) was intended to limit the
exposure of registered investment companies to the entrepreneurial
risks associated with securities related business and to prevent
potential conflicts of interest and reciprocal practices. Applicants
state that the Consolidation does not present the potential for these
abuses. Applicants believe that the procedures and policies adopted by
ACC with respect to its investment advisory operations will ensure that
ACC and the Subsidiaries are being operated and managed in the best
interests of ACC and its shareholders. Applicants also note that ACC
could engage directly in the business of investment management without
the need for exemptive relief.
3. Section 18
a. Section 18(a) of the 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
section 18(a). Section 18(k) provides for modified asset coverage
requirements for SBICs. Section 61 makes section 18, with certain
modifications, applicable to a BDC.
b. Applicants believe that section 61 may require that ACC and the
BDC Subsidiaries comply with the asset
[[Page 63572]]
coverage requirements of section 18(a) (as modified by section 61(a))
on a consolidated basis because ACC could be deemed to be an indirect
issuer of any class of senior securities issued by the Subsidiaries. In
addition, applicants believe that the Surviving SBLC Subsidiary may not
be permitted to rely on the modified asset coverage requirements of
section 18(k) because section 18(k) does not apply to an SBLC licensee
but only to SBIC licensees.
c. Applicants request an exemption under section 6(c) (a) for the
Surviving SBLC Subsidiary from sections 18(a)(1)(A) and (B), and (b)
for ACC to permit senior securities issued by the Surviving BDC
Subsidiaries that are excluded from the individual asset coverage ratio
by section 18(k) or this order to be excluded from ACC's consolidated
asset coverage ratio. Applicants believe the relief satisfied the
section 6(c) standard for the following reasons.
d. Applicants state that the Surviving SBLC Subsidiary should be
treated like an SBIC licensee because SBLCs and SBICs are analogous in
their common purpose to assist small business in raising capital and
both are subject to the regulation and oversight of the SBA. Applicants
assert that policy rationale for the section 18(k) exemption is that
the SBA's regulation of the permissible leverage of an SBA-licensed
investment company is an effective substitute for the SEC's regulation
of asset coverage for senior securities issued by a registered closed-
end company or a BDC. Applicants state that SBICs, SSBICs, and SBLCs
are SBA-licensed investment companies and subject to the SBA's
substantive regulations of permissible leverage in their capital
structure.
e. Applicants contend that if ACC applies the asset coverage
requirements of section 18(a) on a consolidated basis, ACC should be
able to apply the same exemptions available to the Surviving BDC
Subsidiaries. Applicants also contend that to the extent that the
Surviving BDC Subsidiaries on a stand-alone basis are entitled to rely
on section 18(k) for an exemption from the asset coverage requirements
of section 18(a), there is no policy reason to deny the parent the
benefit of the exemption when the parent consolidates its assets with
the Surviving BDC Subsidiaries when testing compliance with section
18(a).
4. Sections 2(a)(48) and 55(a)
a. Section 2(a)(48) of the Act generally defines a BDC to be any
closed-end investment company that operates for the purpose of making
investments in securities described in sections 55(a) (1) through (3)
of the Act and makes available significant managerial assistance with
respect to the issuers of these securities. Section 55(a) of the Act
requires a BDC to have at least 70% of its assets invested in assets
described in sections 55(a) (1) through (6) (``Qualifying Assets'').
Qualifying Assets generally include securities issued by eligible
portfolio companies as defined in section 2(a)(46) of the Act. Section
2(a)(46)(B) of this definition generally excludes (a) an investment
company, as defined under section 3 of the Act, unless the company is
an SBIC licensed by the SBA to operate under the 1958 Act and is a
wholly-owned subsidiary of the BDC, and (2) a company that would be an
investment company but for the exclusion from the definition of
investment company in section 3(c) of the Act.
b. Applicants believe that the Surviving SBLC and REIT Subsidiaries
may not be deemed eligible portfolio companies because the Surviving
SBLC Subsidiary is not an SBIC licensed by the SBA but an SBLC, and the
Surviving REIT Subsidiary may be an investment company but for the
exclusion from the definition of investment company in section 3(c).
Applicants request relief under section 6(c) from section 55(a) to
permit ACC to treat the Surviving SBLC Subsidiary as an eligible
portfolio company within the meaning of section 2(a) (46) solely to the
extent that the Surviving SBLC Subsidiary may not qualify as an
eligible portfolio company for reasons stated above. Further,
applicants request relief from sections 2(a)(48) and 55(a) to permit
the assets held by the REIT Subsidiary, rather than the REIT Subsidiary
itself, to be treated as assets held by ACC for purposes of (1)
determining whether ACC is operated for the purpose of making
investments in securities described in paragraphs (1) through (3) of
sections 55(a), (2) determining whether ACC makes available managerial
assistance to companies as described in section 2(a)(48), and (3)
applying the 70% test in section 55(a). Applicants believe the relief
satisfies the section 6(c) standard for the following reasons.
c. Applicants believe that relief for the Surviving Subsidiary is
appropriate because the loans to be made by the SBLC will be made to
the same category of small business borrowers that represent the type
of securities included in the definition of Qualifying Assets. In
addition, applicants note that the Surviving SBLC Subsidiary will
invest all of its assets in Qualifying Assets and itself will be a BDC.
d. Applicants believe that relief for the REIT Subsidiary is
appropriate because all of the voting securities of the REIT Subsidiary
will be held by ACC and ACC will control the operations of the REIT
Subsidiary, including the acquisition and disposition of its assets.
Applicants also state the assets of the REIT Subsidiary will be held by
the REIT Subsidiary and not directly by ACC only for bona fide business
reasons that are unrelated to the policies underlying the Act and that
do not reflect a substantive economic difference from the assets being
held by ACC. Applicants therefore contend that the assets held by the
REIT Subsidiary are, in economic effect, assets held by ACC, and should
be treated as such in determining ACC's compliance with the relevant
provisions of sections 2(a) (48) and 55(a) of the Act.
5. Sections 57(a) (1) and (2)
a. As discussed above, sections 57(a) (1) and (2) generally
prohibit, with certain exceptions, sales or purchases of securities
between BDCs and certain of their affiliates as described in section
57(b) of the Act. Because they are under the common control of ACC,
each Subsidiary will be an affiliated person of each other Subsidiary
within the meaning of section 57(b).
b. Applicants request relief from sections 57(a) (1) and (2) under
section 57(c) to exempt any transaction between ACC and any BDC
Subsidiary and any transaction between any BDC Subsidiaries and any
Subsidiary with respect to the purchase or sale of securities or other
property. In addition, applicants request relief from sections 57(a)
(1) and (2) to exempt any purchase or sale transaction between ACC and
a controlled portfolio affiliate of a BDC Subsidiary and any purchase
or sale transaction between a BDC Subsidiary and a controlled portfolio
affiliate of ACC or of another BDC Subsidiary, but only to the extent
that any such transaction would not be prohibited if the BDC Subsidiary
were deemed to be part of ACC and not a separate company. For the
following reasons, applicants believe that the requested relief
satisfies the section 57(c) standard.
c. Applicants state that there may be cases when it is in the
interest of ACC's shareholders for a BDC Subsidiary to invest in
securities of an issuer that may be an affiliated person of ACC or for
ACC to invest in securities of an issuer that may be an affiliated
person of a BDC Subsidiary. Likewise, applicants state that a BDC
Subsidiary may want to invest in securities of an issuer that is an
affiliated person of another BDC
[[Page 63573]]
Subsidiary. Applicants note that the relief would permit ACC and the
BDC Subsidiaries to do what the Act would otherwise permit if they were
one company.
6. Sections 21(b) and 57(a)(3)
A. Section 57(a)(3) generally prohibits the borrowing of money or
other property by an affiliated person of a BDC, as described in
section 57(b), from the BDC except as permitted in section 21(b).
Section 21(b) (made applicable to BDCs by section 62) of the Act
generally prohibits loans between BDCs and persons controlling or under
common control with the BDC, except for loans to a company that owns
all of the outstanding securities of the BDC. As described above, each
Subsidiary will be under the common control of ACC and, therefore, will
be affiliated under section 57(b) and subject to section 21(b).
b. Applicants request relief from section 57(a)(3) under section
57(c) to exempt any transaction between a BDC Subsidiary and another
Subsidiary with respect to the borrowing of money or other property and
any borrowing of money or other property by ACC from a BDC Subsidiary.
Applicants also request relief from section 21(b) under section 6(c) to
exempt the lending of money or other property by a BDC Subsidiary to
ACC or another Subsidiary. For the following reasons, applicants
believe that the requested relief satisfies the section 57(c) standard.
c. Applicants state that the proposed transactions will have no
substantive economic effect because they will either be between ACC and
its wholly-owned Subsidiaries, or be between Subsidiaries under the
common ownership of ACC. Applicants note that the relief would permit
ACC and its Subsidiaries to do what the Act would otherwise permit if
they were one company.
7. Section 57(a)(4) and Rule 17d-1
a. Section 17(d) and rule 17d-1 make it unlawful for an affiliated
person of a registered investment company or any affiliated person of
an affiliated person, acting as principal, to participate in or effect
any joint transaction in which the registered company or a company it
controls participates, unless the transaction has been approved by the
SEC. Section 57(a)(4) imposes substantially the same prohibitions on
joint transactions involving BDCs and certain of their affiliates as
described in section 57(b). Section 57(i) provides that the rules and
regulations under section 17(d) shall apply to transactions subject to
section 57(a)(4) in the absence of rules under that section. No rules
with respect to joint transactions have been adopted under section
57(a)(4) and, therefore, the standard set forth under rule 17d-1
governs applicants' request.
b. Applicants state that a joint transaction in which a BDC
Subsidiary and ACC or another Subsidiary participates will be deemed to
be prohibited under section 57(a)(4). Therefore, applicants request
relief under section 57(i) and rule 17d-1 to permit any joint
transaction in which a BDC Subsidiary and ACC or another Subsidiary
participate to the extent that the transaction will not be prohibited
if the BDC Subsidiary were deemed to be part of ACC and not a separate
company.
c. In passing upon applications filed pursuant to rule 17d-1, the
SEC considers whether the participation of the registered investment
company in the joint transaction 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 this standard is
satisfied because the request would simply permit ACC and its
Subsidiaries to conduct their operations as if they were one company.
C. Consolidated Reporting
1. Section 54 of the Act provides that a closed-end investment
company may elect BDC treatment under the Act if the company has
registered or filed a registration statement under section 12 of the
Exchange Act for a class of its equity securities. Section 13(a) of the
Exchange Act requires that issuers of securities registered under the
Exchange Act file certain information and reports with the SEC.
Applicants request an order that the BDC Subsidiaries be exempt from
the reporting requirements of section 13(a) of the Exchange Act in
order to permit them to file consolidated reports with ACC.\3\
---------------------------------------------------------------------------
\3\ Applicants state that there is no separate requirement under
the Exchange Act that the BDC Subsidiaries register their shares
because they do not have the requisite number of shareholders under
the relevant provisions of the Exchange Act.
---------------------------------------------------------------------------
2. 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, the exemption
is not inconsistent with the public interest or the protection of
investors. Applicants believe that the requested exemption meets this
standard for the following reasons.
3. Applicants state that each BDC Subsidiary will have only one
investor and no public investors and, therefore, there will be no
trading in the securities of the BDC Subsidiaries. Applicants further
state that the nature and extent of the activities of the BDC
Subsidiaries will be fully disclosed through consolidated reporting in
accordance with Commission rules and generally accepted accounting
principles.
D. Co-Investing
1. Allied Venture Partnership (``Venture'') and Allied Technology
Partnership (``Technology'') are private venture capital limited
partnerships organized under the laws of the District of Columbia. They
are not registered under the Act in reliance on the exemptions provided
by sections 3(c)(1) and (7) of the Act. After the Consolidation, ACC
will be the investment adviser to Venture and Technology.
2. In reliance on certain prior orders (``Prior Orders''), Allied I
and its wholly-owned subsidiaries, and Allied II and its wholly-owned
subsidiaries have co-invested with Venture and Technology.\4\ Venture
and Technology are fully invested in portfolio companies and are not
expected to raise additional capital or to make new investments (other
than possible ``follow-on investments'' as permitted by the Prior
Orders). Venture and Technology are gradually liquidating their
existing investments in portfolio companies and distributing the
proceeds to their partners. The Prior Orders were subject to detailed
conditions regarding liquidation transactions and follow-on investments
(``Co-investing Conditions'').
---------------------------------------------------------------------------
\4\ Investment Company Act Release Nos. 14694 (Aug. 26, 1985)
(notice) and 14725 (Sept. 17, 1985) (order); 15787 (June 9, 1987
(notice) and 15833 (June 30, 1987) (order; and 17124 (Sept. 1, 1989)
(notice) and 17155 (Sept. 26, 1989) (order).
---------------------------------------------------------------------------
3. As noted above, section 57(a)(4) and rule 17d-1 generally
prohibit joint transactions involving BDCs and certain of their
affiliates unless the SEC has approved the transaction. Venture and
Technology will be affiliated persons of the Surviving SBIC and SSBIC
Subsidiaries within the meaning of section 57(b) because they all will
be under the common control of ACC. Because many of the investments
being liquidated are previous co-investments, the liquidation
transactions could be deemed to constitute joint transactions otherwise
prohibited by section 57(a)(4) and rule 17d-1. The Surviving SBIC and
SSBIC Subsidiaries request an order
[[Page 63574]]
pursuant to section 57(i) and rule 17d-1 to permit them to participate
in the liquidation transactions and possible follow-on investments with
Venture and/or Technology, to the extent that the transactions may
otherwise be prohibited by section 57(a)(4) and rule 17d-1.
4. Applicants believe that the transactions satisfy rule 17d-1(b)'s
standard, as described above, and that the Co-investing Conditions are
unnecessary, because ACC, the parent of the SBIC and SSBIC
Subsidiaries, will be internally managed; Venture and Technology are in
the process of liquidation and will not be engaging in a broad range of
transactions; and Venture and Technology and the SBIC and SSBIC
Subsidiaries will be treated on an equal basis in any transaction.
Applicants also contend that the relief is consistent with rule 57b-1,
which exempts from section 57(a)(4) any transactions in which the BDC
controls the relevant affiliate. Applicants asset that the SBIC and
SSBIC Subsidiaries should be deemed to control Venture and Technology,
for purposes of rule 57b-1, because they are wholly-owned subsidiaries
of ACC.
Applicants' Conditions
Applicants agree that the order granting the requested relief will
be subject to the following conditions:
1. ACC will at all times own and hold, beneficially and of record,
all of the outstanding voting capital stock of the Subsidiaries.
2. No person will serve or act as investment adviser to any
Subsidiary unless the directors and stockholders of ACC will have taken
the action with respect thereto also required to be taken by the
directors and sole stockholder of the Subsidiary.
3. The Consolidation will not be consummated unless it has been
approved by the holders of a majority of outstanding common stock of
Allied I, Allied II, and Allied Lending.
4. ACC will: (a) file with the Commission, on behalf of itself and
the Subsidiaries, all information and reports required to be filed with
the SEC under the Exchange Act and other applicable federal securities
laws, including information and financial statements prepared solely on
a consolidated basis as to ACC and the Subsidiaries, these reports to
be in satisfaction of any separate reporting obligations of the
Subsidiaries; and (b) provide to its stockholders the information and
reports required to be disseminated to ACC's stockholders, including
information and financial statements prepared solely on a consolidated
basis as to ACC and the Subsidiaries, these reports to be in
satisfaction of any separate reporting obligations of the Subsidiaries.
Notwithstanding anything in this condition, ACC will not be relieved of
any of its reporting obligations, including, but not limited to, any
consolidating statement setting forth the individual statements of the
Subsidiaries required by rule 6-03(c) of Regulation S-X.
5. ACC and the Subsidiaries may file on a consolidated basis under
condition 4 above only so long as the amount of ACC's total
consolidated assets invested in assets other than (a) securities issued
by the Subsidiaries or (b) securities similar to those in which the
Subsidiaries invest, does not exceed ten percent.
For the Commission, by the Division of Investment Management,
under delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 97-31395 Filed 11-28-97; 8:45 am]
BILLING CODE 8010-01-M
