[Federal Register Volume 61, Number 119 (Wednesday, June 19, 1996)]
[Notices]
[Pages 31197-31200]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-15578]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Rel. No. 22016; 812-10058]
Sirrom Capital Corporation; Notice of Application
June 13, 1996.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of Application under the Investment Company Act of 1940
(the ``Act'').
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[[Page 31198]]
APPLICANT: Sirrom Capital Corporation (``Sirrom Capital'').
RELEVANT ACT SECTIONS: Applicant requests an order under: Section 6(c)
of the Act for an exemption from sections 12(d)(1), 18(a), 19(b), 60,
and 61(a); sections 6(c) and 17(b) of the Act for an exemption from
section 17(a); section 57(c) of the Act for an exemption from sections
57(a) (1), (2), and (3); and sections 17(d) and 57(a)(4) and rule 17d-1
under the Act to permit Sirrom Capital and Sirrom Investments, Inc.
(``Sirrom Investments'') to effect certain joint transactions.
SUMMARY OF APPLICATION: Applicant requests an order to permit Sirrom
Capital to establish and operate a wholly-owned subsidiary, Sirrom
Investments, under the terms of a proposed reorganization in which
Sirrom Capital will transfer all of its assets, its small business
investment company (``SBIC'') license, and liabilities, to Sirrom
Investments in exchange for all of the common stock of Sirrom
Investments.
FILING DATES: The application was filed on March 2, 1996 and amended on
June 4, 1996.
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
applicant with a copy of the request, personally or by mail. Hearing
requests should be received by the SEC by 5:30 p.m. on July 8, 1996,
and should be accompanied by proof of service on applicant, 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 the date of a hearing may request notification by writing
to the SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549.
Applicant, Sirrom Capital Corporation, 500 Church Street, Suite 200,
Nashville, Tennessee 37219.
FOR FURTHER INFORMATION CONTACT:
Marianne H. Khawly, Staff Attorney, at (202) 942-0562, or Alison E.
Baur, 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.
Applicant's Representations
1. Sirrom Capital is a closed-end management investment company
that has elected to be regulated as a business development company
(``BDC'') under the Act. Sirrom Capital also is licensed by the Small
Business Administration (``SBA'') as an SBIC under the Small Business
Investment Act of 1958 (the ``1958 Act''). Sirrom Capital's investment
objective is long-term capital appreciation through venture capital
investments in small privately-owned companies (``Portfolio
Companies''). Sirrom Capital has filed a registration statement on Form
N-2 pursuant to which it will sell up to 2.3 million shares of common
stock (the ``Public Offering''). The net proceeds of the Public
Offering will be used to capitalize Sirrom Capital following the
consummation of the proposed plan of reorganization (the ``Plan'').
2. Under the Plan, Sirrom Capital intends to transfer all of its
assets (except the net proceeds of the Public Offering), its SBIC
license, and its liabilities to a newly-formed and wholly-owned
subsidiary, Sirrom Investments. In exchange, Sirrom Investments will
issue to Sirrom Capital all of its outstanding capital stock. After the
transfer of assets and liabilities, Sirrom Investments will register
under the Act as an SBIC and will conduct the SBIC activities
previously conducted by Sirrom Capital. Sirrom Investments would
operate as a registered closed-end investment company and an SBIC.
Sirrom Capital will continue to operate as a BDC. Applicants chose a
two-tier structure so that Sirrom Capital could engage in venture
capital transactions and other investment opportunities in which SBICs
cannot participate. In addition, Sirrom Investments will have the same
fundamental investment policies as Sirrom Capital.
3. Sirrom Capital may make additional investments in Sirrom
Investments either as contributions to capital, purchases of additional
stock, or loans. Sirrom Investments will not purchase or otherwise
acquire any of the capital stock of Sirrom Capital. Sirrom Investments
will pay dividends and make other distributions to Sirrom Capital with
respect to its investments in Sirrom Investments' stock, including
capital gains dividends subject in each case to the requirements of the
1958 Act and regulations thereunder. Sirrom Capital intends to cause
Sirrom Investments to qualify and elect to be taxed as a regulated
investment company. Accordingly, Sirrom Investments will be required to
pay out as dividends to Sirrom Capital substantially all of its so-
called ``investment company taxable income'' as defined in section 852
of the Internal Revenue Code (the ``Code''). Similarly, Sirrom Capital
intends to continue to qualify and elect to be taxed as a regulated
investment company as defined by the Code.
4. Sirrom Investments may make loans or other advances to Sirrom
Capital other than on account of purchases of Sirrom Investment's
stock. Sirrom Capital and Sirrom Investments also might invest in
securities of the same issuer, simultaneously or sequentially, in the
same or different securities of such issuer, and deal with such
investments separately or jointly. Sirrom Capital or Sirrom Investments
also might purchase all or a portion of portfolio investments held by
the other in order to enhance the liquidity of the selling company.
5. Sirrom Capital and Sirrom Investments propose 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. Sirrom Capital also intends to
guarantee any borrowings by Sirrom Investments and vice versa. Sirrom
Investments proposes to obtain financing that the SBA permits for
SBICs. Sirrom Investments also intends to borrow from Sirrom Capital
and vice versa.
Applicant's Legal Analysis
1. Applicant requests an order under: Section 6(c) of the Act for
an exemption from sections 12(d)(1), 18(a), 19(b), 60, and 61(a);
sections 6(c) and 17(b) of the Act for an exemption from section 17(a);
section 57(c) of the Act for an exemption from sections 57(a) (1), (2),
and (3); and sections 17(d) and 57(a)(4) and rule 17d-1 under the Act
to permit Sirrom Capital and Sirrom Investments to effect certain joint
transactions.
2. Section 12(d)(1)(A) of the Act provides that no registered
investment company may acquire securities of another investment company
if such securities represent more than 3 percent of the acquired
company's outstanding voting stock, more than 5 percent of the
acquiring company's total assets, or if such securities, together with
the securities of any other acquired investment companies, represent
more than 10 percent of the acquiring company's total assets. Section
12(d)(1)(C) also provides that no registered company may purchase or
otherwise acquire any security issued by a registered closed-end
investment
[[Page 31199]]
company, if immediately after such purchase or acquisition the
acquiring company owns more than 10 percent of the total outstanding
voting stock of such closed-end company. Section 60 of the Act states
that section 12 shall apply to a BDC to the same extent as if it were a
registered closed-end investment company. 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 Sirrom Capital
to Sirrom Investments is exempt from these provisions.
3. Section 12(d)(1), however, also applies to the activities of
Sirrom Investments, and loans made by Sirrom Capital to Sirrom
Investments may violate section 12(d)(1) if such loans were considered
purchases by Sirrom Investments of the securities of Sirrom Capital.
Similarly, loans made by Sirrom Investments to Sirrom Capital may
violate section 12(d)(1) if such loans were considered purchases by
Sirrom Capital of the securities of Sirrom Investments. Accordingly,
applicant requests an exemption from section 12(d)(1) to permit Sirrom
Investments' acquisition of those securities representing indebtedness
of Sirrom Capital.
4. 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 that 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 18(k) provides an exemption from the asset coverage
provisions of section 18(a) for SBICs. Section 61 makes section 18,
with certain modifications, applicable to a BDC.
5. As it is organized currently, Sirrom Capital is entitled to the
section 18(k) exclusion for its SBA-guaranteed debt. Following the
proposed reorganization, Sirrom Investments, as an SBIC, would be
entitled to the section 18(k) exclusion and thus would not need any
asset coverage for its SBA-guaranteed debentures. However, Sirrom
Capital, since it would no longer be an SBIC, would be subject to the
asset coverage requirements of section 18(a), as modified by section
61(a), without the benefit of the section 18(k) exclusion with respect
to senior securities it issued directly as well as those issued by
Sirrom Investments. Thus, absent the requested relief, Sirrom Capital
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 Sirrom Investments' indebtedness.
6. Section 19(b) of the Act prohibits any registered investment
company from distributing long-term capital gains, as defined in the
Code, more often than once every twelve months. Sirrom Investment
proposes to pay dividends and make other distributions to Sirrom
Capital on a regular basis that may include distribution of long-term
capital gains within the meaning of section 19(b) of the Act. Applicant
believes that permitting such distributions more often than once a year
will allow Sirrom Capital to manage more efficiently its internal cash
flow and would result in administrative savings.
7. Section 6(c) of the Act provides that the SEC may exempt persons
or transactions 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
and provisions of the Act. Applicant states that the operation of
Sirrom Capital as a BDC with a wholly-owned SBIC subsidiary is intended
to permit Sirrom Capital to expand the scope of its operations beyond
that which would be permitted to it as an SBIC. Applicant further
states that the requested exemptions would permit Sirrom Capital and
Sirrom Investments to operate effectively as one company even though
they will be divided into two legal entities. Accordingly applicant
believes that the requested exemptions from sections 12(d)(1), 18(a),
19(b), 60(a), and 61(a) meet the section 6(c) standards.
8. Section 17(a) of the Act generally prohibits an affiliated
person of a registered investment company to sell any security or other
property to such registered investment company, to purchase from such
registered investment company any security or other property, or to
borrow money or other property from such registered investment company.
Sections 57(a) (1), (2), and (3) generally prohibit any person related
to a business development company from engaging in the transactions
described in section 17(a). Section 2(a)(3)(A) defines ``affiliated
person'' of another person as, among other things, any person directly
or indirectly owning, controlling, or holding with power to vote, 5% or
more of the outstanding voting securities of such other person. Section
2(a)(3)(B) defines ``affiliated person'' of another person as, among
other things, any person 5% or more of whose outstanding voting
securities are directly or indirectly owned, controlled or held with
power to vote, by such other person. Thus, Sirrom Capital is an
affiliated person of Sirrom Investments and vice versa because Sirrom
Capital owns 100% of Sirrom Investments' voting securities. In
addition, Portfolio Companies of Sirrom Investments may also be
affiliated persons of Sirrom Capital and Sirrom Investments by reason
of ownership of 5% or more of such Portfolio Company's voting
securities. According, any exchange of securities between Sirrom
Capital and Sirrom Investments, and between either or both of them and
their Portfolio Companies, could constitute an affiliated transaction
prohibited by sections 17(a) and 57(a) of the Act.
9. Section 17(b) authorizes the SEC to exempt a proposed
transaction from section 17(a) if evidence establishes that the terms
of the 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, the transaction is consistent with the policies
of the registered investment company, and the general purposes of the
Act. Section 57(c) authorizes the SEC to exempt a proposed transaction
from sections 57(a) (1), (2), and (3) if it finds that the
participation of the BDC meets the criteria set forth for registered
investment companies in section 17(b). Section 57(i) of the Act
provides, among other things, that the rules and regulations under
section 17(a) applicable to registered closed-end investment companies
shall apply to transactions subject to section 57(a) in the absence of
rules under sections 57(a). No rules with respect to affiliated
transactions have been adopted under section 57(a).
10. Rule 57b-1, however, exempts from section 57(a) transactions
between BDCs and specific downstream affiliates. Thus, applicants
assert that if Sirrom Capital were to continue to operate as one BDC,
transactions with portfolio affiliates would be permissible without
Commission approval by virtue of Rule 57b-1 under the Act. Similarly,
certain transactions between registered investment companies and their
downstream affiliates are exempt from the prohibitions of section 17(a)
of the Act by virtue of rule 17a-6. Applicant believes that Sirrom
Investments should be permitted to invest in downstream affiliates of
Sirrom Capital and vice versa to the extent permitted under the Act as
if they were a single company. Thus, applicant believes that the
requested exemption from section 17(a)
[[Page 31200]]
meets the standards of sections 6(c) and 17(b) and the requested
exemption from sections 57(a) (1), (2), and (3) meets the standards of
section 57(c).
11. Section 17(d) of the Act prohibits an affiliated person of a
registered investment company, acting as principal, from effecting any
transaction in which such investment company is a joint, or joint and
several, participant with such person unless the SEC has issued an
order approving the arrangement. Rule 17d-1 states that the Commission
will consider whether the participation of such registered investment
company in such joint arrangement, on the basis proposed, is consistent
with the provisions, policies, and purposes of the Act and the extent
to which such participation is different from or less advantageous than
that of other participants. Section 57(a)(4) of the Act applies
identical standards to BDCs. Since Sirrom Capital and Sirrom
Investments would be affiliated persons, investments by Sirrom Capital
in the Portfolio Companies of Sirrom Investments and investments by
Sirrom Investments in the Portfolio Companies of Sirrom Capital may be
prohibited by sections 17(d), 57(a)(4) and rule 17d-1.
12. If Sirrom Capital and Sirrom Investments were operating as one
registered investment company, rule 17d-1(d)(5) would exempt
transactions between them and their downstream affiliates from section
17(d). If they were operating as one BDC, such transactions would be
exempted from section 57(a)(4) by rule 57b-1. Thus, applicant believes
that Sirrom Capital and Sirrom Investments should be permitted to
invest in Portfolio Companies in which the other is or proposed to be
an investor to the extent that such transaction would not be prohibited
if Sirrom Investments were deemed to be part of Sirrom Capital and not
a separate company. Thus applicant believes that requested relief under
section 17(d) and 57(a)(4) and rule 17d-1 under the Act is consistent
with the provisions, policies, and purposes of the Act and the
participation of Sirrom Capital and Sirrom Investments is not different
from or less advantageous than that of other participants.
Applicant's Conditions
Applicant agrees that the order granting the requested relief shall
be subject to the following conditions:
1. Sirrom Capital at all times will own and hold, beneficially and
of record, all of the outstanding voting capital stock of Sirrom
Investments.
2. Sirrom Investments will have the same fundamental investment
policies as Sirrom Capital, as set forth in Sirrom Capital's Form N-2
(Reg. No. 33-95394). Sirrom Capital will not cause or permit Sirrom
Investments to change any of its fundamental investment policies, or
take any other action referred to in section 13(a) of the Act, unless
such action shall have been authorized by Sirrom Capital after approval
of such action by a vote of a majority, as defined in the Act, of
outstanding voting securities of Sirrom Capital.
3. No person shall serve or act as investment adviser to Sirrom
Investments under circumstances subject to section 15 of the Act,
unless the directors and shareholders of Sirrom Capital shall have
taken the action with respect thereto also required to be taken by the
directors and shareholders of Sirrom Investments.
4. No person shall serve as director of Sirrom Investments who
shall not have been elected as a director of Sirrom Capital at its most
recent annual meeting, as contemplated by section 16(a) of the Act and
subject to the provisions thereof relating to the filling of vacancies.
Notwithstanding the foregoing, the board of directors of Sirrom
Investments will be elected by Sirrom Capital as the sole shareholder
of Sirrom Investments, and such boards will be composed of the same
persons that serve as directors of Sirrom Capital.
5. Sirrom Capital will not itself issue, and Sirrom Capital will
not cause or permit Sirrom Investments to issue, any senior security or
sell any senior security of which Sirrom Capital or Sirrom Investments
is the issuer except as hereinafter set forth: (a) Sirrom Capital and
Sirrom Investments may 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,
provided the following conditions are met: (1) such notes or evidences
of indebtedness are not intended to be publicly distributed, (ii) such
notes or evidence of indebtedness are not convertible into,
exchangeable for, or accompanied by any options to acquire any equity
security (except that, with respect to Sirrom Capital, the restrictions
in this clause (ii) shall not be applicable except to the extent that
they are applicable generally to BDCs), and (iii) immediately after the
issuance or sale of any such notes or evidences of indebtedness, Sirrom
Capital and Sirrom Investments on a consolidated basis, and Sirrom
Capital individually, shall have the asset coverage that would be
required by section 18(a) if Sirrom Capital and Sirrom Investments had
each selected to become a BDC pursuant to section 54 of the Act.
(except that, in determining whether Sirrom Capital and Sirrom
Investments, on a consolidated basis, have the asset coverage required
by section 18(a), any borrowings by Sirrom Investments pursuant to
section 18(k) of the Act shall not be considered senior securities and,
for purposes of the definition of asset coverage in section 18(h),
shall be treated as indebtedness not represented by senior securities);
and (b) in addition, (i) Sirrom Investments may obtain financing on
such basis and in such amount as the SBA may from time to time permit
for SBICs, (ii) Sirrom Investments may borrow from Sirrom Capital and
Sirrom Capital may borrow from Sirrom Investments, and (iii) Sirrom
Investments may guarantee any borrowings of Sirrom Capital, to the
extent permitted by the SBA. None of the borrowings or other
arrangements set forth in clause (b) above shall be deemed senior
securities for purposes of any order issued pursuant to this
application.\1\
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\1\ Sirrom Investments will only issue such senior securities as
are exempt from section 18(a) under section 18(k) of the Act.
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6. Sirrom Capital will file with the Commission financial
statements required by the federal securities laws on a consolidated
basis as to Sirrom Capital and Sirrom Investments, and on an
unconsolidated basis with respect to Sirrom Investments. Sirrom Capital
will provide to its shareholders financial statements on a consolidated
basis as to Sirrom Capital and Sirrom Investments, except when
unconsolidated financial statements are required under generally
accepted accounting principles.
For the SEC, by the Division of Investment Management, under
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-15578 Filed 6-18-96; 8:45 am]
BILLING CODE 8010-01-M
