MODERNIZE BUSINESS DEVELOPMENT COMPANIES FOR THE 21ST CENTURY
SBIA Legislative Recommendation for 115th Congress
BDC modernization legislation would enable BDCs to deploy more capital to small and medium-sized businesses by changing the “asset coverage ratio.” BDCs are currently limited to a 1:1 debt-to-equity ratio as opposed to banks and other financial vehicles that are often leveraged at a 9:1 ratio or higher. Allowing a modest increase in the leverage would enable BDCs to deploy significantly more capital to small and medium-sized businesses, while simultaneously reducing the risk in their portfolios, as they can invest in lower yielding, lower risk investments and still generate valuable returns to their shareholders.
SBIA recommends modestly increasing the debt-to-equity ratio ratio to 2:1.
Modernization legislation should also include provisions to streamline the offering, filing, and registration processes for BDCs at the Securities and Exchange Commission (SEC), eliminating significant regulatory burdens, and aligning the BDCs with other traditional operating companies.
SBIA recommends making the following offering reforms as part of BDC modernization legislation:
- Incorporation by Reference: Allow BDCs to incorporate already filed information by reference into current registration statements with the SEC. This would streamline disclosure requirements and reduce burdensome, duplicative regulatory paperwork for BDCs, while still ensuring investors would receive relevant and necessary disclosures.
- WKSI & Shelf Registration: Allow BDCs to file automatic shelf registration statements and permit them to qualify for Well Known Seasoned Issuer status. These changes would allow BDCs that have a lengthy track record in the market more flexibility and efficiency while seeking to raise capital in the public market by allowing them to time offerings when they will best be received by the market.
- Communications with Investors: Allow BDCs to communicate with investors more freely during the preparation and filing periods for a registration statement. This would permit investors to attain access to more information about a BDC during the time in which it is conducting an offering; thus, eliminating unnecessary liability risks for BDCs in the offering process.
- Research Dissemination: Allow broker-dealers and others flexibility to disseminate research on BDCs; thereby, better informing the market and shareholders. A number of brokerage firms provide research to their clients, thereby driving investor interest in purchasing BDC shares and creating more capital available to lend to small and mid-size businesses.
- Safe Harbors for Additional Information: Provide a safe harbor for BDCs to allow dissemination of additional information during an offering. This safe harbor would allow BDCs to provide investors with updated disclosures or recent developments during the offering process, promoting more expeditious information sharing for investors, while also reducing the cost and time burden of re-circulating lengthy disclosure documents.
- Synchronize Prospectus Filing Requirements: Synchronize the prospectus filing requirements to those of other public companies, as was originally contemplated by Congress in 1980. Many other companies are permitted to forgo the immense expense of sending the lengthy final prospectus to all individual investors, and are only required to file it with the SEC and deliver it to those investors that wish to receive it. Allowing BDCs the same option would save millions of dollars in delivery costs, and prevent investors from having to accept lengthy documents that they don’t wish to receive.
- Regulatory Parity: Relieve BDCs of the requirement to provide written confirmations of sales, notifications of allocation, and deliveries of securities. Eliminating this requirement, as it has been removed for other companies, would do away with significant regulatory paperwork and permit BDCs more flexibility in the sales process.