Securities Lawyer's Deskbook
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The
Investment Company Act of 1940





Section 61 -- Capital Structure


  1. Exceptions for business development company. Notwithstanding the exemption set forth in section 6(f) [15 USCS § 80a-6(f)], section 18 [15 USCS § 80a-18] shall apply to a business development company to the same extent as if it were a registered closed-end investment company, except as follows:

    1. The asset coverage requirements of section 18(a)(1)(A) and (B) [15 USCS § 80a-18(a)(1)(A), (B)] applicable to business development companies shall be 200 per centum.

    2. Notwithstanding section 18(c) [15 USCS § 80a-18(c)], a business development company may issue more than one class of senior security representing indebtedness.

    3. Notwithstanding section 18(d) [15 USCS § 80a-18(d)]--

      1. a business development company may issue warrants, options, or rights to subscribe or convert to voting securities of such company, accompanied by securities, if--

        1. such warrants, options, or rights expire by their terms within ten years;

        2. such warrants, options, or rights are not separately transferable unless no class of such warrants, options, or rights and the securities accompanying them has been publicly distributed;

        3. the exercise or conversion price is not less than the current market value at the date of issuance, or if no such market value exists, the current net asset value of such voting securities; and

        4. the proposal to issue such securities is authorized by the shareholders or partners of such business development company, and such issuance is approved by the required majority (as defined in section 57(o) [15 USCS § 80a-56(o)]) of the directors of or general partners in such company on the basis that such issuance is in the best interests of such company and its shareholders or partners;

      2. a business development company may issue, to its directors, officers, employees, and general partners, warrants, options, and rights to purchase voting securities of such company pursuant to an executive compensation plan, if--

        1. (I) in the case of warrants, options, or rights issued to any officer or employee of such business development company (including any officer or employee who is also a director of such company), such securities satisfy the conditions in clauses (i), (iii), and (iv) of subparagraph (A); or (II) in the case of warrants, options, or rights issued to any director of such business development company who is not also an officer or employee of such company, or to any general partner in such company, the proposal to issue such securities satisfies the conditions in clauses (i) and (iii) of subparagraph (A), is authorized by the shareholders or partners of such company, and is approved by order of the Commission, upon application, on the basis that the terms of the proposal are fair and reasonable and do not involve overreaching of such company or its shareholders or partners;

        2. such securities are not transferable except for disposition by gift, will, or intestacy;

        3. no investment adviser of such business development company receives any compensation described in paragraph (1) of section 205 of title II of this Act except to the extent permitted by clause (A) or (B) of that section; and

        4. such business development company does not have a profit-sharing plan described in section 57(n) [15 USCS § 80a-56(n)]; and

      3. a business development company may issue warrants, options, or rights to subscribe to, convert to, or purchase voting securities not accompanied by securities, if--

        1. such warrants, options, or rights satisfy the conditions in clauses (i) and (iii) of subparagraph (A); and

        2. the proposal to issue such warrants, options, or rights is authorized by the shareholders or partners of such business development company, and such issuance is approved by the required majority (as defined in section 57(o) [15 USCS § 80a-56(o)]) of the directors of or general partners in such company on the basis that such issuance is in the best interests of the company and its shareholders or partners.

      Notwithstanding this paragraph, the amount of voting securities that would result from the exercise of all outstanding warrants, options, and rights at the time of issuance shall not exceed 25 per centum of the outstanding voting securities of the business development company, except that if the amount of voting securities that would result from the exercise of all outstanding warrants, options, and rights issued to such company's directors, officers, employees, and general partners pursuant to any executive compensation plan meeting the requirements of subparagraph (B) of this paragraph would exceed 15 per centum of the outstanding voting securities of such company, then the total amount of voting securities that would result from the exercise of all outstanding warrants, options, and rights at the time of issuance shall not exceed 20 per centum of the outstanding voting securities of such company.

    4. For purposes of measuring the asset coverage requirements of section 18(a) [15 USCS § 80a-18(a)], a senior security created by the guarantee by a business development company of indebtedness issued by another company shall be the amount of the maximum potential liability less the fair market value of the net unencumbered assets (plus the indebtedness which has been guaranteed) available in the borrowing company whose debts have been guaranteed, except that a guarantee issued by a business development company of indebtedness issued by a company which is a wholly-owned subsidiary of the business development company and is licensed as a small business investment company under the Small Business Investment Act of 1958 shall not be deemed to be a senior security of such business development company for purposes of section 18(a) [15 USCS § 80a-18(a)] if the amount of the indebtedness at the time of its issuance by the borrowing company is itself taken fully into account as a liability by such business development company, as if it were issued by such business development company, in determining whether such business development company, at that time, satisfies the asset coverage requirements of section 18(a) [15 USCS § 80a-18(a)].

  2. Compliance. A business development company shall comply with the provisions of this section at the time it becomes subject to sections 55 through 65 [15 USCS § § 80a-54-80a-64], as if it were issuing a security of each class which it has outstanding at such time.


Legislative History


Aug. 22, 1940, ch 686, Title I, § 61, as added Oct. 21, 1980, P.L. 96-477, Title I, § 105 in part, 94 Stat. 2286; Oct. 11, 1996, P.L. 104-290, Title V, § 505, 110 Stat. 3446.

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