On April 8, 2020, the Securities and Exchange Commission (SEC) voted 3-1 to adopt certain rule amendments (the Final Rule) that will modify and streamline the securities offering and communication processes for business development companies (BDCs) and other registered closed-end investment companies (CEFs), including interval funds and “tender offer” funds (collectively, the “affected funds”). The SEC adopted the Final Rule largely as it had been proposed in the initial rule proposal (which we discussed in a previous alert), with certain exceptions. This alert will summarize the significant aspects of the Final Rule and provide a reference chart with a comparison of the Final Rule to what was initially proposed.
Scope and Summary of the Final Rule
The Final Rule applies to both listed and unlisted affected funds and will generally treat BDCs and registered CEFs consistently. Some aspects of the Final Rule, including rule provisions that will allow the use of a short-form shelf registration statement, will only apply to affected funds that are current and timely in their reporting and have at least $75 million in public float (Seasoned Funds). (Since most interval funds and tender offer funds do not list their securities on an exchange and do not have a public float, these funds would not be able to file a short-form registration statement that omits information required to be in an issuer’s prospectus when offering securities.) Additionally, certain aspects of the Final Rule apply only to Seasoned Funds that have at least $700 million in public float.
The Final Rule, among other things, will:
- streamline the registration process to allow eligible listed affected funds, generally Seasoned Funds, to use a short-form shelf registration statement to sell securities “off the shelf” more quickly.
- permit any continuously offered affected fund to make certain changes to their registration statements on an immediately-effective basis or on an automatically effective basis in reliance on Rule 486 of the Securities Act of 1933, as amended (Securities Act).
- allow affected funds that have at least $700 million in public float to qualify as well-known seasoned issuers (WKSIs) under Rule 405.
- permit affected funds to satisfy final prospectus delivery requirements using the same method as operating companies.
- allow affected funds to use certain communication rules currently available to operating companies.
- tailor the disclosure and regulatory framework for affected funds in light of the amendments.
The Final Rule also includes structured data requirements and new annual report disclosure requirements for affected funds.
Automatic or Immediate Effectiveness for Filings by Tender Offer Funds and BDCs
Importantly, the Final Rule will allow registered “tender offer funds” and unlisted BDCs to make certain registration statement filings that become effective either immediately upon filing or automatically after 60 days. Previously, Rule 486 under the Securities Act only permitted interval funds to file post-effective amendments and certain registration statements that were either immediately effective upon filing under Rule 486(b) or automatically effective 60 days after filing under Rule 486(a). The Final Rule amends Rule 486 to allow tender offer funds and unlisted BDCs, which conduct continuous offerings under Rule 415(a)(1)(ix), to rely on Rule 486. In addition, the Final Rule amends Rule 486 to allow registration statements filed every three years under Rule 415(a)(5) and (a)(6) to be immediately effective upon filing if filed to comply with Rule 415 or Rule 486(b). If the registration statement would not qualify for Rule 486(b), the filing could be automatically effective 60 days after filing under Rule 486(a). As a result, the Final Rule will promote consistent treatment across unlisted affected funds’ filings and allow tender offer funds and unlisted BDCs to more efficiently maintain effective registration statements while engaging in continuous offerings.
New Registration Payment Process for Interval Funds and Certain Exchange-Traded Products
In addition, the Final Rule adopts a modernized process that allows interval funds and certain exchange-traded products to pay securities registration fees using the same method that mutual funds and exchange-traded funds (ETFs) currently use. Prior to the adoption of the Final Rule, interval funds were required under the Securities Act to pay a registration fee to the SEC at the time of filing a registration statement. The Final Rule permits interval funds and certain exchange-traded products to register an indefinite amount of securities upon their registration statements’ effectiveness and removes the requirement to pay a registration fee for unsold shares in advance. Under the Final Rule, interval funds will pay registration fees based on their net issuance of shares during the year, no later than 90 days after a fund’s fiscal year end. These funds will be required to pay the registration fees and file information about the computation of their registration fee and other information on Form 24F-2 no later than 90 days after a fund’s fiscal year end. This new process will relieve interval fund sponsors of the burden of paying the upfront registration fee on the proposed maximum aggregate offering price and instead, will spread the costs out over time as the fund’s shares are actually sold.
Comparison of Final Rule to Initial Rule Proposal
For reference, the chart below provides a detailed comparison of the proposed reforms against the Final Rule. Generally, the Final Rule adopts the offering reforms as originally proposed. Notably, however, the Final Rule does not include the requirement for CEFs to file Form 8-Ks.
|Shelf Offering Process and the New Short-Form Registration Statement
The proposed rule amendments would permit affected funds:
- to file a short-form registration statement on Form N-2 that will function like a Form S-3 registration statement.
- to rely on SEC Rule 430B to omit information from the base prospectus and to use the process operating companies follow to file prospectus supplements.
- to include additional information in periodic reports to update their registration statements, provided that this information is identified as being included for this purpose.
The Final Rule adopts, as proposed, the amendments related to the shelf offering process and the new short-form registration statement.
|Ability to Qualify for WKSI Status
The proposed rule amendments would:
- amend SEC Rule 405 to allow eligible BDCs and registered investment companies to qualify as a WKSI.
- add a parallel reference to the registrant requirements of the proposed short-form registration instruction.
- amend the definition of “ineligible issuer” to state a registered CEF would be ineligible if it has failed to file all reports and materials required to be filed under section 30 of the 1940 Act during the preceding 12 months.
- amend the definition of “ineligible issuer” to give effect to the current anti-fraud prong in that definition in the context of affected funds and propose a parallel anti-fraud prong for affected funds.
The Final Rule adopts, as proposed, the amendments related to an affected funds’ ability to qualify for WKSI status.
| Prospectus Delivery Reforms
The proposed rule amendments would allow affected funds to satisfy their final prospectus delivery obligations by filing their final prospectuses with the SEC, which is consistent with the alternative delivery method used by operating companies.
The Final Rule adopts the prospectus delivery reforms, as proposed.
|Offering Communications Reforms
The proposed rule amendments would permit affected funds to:
- use certain communications prescribed by SEC Rule 134 to publish factual information about the issuer or the offering, including “tombstone ads.”
- rely on SEC Rule 163A, which provides issuers a bright-line time period, ending 30 days prior to filing a registration statement, during which they may communicate without risk of violating the “gun-jumping” provisions.
- rely on SEC Rule 168 if they are reporting companies to publish or disseminate regularly released factual business information and forward-looking information at any time, including around the time of a registered offering.
- rely on SEC Rules 164 and 433 to use a “free writing prospectus.”
- engage at any time if they are WKSIs in oral and written communications, including use at any time of a free writing prospectus, subject to the same conditions applicable to other WKSIs.
Affected funds could take advantage of the additional flexibility of the proposed rule amendments or continue to rely on SEC Rule 482 and other rules currently applicable to investment company communications.
The Final Rule adopts the offering communications reforms, as proposed.
|Broker-Dealer Research Reports
The proposed rule amendments would amend SEC Rule 138 to include parallel references to a registration statement filed on Form N-2 and to the reports that registered CEFs are required to file, which would allow affected funds to publish or distribute research about the issuer’s fixed income securities if it publishes or distributes that research in the regular course of business.
The Final Rule adopts the amendments to SEC Rule 138, as proposed.
| Rule 418 Supplemental Information
The rule amendments propose to amend SEC Rule 418(a)(3) to add parallel references to registrants that are eligible to file a short-form registration statement on Form N-2. The proposed rule amendment would exempt affected funds from being prepared to furnish supplemental information to the SEC promptly upon request.
As proposed, the Final Rule adopts amendments to Rule 418 to exempt affected funds eligible to file a short-form registration statement on Form N-2 from the requirement to furnish certain supplemental information under the rule.
| New Method for Interval Funds to Pay Registration Fees
The rule amendments propose a modernized approach that would amend SEC Rules 23c-3 and 24f-2 to permit interval funds to pay securities registration fees using the same method as mutual funds and ETFs. Thus, interval funds could pay registration fees based on their net issuance of shares, no later than 90 days after the fund’s fiscal year end rather than in advance.
The Final Rule adopts the amendments, as proposed, to allow interval funds to pay securities registration fees using the same method that mutual funds and ETFs use.
|Structured Data Requirements
The rule amendments proposed to require that:
- BDCs, like operating companies, submit financial statement information using Inline XBRL format.
- registered CEFs and BDCs include structured cover page information in their registration statements on Form N-2 using Inline XBRL format.
- certain information required in an affected fund’s prospectus be tagged using Inline XBRL format.
- filings on Form 24F-2 be submitted in XML format.
The Final Rule adopts, substantially as proposed, the structured data requirements for registered CEFs and BDCs.
|Periodic Reporting Requirements
The rule amendments proposed to require funds filing a short-form registration statement on Form N-2 to include key information in their annual reports that they currently disclose in their prospectuses, including:
- The Fee and Expense Table;
- Share Price Data.
- the Senior Securities Table.
Additionally, the rule amendments proposed to require:
- registered CEFs to provide management’s discussion of fund performance in their annual reports to shareholders.
- BDCs to provide financial highlights in their registration statements and annual reports.
- affected funds filing a short-form registration statement on Form N-2 to disclose material unresolved staff comments.
The Final Rule adopts, as proposed, the periodic reporting requirements for affected funds.
|Current Reporting Requirements
The proposed rule amendments would require registered CEFs to report information on Form 8-K. The rule amendments also proposed to amend Form 8-K to:
- add new reporting items for affected funds on (i) material changes to investment objectives or policies, and (ii) material write-downs of significant investments.
- tailor the existing reporting requirements and instructions to affected funds.
The Final Rule does not adopt the proposed amendments to require registered CEFs to report information on Form 8-K.
|Incorporation by Reference Changes
The proposed rule amendments would allow affected funds to incorporate by reference the information required under Item 13 of Schedule 14A, including financial statements and other information for proxy statements containing specific proposals.
In addition, the proposed rule amendments would remove the requirement that a fund deliver to new investors information that it has incorporated by reference into the prospectus or SAI, and instead require the fund to make its prospectus, SAI and the incorporated materials readily available and accessible on a website.
Finally, the proposed rule amendments would streamline Form N-2’s current provisions regarding disclosure requirements for incorporation by reference to mirror the disclosure requirements of Form S-3.
As proposed, the Final Rule adopts the amendments related to incorporation by reference in Schedule 14A, in a fund’s prospectus or SAI when delivering new investors information and to short-form registration statements filed on Form N-2.
Effective and Compliance Dates
The Final Rule will become effective on August 1, 2020. The SEC will adopt certain compliance dates that provide a transition period for certain new requirements after the effective date of the Final Rule. The August 1, 2020 effective date will apply to all aspects of the Final Rule, except for the following:
|Amendments to Rules 23c-3, 24f-2 and Form 24F-2
August 1, 2021
|Amendments to Rules 465 and 457 and Forms S-1, S-3, F-1 and F-3
August 1, 2021
| Structured Data Requirements
August 1, 2021
(An annual report filed by a registered CEF one year or more after the effective date of the final rule will be required to include the MDFP disclosures.)
| Structured Data Requirements (Financial Statement, Cover Page, and Prospectus Information)
All affected funds that are eligible to file a short-form registration statement will be required to comply with those provisions 24 months after the effective date, or August 1, 2022. All other affected funds
Practice Points and Tips
The Final Rule generally adopts the rule amendments proposed a year ago by the SEC, except the requirement for registered CEFs to file Form 8-K. The amendments provide welcome improvements that will streamline and modernize the offering and communication processes for affected funds. While the Final Rule will increase certain periodic disclosure requirements, overall the Final Rule promotes efficiency and consistent treatment across affected funds. The ability of tender offer funds and unlisted BDCs to file automatically effective registration statements will increase legal and regulatory efficiency and facilitate the ability of these funds to raise capital without delay. Advisers and Boards to the affected funds should consider the impact of the Final Rule on the affected funds that they manage and oversee. For more information on the application of the Final Rule or investment company regulatory compliance, please feel free to call or e-mail your contact within the Investment Management Group.