(Article from Registered Funds Alert, September 2017)
For more information, please visit the Registered Funds Alert Resource Center.
As noted in a recent Alert, earlier this summer the SEC expanded the range of issuers who can avail themselves of a confidential filing review process so that any issuer filing with the Division of Corporation Finance is entitled to confidential review by the SEC of the registration statement for an initial public offering, spin-off or follow-on offering. Notably, the SEC’s announcement does not appear to apply to filings made with the Division of Investment Management. As registered investment companies do not file with the Division of Corporation Finance, it appears that they cannot utilize the expanded confidential review process. In this Alert, we suggest that investment companies and business development companies (“BDCs”) be granted a similar confidential review process for registration statements related to new offerings, and that the Division of Investment Management also accept confidential submissions of exemptive applications tied to such offerings. Extending confidential review to investment companies would further the stated policy goal of SEC Chairman Jay Clayton to facilitate capital formation.
Some BDCs Already Can Utilize the Confidential Review Process
When Congress enacted the Jumpstart Our Business Startups Act (“JOBS Act”) in 2012, it allowed “emerging growth companies” (“EGCs”) to submit registration statements, and related revisions, on a nonpublic basis for confidential SEC review. The opportunity to obtain non-public SEC review quickly became one of the most popular capital access modifications in the JOBS Act. Prior to the SEC’s recent announcement, the confidential review process was limited to EGCs. The SEC has issued guidance that investment companies do not qualify as EGCs, but BDCs may qualify as EGCs provided they meet general EGC criteria, including having less than $1.07 billion in annual revenue. In determining that investment companies could not qualify as EGCs, the SEC focused on the fact that investment companies have different disclosure requirements than typical EGCs. BDCs, on the other hand, are subject to similar disclosure requirements under the Exchange Act as other issuers submitting filings with the Division of Corporation Finance, which supported the SEC’s determination that BDCs could qualify as EGCs.
The SEC did not cite the confidential review process in considering whether investment companies should be able to qualify as EGCs, which suggests that the SEC did not have a specific view on whether investment companies should be able to file confidentially. As the SEC is no longer limiting confidential filings to EGCs, there is no obvious rationale for continuing to exclude investment companies and non-EGC BDCs from this process, especially when they would benefit from confidential review in a similar manner as other issuers.
The Division of Investment Management Should Review Certain Exemptive Applications on a Confidential Basis
If the Division of Investment Management expands the confidential review process of registration statements to investment companies and BDCs, it should similarly allow for confidential review of exemptive applications related to the same offering.
Akin to other issuers, the registration statements of investment companies and BDCs can contain sensitive information about the issuer or its sponsor, and the prospect of immediate public disclosure of an offering can discourage an issuer from going to market or delay an offering. In some cases, the success and/or day-to-day operations of a new product or offering will require exemptive relief from the SEC, and the application for such relief could contain similar sensitive information. Given the amount of time that it can take to navigate the exemptive application process and receive an exemptive order, an exemptive application might be filed contemporaneously with a registration statement (for example, for co-investment relief). If the exemptive application does not receive confidential treatment, it could defeat the purpose of reviewing the registration statement on a confidential basis.
The Division of Investment Management Should Follow the Example of the Division of Corporation Finance
It is a logical step for the Division of Investment Management to follow the Division of Corporation Finance and embrace confidential filings for registration statements tied to new offerings. Under the confidential review process, an issuer can take the initial steps towards going public or beginning a follow-on offering without revealing sensitive information to the public (or competitors). This provides issuers with greater flexibility to plan their offerings to account for changes in market conditions, regulatory considerations or investor demand, allowing offerings to become public at a time the issuer believes is appropriate. Further, an issuer might not want to announce that it is pursuing entering the public markets until that offering is more certain to take place in order to keep its business and financial information confidential from copycat investors or other opportunistic actors. These benefits apply to investment companies and BDCs just as much as any other corporate issuers, and would be particularly helpful for investment companies and BDCs that may have novel investment strategies or offering structures.