15 U.S.C. § 80a–60 — Capital structure

(a) Exceptions for business development company. Business development companies (BDCs) generally follow section 80a-18, the asset-coverage rule for closed-end investment companies, but with several changes. (1) Normally, a BDC must keep 200 percent asset coverage under section 80a-18(a)(1)(A) and (B). (2) That requirement drops to 150 percent — for both section 80a-18(a)(1)(A)/(B) and 80a-18(a)(2)(A)/(B) — if the BDC meets four conditions: (A) within 5 business days after the lower requirement is approved (see (D)), the BDC discloses the approval and its effective date, both in a filing under section 78m(a) or 78o(d) and in a notice on its website; (B) each of its periodic filings discloses the amount of its outstanding senior securities, its current asset coverage percentage, that it approved the lower requirement, and when that approval took effect; (C) if the BDC has common stock, each periodic filing also explains, in plain terms, the amount of senior securities outstanding and the risks they carry; and (D) the company's board or partners approve the change — either (i)(I) by a "required majority" vote under section 80a-56(o), taking effect one year later, or (II) by more than 50 percent of votes cast at a special or annual meeting, taking effect the next day — and, if the company isn't listed on a national exchange, it must also offer every shareholder as of the approval date a chance to sell back their shares (possibly through a tender offer), buying back 25 percent of them in each of the following four quarters. (3) Despite section 80a-18(c), a BDC may issue more than one class of debt-type senior security. (4) Despite section 80a-18(d), a BDC may issue certain warrants, options, or rights to buy its voting stock: (A) Bundled with other securities, if the warrants expire within 10 years, aren't separately tradable unless the whole bundle was sold to the public, are priced at or above current market value (or net asset value if there's no market value), and are approved by shareholders and by a required majority of directors or general partners as being in the company's best interest. (B) As part of an executive compensation plan for directors, officers, employees, and general partners, if — for officers and employees, the same expiration, transferability, and pricing rules as (A) apply; for outside directors and general partners, the expiration and pricing rules apply, plus shareholder approval and an SEC order finding the terms fair; the warrants can't be transferred except by gift, will, or inheritance; the BDC's investment adviser gets no extra compensation for this beyond what section 80b-5(b)(1) or (2) allows; and the BDC has no profit-sharing plan under section 80a-56(n). (C) Unbundled from other securities, if they meet the same expiration and pricing rules as (A), and shareholders and a required majority of directors or general partners approve them as being in the company's best interest. Across all of these, the voting stock that could come from exercising every outstanding warrant, option, and right can't exceed 25 percent of the BDC's outstanding voting stock. But if the executive-compensation-plan warrants alone would exceed 15 percent, then the overall cap drops to 20 percent. (5) When measuring asset coverage under section 80a-18(a), a BDC's guarantee of another company's debt counts as a senior security equal to the guarantee's maximum potential liability, minus the fair market value of the borrower's unencumbered net assets (plus any debt already counted as guaranteed). Exception: a guarantee of debt issued by a wholly-owned subsidiary that is a licensed small business investment company doesn't count as a senior security of the BDC, as long as the BDC already counts that debt fully as its own liability when checking its own asset coverage. (b) Compliance. A BDC must follow this section starting the moment it becomes subject to sections 80a-54 through 80a-64, treating itself as though it were issuing, at that moment, each class of security it already has outstanding.