b'Tender Offer FundsBusiness Development Companies (BDCs)A tender offer fund is another continuously offeredBDCs are closed-end investment companies regulated closed-end fund registered under the 1940 Act. A tenderunder the 1940 Act, designed to provide capital to small- offer fund conducts periodic tender offers, most oftenand mid-sized U.S. companies. BDCs invest primarily quarterly, at the discretion of a funds board pursuant toin small- and middle-market companies in the United Rule 13e-4 under the Exchange Act. Tender offer fundsStates. As a result of their special status under the 1940 have flexibility to value their assets periodically (daily,Act, BDCs are exempt from many of the regulatory weekly, or monthly). This discretion allows these fundsrequirements imposed by the 1940 Act on traditional to provide controlled liquidity to investors. Shares areinvestment companies and generally benefit from pass-typically repurchased at or near NAV, and the processthrough tax treatment (i.e., the BDC is not taxed, and allows managers to control liquidity and manage theincome and expenses are passed through to the owners funds assets more effectively. of the BDC). Given the limited access to, and availability of, financing from traditional bank lenders, BDCs Tender offers provide more flexibility for fund managershave played an important role as a source of capital in terms of frequency, amount and timing of shareand liquidity for small- and mid-sized companies that repurchases than interval funds, and these funds haveotherwise may be unable to obtain financing or do so no liquidity requirements. One common reason forat attractive rates.commencing a tender offer presents itself when the funds shares are trading at a significant discount to theSection 2(a)(48) of the 1940 Act defines a BDC as funds NAV. The fund can try to reduce the NAV discounta domestic closed-end company that operates for by offering to buy back shares and allow investors tothe purpose of making investments in the securities earn fair value returns on their shares. These purchasesspecified in Section 55(a) of the 1940 Act and that makes may improve the market price of the funds shares. Ruleavailable significant managerial assistance to the issuers 13e-4 of the Exchange Act sets forth the parametersof those types of securities. Section 54(a) of the 1940 Act for commencing, terminating, filing, disseminatingprovides that a company may become a BDC by electing and generally conducting such a tender offer. Atto be subject to Sections 55 through 65 of the 1940 Act. tender offer commencement, the tender offer fund willThe 1940 Act requires that a BDC maintain at least 70% of notify shareholders of the repurchase offer, share theits investments in eligible assets, before being permitted Schedule TO, deliver the Letter of Transmittal, and fileto invest in non-eligible assets. BDCs are subject to all repurchase offer documents with the Securities andcertain other ongoing requirements under the 1940 Exchange Commission (the SEC). Schedule TO is theAct. For example, under Section 56(a) of the 1940 Act, tender offer statement of the fund and includes, typicallythe majority of directors of a BDC must be disinterested by exhibit, the Offer to Purchase.persons. Section 57 of the 1940 Act prohibits certain transactions between a BDC and its related persons, Generally, Section 205 of the Investment Advisers Act ofabsent approval by the SEC or, in some cases, its board 1940 (the Advisers Act) prohibits advisers from chargingof directors. Rule 17j-1 under the 1940 Act requires the performance fees. Closed-end funds may chargeadoption of a written code of ethics applicable to fund performance fees if all shareholders of the fund arepersonnel and outside advisers who are involved in qualified clients under Rule 205-3 of the Advisers Act.a BDCs investment activities. BDCs are also required Closed-end funds are also permitted to charge a fulcrumto implement compliance procedures under the fee, which is a performance fee that adjusts up or down1940 Act, which must be approved by a majority of based on how the fund performs against a specificthe BDCs board and must include appointment of a benchmark. When interval and tender offer funds followchief compliance officer. Section 31 of the 1940 Act a fund-of-funds strategy of investing assets in othersets forth the recordkeeping requirements for a BDC. privately offered investment vehicles, the underlyingThe 1940 Act imposes a variety of requirements on funds are permitted to charge performance fees.BDCs. A fair number of these are focused on boards of directors; related party transactions; capital structure Learn more about interval and tender offer funds atrequirements; advisory agreements; fidelity bonds; and Whats the Deal. investment restrictions.Mayer Brown|Introduction 4'