November 02, 2020

On point. – Shelf Offerings by Business Development Companies

Business development companies (“BDCs”) are companies that invest primarily in the securities of private and smaller public companies and that elect to be registered under the Investment Company Act of 1940, as amended (the “1940 Act”). Historically, BDCs have faced challenges raising capital due to regulatory constraints imposed by the 1940 Act. BDCs generally cannot issue and sell shares of their common stock at a price below their net asset value (“NAV”) unless the issuing BDC receives prior approval from its shareholders to do so. The common stock of BDCs frequently trades below NAV. Further, the 1940 Act imposes a number of additional restrictions on the issuance of debt, preferred and other senior securities by BDCs. In particular, the issuance of a debt, preferred or senior security typically requires the issuing BDC to maintain an asset coverage of at least 200% (or 150% for electing BDCs), generally limiting the BDC’s ability to incur leverage.

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