BDC THAT IGNORED 1940 ACT LOSES REG E EXEMPTION
A venture capital company that elected to become a Business Development Company was sanctioned by the SEC for failing to observe several provisions of the Investment Company Act. Most significantly, the SEC suspended the firm’s ability to rely on Regulation E’s exemption from registration under the 1933 Act. The SEC charged the firm with violating the 1940 Act by issuing convertible securities for services and failing to (i) establish a Board majority of independent directors, (ii) adopt a compliance program, and (iii) obtain a fidelity bond.
OUR TAKE: While the BDC is an elegant vehicle to raise capital for venture investing, firms often overlook their obligations to comply with several applicable provisions of the Investment Company Act.