Home » Securities Law Updates » New Statutes, Regulations and Rules » Current Summary
Securities Law Summary
SEC Issues Expanded Definition of “Eligible Portfolio Company” Under the Investment Company Act of 1940
Definition of Eligible Portfolio Company under the Investment Company Act of 1940
(Release No. IC-28266; File No. S7-37-04), 17 CFR Part 270, 05/15/2008
Basic Information
The Securities and Exchange Commission (“SEC”) issued an amendment to Rule 2a-46 [17 CFR 270.2a-46] under the Investment Company Act of 1940 [15 U.S.C. 80a]. Specifically, the amendment expanded the definition of “eligible portfolio company” to include certain companies that list their securities on a national securities exchange. The new release sought to more closely align the definition of eligible portfolio company, and the investment activities of business development companies (“BDCs”), with the purpose that Congress intended. The effective date of this new issuance is July 21, 2008.
By way of background, a BDC is a closed-end investment company that Congress established for the purpose of making capital more readily available to certain types of companies. Under the Investment Company Act (“ICA”), a BDC must invest at least 70 percent of its assets in “eligible portfolio company” securities and certain other securities. Rule 2a-46 (Oct. 25, 2006) [71 FR 64086 (Oct. 31, 2006)] defines the term eligible portfolio company to include any company whose securities are not listed on a national securities exchange (“Exchange”).
When the SEC first issued Rule 2a-46 in 2006, the agency requested comment on whether to further expand the definition to include Exchange-listed companies that have (i) less than $75 million in public float or (ii) either less than $150 million in market capitalization or less than $250 million in market capitalization. In the end, the SEC decided to amend Rule 2a-46 to expand the definition of eligible portfolio company to include Exchange-listed companies that have less than $250 million in market capitalization.
This $250 million market cap is calculated using the price at which the company’s common equity is last sold, or the average of the bid and asked prices of the company’s common equity, in the principal market for such common equity on any day in the 60-day period immediately before the BDC’s acquisition of its securities. “We believe that the new rule is consistent with the public interest, the protection of investors and the purposes fairly intended by the policy and provisions of the Investment Company Act, “the SEC said in its new release (Release, p. 9).
The SEC believed that this new standard would be consistent with legislative intent, and would broaden the definition of eligible portfolio company. It estimated that, based on January 31, 2008 data, 6,062 companies, representing 61.3% (6,062/9,883) of all public domestic operating companies, qualify as eligible portfolio companies under Rule 2a-46(a). In addition, there are about 1,649 Exchange-listed companies that qualify as eligible portfolio companies under Rule 2a-46(b).49. In effect, there would be about 7,711 companies, representing 78% (7,711/9,883) of all public domestic operating companies which qualify as eligible portfolio companies under Rule 2a-46 as amended.
View a PDF of the rule.Service
Link to this article · 
Send via E-mail · 
Printable Version (opens in new window)
