Why Every Business Development Company Should Consider Registering Under the 1940 Act
If you’re running a business development company (BDC), you’ve probably heard about the Investment Company Act of 1940. This act, also known as the ‘1940 Act,’ governs investment companies, and requires them to register with the Securities and Exchange Commission (SEC). While BDCs are technically exempt from this requirement, there are compelling reasons why you should consider registering anyway.
What is the 1940 Act?
The Investment Company Act of 1940 was enacted to regulate investment companies, or companies that pool money from investors and invest it on their behalf. The act sets guidelines for how these companies should operate, and requires them to register with the SEC. The purpose of the act is to protect investors from fraud and other abuses that can arise when their money is pooled together.
What is a BDC?
A Business Development Company, or BDC, is a type of investment company that focuses on investing in small and medium-sized businesses. BDCs are required to meet certain criteria, such as having at least 70% of their assets invested in eligible assets, and distributing at least 90% of their taxable income to shareholders. BDCs can provide valuable capital to these businesses, and in turn, generate returns for their own shareholders.
Why Register Under the 1940 Act?
While BDCs are technically exempt from registering under the 1940 Act, there are compelling reasons why you should consider doing so anyway.
First, registering under the act can provide your company with added credibility in the eyes of investors. By registering with the SEC, you demonstrate that your company is committed to transparency, accountability, and adhering to regulatory standards.
Second, registering can open up new avenues for financing. Registered BDCs can access public capital markets through the sale of securities, such as bonds or preferred stock. This can provide additional sources of capital beyond what is available through private placements or bank loans.
Finally, registering can provide your company with additional regulatory oversight and guidance. By complying with the regulations set forth in the act, you can avoid potential legal issues and ensure that your company is operating in a way that is compliant with industry standards.
Conclusion
In summary, while BDCs are exempt from registering under the 1940 Act, there are compelling reasons why you should consider doing so anyway. Registration can provide added credibility, access to new financing opportunities, and additional regulatory oversight and guidance. As a business development company, registering under the 1940 Act can help ensure your company is well-positioned for success both now and in the future.
