Growth Strategies

SEC Plans to Boost Small-Business Capital Formation

The commission wants to widen access to capital for exchange-listed companies.
Sarah JohnsonMay 8, 2008

The Securities and Exchange Commission will consider a proposal its staff says would boost access to capital for small companies that are either developing or struggling.

The rule amendment would give more small, financially troubled businesses a better chance at getting investment dollars. As it is, some of them have been deprived of financing from a group of companies that have investment restrictions under SEC rules.

The new rule would change the definition of so-called “eligible portfolio companies,” smaller business that until now have included private and public companies not listed on a national exchange. The amendment would bring some exchange-listed companies into the fold, which could affect up to 1,500 businesses, based on 2006 SEC data. The number of qualifying companies could increase by 11 percent to 16 percent, depending on the details of the SEC proposal.

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Under the Investment Company Act, “business development companies” (BDCs) are required to have at least 70 percent of their investments in certain types of assets, including securities of eligible portfolio companies. BDCs, estimated to have a total of more than $20 billion in market capitalization, were created by law in 1980 to provide small and private companies with alternative means of capital.

The SEC contends that the 10-year-old definition of an eligible portfolio company has limited the number of businesses in which these publicly traded investment companies could put their money. The proposal would broaden the definition and “was designed to facilitate small business capital formation,” the SEC said in a press release.

The proposal has already gone though a public-comment period and awaits approval by the commissioners. Currently, the SEC has only three commissioners, including chairman Christopher Cox and Paul Atkins, who announced earlier this week that he will leave after his second term ends in June.

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