Growth Strategies

SEC Rule Aids Small-Biz Capital

So-called business development companies now can make investments in more small firms.
Stephen TaubMay 16, 2008

The Securities and Exchange Commission has adopted a rule amendment to increase the availability of capital to smaller companies that may not have ready access to the public capital markets or other forms of conventional financing.

With the rule change, more small, financially troubled businesses will have a better chance of 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, slated to take effect in July, changes the definition of so-called eligible portfolio companies, smaller businesses 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.

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The SEC estimates that 7,711 companies, representing 78 percent of all public domestic operating companies, qualify as eligible portfolio companies under the amended rule. This is an increase from 6,062 companies, or 61.3 percent, that qualified under the old rule.

In 1980, the SEC explains, Congress established business development companies (BDCs), a type of publicly traded investment company, to help make capital more readily available to small, developing, and financially troubled businesses. To accomplish this, the Investment Company Act generally prohibits a BDC from making any investment unless, at the time of the investment, at least 70 percent of its total assets are invested in securities of certain specific types of companies, including eligible portfolio companies.

The commission amended the rule to expand the definition of eligible portfolio company to include any domestic operating company with securities listed on a national securities exchange, if the company has a market capitalization of less than $250 million.

In 2006 the SEC adopted new rules to include in the definition of eligible portfolio company all private companies and public companies whose securities are not listed on a national securities exchange.

“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 a statement. It explained that it chose not to adopt a public float standard since this kind of threshold is not present in other commission rules that incorporate such a standard.

“Small businesses are the backbone of the U.S. economy,” SEC chairman Christopher Cox added. “Today’s action will help retail investors broaden their participation in small business financing. That will improve opportunities for investors and small businesses alike and contribute directly to the health of our nation’s capital markets.”