SEC Broadens Opportunities for Small Business Financing

The Securities and Exchange Commission on May 15, 2008 broadened small business financing opportunities by adopting a rule amendment under the Investment Company Act to increase the availability of capital to certain smaller companies that may not have ready access to the public capital markets or other forms of conventional financing.

Congress in 1980 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 purpose, 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 has amended Rule 2a-46 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.

The Investment Company Act defines eligible portfolio company to include a domestic operating company that, among other things, does not have any class of securities that are marginable under rules issued by the Federal Reserve Board. In 1998, for reasons unrelated to small business capital formation, the Federal Reserve Board amended its margin rules to include all publicly traded equity securities and most debt securities. These 1998 amendments had the unintended consequence of substantially reducing the number of companies that met the definition of eligible portfolio company.

In 2006, the Commission adopted new rules under the Investment Company Act to address the effect of the Federal Reserve Board's 1998 amendments on the definition of eligible portfolio company. The Commission adopted Rule 2a 46 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. This is the rule that the Commission has amended on May 15, 2008. The Commission in 2006 also adopted Rule 55a-1 to conditionally permit a BDC to include in its 70 percent basket any follow on investments in a company that met the new definition of eligible portfolio company at the time of the BDC's initial investment in it. The amendment to Rule 2a-46 will become effective in July 2008, 60 days after its publication in the Federal Register.

The Securities and Exchange Commission on May 15, 2008 broadened small business financing opportunities by adopting a rule amendment under the Investment Company Act to increase the availability of capital to certain smaller companies that may not have ready access to the public capital markets or other forms of conventional financing.

Congress in 1980 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 purpose, 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 has amended Rule 2a-46 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.

The Investment Company Act defines eligible portfolio company to include a domestic operating company that, among other things, does not have any class of securities that are marginable under rules issued by the Federal Reserve Board. In 1998, for reasons unrelated to small business capital formation, the Federal Reserve Board amended its margin rules to include all publicly traded equity securities and most debt securities. These 1998 amendments had the unintended consequence of substantially reducing the number of companies that met the definition of eligible portfolio company.

In 2006, the Commission adopted new rules under the Investment Company Act to address the effect of the Federal Reserve Board's 1998 amendments on the definition of eligible portfolio company. The Commission adopted Rule 2a 46 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. This is the rule that the Commission has amended on May 15, 2008. The Commission in 2006 also adopted Rule 55a-1 to conditionally permit a BDC to include in its 70 percent basket any follow on investments in a company that met the new definition of eligible portfolio company at the time of the BDC's initial investment in it.

The amendment to Rule 2a-46 will become effective in July 2008, 60 days after its publication in the Federal Register.

Mergers and Acquisitions News

SEC Proposes New Way for Investors to Get Financial Information on Companies

The Securities and Exchange Commission today voted unanimously to formally propose using new technology to get important information to investors faster, more reliably, and at a lower cost.

At the center of the SEC proposal is "interactive data" - computer "tags" similar in function to bar codes used to identify groceries and shipped packages. The interactive data tags uniquely identify individual items in a company's financial statement so they can be easily searched on the Internet, downloaded into spreadsheets, reorganized in databases, and put to any number of other comparative and analytical uses by investors, analysts, and journalists.

The proposed rule would require all U.S. companies to provide financial information using interactive data beginning next year for the largest companies, and within three years for all public companies.

Since 2005, companies have voluntarily submitted to the SEC financial information in interactive data format. The rules proposed today would require companies to provide this information according to a phase-in schedule.

The SEC's proposed schedule would require companies using U.S. Generally Accepted Accounting Principles with a worldwide public float over $5 billion (approximately the 500 largest companies) to make financial disclosures using interactive data formatted in eXtensible Business Reporting Language (XBRL) for fiscal periods ending in late 2008. If adopted, the first interactive data provided under the new rules would be made public in early 2009. The remaining companies using U.S. GAAP would provide this disclosure over the following two years. Companies using International Financial Reporting Standards as issued by the International Accounting Standards Board would provide this disclosure for fiscal periods ending in late 2010. The disclosure would be provided as additional exhibits to annual and quarterly reports and registration statements. Companies also would be required to post this information on their websites.

The required tagged disclosures would include companies' primary financial statements, notes, and financial statement schedules. Initially, companies would tag notes and schedules as blocks of text, and a year later, they would provide tags for the details within the notes and schedules.

Companies filing under the proposed rule that use U.S. GAAP will use upgraded data tags issued April 28, 2008, by XBRL US, Inc. that were developed based on U.S. GAAP and on the review of hundreds of actual SEC filings. The SEC's EDGAR system will accept test filings using a February 11 version of these tags later this month, with the final April 28 version of the tags becoming usable in June. In addition, an interim system is expected to be announced shortly that will enable companies immediately to provide interactive data submissions to the SEC using the April 28 version of the tags.

The SEC has had an interactive data pilot program for three years, beginning in 2005. It covered the financial statements of corporate filers. In addition, the SEC began an interactive data filing program for mutual fund risk return information in August 2007. Also last year, the SEC created an online database tagging executive compensation data for 500 large companies. Filers seeking a head start on data tagging are invited to formally join these SEC voluntary filing programs or informally practice with the new data tags.