# Securities Offering Reform for Closed-End Investment Companies > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2019-05776 ## Record - **Collection:** Federal Register - **Document type:** Proposed Rule - **Published:** April 10, 2019 - **Citation:** 84 FR 14448 ## Text SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 229, 230, 232, 239, 240, 243, 249, 270, and 274 [Release Nos. 33-10619; 34-85382; IC-33427; File No. S7-03-19] RIN 3235-AM31 Securities Offering Reform for Closed-End Investment Companies AGENCY: Securities and Exchange Commission. ACTION: Proposed rule. SUMMARY: The Securities and Exchange Commission (the “Commission”) is proposing rules that would modify the registration, communications, and offering processes for business development companies (“BDCs”) and other closed-end investment companies under the Securities Act of 1933. As directed by Congress, we are proposing rules that would allow these investment companies to use the securities offering rules that are already available to operating companies. The proposed rules would extend to closed-end investment companies offering reforms currently available to operating company issuers by expanding the definition of “well-known seasoned issuer” to allow these investment companies to qualify; streamlining the registration process for these investment companies, including the process for shelf registration; permitting these investment companies to satisfy their final prospectus delivery requirements by filing the prospectus with the Commission; and permitting additional communications by and about these investment companies during a registered public offering. In addition, the proposed rules would include amendments to our rules and forms intended to tailor the disclosure and regulatory framework to these investment companies. The proposed rules also include a modernized approach to securities registration fee payment that would require closed-end investment companies that operate as “interval funds” to pay securities registration fees using the same method that mutual funds use today. Lastly, we are proposing certain structured data reporting requirements, including the use of structured data format for filings on the form providing annual notice of securities sold pursuant to the rule under the Investment Company Act of 1940 that prescribes the method by which certain investment companies (including mutual funds) calculate and pay registration fees. DATES: Comments should be received by June 10, 2019. ADDRESSES: Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission's internet comment forms ( http://www.sec.gov/rules/proposed.shtml ); or • Send an email to rule-comments@sec.gov. Please include File Number S7-03-19 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, U.S. Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090. All submissions should refer to File Number S7-03-19. This file number should be included on the subject line if email is used. To help us process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's website ( http://www.sec.gov/rules/proposed.shtml ). Comments also are available for website viewing and printing in the Commission's Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. Studies, memoranda, or other substantive items may be added by the Commission or staff to the comment file during this rulemaking. A notification of the inclusion in the comment file of any such materials will be made available on the Commission's website. To ensure direct electronic receipt of such notifications, sign up through the “Stay Connected” option at www.sec.gov to receive notifications by email. FOR FURTHER INFORMATION CONTACT: Asaf Barouk, Attorney-Adviser; J. Matthew DeLesDernier, Senior Counsel; Sean Harrison, Senior Counsel; Amy Miller, Senior Counsel; Angela Mokodean, Senior Counsel; Jacob D. Krawitz, Branch Chief; David J. Marcinkus, Branch Chief; Amanda Hollander Wagner, Branch Chief; or Brian McLaughlin Johnson, Assistant Director, at (202) 551-6792, Investment Company Regulation Office; Christian T. Sandoe, Assistant Director or Michael J. Spratt, Assistant Director, at (202) 551-6921, Disclosure Review and Accounting Office; Division of Investment Management; U.S. Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090. SUPPLEMENTARY INFORMATION: The Commission is proposing for public comment amendments to: 1 15 U.S.C. 77a et seq. 2 15 U.S.C. 78a et seq. 3 15 U.S.C. 80a-1 et seq. Commission reference CFR citation (17 CFR) Securities Act of 1933 (“Securities Act ”) 1 Rule 134 § 230.134. Rule 138 § 230.138. Rule 139 § 230.139. Rule 156 § 230.156. Rule 163 § 230.163. Rule 163A § 230.163A. Rule 164 § 230.164. Rule 168 § 230.168. Rule 169 § 230.169. Rule 172 § 230.172. Rule 173 § 230.173. Rule 405 § 230.405. Rule 415 § 230.415. Rule 418 § 230.418. Rule 424 § 230.424. Rule 430B § 230.430B. Rule 433 § 230.433. Rule 462 § 230.462. Rule 497 § 230.497. Securities Exchange Act of 1934 (“Exchange Act ”) 2 Rule 13a-11 § 240.13a-11. Rule 15d-11 § 240.15d-11. Form 8-K § 249.308. Investment Company Act of 1940 (“Investment Company Act ”) 3 Rule 8b-16 § 270.8b-16. Rule 23c-3 § 270.23c-3. Rule 24f-2 § 270.24f-2. Form 24F-2 § 274.24. Securities Act and Investment Company Act Form N-2 § 239.14 and § 274.11a-1. Table of Contents I. Introduction II. Discussion A. Scope of Closed-End Investment Companies Affected by the Proposed Rules B. Registration Process 1. Current Shelf Offering Process for Affected Funds 2. Proposed Amendments to the Registration Process for Affected Funds C. Well-Known Seasoned Issuer Status D. Final Prospectus Delivery Reforms E. Communications Reforms 1. Offering Communications 2. Broker-Dealer Research Reports F. Other Proposed Rule Amendments 1. Rule 418 Supplemental Information 2. Amendments to Incorporation by Reference Into Proxy Statements G. New Registration Fee Payment Method for Interval Funds H. Disclosure and Reporting Parity Proposals 1. Structured Data Requirements 2. Periodic Reporting Requirements 3. New Current Reporting Requirements for Affected Funds 4. Online Availability of Information Incorporated by Reference 5. Enhancements to Certain Registered CEFs' Annual Report Disclosure I. Certain Staff No-Action Letters J. Conforming Changes to Form N-2 K. Compliance Date III. General Request for Comment IV. Economic Analysis A. Introduction and Baseline 1. Number of Affected Funds 2. Current Securities Offering Requirements for Affected Funds 3. Current Disclosure Obligations of Affected Funds B. Potential Benefits Resulting From the Proposed Implementation of the Statutory Mandates 1. Improved Access to Capital and Lower Cost of Capital 2. Facilitated Communication With Investors C. Potential Costs Resulting From the Proposed Implementation of the Statutory Mandates 1. Compliance Costs 2. Other Costs D. Alternatives to Proposed Approach to Implementing Statutory Mandates E. Discussion of Discretionary Choices 1. New Registration Fee Payment Method for Interval Funds 2. Structured Data Requirements 3. Periodic Reporting Requirements 4. New Current Reporting Requirements for Affected Funds 5. Online Availability of Information Incorporated by Reference F. Request for Comments V. Paperwork Reduction Act Analysis A. Background B. Summary of the Proposed Amendments and Impact on Information Collections 1. Proposed Amendments to Form N-2 Registration Statement 2. Proposed Structured Data Reporting Requirements 3. Proposed New Annual Reporting Requirements Under Rule 30e-1 and Exchange Act Periodic Reporting Requirements for BDCs 4. Securities Offering Communications 5. Prospectus Delivery Requirements 6. Proposed Form 8-K Reporting Requirements 7. Form 24F-2 C. Request for Comments VI. Initial Regulatory Flexibility Act Analysis A. Reasons for and Objectives of the Proposed Actions B. Legal Basis C. Small Entities Subject to the Rule D. Projected Reporting, Recordkeeping, and Other Compliance Requirements 1. Registration Process and Final Prospectus Delivery 2. Communication Rules 3. New Registration Fee Payment Method for Interval Funds 4. Disclosure and Reporting Requirements E. Duplicative, Overlapping, or Conflicting Federal Rules F. Significant Alternatives 1. Alternatives to Proposed Approach to Implementing Statutory Mandates 2. Alternative Approaches to Discretionary Choices G. General Request for Comment VII. Consideration of Impact on the Economy VIII. Statutory Authority Text of Proposed Rules and Forms I. Introduction We are proposing rules that would modify the registration, communications, and offering processes for business development companies (“BDCs”) and registered closed-end investment companies (“registered CEFs” and, collectively with BDCs, “affected funds”) under the Securities Act. 4 In 2005, the Commission adopted securities offering reforms for operating companies to modernize the securities offering and communication processes while maintaining the protection of investors under the Securities Act. 5 At that time, the Commission specifically excluded all investment companies—including affected funds—from the scope of the reforms. 6 Now, as directed by Congress, we are proposing rules that would allow affected funds to use the securities offering rules that are already available to operating companies. 7 4 BDCs are a category of closed-end investment companies that do not register under the Investment Company Act, but rather elect to be subject to the provisions of sections 55 through 65 of the Investment Company Act. See section 2(a)(48) of the Investment Company Act [15 U.S.C. 80a-2(a)(48)]. Congress established BDCs for the purpose of making capital more readily available to small, developing and financially troubled companies that do not have ready access to the public capital markets or other forms of conventional financing. See H.R. Rep. No. 1341, 96th Cong., 2d Sess. 21 (1980). 5 Securities Offering Reform, Securities Act Release No. 8591 (July 19, 2005) [70 FR 44721 (Aug. 3, 2005)] (“Securities Offering Reform Adopting Release”). In this release we generally use the term “operating company” to refer to issuers that are not investment companies and that are currently eligible to rely on the rules we are proposing to amend. 6 See, e.g., id. at 44727 (discussing the exclusion of investment companies registered under the Investment Company Act and BDCs from the definition of “well-known seasoned issuer”); id. at 44735 (discussing the exclusion of such companies from safe harbors for factual business information and forward-looking information); id. at 44784 (discussing the exclusion of such companies from final prospectus delivery reforms). 7 See Part II.A infra concerning the definition of “affected funds.” The Small Business Credit Availability Act (the “BDC Act”) directs us to allow a BDC to use the securities offering rules that are available to other issuers required to file reports under section 13(a) or section 15(d) of the Exchange Act. 8 As discussed in detail below, the BDC Act identifies with specificity the required revisions. 9 The Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Registered CEF Act”) (and, together with the BDC Act, the “Acts”) directs us to finalize rules to allow any registered CEF that is listed on a national securities exchange (a “listed registered CEF”) or that makes periodic repurchase offers under rule 23c-3 under the Investment Company Act (“rule 23c-3”) 10 (an “interval fund”) to use the securities offering rules that are available to other issuers that are required to file reports under section 13(a) or section 15(d) of the Exchange Act, subject to appropriate conditions. 11 Unlike the BDC Act, the Registered CEF Act does not identify with specificity the revisions that are required. 8 Section 803(b) of Small Business Credit Availability Act, Public Law 115-141, 132 Stat. 348 (2018) (“BDC Act”). This section also directs us to make specified revisions to allow a BDC to use the proxy rules that are available to such other issuers. Id. Affected funds generally use the proxy rules that are available to operating companies already. One current difference applicable to these entities, however, is a more limited ability to incorporate information into their proxy statements by reference. The BDC Act directs that we eliminate this difference by providing these entities parity with operating companies. Section 803(b)(2)(N) of the BDC Act; see also infra Part II.F.2. 9 See section 803(b)(2) of BDC Act. 10 17 CFR 270.23c-3. 11 Section 509(a) of Economic Growth, Regulatory Relief, and Consumer Protection Act, Public Law 115-174, 132 Stat. 1296 (2018) (“Registered CEF Act”). The Registered CEF Act also refers to proxy rules, as does the BDC Act. See supra footnote 8. The proposed rules would institute a number of reforms: • First, they would streamline the registration process to allow eligible affected funds to use a short-form shelf registration statement to sell securities “off the shelf” more quickly and efficiently in response to market opportunities. • Second, the proposed rules would allow affected funds to qualify as “well-known seasoned issuers” (“WKSIs”) under rule 405 under the Securities Act. • Third, they would allow affected funds to satisfy final prospectus delivery requirements using the same method as operating companies. • Fourth, they would allow affected funds to use communications rules currently available to operating companies, such as the use of certain factual business information, forward-looking information, a “free writing prospectus,” and broker-dealer research reports. • Finally, they would tailor the disclosure and regulatory framework for affected funds in light of the proposed amendments to the offering rules applicable to them. These proposed amendments include structured data requirements to make it easier for investors and others to analyze fund data; new annual report disclosure requirements to provide key information in annual reports; a new requirement for registered CEFs to file reports on Form 8-K in a manner similar to operating companies and BDCs, including new Form 8-K items tailored to registered CEFs and BDCs; and a proposal to require interval funds to pay securities registration fees using the same method that mutual funds and exchange-traded funds (“ETFs”) use today. As discussed in detail below, the proposed rules would affect categories of affected funds differently just as categories of operating companies are treated differently under these rules currently. For example, some of the rules would apply to all affected funds, that is, all BDCs and registered CEFs. Many of the proposed rules, however, would apply only to “seasoned funds.” These are affected funds that are current and timely in their reporting and therefore generally eligible to file a short-form registration statement under the proposal if they have at least $75 million in “public float.” 12 Some of the proposed rules would apply only to seasoned funds that also qualify as WKSIs, that is, seasoned funds that generally have at least $700 million in public float. Table 1 summarizes these different impacts. 12 See infra footnote 18. Form S-3 defines an issuer's “aggregate market value,” commonly referred to as “public float,” as the “aggregate market value of the voting and non-voting common equity held by non-affiliates.” See General Instruction I.B.1 of Form S-3. The determination of public float is based on a public trading market, such as an exchange or certain over-the-counter markets. See Securities Offering Reform Adopting Release, supra footnote 5, at n.50. Table 1 Rule Summary description of rule Entities affected by proposed changes Discussed below in REGISTRATION PROVISIONS Securities Act Rule 415 Permits registration of securities to be offered on a delayed or a continuous basis Seasoned Funds* Parts II.B.1-II.B.2.a. Proposed General Instructions A.2 and F.3 of Form N-2 Provide for backward and forward incorporation by reference Seasoned Funds Part II.B.2.a. Proposed General Instruction F.4.a Requires online posting of information incorporated by reference Affected Funds Part II.H.4. Securities Act Rule 430B Permits certain issuers to omit certain information from their “base” prospectuses and update the registration statement after effectiveness Seasoned Funds Part II.B.2.b. Securities Act Rules 424 and 497 Provide the processes for filing prospectus supplements Affected Funds Part II.B.2.b. Securities Act Rule 462 Provides for effectiveness of registration statements immediately upon filing with the Commission WKSIs Part II.B.2.a. Securities Act Rule 418 Exempts some registrants from an obligation to furnish certain engineering, management, or similar reports Seasoned Funds Part II.F.1. Investment Company Act Rule 22c-3 Subjects interval funds to the registration fee payment system based on annual net sales Interval Funds Part II.G. COMMUNICATIONS PROVISIONS Securities Act Rule 134 Permits issuers to publish factual information about the issuer or the offering, including “tombstone ads” Affected Funds Part II.E.1. Securities Act Rule 163A Permits issuers to communicate without risk of violating the gun-jumping provisions until 30 days prior to filing a registration statement Affected Funds Part II.E.1. Securities Act Rules 168 and 169 Permit the publication and dissemination of regularly released factual and forward-looking information Affected Funds Part II.E.1. Securities Act Rules 164 and 433 Permit use of a “free writing prospectus” Affected Funds Part II.E.1. Securities Act Rule 163 Permits oral and written communications by WKSIs at any time WKSIs Part II.E.1. Securities Act Rule 138 Permits a broker or dealer to publish or distribute certain research about securities other than those they are distributing Seasoned Funds Part II.E.2. PROXY STATEMENT PROVISION Item 13 of Schedule 14A Permits certain registrants to use incorporation by reference to provide information that otherwise must be furnished with certain types of proxy statements Seasoned Funds Part II.F.2. PROSPECTUS DELIVERY PROVISIONS Securities Act Rules 172 and 173 Permit issuers, brokers, and dealers to satisfy final prospectus delivery obligations if certain conditions are satisfied Affected Funds Part II.D. STRUCTURED DATA REPORTING PROVISIONS Structured Financial Statement Data A requirement that BDCs tag their financial statements using Inline eXtensible Business Reporting Language (“Inline XBRL”) format BDCs Part II.H.1.a. Prospectus Structured Data Requirements A requirement that registrants tag certain information required by Form N-2 using Inline XBRL Affected Funds Parts II.H.1.b-II.H.1.c. Form 24F-2 Structured Format A requirement that filings on Form 24F-2 be submitted in a structured format Form 24F-2 Filers Part II.H.1.d. PERIODIC REPORTING PROVISIONS Investment Company Act Rule 8b-16 A requirement that funds that rely on the rule disclose certain enumerated changes in the annual report in enough detail to allow investors to understand each change and how it may affect the fund Registered CEFs Part II.H.5. Proposed Item 24.4.h(2) of Form N-2 A requirement for information about the investor's costs and expenses in the registrant's annual report Seasoned Funds Part II.H.2.a. Proposed Item 24.4.h(3) of Form N-2 A requirement for information about the share price of the registrant's stock and any premium or discount in the registrant's annual report Seasoned Funds Part II.H.2.a. Proposed Item 24.4.h(1) of Form N-2 A requirement for information about each of a fund's classes of senior securities in the registrant's annual report Seasoned Funds Part II.H.2.a. Proposed Item 24.4.g of Form N-2 A requirement for narrative disclosure about the fund's performance in the fund's annual report Registered CEFs Part II.H.2.b. Item 4 of Form N-2 Requires disclosure of certain financial information BDCs Part II.H.2.c. Proposed Item 24.4.h(4) of Form N-2 A requirement to disclose outstanding material staff comments that remain unresolved for a substantial period of time Seasoned Funds Part II.H.2.d. CURRENT REPORT PROVISIONS Exchange Act Rules 13a-11 and 15d-11 Require registered CEFs to file current reports on Form 8-K Registered CEFs Part II.H.3.a. Proposed Section 10 of Form 8-K Requires current reporting of two new events specific to affected funds Affected Funds Part II.H.3.b. Regulation FD Rule 103 Provides that a failure to make a public disclosure required solely by rule 100 of Regulation FD will not disqualify a “seasoned” issuer from use of certain forms Seasoned Funds Part II.H.3.d. * Some of the proposed rule changes that are shown above as affecting “seasoned funds” would only affect those seasoned funds that elect to file a registration statement on Form N-2 using a proposed instruction permitting funds to use the form to file a short-form registration statement. II. Discussion A. Scope of Closed-End Investment Companies Affected by the Proposed Rules While the rulemaking mandate of the BDC Act applies to all BDCs, the mandate of the Registered CEF Act extends to most, but not all, registered CEFs. 13 Specifically, the BDC Act addresses both BDCs that are listed on an exchange and those that are not, while the Registered CEF Act extends to all registered CEFs that are listed on an exchange as well as interval funds, but excludes other unlisted funds. We propose to apply the proposed rules to all BDCs and registered CEFs, with certain conditions and exceptions discussed below and generally illustrated in Table 1 above. 13 See section 509(a) of Registered CEF Act. Although the Registered CEF Act only requires us to allow interval funds and listed registered CEFs to use the securities offering rules available to operating companies, that Act does not preclude us from exercising our discretion to extend these rules to all registered CEFs. Except as noted below, we believe, for purposes of the relevant securities offering and communications rules, that unlisted registered CEFs are not distinguishable from unlisted BDCs, which the proposed rules must cover, and that unlisted registered CEFs would benefit from parity of treatment. Although certain benefits of the rules we are proposing to amend are less likely to apply, by their existing terms, to unlisted issuers, 14 the scope of our proposed amendments would generally treat unlisted BDCs, unlisted registered CEFs, and unlisted operating companies in a consistent manner. We believe that this approach would benefit unlisted registered CEFs and their investors, including by providing new investor protections to investors in these funds. It also could avoid adverse consequences that could result from treating unlisted registered CEFs differently from all other registered CEFs and unlisted BDCs. For example, such disparate treatment could produce potential competitive disparities 15 and the possibility of anomalous results if an unlisted registered CEF were to list its shares and at that time become subject to different offering requirements. The proposal therefore would provide all BDCs and registered CEFs additional flexibility in raising capital, subject to the conditions and associated investor protections included in the proposed rules. We recognize that despite this consistent treatment of affected funds, unlisted affected funds may not qualify to rely on all of the rules we propose to amend, by those rules' existing terms and conditions (for example, most interval funds). However, these funds still would be able to rely on many of the rules to gain additional flexibility in multiple aspects of the offering process. 16 14 For example, affected funds that do not list their securities on an exchange and do not have “public float”—such as most interval funds—would generally not qualify to be WKSIs or to file short-form registration statements. See, e.g., infra footnotes 35-37. 15 See infra Part IV.B.1. 16 For example, these funds would newly be able to satisfy final prospectus delivery obligations by filing a prospectus with the Commission under the conditions discussed in Part II.D infra, and the proposed rules also would significantly expand these funds' flexibility with respect to offering communications as discussed in Part II.E infra. These funds would also be subject to the other requirements we are proposing for affected funds, such as the requirement to provide reports on Form 8-K discussed in Part II.H.3 infra. We are also proposing a modernized approach to interval funds' payment of securities registration fees. See infra Part II.G. Although the BDC Act's requirements are more specific than those in the Registered CEF Act, we believe they both share the overall purpose of providing offering and communication rule parity to the investment companies covered by the Acts. In particular, both Acts direct that we make available to these investment companies the securities offering rules that are available to other issuers required to file reports under section 13 or 15(d) of the Exchange Act. The BDC Act expressly and specifically requires that we apply many of the proposed amendments to BDCs while the Registered CEF Act does not expressly and specifically identify the required revisions for registered CEFs, but the two Acts share similar broad mandates. We believe that, except where dictated by meaningful differences between BDCs and registered CEFs—or each type of entity's broader regulatory environment—consistent application of the proposed rules across affected funds would result in more efficient offering processes and more consistent investor protections. Accordingly, the proposed rules would generally apply the specific requirements of the BDC Act to both BDCs and registered CEFs, with certain conditions and exceptions discussed below. We request comment on the proposed scope of affected funds. • Is the proposed scope of affected funds appropriate? • Should open-end registered investment companies be included in the scope of the affected funds? Why or why not? Should some open-end registered investment companies but not others be included? If so, which ones and why? • Should any investment companies be removed from the scope of affected funds? If so, which ones and why? Should the scope—or the scope of any of the individual aspects of the proposed rules—be narrowed to exclude registered CEFs that are neither interval funds nor listed registered CEFs? • We also request comment as to whether each proposed amendment discussed throughout this release should include additional or fewer types of investment companies. B. Registration Process We are proposing amendments to our rules and forms to permit affected funds to use the more flexible registration process currently available to operating companies. Specifically, the proposed amendments would allow affected funds to sell securities “off the shelf” more quickly and efficiently in response to market opportunities. 1. Current Shelf Offering Process for Affected Funds Issuers, including affected funds, that are eligible to register their securities offerings on Form S-3 may conduct primary offerings “off the shelf” under Securities Act rule 415(a)(1)(x), the provision for offerings made on a delayed or continuous basis. 17 In a rule 415(a)(1)(x) shelf offering, a seasoned issuer can register an unallocated dollar amount of securities for sale at a later time. 18 The issuer can then take down securities “off the shelf” for sale in a public offering as market conditions warrant. This allows seasoned issuers to quickly access the public securities markets from time to time to take advantage of favorable market conditions. 19 17 Primary offerings that are not continuous in nature may only be made on a delayed, or “shelf,” basis if they fit within one of the narrow sets of permissible delayed offerings in Rule 415(a)(1), including rule 415(a)(1)(x). In a continuous offering, an issuer must be ready and willing to sell the securities at all times. The issuer may not suspend and resume the offering. See Continuous or Delayed Offerings by Certain Closed-End Management Investment Companies, Investment Company Act Release No. 19391 (Apr. 7, 1993) [58 FR 19361, 19362 (Apr. 14, 1993)]. An issuer also can rely on rule 415(a)(1)(x) to make an immediate offering. 18 In this release we use the term “seasoned” to refer generally to an issuer that meets the registrant requirements in General Instruction I.A of Form S-3 and, when referring to seasoned funds, a fund that meets these Form S-3 registrant requirements as well as certain proposed modifications for registered CEFs. Among other things, General Instruction I.A requires that the registrant (1) has been subject to the reporting requirements of sections 12 or 15(d) of the Exchange Act and has filed all of the material required to be filed pursuant to sections 13, 14, or 15(d) of the Exchange Act for at least twelve calendar months immediately preceding the filing of the registration statement; and (2) has filed in a timely manner all reports required to be filed during the twelve calendar months and any portion of a month immediately preceding the filing of the registration statement (with specified Form 8-K exceptions). A foreign private issuer also can meet the registrant requirements of Form F-3, in lieu of Form S-3. We focus in this release on Form S-3 because a foreign investment company generally cannot make a public offering of its securities in the United States. See section 7(d) of the Investment Company Act [15 U.S.C. 80a-7(d)]. 19 Issuers that rely on rule 415(a)(1)(x) must file a new registration statement every three years, with unsold securities and unused fees carried forward to the new registration statement. See Securities Act rule 415(a)(5) [17 CFR 230.415(a)(5)]. If the new registration statement is an automatic shelf registration statement filed by a WKSI, it will be effective immediately upon filing. Affected funds currently can make shelf offerings under rule 415(a)(1)(x) if they meet the eligibility criteria for Form S-3, even though affected funds register their securities offerings on Form N-2. 20 Our rules for operating companies, however, are more flexible and efficient than for affected funds. In particular, seasoned operating companies can use a short-form registration statement on Form S-3. Certain seasoned operating companies also can rely on Securities Act rule 430B to omit certain information from the “base” prospectus when the registration statement becomes effective and later provide that information in a subsequent Exchange Act report incorporated by reference, a prospectus supplement, or a post-effective amendment. 21 The ability to “forward incorporate” information in Exchange Act reports filed after the registration statement becomes effective allows operating companies to efficiently update their prospectuses and access capital markets without the expense and delay of filing post-effective amendments in most cases. 20 See Revisions to the Eligibility Requirements for Primary Securities Offerings on Forms S-3 and F-3, Securities Act Release No. 8878 (Dec. 19, 2007) [72 FR 73534, 73537 n.36 (Dec. 27, 2007)] (“Rule 415(a)(1)(x) permits shelf offerings of securities `registered ( or qualified to be registered ) ' on Form S-3 or Form F-3. We note that a closed-end investment company, including a business development company . . . that meets the eligibility standards enumerated in Form S-3, as revised by new General Instruction I.B.6., may register its securities in reliance on Rule 415(a)(1)(x) notwithstanding the fact that closed-end funds register their securities on Form N-2 rather than Form S-3.” (emphasis added)). Affected funds also can currently conduct offerings under other provisions of rule 415(a)(1). 21 The base prospectus of a shelf registration statement will generally describe in broad terms the types of securities and offerings that the issuer may conduct at some later time. Affected funds, on the other hand, currently have limited ability to incorporate information by reference into their registration statements and cannot forward incorporate information from subsequently-filed Exchange Act reports. 22 When an affected fund sells securities, including as part of a “takedown off the shelf,” its registration statement must include all required information. 23 In particular, the affected fund's registration statement must include current financial information, including any annual update required by section 10(a)(3) of the Securities Act. 24 Affected funds provide any section 10(a)(3) update to the registration statement by filing a post-effective amendment, which involves the expense and potential delay associated with the fund's preparation of the amendment and our staff's review and comment process. 25 22 Form N-2 permits registrants to “backward incorporate” financial information from a previously-filed report under limited circumstances: (1) A registered CEF can satisfy the requirements to provide financial highlights in the prospectus, and financial statements in the SAI, by incorporating this information by reference to a previously-filed annual or semi-annual report filed on Form N-CSR; and (2) a BDC may satisfy the requirement to provide similar financial and other information by reference to a previously-filed annual report on Form 10-K. See General Instruction F of Form N-2. 23 The fund's registration statement must include all required information to avoid liability from selling securities from an out-of-date prospectus and to satisfy section 10(a) of the Securities Act. See infra footnotes 67-68 and accompanying text. 24 Section 10(a)(3) of the Securities Act provides that when a prospectus is used more than nine months after the effective date of the registration statement, the information contained therein shall be as of a date not more than sixteen months prior to such use. 15 U.S.C. 77j. An affected fund registering an offering under rule 415 also must undertake to file a post-effective amendment to the registration statement: (1) To include any prospectus required by section 10(a)(3) of the Securities Act; (2) to reflect in the prospectus any facts or events after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; and (3) to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. See Item 34.4 of Form N-2. 25 These post-effective amendments are filed pursuant to section 8(c) of the Securities Act and must be declared effective, typically by the staff acting pursuant to delegated authority. In contrast, under Form S-3, an issuer's section 10(a)(3) update need not be made through a separate post-effective amendment. Rather, under that form, when the issuer files its annual report on Form 10-K containing the issuer's audited financial statements for its most recently completed fiscal year by the due date of the annual report, it operates as a post-effective amendment to the registration statement for purposes of section 10(a)(3). See Securities Offering Reform Adopting Release, supra footnote 5, at n.61. Affected funds also cannot currently rely on rule 430B, which allows certain issuers to omit information from a base prospectus, or the process that operating companies follow to file prospectus supplements. 26 In addition, affected funds cannot currently file automatic shelf registration statements because only WKSIs can file these registration statements. These differences can result in additional expense or delay for affected funds relative to operating companies and can affect the timing of an affected fund's capital raising. 27 26 Rule 430B is available for automatic shelf registration statements filed by WKSIs and shelf registration statements filed by certain issuers eligible to use Form S-3 for a primary offering. Affected funds currently rely on Securities Act rule 430A and rule 430C, which do not permit an issuer to omit as much information as permitted under rule 430B. 27 Affected funds in particular may want greater flexibility to control the timing of their capital raising because section 23(b) of the Investment Company Act generally prohibits a registered CEF from issuing its shares at a price below the fund's current net asset value (“NAV”) without shareholder approval (and this provision applies to BDCs as well with certain modifications). 15 U.S.C. 80a-23(b); 15 U.S.C. 80a-62. Because the shares of affected funds often trade at a discount to NAV, these funds may want to quickly access the markets when their shares are trading at a premium. Selling securities “off the shelf” is one way to achieve such quick access. 2. Proposed Amendments to the Registration Process for Affected Funds Consistent with the BDC Act and the Registered CEF Act, we are proposing to provide affected funds parity with operating companies by permitting affected funds to: • File a short-form registration statement on Form N-2 that will function like a Form S-3 registration statement. An affected fund eligible to file this short-form registration statement could use it to register shelf offerings, including shelf registration statements filed by WKSI affected funds that become effective automatically, and could satisfy Form N-2's disclosure requirements by incorporating by reference information from the fund's Exchange Act reports; • Rely on rule 430B to omit information from their base prospectuses, and to use the process operating companies follow to file prospectus supplements; and • Include additional information in periodic reports to update their registration statements, provided that this information is identified as being included for this purpose. a. Short-Form Registration on Form N-2 We are proposing a new instruction to Form N-2 to allow affected funds to file a short-form registration statement on Form N-2 that will function like a registration statement filed on Form S-3. We generally refer to this proposed instruction, General Instruction A.2, as the “short-form registration instruction” and funds relying on this instruction as filing a short-form registration statement on Form N-2. 28 If a fund is eligible to file a registration statement under this new instruction, the fund's registration statement would incorporate certain past and future Exchange Act reports by reference, allowing the fund to use a short-form registration statement and avoid the need to make post-effective amendments in most cases. An affected fund could use the proposed instruction to register a shelf offering under rule 415(a)(1)(x), and we are proposing conforming amendments to that rule to make this clear. But the proposed instruction would not be limited to offerings under rule 415(a)(1)(x); an affected fund could use the proposed instruction to register any of the securities offerings that operating companies are permitted to register on Form S-3. 29 28 Proposed General Instruction A.2 of Form N-2. Some of the required amendments and the conditions in our current rules are available only to issuers that meet the eligibility and transaction requirements of Form S-3 and are therefore eligible to file a short-form registration statement on that form. The proposed short-form registration instruction in Form N-2 is designed to facilitate these amendments that we are proposing to implement the BDC Act and the Registered CEF Act. 29 See General Instruction I.B of Form S-3 (identifying transactions that can be registered on the form); proposed General Instruction A.2.c of Form N-2. Form S-3, and therefore the proposed short-form registration instruction, also is available to a majority-owned subsidiary that is a closed-end management investment company eligible to register a securities offering on Form N-2 if (1) the subsidiary independently satisfies the form's registrant eligibility and transactional requirements; (2) the parent satisfies the form's registrant requirements and the transaction requirement for a primary offering of non-convertible securities; (3) the parent satisfies the form's registrant eligibility and transactional requirements and provides a full and unconditional guarantee of the payment obligations on the securities being registered; (4) the parent satisfies the form's registrant eligibility and transactional requirements and the securities of the registrant subsidiary being registered are guarantees of the payment obligations on the parent's non-convertible securities; and (5) the parent satisfies the form's registrant eligibility and transactional requirements and the securities of the registrant subsidiary being registered are guarantees of the payment obligations on the non-convertible securities being registered by another majority-owned subsidiary. See General Instruction I.C of Form S-3. Eligibility To File a Short-Form Registration Statement An affected fund would be able to file a short-form registration statement under the proposed short-form registration instruction if: • For either a BDC or a registered CEF, the fund meets the registrant and transaction requirements of Form S-3 ( i.e., the fund could register the offering on Form S-3 if it were an operating company); 30 and 30 See proposed General Instructions A.2.a and A.2.c of Form N-2; General Instructions I.A (registrant requirements) and I.B (transaction requirements) of Form S-3. • For registered CEFs, the fund also has been registered under the Investment Company Act for at least 12 calendar months immediately preceding the filing of the registration statement and has timely filed all reports required to be filed under section 30 of the Investment Company Act during that time. 31 This time period and timely-filing requirement parallel the requirements in Form S-3 regarding an issuer's Exchange Act reports. 31 Under the proposed amendment, the fund would also have to have timely filed all reports required to be filed under section 30 of the Investment Company Act during any portion of a month immediately preceding the filing of the registration statement. See proposed General Instruction A.2.b of Form N-2. An affected fund would generally meet the registrant requirements of Form S-3 if it has timely filed all reports and other materials required under the Exchange Act during the prior year. 32 An affected fund would generally meet the transaction requirements of Form S-3 for a primary offering if the fund's public float is $75 million or more. 33 Requiring affected funds to satisfy the requirements of Form S-3 in order to file a short-form registration statement would provide parity for affected funds and operating companies. 32 See General Instruction I.A.3 of Form S-3. In addition, we are proposing two new Form 8-K reporting items for affected funds. An affected fund's failure to timely file Form 8-K reports solely under these proposed items would not affect the fund's ability to file a short-form registration statement on Form N-2. See infra Part II.H.3. 33 See General Instruction I.B of Form S-3. For example, certain issuers with less than a $75 million public float also are eligible to use Form S-3 to register a primary offering but are limited as to the amount of securities they can register. See General Instruction I.B.6 of Form S-3. See also infra Part II.C (discussing our consideration of a different level of public float for an affected fund to qualify as a WKSI or to file a short-form registration statement on Form N-2, or a different metric in lieu of an affected fund's public float). Certain affected funds, including most interval funds, 34 do not list their securities on an exchange and do not have public float. As a result, there are some affected funds that generally would not be able to satisfy the transaction requirement necessary to file a short-form registration statement. 35 Interval funds have their own offering provision, Securities Act rule 415(a)(1)(xi), 36 and certain post-effective amendments to their registration statements are immediately effective under rule 486(b) under the Securities Act. 37 As a result, interval funds currently have a tailored registration process that, although different in certain respects from that of operating companies, may provide many of the same efficiencies. In addition, because interval funds make continuous offerings, they would not be able to file a short-form registration statement that omits information required to be in an issuer's prospectus when it is offering its securities. 34 Only one interval fund is currently exchange-traded. 35 The proposed short-form registration instruction is designed to provide affected funds parity with operating companies by permitting them to use the instruction to register the same transactions that an operating company can register on Form S-3. To register a primary offering of equity securities on Form S-3, an issuer must have a requisite amount of public float. See General Instruction I.B.1 of Form S-3. Alternatively, an issuer must have shares listed on an exchange and limit the amount sold over a twelve-month period to no more than one-third of the aggregate value of voting and non-voting common equity held by non-affiliates. See General Instruction I.B.6 of Form S-3. Interval funds that are not exchange-listed and without public float would not be qualified to register a primary offering of their shares on Form S-3. 36 17 CFR 230.415(a)(1)(xi). 37 17 CFR 230.486(b). Along with satisfying the registrant requirements of Form S-3, a registered CEF also must have timely filed all reports required under section 30 of the Investment Company Act for the preceding 12 months in order to register an offering under the proposed short-form registration instruction. 38 A registered CEF therefore must have timely filed during the prior year all required Exchange Act reports, such as annual and semi-annual reports to shareholders filed with the Commission on Form N-CSR, 39 as well as reports required only under section 30 of the Investment Company Act, such as reports on new Forms N-CEN 40 and N-PORT. 41 38 See proposed General Instruction A.2.b of Form N-2. 39 17 CFR 249.331 and 17 CFR 274.128. Reports on Form N-CSR are filed both under the Exchange Act and the Investment Company Act. 40 17 CFR 249.330 and 17 CFR 274.101. 41 17 CFR 274.150. In October 2016, we modernized the reporting and disclosure of information by registered investment companies. Specifically, we adopted a new monthly portfolio reporting form, Form N-PORT, which replaces Form N-Q [17 CFR 249.332 and 17 CFR 274.130]. Form N-PORT requires registered investment companies other than money market funds and small business investment companies to report information about their monthly portfolio holdings to the Commission in a structured data format on a quarterly basis, 60 days after quarter end. See Investment Company Reporting Modernization, Investment Company Act Release No. 32314 (Oct. 13, 2016) [81 FR 81870 (Nov. 18, 2016)] (“Reporting Modernization Release”); see also Amendments to the Timing Requirements for Filing Reports on Form N-PORT, Investment Company Act Release No. 33384 (Feb. 27, 2019) [84 FR 7980 (Mar. 6, 2019)] (“N-PORT Modification Release”). We also adopted a new annual reporting form, Form N-CEN, to be used by registered investment companies to report annually certain census-type information. Fund groups with $1 billion or more in net assets will begin filing reports on Form N-PORT with the Commission by April 30, 2019 (for the period ending March 31, 2019). Smaller fund groups ( i.e., fund groups with less than $1 billion in net assets) will be required to begin submitting reports on Form N-PORT by April 30, 2020 (for the period ending March 31, 2020). See also Investment Company Reporting Modernization, Investment Company Act Release No. 32936 (Dec. 8, 2017) [82 FR 58731 (Dec. 14, 2017)]. An issuer's Exchange Act record provides the basic source of information to the market and to potential purchasers, and investors in the secondary market use that information in making their investment decisions. 42 Although all affected funds file reports under the Exchange Act, registered CEFs also file reports under the Investment Company Act. Investment Company Act reports also provide important information to the market and investors, including information about an affected fund's portfolio holdings that will be publicly reported on a quarterly basis on Form N-PORT. We believe that the market will analyze this portfolio holdings information in a similar manner to how it analyzes financial statements for operating companies to determine changes in prospects for growth and performance. Portfolio holdings disclosure on Form N-PORT, for example, provides important information that is comparable to information BDCs include in Exchange Act reports for purposes of providing a quarterly flow of key information to the market. 43 Moreover, requiring registered CEFs to have timely filed their Investment Company Act reports would also provide parity among BDCs, registered CEFs, and operating companies. This is because once Form N-PORT fully replaces Form N-Q, 44 registered CEFs will only file Exchange Act reports semi-annually on Form N-CSR, whereas BDCs and operating companies file Exchange Act reports quarterly on Forms 10-K and 10-Q. 45 Under the proposal, all issuers would be required to have filed their quarterly and other required reports in order to file a short-form registration statement. 46 42 See Shelf Registration, Securities Act Release No. 6499 (Nov. 17, 1983) [48 FR 52889 (Nov. 23, 1983)]. See also Securities Offering Reform Adopting Release, supra footnote 5, at 44726 (recognizing that an “issuer's Exchange Act record provides the basic source of information to the market and to potential purchasers regarding the issuer and its management, business, financial condition, and prospects. Because an issuer's Exchange Act reports and other publicly available information form the basis for the market's evaluation of the issuer and the pricing of its securities, investors in the secondary market use that information in making their investment decisions.”). 43 Exchange Act reports, such as reports on Form 10-Q or Form N-CSR, include information required by Regulation S-X. Certain reports on Form N-PORT must include the portfolio holdings information required by the schedules set forth in rules 12-12 through 12-14 of Regulation S-X. See Part F of Form N-PORT. We also require reports on Form N-PORT to include, in a structured format, data elements that are otherwise required by Regulation S-X. See Reporting Modernization Release, supra footnote 41, at 81894. 44 Form N-Q will be rescinded on May 1, 2020. See supra footnote 41. 45 Reports on Form N-PORT with monthly information will be filed with the Commission on a quarterly basis, but only information reported for the third month of each fund's fiscal quarter on Form N-PORT will be publicly available (and not until 60 days after the end of the fiscal quarter). 46 Affected funds historically must have timely filed reports on Forms N-Q and N-SAR for the preceding 12 months in order to rely on rule 415(a)(1)(x). This is because to rely on that rule, an issuer must have timely filed required Exchange Act reports and Form N-Q is, and Form N-SAR was, filed under both the Investment Company Act and section 13(a) or 15(d) of the Exchange Act. Information Incorporated by Reference The same rules on incorporation by reference that apply to Form S-3 registration statements would apply to a short-form registration statement filed on Form N-2. 47 Specifically, an affected fund relying on the short-form registration instruction would be required to: 47 See section 803(c)(1) of the BDC Act (directing us to include an item or instruction that is similar to item 12 on Form S-3 to provide that a BDC that would otherwise meet the requirements of Form S-3 shall incorporate by reference the reports and documents filed by the BDC under the Exchange Act into the registration statement of the BDC filed on Form N-2). We would eliminate current General Instruction F.3 of Form N-2 in its entirety and replace it with proposed General Instruction F.3. In these proposed provisions and others that are substantively identical to parallel provisions in Form S-3, we have proposed conforming references to a fund's SAI. • Specifically incorporate by reference into the prospectus and statement of additional information (“SAI”): (1) Its latest annual report filed pursuant to section 13(a) or section 15(d) of the Exchange Act that contains financial statements for the registrant's latest fiscal year for which a Form N-CSR or Form 10-K was required to be filed; and (2) all other reports filed pursuant to sections 13(a) or 15(d) of the Exchange Act since the end of the fiscal year covered by the annual report (backward incorporation by reference); 48 and 48 Proposed General Instruction F.3.a(1)-(2) of Form N-2; cf. Item 12(a)(1)-(2) of Form S-3. In addition, if sales of a class of capital stock are to be registered on Form N-2 and the same class is registered under section 12 of the Exchange Act, the affected fund must incorporate by reference the description of the class contained in the Exchange Act registration statement with respect to that class (including any amendment or reports filed for the purpose of updating such description). Proposed General Instruction F.3.a(3) of Form N-2; cf. Item 12(a)(3) of Form S-3. • State that all documents subsequently filed pursuant to sections 13(a), 13(c), 14, or 15(d) of the Exchange Act prior to the termination of the offering shall be deemed to be incorporated by reference into the prospectus and SAI (forward incorporation by reference). 49 49 Proposed General Instruction F.3.b of Form N-2; cf. Item 12(b) of Form S-3. We also are proposing to allow an affected fund filing a short-form registration statement on Form N-2 to satisfy the disclosure requirements for its prospectus or SAI by incorporating the information by reference from Exchange Act reports. 50 This approach, which is substantively identical to a parallel item in Form S-3, would give affected funds filing a short-form registration statement on Form N-2 the option to either provide required disclosure directly in the prospectus or SAI or to satisfy Form N-2's disclosure requirements with information incorporated by reference. 51 50 See proposed General Instruction F.3. The proposed amendments would permit a fund to use this incorporated information to provide the disclosure required by Items 3-13 and Items 16-24 of Form N-2. Proposed General Instruction F.3.c of Form N-2; cf. Item 12(d) of Form S-3. 51 The BDC Act directs that we extend this parallel item in Form S-3 (Item 12) to BDCs that meet Form S-3's requirements. See supra footnote 47; Item 12(d) of Form S-3; see also section 509(a) of the Registered CEF Act. We considered requiring registered CEFs to incorporate by reference into their prospectuses and SAIs reports filed on Forms N-PORT and Form N-CEN. These forms provide important information to investors, other market participants, and Commission staff, and we propose including these forms in the timeliness requirement for registered CEFs to use the new short-form registration statement instruction. 52 This information, however, is not specifically required disclosure under Form N-2, and so incorporating it by reference would not update the required disclosures on Form N-2. Taking this consideration into account, we are not proposing to require such incorporation. 52 Proposed General Instruction A.2.b of Form N-2. We are also proposing conforming changes to Form N-2's undertakings. 53 Form N-2 currently requires an undertaking that would prevent seasoned funds from incorporating information by reference as proposed because it requires these funds to file post-effective amendments in certain circumstances (and would do so regardless of whether the information had already been incorporated by reference). 54 In contrast, operating companies registering on Form S-3 are not required to make this undertaking if the required information is included in an Exchange Act report incorporated by reference or in a prospectus supplement that is part of the registration statement. 55 To implement the statutory mandate and provide parity for affected funds, we propose to amend Form N-2's undertakings to provide the same approach for affected funds filing a short-form registration statement on that form that applies to operating companies that file on Form S-3. 56 53 See section 803(b)(2)(P) of the BDC Act (directing us to revise Item 34 of Form N-2 to require a BDC to provide undertakings that are no more restrictive than the undertakings that are required of a registrant pursuant to Item 512 of Regulation S-K, which are the undertakings that apply to an operating company registering an offering on Form S-3). 54 Form N-2 currently requires an affected fund registering an offering under rule 415 to undertake to file, during any period in which offers or sales are being made, a post-effective amendment to the registration statement under certain circumstances, including to provide any prospectus required by section 10(a)(3) of the Securities Act. Item 34.4.a(1) of Form N-2. 55 See Item 512(a)(iii)(B) of Regulation S-K [17 CFR 229.512(a)(iii)(B)]. 56 Specifically, we propose to add a new provision to Item 34.4.a of Form N-2 stating that the requirement to undertake to file a post-effective amendment would not apply if the registration statement is filed under the proposed short-form registration instruction and the information required to be included in a post-effective amendment by Items 34.4.a(1)-(3) is contained in Exchange Act reports that are incorporated by reference into the fund's registration statement or is contained in a form of prospectus that is part of the registration statement. See proposed Item 34.4.a of Form N-2; cf. Item 512(a) of Regulation S-K. We also propose to revise Item 34 to make conforming changes to mirror parallel undertakings in Item 512 of Regulation S-K. See, e.g., proposed Item 34.4.a(2) of Form N-2; cf. Item 512(a)(1)(ii) of Regulation S-K; proposed Item 34.4.d(1) of Form N-2; cf. Item 512(a)(5)(i) of Regulation S-K; proposed Item 34.4.e(2)-(3) of Form N-2; cf. Item 512(a)(6)(ii)-(iii) of Regulation S-K; proposed Item 34.6 of Form N-2; cf. Item 512(b) of Regulation S-K; and proposed Item 34.7 of Form N-2; cf. Item 512(h) of Regulation S-K. Affected Funds' Use of Rule 415(a)(1)(x) and Automatic Shelf Registration Statements We are proposing two additional amendments to allow affected funds to use the shelf registration system in parity with operating companies. First, we propose to amend rule 415(a)(1)(x) to clarify that affected funds may use that rule by adding references to a registration statement filed under the proposed short-form registration instruction. 57 Second, we propose a new general instruction to permit affected funds that would be WKSIs under the proposed amendments to file an automatic shelf registration statement. 58 A WKSI can register unspecified amounts of different types or classes of securities on an automatic shelf registration statement. 59 The ability to use an automatic shelf registration statement means that the registration statement and any amendments will be effective immediately upon filing. 60 Automatic shelf registration provides WKSIs with significant flexibility to take advantage of market windows, structure terms of securities on a real-time basis to accommodate investor demand, and determine or change the plan of distribution in response to changing market conditions. WKSIs using an automatic shelf registration statement also benefit by being able to pay filing fees at any time in advance of a shelf takedown or on a “pay-as-you-go” basis at the time of each takedown off the shelf registration statement in an amount calculated for that takedown. 61 Our proposed amendments would extend these same benefits to affected funds that would be WKSIs under the proposed amendments, as directed by the BDC Act and the Registered CEF Act. 62 57 See proposed rule 415(a)(1)(x) (revised to include securities registered pursuant to General Instruction A.2 of Form N-2). See also section 803(b)(2)(J) of the BDC Act (directing us to revise rule 415(a)(1)(x) to provide that a BDC that would otherwise meet the eligibility requirements of Form S-3 can register its securities under that provision). We also are proposing to add a reference to a Form N-2 registration statement filed pursuant to General Instruction A.2 to rule 415(a)(2) to make clear that affected funds registering offerings pursuant to rule 415(a)(1)(ix), like other issuers relying on that provision, would not be subject to the limitation that they register an amount of securities that the issuer reasonably expected would be offered or sold within two years from the date that the registration statement became effective. Cf. Securities Offering Reform Adopting Release, supra footnote 5, at 44774-44775. 58 See proposed General Instruction B of Form N-2; section 803(c)(2) of the BDC Act (directing that we amend Form N-2 to include an instruction that is similar to the instruction regarding automatic shelf registration offerings by well-known seasoned issuers on Form S-3 to provide that a BDC that is a well-known seasoned issuer may file automatic shelf offerings on Form N-2). The proposed instruction would provide that an affected fund that is a WKSI may use the form as an automatic shelf registration statement only for the transactions that are described in, and consistent with the requirements of, General Instruction I.D of Form S-3. This provides parity with operating companies because General Instruction I.D of Form S-3 specifies the transactions and requirements for an automatic shelf registration statement filed on Form S-3. Consistent with General Instruction I.D of Form S-3, proposed General Instruction B specifies that the form could not be used as an automatic shelf registration statement for securities offerings under rule 415(a)(1)(vii) or (viii). 59 See rule 430B(a) under the Securities Act [17 CFR 230.430B(a)]. 60 See rule 462(e) and rule 462(f) under the Securities Act [17 CFR 230.462(e) and 17 CFR 230.462(f)]. 61 See rule 457(r) and rule 456(b) under the Securities Act [17 CFR 230.457(r) and 17 CFR 230.456(b)]. 62 We are proposing conforming amendments to Securities Act rule 462(f) and to the registration fee table in Form N-2 to enhance consistency with Form S-3 and to recognize that affected funds that would be WKSIs could use the pay-as-you-go registration fee process. We request comment on these proposed amendments, including: • Do the proposed amendments provide parity to affected funds? Why or why not? Are there other changes that we should make that would provide parity for affected funds? What changes and why? • Currently, Form S-3 under specified circumstances allows majority-owned subsidiaries of a parent issuer eligible to use Form S-3 to register offerings of certain non-convertible securities or guarantees under General Instruction I.C of the form. Under the proposed amendments, an affected fund could use the new short-form registration instruction of Form N-2 to register the same types of offerings that operating companies can register on Form S-3, including offerings by majority-owned subsidiaries that are closed-end management investment companies eligible to register a securities offering on Form N-2. Is it appropriate to amend Form N-2 to provide a similar process for affected funds to register the same types of offerings by majority-owned subsidiaries that operating companies can register on Form S-3? Would affected funds expect to register these offerings using the proposed short-form registration instruction? How do affected funds treat securities issued by majority-owned subsidiaries that are investment companies when calculating asset coverage under sections 18 or 61 of the Investment Company Act? 63 If affected funds do not include these securities in calculating asset coverage, why not? 63 15 U.S.C. 80a-18 and 80a-60. • Rather than amending Form N-2, should we create a separate registration form specifically for affected funds to file a short-form registration statement? • Should we require registered CEFs to have timely filed reports under section 30 of the Investment Company Act during the prior year in order to file a short-form registration on Form N-2, as proposed? • We are proposing to allow an affected fund filing a short-form registration statement on Form N-2 to satisfy the disclosure requirements for its prospectus or SAI by incorporating the information by reference from Exchange Act reports. Are there any specific prospectus or SAI disclosure items that an affected fund should not be permitted to incorporate by reference into the registration statement? If so, which ones and why? • An affected fund filing a short-form registration statement on Form N-2 would incorporate by reference into its prospectus and SAI certain past and future Exchange Act reports. This could increase an affected fund's liability with respect to information that has not previously been incorporated into its registration statement. Would this raise any concerns unique to affected funds? For example, is there any information in registered CEFs' annual and semi-annual reports that should not be incorporated by reference? If so, which information and why? • Are there any changes we should make to the registration process for interval funds? Should we, for example, permit them to forward incorporate if they would be eligible to rely on the proposed short-form registration instruction but for their lack of public float? Why or why not? Is there a basis to treat interval funds differently in this respect than any other issuer that does not have public float? Besides the additional flexibility in the aspects of the offering process that interval funds would receive under this proposal, 64 are there any other ways in which we should modernize the offering process for interval fund offerings? 64 See supra footnote 16. • Unlisted BDCs and unlisted registered CEFs also would not generally have “public float.” Are there any changes we should make to the shelf registration process for these funds? • Are there any other line items or language from Forms S-1 or S-3 that we should include in Form N-2 to facilitate the incorporation by reference regime (or to otherwise enhance or modernize Form N-2 to provide parity with the operating company regime)? For example, is it necessary or useful to add a new item for “Material Changes” in Form N-2 that mirrors Item 11A of Form S-1 and Item 11(a) of Form S-3? 65 Those items generally provide that, where a registrant is backward incorporating information by reference into a new registration statement, it must disclose in the registration statement any material changes that have not been disclosed in an Exchange Act report being incorporated by reference. Would it be necessary or useful to include a new item for “Material Changes” in Form N-2 to remind registrants that, as currently required, the new registration statement must include all material information? Would it elicit any disclosure that is not otherwise required by Form N-2's other items? 65 See Item 11A of Form S-1 (directing a registrant that elects to incorporate information by reference to describe any and all material changes in the registrant's affairs which have occurred since the end of the latest fiscal year for which audited financial statements were included in the latest Form 10-K and that have not been described in a Form 10-Q or Form 8-K filed under the Exchange Act); see also Item 11(a) of Form S-3 (describing parallel requirements). • We are not proposing to require that registered CEFs incorporate by reference reports filed on Forms N-PORT or N-CEN. Do commenters agree that this is appropriate? Conversely, should the reports on those forms be incorporated by reference? Should we permit or require a fund to incorporate the exhibit to certain reports on Form N-PORT that sets forth a registered CEF's complete portfolio holdings presented using the form and content specified by Regulation S-X? Would incorporating these reports allow funds to update any aspect of their registration statement and in that way avoid having to provide the same information through a prospectus supplement or post-effective amendment? • Are there incorporation by reference provisions in any other registration forms filed by affected funds that should be modified to provide parity or consistency across registration statements, and if so, in what respect? For example, should we amend General Instruction G of Form N-14 to provide that BDCs may incorporate by reference to the same extent as registered CEFs? Would BDCs use this ability to incorporate information by reference? • Proposed General Instruction B cross-references General Instructions II.E, F, and G and IV of Form S-3. These instructions explain the application of general rules and regulations. Cross-referencing these instructions would direct registrants' attention to them without having to set forth the instructions in Form N-2 as well. Would it be clearer, however, to set forth the substance of those instructions in Form N-2? b. Omitting Information From a Base Prospectus and Prospectus Supplements Affected funds registering securities in shelf offerings under Securities Act rule 415 can generally omit required information from the base prospectus that is unknown or not reasonably available to the fund when the registration statement becomes effective. 66 Rule 430B also permits WKSIs and certain issuers eligible to use Form S-3 for primary offerings to omit certain additional information. A base prospectus that omits statutorily-required information is not a final prospectus under section 10(a) of the Securities Act. 67 Filing a prospectus supplement is one way to provide information required for a prospectus to satisfy section 10(a). 68 66 See Securities Act rule 409 [17 CFR 230.409]. 67 15 U.S.C. 77j(a). 68 Omitted information also may be provided in a post-effective amendment or, where permitted, through Exchange Act filings that are incorporated by reference. Our rules currently provide different processes for operating companies and investment companies to file prospectuses. Operating companies currently follow rule 424 to file prospectus supplements, whereas investment companies follow rule 497. Although these rules provide similar processes, they have certain key differences. For example, rule 424(b) is designed to work together with rule 415(a)(1)(x), and provides additional time for an issuer to file a prospectus. Rule 497 does not contain provisions specifically related to offerings under rule 415(a)(1)(x) and requires the fund to file a prospectus with the Commission before using it. Rule 424 also requires an issuer to file a prospectus only if the issuer makes substantive changes from or additions to a previously-filed prospectus, whereas rule 497 requires funds to file every prospectus that varies from any previously-filed prospectus. In order to provide parity with operating companies, the BDC Act directs us to include a process for a BDC to file a prospectus in the same manner as under rule 424(b). 69 Consistent with this directive and with the Registered CEF Act, we are proposing to amend rule 424(f) to allow affected funds to file a prospectus under rule 424. 70 Under the proposed amendment, an affected fund would be able to file any type of prospectus enumerated in rule 424(b) to update, or to include information omitted from, a prospectus or in connection with a shelf takedown. We also are proposing to amend rule 497 to provide that rule 424 would be the exclusive rule for affected funds to file a prospectus supplement other than an advertisement that is deemed to be a prospectus under rule 482. 71 This would avoid any confusion that might result if affected funds were permitted to file prospectuses under both rule 424 and rule 497, while also continuing to require affected funds to file rule 482 advertisements as they and other investment companies do today. 69 See section 803(b)(2)(K) of the BDC Act. 70 The proposed amendments would not apply to open-end funds or other registered investment companies. Accordingly, those investment companies would continue to file prospectuses pursuant to rule 497. See proposed amendments to rule 424(f). We also are proposing to amend rule 424(f) to state that references to the term “form of prospectus” in the rule includes the Statement of Additional Information. 71 See proposed Securities Act rule 497(l). We also are proposing an amendment to permit affected funds to use rule 430B in parity with operating companies. That rule permits an issuer to omit specified information from its base prospectus in two circumstances. First, a WKSI filing an automatic shelf registration statement can omit the plan of distribution and whether the offering is a primary one or an offering on behalf of selling security holders. An amendment to rule 430B is not required to achieve parity with respect to this first use because, once affected funds are permitted to qualify as WKSIs, those that are WKSIs would be able to rely on rule 430B as currently written. Second, the rule also applies to issuers eligible to file a registration statement on Form S-3 to register a primary offering, where the issuer is registering securities for selling security holders. In this case, the prospectus can omit the same information that WKSIs can omit, as well as the identities of selling security holders and the amount of securities to be registered on their behalf, subject to conditions. Unlike the first use, this second use would not be available to affected funds without a modification to the rule. Accordingly, we are proposing an amendment to allow affected funds eligible to register a primary offering under the proposed short-form registration instruction to rely on rule 430B for this second use as well. In addition, affected funds relying on rule 430B, like operating companies, would undertake that for purposes of determining liability under the Securities Act with respect to any purchaser, each prospectus supplement is deemed part of the registration statement containing the base prospectus to which the supplement relates. This is measured as of the earlier of the date the prospectus supplement is first used after effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus. 72 72 See proposed rule 430B(b). Rules 430B, 424, and 158 specify when information contained in a prospectus supplement will be deemed part of and included in the registration statement and circumstances that will trigger a new effective date of the registration statement for purposes of section 11(a) of the Securities Act. These rules would apply to affected funds just as they apply to operating companies. We also are proposing to amend the undertakings in Form N-2 to require affected funds relying on rule 430B to make the same undertakings required of operating companies that rely on the rule. See proposed Item 34.4.d(1); cf. Item 512(a)(5)(i) of Regulation S-K. See also supra footnote 53. We request comment on these proposed amendments, including: • Should we amend rule 424(f) as proposed to allow affected funds to file a prospectus under rule 424? Is this an effective means to implement the parity requirements of the BDC Act and Registered CEF Act? Why or why not? • Are there additional amendments that we should make to rules 430B, 424, or 497 to allow affected funds to omit information from their base prospectuses and file prospectus supplements in parity with operating companies? • Should we make rule 424 the exclusive rule under which affected funds must file prospectuses as proposed, or should we allow affected funds to have the option to file a prospectus under rule 424 or rule 497? If we provided optionality, would that increase the potential to cause confusion for funds or investors? Are there any other consequences of requiring affected funds to use rule 424 that we should consider? Rather than require affected funds to use rule 424 as proposed, should we amend rule 497 to include the substantive requirements of rule 424 for affected funds? c. Additional Information in Periodic Reports Under the proposed amendments, certain affected funds would be permitted to forward incorporate information from their Exchange Act reports. These funds may wish to include information in their periodic reports that is not required to be included in these reports in order to update their registration statements. We therefore propose to include a new instruction to Form N-2 that would allow a fund to include additional information so as long as the fund includes a statement in the report identifying information that it has included for this purpose. 73 This would provide context for investors in considering this additional disclosure, akin to the context funds today provide investors when they mail prospectus “stickers” updating disclosure in the prospectus. 73 Proposed Instruction 6.i of Item 24 of Form N-2. We request comment on this proposed instruction, including: • Does the proposed instruction adequately provide a mechanism for affected funds to update their registration statements via their periodic reports? • Does the proposed instruction provide sufficient guidance to an affected fund regarding whether and how it may include additional information in its periodic reports to update its registration statement, and how to identify that information? • Is there any reason we should not permit affected funds to incorporate by reference information from their periodic reports that is not required to be included in those reports, or should we further prescribe how any additional information must be presented? Should we, for example, require that any additional information appear after the information affected funds are required to include in their annual reports? • In addition to affected funds' periodic reports, should we also require an affected fund to identify information included in a report on Form 8-K filed for the purpose of updating the fund's registration statement? C. Well-Known Seasoned Issuer Status We are proposing amendments that would allow an affected fund to qualify as a WKSI. In 2005, the Commission created a new category of issuer—a WKSI—that benefits to the greatest degree from the modifications to our rules regarding communications and the registration processes that the Commission adopted at that time. 74 A WKSI, for example, can file a registration statement or amendment that becomes effective automatically in a broader variety of contexts than non-WKSIs. Subject to certain conditions, our rules also permit a WKSI to communicate at any time, including through a free writing prospectus, without violating the “gun-jumping” provisions of the Securities Act. 75 In order for an issuer to qualify as a WKSI, the issuer must meet the registrant requirements of Form S-3, i.e., it must be “seasoned,” 76 and generally must have at least $700 million in “public float.” 77 An issuer is ineligible for WKSI status if, among other bases: (1) It is not current and timely in its Exchange Act reports, or (2) it is the subject of a judicial or administrative decree or order arising out of a governmental action involving violations of the anti-fraud provisions of the federal securities laws (the “anti-fraud prong” of the ineligible issuer definition). 78 74 Securities Offering Reform Adopting Release, supra footnote 5, at 44727. 75 See infra Part II.E.1. 76 See supra footnote 18. 77 See paragraph (1)(i)(A) of the WKSI definition in rule 405 (providing that the issuer must have at least $700 million in worldwide “public float,” that is, the market value of outstanding voting and non-voting common equity held by non-affiliates). An alternative basis for an issuer to satisfy this requirement is to have issued, for cash, within the last three years, at least $1 billion in aggregate principal amount of non-convertible securities through primary offerings registered under the Securities Act (paragraph (1)(i)(B) of the WKSI definition). The definition also includes provisions for transactions involving majority-owned subsidiaries (paragraph (1)(ii) of the WKSI definition). 78 See paragraph (1)(i) and (1)(vi) of the definition of ineligible issuer in Securities Act rule 405. The BDC Act directs us to revise Securities Act rule 405 to allow a BDC to qualify as a WKSI and the Registered CEF Act directs us to allow registered CEFs covered by the Act to use the securities offering rules that are available to operating companies. 79 We are also proposing conforming amendments to the definition of an “ineligible issuer.” Specifically: 79 Section 803(b)(2)(A)(i). • First, the WKSI definition specifically excludes BDCs and registered investment companies. We propose to amend rule 405 so that the exclusion does not apply to affected funds. 80 80 See proposed amendments to paragraph (1)(v) of rule 405. • Second, the WKSI definition currently provides that an issuer must meet the registrant requirements of Form S-3. We propose to add a parallel reference to the registrant requirements of the proposed short-form registration instruction. 81 81 See proposed amendments to paragraph (1)(v) of the WKSI definition in rule 405. In addition, in certain places where the WKSI definition currently refers to Form S-3, we propose to add conforming references to a Form N-2 registration statement filed under proposed General Instruction A.2 of Form N-2. See proposed amendments to paragraph (1)(i) and (1)(i)(B)(2) of the definition of WKSI in rule 405. See proposed General Instruction A.2 of Form N-2. We also are proposing a conforming amendment to paragraph (2) of the definition of WKSI to add a reference to Form N-CSR, the form on which registered CEFs file their shareholder reports with the Commission. See proposed amendment to paragraph (2) of the definition of WKSI in Securities Act rule 405. See also infra Part II.D.2. • Third, we propose to amend the definition of “ineligible issuer” to provide that a registered CEF would be ineligible if it has failed to file all reports and materials required to be filed under section 30 of the Investment Company Act during the preceding 12 months. This provision is consistent with the proposed short-form registration instruction and would mirror the current Exchange Act reporting provision in the ineligible issuer definition. 82 82 See supra footnote 78. • Finally, we propose to amend the definition of ineligible issuer to give effect to the current anti-fraud prong in that definition in the context of affected funds. Specifically, we are proposing a parallel anti-fraud prong for affected funds. The current anti-fraud prong provides that an issuer that, within the past three years, was the subject of a judicial or administrative decree or order arising out of a governmental action involving violations of the anti-fraud provisions of the federal securities laws would be an ineligible issuer. 83 The proposed new anti-fraud prong for affected funds would provide that an affected fund would be an ineligible issuer if within the past three years its investment adviser, including any sub-adviser, was the subject of any judicial or administrative decree or order arising out of a governmental action, that determines that the investment adviser aided or abetted or caused the affected fund to have violated the anti-fraud provisions of the federal securities laws. 84 Investment companies typically are externally managed by an investment adviser, which is primarily responsible for the day-to-day management of the fund and the preparation of the fund's disclosures. 83 See paragraph (1)(vi) of the ineligible issuer definition in rule 405. 84 See proposed paragraph (1)(ix) of the ineligible issuer definition in rule 405. The proposed amendment's reference to an affected fund's investment adviser would include any sub-adviser. This is consistent with the Investment Company Act's definition of an “investment adviser” to an investment company, which includes sub-advisers. See section 2(a)(20) of the Investment Company Act. Cf. proposed Item 10.01 of Form 8-K (providing that an affected fund would be required to file a Form 8-K report if the fund's investment adviser, including any sub-adviser, has determined to implement a material change to the registrant's investment objectives or policies, and such change has not been, and will not be, submitted to shareholders for approval). We considered proposing a different level of public float for an affected fund to qualify as a WKSI (or to file a short-form registration statement on Form N-2), or a different metric in lieu of an affected fund's public float, such as its net asset value for funds whose shares are not traded on an exchange. 85 Either of these types of changes could permit additional affected funds to qualify as WKSIs and enjoy the associated benefits. The BDC Act and the Registered CEF Act, however, direct that we allow the funds covered by those Acts to use the rules available to operating companies. 85 We focus in this section on affected funds' public float because we believe that affected funds would be more likely to qualify for WKSI status on the basis of having $700 million or more in public float than to have to have issued, for cash, within the last three years, at least $1 billion in aggregate principal amount of non-convertible securities in registered offerings. See supra footnote 77. Specifically, the WKSI definition, including its $700 million public float threshold, is meant to capture issuers that are presumptively the most widely followed in the marketplace and whose disclosures and other communications are subject to market scrutiny by investors, the financial press, analysts, and others. 86 As a result of the active participation of these issuers in the markets and, among other things, the wide following of these issuers by market participants, the media, and institutional investors, the Commission has previously stated that it believes that it is appropriate to provide communications and registration flexibilities to WKSIs beyond that provided to other issuers, including other seasoned issuers. 87 86 See id. at 44726-30. 87 See id. at 44727. In adopting the current $700 million public float threshold for WKSIs, the Commission observed that high levels of analyst coverage, institutional ownership, and trading volume are useful indicators of the scrutiny that an issuer receives from the market, recognizing that no one statistic can fully capture the extent to which an issuer is followed by the market. 88 Operating company issuers with market capitalization in excess of $700 million that conducted offerings from 1997 to 2004 typically had an average of 12 analysts following them prior to the offering, which the Commission observed was likely a conservative indicator of analyst scrutiny because it included only sell-side analysts. 89 Institutional investors accounted for an average of 52% of equity ownership prior to offerings by issuers with market capitalization above $700 million; these issuers had an average daily trading volume of nearly $52 million prior to offerings in this period; and these issuers accounted for significant percentages of capital raised ( e.g., 70% of equity capital raised from 1997 to 2004). 90 The Commission observed that the issuers that would meet the thresholds for WKSI status are the most active issuers in the U.S. public capital markets. 91 88 See id. at 44728. 89 Id. 90 Id. 91 Id. at 44727. Affected funds, in contrast, have limited analyst coverage relative to operating companies and many have high levels of retail, rather than institutional, investors. 92 Affected funds have relatively modest daily trading volumes: For example, the average daily dollar volume of a listed affected fund (a listed BDC or listed registered CEF) prior to offerings was $3.8 million in 2017, and listed affected funds represented less than one percent of the daily dollar trading volume on the New York Stock Exchange and NASDAQ in 2017. 93 Affected funds also do not account for significant percentages of capital raised, with affected funds (listed and non-listed) raising about two percent of the total capital raised in 2017 in registered offerings. 94 Based on our consideration of the same criteria the Commission evaluated in 2005, we do not believe that affected funds would be likely to have a level of market following at lower levels of public float than operating companies that would justify a lower public float threshold or alternative metric to qualify as a WKSI. We also are not aware of alternative indicia of a market following for affected funds or any particular type of affected funds that would suggest a lower public float threshold, or alternative metric in lieu of public float, would be appropriate. We believe these same considerations also support our proposal to require affected funds to have the same level of public float to file a short-form registration statement—currently $75 million—that applies to operating companies. 95 92 For example, listed BDCs having on average six security analysts following them as of December 2017, and listed registered CEFs having on average zero security analysts following them as of December 2017. Data on analyst coverage is taken from the I/B/E/S database (Thomson Reuters). 93 Data on daily trading volume is taken from the TAQ database. Data on securities offerings is taken from taken from Securities Data Corporation's New Issues database (Thomson Reuters). We estimated affected funds' average daily trading volume during a period of a month prior to a securities offering. See also infra footnote 383 and accompanying text (discussing institutional ownership of affected funds and operating companies). 94 Data on registered securities offerings are taken from Securities Data Corporation's New Issues database (Thomson Reuters). 95 See supra footnote 33 (explaining that there are other bases to file a short-form registration statement on Form S-3 that do not require an issuer to have $75 million in public float and that these other bases would also be available to affected funds filing a short-form registration statement on Form N-2). Indeed, based on the general level of affected funds' analyst coverage, trading volume, and capital raised, we considered whether the public float threshold should be higher for affected funds than for operating companies. We determined not to propose a higher threshold, however, because we believe the same public float threshold for all issuers would be consistent with the general directive in the BDC Act and the Registered CEF Act to provide the funds covered in those Acts the securities offerings rules available to operating companies. We also considered whether to propose any modifications to the way that an affected fund would calculate its public float. The Commission recently adopted new Securities Act rule 139b to permit broker-dealers to publish “covered investment fund research reports,” which include reports covering affected funds. 96 In that rulemaking the Commission determined not to require broker-dealers to exclude shares held by the fund's affiliates from the calculation of the fund's public float. 97 Our approach to the public float calculation in rule 139b, however, was designed to address operational challenges broker-dealers could experience in obtaining affiliate shareholder information. 98 Affected funds should not experience the same operational difficulties in calculating their own public float. Indeed, BDCs currently disclose their public float net of affiliate holdings on Form 10-K, and registered CEFs (as well as BDCs) that conduct offerings under rule 415(a)(1)(x) currently must determine their public float net of affiliate holdings to evaluate their eligibility to use that rule. 96 See infra Part II.E.2. 97 In new rule 139b, consistent with this proposal, we generally provided that issuers covered in research reports published under the rule must have the same level of public float required for research reports on operating companies. 98 See Covered Investment Fund Research Reports, Securities Act Release No. 10580 (Nov. 30, 2018) [83 FR 26788 (Dec. 13, 2018)] (“CIFRR Adopting Release”). Not all affected funds will have public float or the level of public float required to be a WKSI or to file a short-form registration statement. For example, unlisted funds, including interval funds, will generally not have public float. However, the same is true for operating companies. For example there are many unlisted real estate investment trusts that do not have a public float and cannot qualify as a WKSI. 99 An unlisted affected fund, like an unlisted operating company, could list its shares and qualify as a WKSI or use a short-form registration statement if it had the requisite public float and met the other requirements. We request comment in this release on extending the benefits of particular reforms to affected funds that would not qualify because they do not have the requisite public float. 100 99 The determination of public float is based on a public trading market, such as an exchange or certain over-the-counter markets. See Securities Offering Reform Adopting Release, supra footnote 5, at n.50. 100 See, e.g., supra footnotes 35-37 and accompanying text; requests for comment in supra Part II.B.2.a (requesting comment on whether we should make any changes to the registration process for interval funds that do not list their securities on an exchange and do not have public float). We request comment generally on the proposed amendments to the WKSI and ineligible issuer definitions, including: • Would these proposed amendments to the WKSI definition provide parity to affected funds? Why or why not? Are there other revisions that we should make to the definition to achieve that objective? • Are the proposed amendments to the definition of ineligible issuer appropriate, and would they help give effect to the current anti-fraud prong of the ineligible issuer definition in the context of affected funds, in light of funds' management structure? If not, what approach would better give effect to the anti-fraud prong in the context of affected funds? Are the proposed amendments clear, and would issuers understand what it means for an investment adviser, including any sub-adviser, to have aided or abetted or caused the issuer to have violated the anti-fraud provisions of the federal securities laws? If not, how should we change, or provide guidance on, the proposed provision? For example, should we clarify how the proposed ineligible issuer definition would apply to a fund where the investment adviser, including any sub-adviser, aided, abetted, or caused the fund to have violated certain anti-fraud provisions within the three-year look-back period that the proposed definition specifies, and then the fund selected a new investment adviser within this same period? • The activities of affected funds, unlike those of operating companies, are substantively regulated under the Investment Company Act. For example, certain provisions of the Investment Company Act directly govern the operations of investment companies, such as prohibitions on management self-dealing, 101 breaches of fiduciary duty, 102 or changes in an investment company's business or investment policies without shareholder approval. 103 Neither the current ineligible issuer definition in rule 405 nor our proposed amendments to the definition would cover substantive provisions of the Investment Company Act that do not involve a violation of the anti-fraud provisions of the federal securities laws. Should we expand the definition of ineligible issuer to include violations of non-antifraud provisions of the Investment Company Act? If so, which provisions of the Investment Company Act? For example, should an affected fund be ineligible if it is the subject of a judicial or administrative decree involving violations of the self-dealing provisions of section 17 or 57 of the Investment Company Act, or such a decree involving violations of the asset coverage requirements of section 18 or 61 of the Investment Company Act? 101 See section 17 of the Investment Company Act [15 U.S.C. 80a-17]. 102 See section 36 of the Investment Company Act [15 U.S.C. 80a-35]. 103 See section 13 of the Investment Company Act [15 U.S.C. 80a-13]. • Should we adopt a different level of public float for an affected fund to qualify as a WKSI (or to file a short-form registration statement on Form N-2), or a different metric in lieu of an affected fund's public float? If so, which level or metric and why? • Should we, for example, provide for a different metric for interval funds, whose shares are generally not listed on an exchange, or for other unlisted affected funds? If so, which metric and why? For example, would it be appropriate to allow these funds to use their net asset values in lieu of or in addition to public float? Do interval funds or other unlisted affected funds with net asset values of $700 million or more (or $75 million or more) have a similar degree of market following and scrutiny as listed issuers with comparable amounts of public float? Are there other metrics tailored to affected funds that would indicate a similar degree of market following and scrutiny as listed issuers with comparable amounts of public float? Would it be appropriate to provide more advantageous provisions for interval funds or other types of affected funds relative to operating companies? Should we adopt any differences in the way that an affected fund would calculate its public float? D. Final Prospectus Delivery Reforms We propose to apply the alternative delivery method for operating company final prospectuses to affected funds. As a result, an affected fund would be allowed to satisfy its final prospectus delivery obligations by filing its final prospectus with the Commission. The Securities Act requires registrants to deliver to each investor in a registered offering a prospectus meeting the requirements of section 10(a) (known as a “final prospectus”). 104 Section 5(b)(2) makes it unlawful to deliver a security for the purpose of sale or for delivery after sale unless accompanied or preceded by a final prospectus. After the effective date of a registration statement, a written communication that offers a security for sale, or confirms the sale of a security, may be provided to investors if a final prospectus is sent or given previously or at the same time. Otherwise, such a communication is a prospectus and may not be provided unless it meets the requirements of section 10(a). 105 104 15 U.S.C. 77j(a). 105 15 U.S.C. 77e(b)(2). Rule 172 allows issuers, brokers, and dealers to satisfy final prospectus delivery obligations if a final prospectus is or will be on file with the Commission within the time required by the rules and other conditions are satisfied. 106 For example, rule 172 provides that a final prospectus will be deemed to precede or accompany a security for sale for purposes of section 5(b)(2) as long as the final prospectus is filed with the Commission or it will be filed as part of the registration statement. 107 Rule 172 applies only to final prospectuses and not to other documents. 108 Rule 173 requires a notice stating that a sale of securities was made pursuant to a registration statement or in a transaction in which a final prospectus would have been required to have been delivered in the absence of rule 172. 109 106 17 CFR 230.172; see also Securities Offering Reform Adopting Release, supra footnote 5, at 44783. 107 See id. In the event that the issuer fails to file such a prospectus in a timely manner, the issuer must file the prospectus as soon as practicable thereafter. 17 CFR 230.172(c)(3); see also Securities Offering Reform Adopting Release, supra footnote 5, at 44784 (summarizing the effect of this “cure” provision). 108 Id. at 44784. 109 17 CFR 230.173. This notification enables investors to “trace” their purchases of securities for purposes of asserting their rights under the liability provisions of the federal securities laws. See Securities Offering Reform Adopting Release, supra footnote 5, at 44784. Rule 173(d) provides that a purchaser who receives a notification may request a copy of the final prospectus. We are proposing a conforming change to current Item 34.6 of Form N-2, under which funds currently undertake to provide an SAI upon request, to also require an affected fund to undertake to provide a prospectus upon request. See proposed Item 34.8 of Form N-2. Currently, affected funds are specifically excluded from the issuers that may rely on these rules. 110 The BDC Act directs us to remove this exclusion for BDCs. 111 To implement the BDC Act, and to provide parity for registered CEFs consistent with the Registered CEF Act, we propose to amend rules 172 and 173 to remove the exclusion for offerings by affected funds. 112 110 See rule 172(d)(1)-(2) under the Securities Act [17 CFR 230.172(d)(1)-(2)]; rule 173(f)(2)-(3) under the Securities Act [17 CFR 230.173(f)(2)-(3)]. 111 Section 803(b)(2)(L) of the BDC Act; see also section 509(a) of Registered CEF Act (requiring parity of securities offering rules with operating companies for listed registered CEFs and interval funds). 112 See proposed rule 172(d) under the Securities Act; proposed rule 173(f) under the Securities Act. We request comment on the proposed revisions to the final prospectus delivery rules. • Are the proposed revisions to rules 172 and 173 appropriately tailored to affected funds? Should we add additional conditions to reliance on rule 172 for some or all affected funds? If so, which ones and why? For example, should we limit the availability of rule 172 only to affected funds that have timely filed all reports and other materials required under the Exchange Act and/or Investment Company Act for a certain period of time prior to reliance on the rule? As another example, should we limit the availability of rule 172 only to seasoned funds that file a short-form registration statement on Form N-2, or to funds that qualify for WKSI status? E. Communications Reforms 1. Offering Communications The Securities Act restricts the types of offering communications that issuers or other parties subject to the Act's provisions may use in connection with a registered public offering. 113 These provisions, which we refer to as the “gun-jumping provisions,” were designed to make the statutorily mandated prospectus the primary means for investors to obtain information regarding a registered securities offering. 114 Accordingly, unless otherwise permitted: 113 Unless otherwise noted, offering communications generally refer to written communications. Rule 405 provides that “[e]xcept as otherwise specifically provided or the context otherwise requires, a written communication is any communication that is written, printed, a radio or television broadcast, or a graphic communication as defined in [rule 405].” 17 CFR 230.405. 114 See Securities Offering Reform Adopting Release, supra footnote 5, at 44731. • Before an issuer files a registration statement, all offers, in whatever form, are prohibited; 115 115 See Securities Act section 5(c) [15 U.S.C. 77e(c)]. • After the issuer files a registration statement but before it has become effective, the only written offers that are permitted are those made using a preliminary prospectus that meets the requirements of section 10 of the Securities Act, which must be filed with the Commission; 116 and 116 This is because after the filing of the registration statement but before its effectiveness, offers made in writing (including electronically), by radio, or by television are limited to a “statutory prospectus” that conforms to the information requirements of Securities Act section 10. See Securities Act section 5(b)(1) [15 U.S.C. 77e(b)(1)] and Securities Act section 10 [15 U.S.C.77j]. • Even after the registration statement is declared effective, offering participants still may make written offers only through a statutory prospectus, except that they may use additional written offering materials if a final prospectus that meets the requirements of Securities Act section 10(a) is sent or given prior to or with those materials. 117 117 See Securities Act section 2(a)(10) [15 U.S.C. 77b(a)(10)] and section 5(b)(1) [15 U.S.C. 77e(b)(1)]. The Commission has previously adopted rules that provide operating companies and other parties (such as underwriters) increased flexibility in their communications as compared to the limitations described above. 118 The Commission adopted these rules, which we refer to as the “communications rules,” because the Commission believed that investors and the market could benefit from access to greater communications under conditions that preserve important investor protections. These communication rules, however, are generally not available to affected funds, which are subject to a separate framework governing communications with investors. 119 118 See, e.g., Securities Offering Reform Adopting Release, supra footnote 5, at 44731. See also rules 134 [17 CFR 230.134], 138 [17 CFR 203.138], 139 [17 CFR 230.139], 156 [17 CFR 230.156], 163 [17 CFR 230.163], 163A [17 CFR 230.163A], 164 [17 CFR 230.164], 168 [17 CFR 230.168], 169 [17 CFR 230.169], and 433 [17 CFR 230.433]. 119 See Securities Offering Reform Adopting Release, supra footnote 5, at n.115 and accompanying text. Certain of the communications rules expressly exclude registered investment companies and BDCs from the types of issuers that may rely on them. See, e.g., rules 134(g) [17 CFR 230.134(g)], 163(b)(3)(ii)-(iii) [17 CFR 230.163(b)(3)(ii)-(iii)], 163A(b)(4)(i)-(ii) [17 CFR 230.163A(b)(4)(i)-(ii)], 164(f) [17 CFR 230.164(f)], 168(d)(3) [17 CFR 230.168(d)(3)], and 169(d)(4) [17 CFR 230.169(d)(4)]. Other communications rules, such as rule 139, do not expressly exclude registered investment companies and BDCs but include conditions that can make them unavailable for affected funds. See also CIFRR Adopting Release, supra footnote 98 at 64183 (adopting new rule 139b which covers a broker-dealers' distribution of research reports concerning “covered investment funds,” which includes registered investment companies and BDCs). The BDC Act directs us to allow BDCs to use the same communications rules available to operating companies, generally by removing a BDC from the list of issuers that are ineligible for the exemptions provided by these rules. 120 To implement the BDC Act, and to provide parity for registered CEFs consistent with the Registered CEF Act, we propose to remove the exclusions for affected funds from the following rules and to make other conforming changes. 121 These proposed amendments would: 120 See section 803(b)(2)(B)-(E) and 803(b)(2)(G)-(I) of the BDC Act, supra footnote 8. See also section 509(a) of the Registered CEF Act, supra footnote 11 (requiring parity of securities offering rules with operating companies for listed registered CEFs and interval funds). 121 See proposed rules 134(g), 163(b)(3), 163A(b)(4) 164(f), 168(d)(3), and 169(d)(4) (removing references to BDCs and limiting the rules' exclusion of registered investment companies from the safe harbor to exclude registered funds other than registered CEFs). See also conforming amendments to proposed rule 168 (proposing to add to paragraphs (b)(1) and (2) references to the Investment Company Act to parallel current references to the Exchange Act to provide that forward-looking information and factual business information may be included in materials filed under the Investment Company Act); proposed rule 433 (proposing to add to paragraphs (a)(1)(i) and (iv) references to registration statements filed on Form N-2 under proposed General Instruction A.2 to parallel current references to Form S-3; proposing to add to paragraph (c)(1)(ii) a reference to reports filed under section 30 of the Investment Company as reports with which a free-writing prospectus may not conflict). See also proposed rule 156(d), infra footnote 124. • Permit affected funds to use certain communications prescribed by rule 134 to publish factual information about the issuer or the offering, including “tombstone ads.” 122 122 Rule 134 generally provides that the terms “prospectus” as defined in section 2(a)(10) of the Securities Act or “free writing prospectus” as defined in Rule 405 shall not include a communication limited to the statements required or permitted by the rule, provided that the rule 134 communications are published or transmitted to any person only after a registration statement has been filed that includes a prospectus satisfying the requirement of section 10 of the Securities Act, except as otherwise provided in the rule. • Permit affected funds to rely on rule 163A, which provides issuers a bright-line time period, ending 30 days prior to filing a registration statement, during which they may communicate without risk of violating the gun-jumping provisions. 123 123 Rule 163A provides that a communication that meets the rule's conditions is not an “offer” for purposes of Securities Act section 5(c). The Commission has explained that, because rule 163A provides a safe harbor from the application of Securities Act section 5(c), it necessarily applies only prior to the filing of a registration statement. This exclusion will thus not apply to issuers offering securities off a shelf registration statement on file, whether or not effective, as the prohibition in section 5(c) does not apply to the offering of the securities covered by such shelf registration statement. See Securities Offering Reform Adopting Release, supra footnote 5, at n.155. • Permit affected funds that are reporting companies to rely on rule 168 to publish or disseminate regularly released factual business information and forward-looking information at any time, including around the time of a registered offering. 124 Rule 169 would also permit affected funds' continued publication or dissemination of regularly released factual business information that is intended for use by persons other than in their capacity as investors or potential investors. 125 We also are proposing to amend rule 156 to state that nothing in that rule may be construed to prevent an affected fund from qualifying for an exemption under rules 168 or 169. 126 The contents of any rule 168 or 169 communication would remain subject to the anti-fraud provisions of the federal securities laws. 124 Rule 168 is a safe harbor from the definition of “prospectus” in Securities Act section 2(a)(10) and, therefore, prevents the application of the prohibition in Securities Act section 5(b)(1) on the use of a prospectus that is not a statutory prospectus. Rule 168 also is a safe harbor from the prohibitions on pre-filing “offers” in Securities Act section 5(c). 125 Rule 169 is also a safe harbor from the definition of “prospectus” in Securities Act section 2(a)(10). 126 See proposed rule 156(d); section 803(b)(2)(G) of the BDC Act; section 509(a) of Registered CEF Act. • Permit affected funds to rely on rules 164 and 433 to use a “free writing prospectus.” 127 127 Rules 164 and 433 provide that a free writing prospectus is a permitted prospectus for purposes of section 10(b) of the Securities Act and can be used without violating section 5(b)(1) of the Securities Act only after a registration statement related to the offering has been filed. [17 CFR 230.164 and 17 CFR 230.433]. See also Securities Offering Reform Adopting Release, supra footnote 5, at 44744. Rule 433(a) further provides that a free writing prospectus is a prospectus permitted under section 10(b) for purposes of sections 2(a)(10) and 5(b)(2) of the Securities Act. • Permit affected funds that are WKSIs to engage at any time in oral and written communications, including use at any time of a free writing prospectus (before or after a registration statement is filed), subject to the same conditions applicable to other WKSIs. 128 128 A WKSI can: (1) Rely on the bright-line time period provided by rule 163A for communications made more than 30 days before a registration statement is filed and that do not reference a securities offering that is or will be the subject of a registration statement; (2) subject to specified conditions, rely on the exemption in rule 163 from the prohibition on offers before the filing of a registration statement to engage in written or oral communications, including use at any time of a free writing prospectus, made by or on behalf of eligible WKSIs; (3) disseminate regularly released factual and forward-looking information at any time, including around the time of a registered offering, in reliance on rule 168; (4) issue a broader category of routine communications set forth in rule 134 regarding issuers, offerings, and procedural matters, that are excluded from the definition of “prospectus,” and (5) use a free writing prospectus after a registration statement is filed in reliance on rules 164 and 433. Investment company communications currently are subject to rule 482 under the Securities Act. Rule 482 communications, or “ads,” can only be used by a fund that is selling or is proposing to sell its securities pursuant to a filed registration statement. 129 Some of the communications rules we propose to amend, in contrast, permit an issuer to communicate before it has filed a registration statement. In addition, a rule 482 ad, like the free-writing prospectuses that we propose to permit affected funds to use, is a prospectus subject to prospectus liability under section 12 of the Securities Act. Some communications rules we propose to extend to affected funds, however, deem permissible communications not to be prospectuses, such as rule 134 communications. The proposed amendments to the communications rules would therefore provide incremental flexibility to affected funds in their communications. Funds would have additional flexibility to communicate before filing a registration statement, and they would have some additional flexibility in using communications that are not subject to prospectus liability under section 12 of the Securities Act. Affected funds would be permitted to take advantage of this additional flexibility or to continue to rely on rule 482 and other rules currently applicable to investment company communications. 129 17 CFR 230.482; see also 17 CFR 230.497(i). We request comment on the proposed amendments to the communication rules: • Are there other changes we should make to the communication rules to permit affected fund communications under those rules? Which changes and why? • Are there changes we should make, or guidance we should provide, regarding the application of the conditions in the communication rules to affected fund communications? • Are there any changes we should make to rule 482 regarding the communications that affected funds can make using the rule? Which provisions and why? Should we include any standardized performance presentation requirements for affected funds in rule 482? If so, should they differ in any way from open-end funds' performance presentation requirements already required by rule 482? Rather than or in addition to any changes to rule 482, should we amend the communications rules to require that any affected fund communication, such as a free writing prospectus, that contains performance information must present that information in accordance with standardized presentation requirements? If so, should these standardized presentation requirements be the same as those that are included in rule 482, replicate the instructions to Item 4.1.g set forth in Form N-2, 130 or differ from either of these sets of requirements in any way? 130 See, e.g., Securities Act rule 139b(a)(3) [17 CFR 230.139b(a)(3)] requiring that the performance of certain covered investment funds, including registered CEFs, to be presented in accordance with certain standardized presentation requirements. Rule 139b requires that a registered CEF's performance be presented in accordance with the instructions to Item 4.1.g of Form N-2. Id. Other historical measures of fund performance are also permitted, so long as the other measures are set out with no greater prominence. Id. • As discussed above, rules 163, 163A, 168, and 169 all permit issuers to engage in specified communications prior to, or during, the filing of a registration statement. Would affected funds rely on these rules, as proposed to be amended, in practice? If so, what types of communications would affected funds make in reliance on these rules? Are there any additional changes to these rules that we should make to tailor them to affected fund communications? • Rule 134 deems certain permitted communications not to be prospectuses. Should we make any additional changes to tailor this rule to affected fund communications? For example, should we explicitly include the fund's investment adviser as permissible information to disclose in paragraph (a) of rule 134? Should we expand rule 134(a)(3) to include the business of affected funds, or is 134(a)(3)(iv) sufficient? 131 Why or why not? What other information specific to affected funds should we permit that would be consistent with the intent of rule 134 communications? 131 Rule 134(a)(3) currently permits an issuer to provide a brief indication of the general type of business it engages in, but restricts that information according to the type of business involved. The rule provides specific requirements for certain types of companies ( e.g., manufacturing companies), as well as a catch-all provision in paragraph (a)(3)(iv) for companies in a business that is not specifically enumerated. • In 2003, the Commission removed certain investment-company specific provisions from rule 134 on the basis that rule 134 was unnecessary for investment company communications in light of the amendments we adopted to rule 482 at that time. 132 For example, prior rule 134 permitted investment compa [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2019-05776. Public record. Not legal advice.