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No-Action Letter under:
|
| RESPONSE OF THE OFFICE OF CHIEF COUNSEL DIVISION OF INVESTMENT MANAGEMENT |
Our Ref. No. 20000095 Windamere Capital Ventures, L.P File No. 132-3________ |
Your letter dated July 11, 2001 requests our assurance that we would not recommend enforcement action to the Securities and Exchange Commission (the "Commission") under Section 7 of the Investment Company Act of 1940 (the "1940 Act") against Windamere Capital Ventures, L.P. ("Windamere Capital") or its general partner, Windamere Capital Ventures Company, LLC, if Windamere Capital does not register with the Commission as an investment company. You state that you are requesting our assurance because you believe that Windamere Capital would not be able to rely on the exemption from the requirements of the 1940 Act, including the registration requirements, that Section 6(a)(5)(A) of the 1940 Act provides if the Small Business Administration ("SBA") purchases certain securities issued by Windamere Capital.
FACTS
Windamere Capital is a limited partnership that is organized under the laws of California. Windamere Capital Management Company, LLC will manage Windamere Capital. You state that Windamere Capital will provide financial or managerial assistance to small businesses by investing in, negotiating transactions with, and providing management assistance to, start-up, early-stage, and on-going small business ventures that are located in California.1
You represent that Windamere Capital has applied to the SBA to be licensed as a small business investment company (a "SBIC"), and that Windamere Capital will then seek financial assistance from the SBA. You state that the SBA is an agency of the U.S. Government that administers a program for SBICs. The program provides financial assistance to SBICs and regulates certain aspects of their activities. You state that the SBA, through its SBIC program, may provide financial assistance to a SBIC by, among other things, purchasing certain equity interests in the SBIC called participating securities. You state that Windamere Capital initially will seek to sell up to $50 million of its limited partnership interests in a private offering.2 Following the private offering, you represent that Windamere Capital will seek to obtain financial assistance from the SBA of up to $100 million by issuing participating securities to the SBA.
ANALYSIS
Section 6(a)(5)(A) of the 1940 Act provides an exemption from the requirements of the 1940 Act for certain companies, commonly known as business industrial development companies ("BIDCOs"), that are:
. . . not engaged in the business of issuing redeemable securities, the operations of which are subject to regulation by the State in which the company is organized under a statute governing entities that provide financial or managerial assistance to enterprises doing business, or proposing to do business, in that State. . . .3
Under Section 6(a)(5)(A)(ii), immediately following each sale of a BIDCO's securities by the BIDCO or its underwriter, not less than 80% of the securities being offered in such a sale, on a class-by-class basis, must be held by persons who reside, or who have a substantial business presence, in the State in which the BIDCO is organized. Under Section 6(a)(5)(A)(iii), a BIDCO or its underwriter may sell the BIDCO's securities, or propose to sell the securities, only to accredited investors, as defined in Section 2(a)(15) of the Securities Act of 1933 ("accredited investors"),4 or to such other persons that the Commission may permit by rule, regulation, or order. The exemption provided by Section 6(a)(5)(A) is subject to additional requirements that are not relevant here.
Congress adopted Section 6(a)(5)(A) to facilitate the formation of BIDCOs based on its view that BIDCOs perform an important local function by providing direct investment and loan financing, as well as managerial assistance, to state and local enterprises, and that the State in which a BIDCO was organized should regulate the BIDCO.5 Congress ensured that a State would have an interest in protecting BIDCO investors by requiring, under Section 6(a)(5)(A)(ii) of the 1940 Act, that the bulk of the investors in a BIDCO reside, or have a substantial business presence, in that State.6 Congress also addressed the investor protection concerns that may be raised by exempting BIDCOs from the requirements of the 1940 Act by requiring, under Section 6(a)(5)(A)(iii) of the 1940 Act, that a BIDCO may sell or propose to sell its securities only to accredited investors.7
You state that California has enacted legislation (the California Capital Access Company Law) that regulates California BIDCOs, and that Windamere Capital will seek a license to operate thereunder as a "California Capital Access Company." You state, however, that Windamere Capital would not be able to comply with Section 6(a)(5)(A)(ii) of the 1940 Act because the SBA, to which Windamere Capital proposes to issue its participating securities, may not qualify as a person who resides or who has a substantial business presence in California (a "California Person"). In addition, you state that Windamere Capital would not be able to comply with Section 6(a)(5)(A)(iii) because the SBA may not qualify as an accredited investor. You represent that Windamere Capital will otherwise meet all of the other requirements of Section 6(a)(5)(A) of the 1940 Act.
You argue that by obtaining financial assistance from the SBA Windamere Capital would further the purpose underlying Section 6(a)(5)(A) because Windamere Capital would use the SBA's financial assistance to increase its investments in California and local enterprises. You also assert that it is appropriate for the SBA to invest substantial amounts in Windamere Capital because the SBA's purpose, to provide financial, technical, and managerial assistance to small businesses, complements the purpose of Section 6(a)(5)(A).8
You assert that allowing the SBA to provide financial assistance to Windamere Capital would not diminish California's interest in regulating Windamere Capital because California Persons would still have significant ownership interests in Windamere Capital. In support, you represent that, prior to any investment by the SBA in Windamere Capital, Windamere Capital would raise up to $50 million of private capital and that, consistent with Section 6(a)(5)(A)(ii), immediately following this sale of Windamere Capital's securities, not less than 80% of the securities offered, on a class-by-class basis, would be held by California Persons. You also represent that, immediately following any offering by Windamere Capital or its underwriter in which Windamere Capital sells its securities to the SBA, not less than 80% of the securities that are not sold to the SBA, on a class-by-class basis, would be held by California Persons. Finally, you state that immediately following any subsequent sale of Windamere Capital's securities in which the SBA does not participate, not less than 80% of the securities offered, on a class-by-class basis, would be held by California Persons.
You also assert that it is unnecessary for the SBA to qualify as an accredited investor in connection with the offer or sale of Windamere Capital's participating securities to the SBA. In particular, you argue that the offer or sale of those securities to the SBA does not raise any investor protection concerns because the SBA is an agency of the U.S Government that fulfills its Congressional directive by making investments in SBICs. 9
Based on the facts and representations set forth in your letter, we would not recommend enforcement action to the Commission under Section 7 of the 1940 Act against Windamere Capital or Windamere Capital Ventures, LLC if, Windamere Capital does not register with the Commission as an investment company. This response expresses our views on enforcement action only and does not express any legal conclusion on the questions presented. Because our position is based on the facts and representations in your letter, you should note that any different facts or representations may require a different conclusion.
Kathleen L. Knisely
Senior Counsel
| 1 | You state that Windamere Capital will invest in a variety of businesses including: biotechnology, biomedical engineering, computer hardware and software, interactive media, telecommunications, networking, environmental technology, and materials technology. You state that Windamere Capital also may invest in other types of product or service companies that have high growth potential. |
| 2 | You represent that Windamere Capital will not issue any redeemable securities, as defined in Section 2(a)(32) of the 1940 Act. |
| 3 | A BIDCO's organizational documents must state that the BIDCO's activities are limited to the promotion of economic, business, or industrial development in the State in which it is organized through the provision of financial or managerial assistance to enterprises doing business, or proposing to do business, in that State. See Section 6(a)(5)(A)(i). |
| 4 | Section 2(a)(15) of the Securities Act of 1933 defines an accredited investor as: (i) a bank as defined in Section 3(a)(2) of the 1933 Act whether acting in its individual or fiduciary capacity; an insurance company as defined in Section 2(a)(13) of the 1933 Act; an investment company registered under the 1940 Act or a business development company as defined in Section 2(a)(48) of the 1940 Act; a SBIC licensed by the SBA; or an employee benefit plan, including an individual retirement account, which is subject to the provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"), if the investment decision is made by a plan fiduciary, as defined in Section 3(21) of ERISA, which is either a bank, insurance company, or registered investment adviser; or (ii) any person who, on the basis of such factors as financial sophistication, net worth, knowledge, and experience in financial matters, or amount of assets under management qualifies as an accredited investor under rules and regulations which the Commission shall prescribe. |
| 5 | See Senate Committee on Banking, Housing, and Urban Affairs, The Securities Investment Promotion Act of 1996, S. Rep. No. 104-293, 104th Cong., 2d Session (1996) ("Banking Committee Report"). |
| 6 | Id. |
| 7 | In recognition that some State statutory provisions may not provide comprehensive regulation of BIDCOs, Congress provided, under Section 6(a)(5)(E) of the 1940 Act, that the Commission may supplement (by rule, regulation, or order) the State provisions as necessary to respond to investor protection concerns. See Banking Committee Report, supra note 4. To date, the Commission has not supplemented any State provisions. |
| 8 | The purpose of the legislation creating the SBA is to:
. . . improve and stimulate the national economy in general and the small-business segment thereof in particular by establishing a program to stimulate and supplement the flow of private equity capital and long-term loan funds which small-business concerns need for the sound financing of their business operations and for their growth, expansion, and modernization, and which are not available in adequate supply. See Small Business Investment Act of 1958, Pub. L. No. 85-699, Section 102 (1958). |
| 9 | You note that after the SBA purchases an SBIC's securities, the SBA may resell those securities to the public backed by the full and unconditional guarantee of the SBA ("SBA-guaranteed SBIC securities"). You assert that the SBA's full and unconditional guarantee of SBA-guaranteed SBIC securities reduces any investor protection concerns that may be raised by the offer and sale of those securities. |
July 11, 2001
Douglas Scheidt, Chief Counsel
Division of Investment Management
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Re: Windamere Capital Ventures, L.P.
Dear Mr. Scheidt:
On behalf of Windamere Capital Ventures, L.P. ("Windamere Capital"), we request confirmation from the Division of Investment Management that the staff will not recommend enforcement action against Windamere Capital or its general partner, Windamere Capital Ventures Company, LLC (the "General Partner") under Section 7 of the Investment Company Act of 1940 (the "1940 Act") if Windamere Capital does not register under the 1940 Act. We are requesting your assurance because we believe that Windamere Capital would not be able to rely on the exemption from the requirements of the 1940 Act, including the registration requirements, that Section 6(a)(5)(A) of the 1940 Act provides if the Small Business Administration ("SBA") purchases certain securities issued by Windamere Capital.
FACTS:
Windamere Capital is a limited partnership organized under the laws of California. Windamere Capital Management Company, LLC will manage Windamere Capital. Windamere Capital will provide financial or managerial assistance to small businesses by investing in, negotiating transactions with, and providing management assistance to, start-up, early-stage, and on-going small business ventures that are located in California.1
Windamere Capital has applied to the SBA to be licensed as a small business investment company (a "SBIC"), and Windamere Capital will seek financial assistance from the SBA. The SBA is an agency of the U.S. Government that administers a program for SBICs. The program provides financial assistance to SBICs and regulates certain aspects of their activities. The SBA, through its SBIC program, may provide financial assistance to an SBIC by, among other things, purchasing certain equity interests in the SBIC called participating securities. Windamere Capital has raised over $10 million of private capital from less than 100 investors, and will seek to sell up to $50 million of its limited partnership interests in a private offering.2 Following the private offering and obtaining its SBIC license, Windamere Capital will seek to obtain financial assistance from the SBA of up to $100 million by issuing participating securities to the SBA.
ANALYSIS:
Section 6(a)(5)(A) of the 1940 Act provides an exemption from the requirements of the 1940 Act for certain companies, commonly known as business industrial development companies ("BIDCOs"), that are:
...not engaged in the business of issuing redeemable securities, the operations of which are subject to regulation by the State in which the company is organized under a statute governing entities that provide financial or managerial assistance to enterprises doing business, or proposing to do business, in that State...3
Under Section 6(a)(5)(A)(ii), immediately following each sale of a BIDCO's securities by the BIDCO or its underwriter, at least 80% of the securities being offered in such a sale, on a class-by-class basis, must be held by persons who reside, or who have a substantial business presence, in the State in which the BIDCO is organized. Under Section 6(a)(5)(A)(iii), a BIDCO or its underwriter may sell the BIDCO's securities, or propose to sell the securities, only to accredited investors, as defined in Section 2(a)(15) of the Securities Act of 1933 ("accredited investors"),4 or to such other persons that the Commission may permit by rule, regulation, or order. The exemption provided by Section 6(a)(5)(A) is subject to additional requirements that are not relevant here.
Congress adopted Section 6(a)(5)(A) to facilitate the formation of BIDCOs based on its view that BIDCOs perform an important local function by providing direct investment and loan financing, as well as managerial assistance, to state and local enterprises, and that the State in which a BIDCO was organized should regulate the BIDCO.5 Congress ensured that a State would have an interest in protecting BIDCO investors by requiring, under Section 6(a)(5)(A)(ii) of the 1940 Act, that the bulk of investors in a BIDCO reside, or have a substantial business presence, in that State.6 Congress also addressed the investor protection concerns that may be raised by exempting BIDCOs from the requirements of the 1940 Act by requiring, under Section 6(a)(5)(A)(iii) of the 1940 Act, that a BIDCO may sell or propose to sell its securities only to accredited investors.7
California has enacted legislation (the California Capital Access Company Law) that regulates California BIDCOs, and Windamere Capital (or an affiliated sister fund managed by the same management group) will seek a license to operate thereunder as a "California Capital Access Company." Windamere Capital would not, however, be able to comply with Section 6(a)(5)(A)(ii) of the 1940 Act because the SBA, to which Windamere Capital proposes to issue its participating securities, may not qualify as a person who resides or who has a substantial business presence in California (a "California Person"). In addition, Windamere Capital would not be able to comply with Section 6(a)(5)(A)(iii) because the SBA may not qualify as an accredited investor. Windamere Capital will otherwise meet all of the other requirements of Section 6(a)(5)(A).
We believe that by obtaining financial assistance from the SBA, Windamere Capital would further the purpose underlying Section 6(a)(5)(A) because Windamere Capital would use the SBA's financial assistance to increase its investments in California and local enterprises. We further believe that it is appropriate for the SBA to invest substantial amounts in Windamere Capital because the SBA's purpose, to provide financial, technical, and managerial assistance to small businesses, complements the purpose of Section 6(a)(5)(A). 8
We believe that allowing the SBA to provide financial assistance to Windamere Capital would not diminish California's interest in regulating Windamere Capital because California Persons would still have significant ownership interests in Windamere Capital. In support, we represent that, prior to any investment by the SBA in Windamere Capital, Windamere Capital would raise up to $50 million of private capital and that, consistent with Section 6(a)(5)(A)(ii), immediately following the sale of Windamere Capital's securities, at least 80% of the securities offered, on a class-by-class basis, would be held by California Persons. We also represent that, immediately following any offering by Windamere Capital or its underwriter in which Windamere Capital sells its securities to the SBA, not less than 80% of the securities that are not sold to the SBA, on a class-by-class basis, would be held by California Persons. Finally, we state that immediately following any subsequent sale of Windamere Capital's securities in which the SBA does not participate, not less than 80% of the securities offered, on a class-by-class basis, would be held by California Persons.
We believe it is unnecessary for the SBA to qualify as an accredited investor in connection with the offer or sale of Windamere Capital's participating securities to the SBA. In particular, we believe that the offer or sale of those securities to the SBA does not raise any investor protection concerns because the SBA is an agency of the U.S. Government that fulfills its Congressional directive by making investments in SBICs.9
ACTION REQUESTED:
We respectfully request that the staff of the Commission confirm that it will not recommend enforcement action under Section 7 of the 1940 Act against Windamere Capital or the General Partner, if Windamere Capital does not register as an investment company under the 1940 Act.
Thank you for your consideration of this matter. If you need clarification or have any questions concerning this matter, please contact either Mark Hiraide or Lee Petillon of Petillon & Hansen at (310) 543-0500.
Sincerely,
PETILLON & HANSEN
Lee R. Petillon
LRP:ml
cc: Milton Lohr
Ken Widder
| 1 | Windamere Capital will invest in a variety of businesses including: biotechnology, biomedical engineering, computer hardware and software, interactive media, telecommunications, networking, environmental technology, and materials technology. Windamere Capital also may invest in other types of product or service companies that have high growth potential. |
| 2 | Windamere Capital will not issue any redeemable securities, as defined in Section 2(a)(32) of the 1940 Act. |
| 3 | A BIDCO's organizational documents must state that its activities are limited to the promotion of economic, business, or industrial development in the State in which it is organized through the provision of financial or managerial assistance to enterprises doing business, or proposing to do business, in that State. See Section 6(a)(5)(A)(i). |
| 4 | Section 2(a)(15) of the Securities Act of 1933 defines an accredited investor as: (i) a bank as defined in Section 3(a)(2) of the 1933 Act whether acting in its individual or fiduciary capacity; an insurance company as defined in Section 2(a)(13) of the 1933 Act; an investment company registered under the 1940 Act or a business development company as defined in Section 2(a)(48) of the 1940 Act; a SBIC licensed by the SBA; or an employee benefit plan, including an individual retirement account, which is subject to the provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"), if the investment decision is made by a plan fiduciary, as defined in Section 3(21) of ERISA, which is either a bank, insurance company, or registered investment adviser; or (ii) any person who, on the basis of such factors as financial sophistication, net worth, knowledge, and experience in financial matters, or amount of assets under management qualifies as an accredited investor under rules and regulations which the Commission shall prescribe. |
| 5 | See Senate Committee on Banking, Housing, and Urban Affairs, The Securities Investment Promotion Act of 1996, S. Rep. No. 104-293, 104th Cong., 2d Session (1996) ("Banking Committee Report"). |
| 6 | Id. |
| 7 | In recognition that some State statutory provisions may not provide comprehensive regulation of BIDCOs, Congress provided, under Section 6(a)(5)(E) of the 1940 Act, that the Commission may supplement (by rule, regulation, or order) the State provisions as necessary to respond to investor protection concerns. See Banking Committee Report supra note 4. To date the Commission has not supplemented any State provisions. |
| 8 | The purpose of the legislation creating the SBA is to:
...improve and stimulate the national economy in general and the small-business segment thereof in particular by establishing a program to stimulate and supplement the flow of private equity capital and long-term loan funds which small-business concerns need for the sound financing of their business operations and for their growth, expansion, and modernization, and which are not available in adequate supply. See Small Business Investment Act of 1958, Pub. L. No. 85-699, Section 102 (1958). |
| 9 | Note that after the SBA purchases an SBIC's securities, the SBA may resell those securities to the public backed by the full and unconditional guarantee of the SBA ("SBA-guaranteed SBIC securities"). The SBA's full and unconditional guarantee of SBA-guaranteed SBIC securities reduces any investor protection concerns that may be raised by the offer and sale of those securities. |
http://www.sec.gov/divisions/investment/noaction/windamere072301.htm
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