[Federal Register Volume 77, Number 4 (Friday, January 6, 2012)]
[Notices]
[Pages 826-828]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-33859]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 29896; 812-13781]


Cantilever Capital, LLC and Cantilever Group, LLC; Notice of 
Application

December 29, 2011.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTIONS: Notice of application for an order under section 6(c) of the 
Investment Company Act of 1940 (the ``Act'') granting an exemption from 
section 12(d)(3) of the Act.

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Applicants: Cantilever Capital, LLC (``Cantilever'' or the ``Company'') 
and Cantilever Group, LLC (the ``Adviser'').

Summary of Application: Cantilever, or any successor to Cantilever, and 
the Adviser, or any successor to the Adviser (each, an ``Applicant'' 
and collectively, the ``Applicants'') seek an order under section 6(c) 
of the Act to permit Cantilever to acquire the securities of various 
investment managers that each derives more than 15% of its gross 
revenues from securities related activities as defined in rule 12d3-
1(d)(1) under the Act, in excess of the limitations in rule 12d3-
1(b).\1\
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    \1\ For the purposes of the requested order, ``successor'' is 
limited to an entity or entities that result from a reorganization 
into another jurisdiction or a change in the type of business 
organization.

DATES: Filing Dates: The application was filed on June 8, 2010, and 
amended on October 18, 2010, and December 5, 2011. Applicants have 
agreed to file an amendment during the notice period, the substance of 
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which is reflected in this notice.

Hearing or Notification of Hearing: An order granting the requested 
relief will be issued unless the Commission orders a hearing. 
Interested persons may request a hearing by writing to the Commission's 
Secretary and serving applicants with a copy of the request, personally 
or by mail. Hearing requests should be received by the Commission by 
5:30 p.m. on January 23, 2012, and should be accompanied by proof of 
service on the applicants, in the form of an affidavit or, for lawyers, 
a certificate of service. Hearing requests should state the nature of 
the writer's interest, the reason for the request, and the issues 
contested. Persons who wish to be notified of a hearing may request 
notification by writing to the Commission's Secretary.

ADDRESSES: Secretary, Securities and Exchange Commission, 100 F Street 
NE. Washington, DC 20549-1090. Applicants, c/o Mr. David Ballard, 
Cantilever Capital, LLC, 137 Rowayton Ave., Third Floor, Rowayton, CT 
06853.

FOR FURTHER INFORMATION CONTACT: Jean E. Minarick, Senior Counsel, at 
(202) 551-6811, or Janet M. Grossnickle, Assistant Director, at (202) 
551-6821 (Division of Investment Management, Office of Investment 
Company Regulation).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained via the 
Commission's Web site by searching for the file number, or for an 
applicant using the Company name box, at http://www.sec.gov/search/search.htm, or by calling (202) 551-8090.

Applicants' Representations

    1. The Company, a Delaware limited liability company, intends to 
operate as a non-diversified, closed-end management investment company 
under the Act. The Company intends to elect to be treated as a business 
development company under section 54 of the Act on or before June 30, 
2014.\2\ The Adviser is a Delaware limited liability company organized 
to manage the Company, which will be the sole client of the Adviser, 
and will not engage in any other business. Cantilever will invest more 
than 70% of the total value of its assets in securities of private 
companies engaged exclusively in the investment management business 
(each, an ``Investment Manager''), with the exception that certain 
Investment Managers may, through affiliates (as defined below) or 
subsidiaries, also provide limited broker-dealer services in connection 
with distribution of their investment products or as part of a wealth 
management business. Applicants expect that more than 15% of the 
revenues of each Investment Manager will be from ``securities related 
activities'' as defined in rule 12d3-1(d)(1) under the Act.\3\
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    \2\ Section 2(a)(48) of the 1940 Act defines a business 
development company to be any closed-end investment company that 
operates for the purposes of making investment in securities 
described in sections 55(a)(1) through 55(a)(3) of the Act, makes 
available significant managerial assistance with respect to the 
issuers of such securities and has elected to be subject to the 
provisions of section 55 through 65 of the 1940 Act.
    \3\ Subparagraph (d)(1) of rule 12d3-1 defines ``securities 
related activities'' to mean a person's activities as a broker, 
dealer, underwriter, registered investment adviser or investment 
adviser to a registered investment company.
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    2. Applicants will offer to make available to the Investment 
Managers, and if desired by the Investment Managers provide, managerial 
services including distribution and marketing advice; guidance on 
industry best practices; advice on planning, strategy and product 
development; geographic expansion and mergers and acquisitions, joint 
ventures, and liftouts; advice on operations, accounting, legal, 
capital structure, human resources and compensation, general management 
and industry networking. Neither the Applicants nor their affiliates 
will provide any managerial assistance that includes any activity 
involving any Investment Manager's investment process or investment 
decisions.
    3. The Company will provide debt capital to Investment Managers,

[[Page 827]]

including Investment Managers that are or may become registered under 
the Investment Advisers Act of 1940. In exchange for a non-voting, non-
controlling loan from the Company or its affiliates (as defined below), 
the Investment Manager will issue a participating convertible debt 
security to the Company (each, a ``Note'' and such loan, a ``Loan''). 
Each Note will have a coupon and will provide for repayment of 
principal at the Note's maturity (such maturity is contemplated to be 
20 years after the issue date) in the event that it is not converted 
into equity of the underlying Investment Manager at such time. If 
converted into equity, it is expected that in most cases the equity 
security received from the conversion of the Notes would consist of 
non-voting securities and in any case would not represent more than 25% 
of outstanding voting securities, or otherwise constitute control, of 
the underlying Investment Manager. The Notes will not be actively or 
publicly traded; they will be purchased by the Company in private 
transactions and, generally, held to maturity.
    4. Applicants represent that most of the Investment Managers 
issuing the Notes will be registered investment advisers and the vast 
majority of each Investment Manager's revenue will be earned by 
charging a fee on assets under management or possibly also through a 
performance fee. The amount of the Company's investments in each of the 
Notes, which Applicants believe will be treated as equity securities 
for purposes of rule 12d3-1, will likely constitute more than 5% of the 
outstanding equity securities of each Investment Manager at the time of 
the investment. In the event the Company invests in Notes of an 
Investment Manager that are treated as debt securities for purposes of 
rule 12d3-1, the principal amount of that debt will likely exceed 10% 
of the outstanding principal amount of the Investment Manager's debt 
securities. In addition, Applicants believe that there will be 
instances whereby more than 5% of the value of Applicant's total assets 
will be invested in each of several of the Investment Managers.\4\
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    \4\ In order to comply with the Internal Revenue Code's 
diversification requirements for regulated investment companies, it 
is contemplated that, with respect to at least 50% of the Company's 
total assets, each of the investments in an Investment Manager will 
not constitute more 5% of the Company's total assets at the time of 
investment. However, with respect to the remaining 50% of the 
Company's total assets, the Company intends to make investments that 
each constitute more than 5% but less than 25% of the value of the 
Company's total assets, as measured at the time of the acquisition.
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    5. Applicants believe that permitting the Company to invest in the 
equity and debt securities of various Investment Managers, each of 
which the Applicants believe will be an issuer that derives more than 
15% of its gross revenues from ``securities related activities,'' in 
excess of the quantitative limitations set forth in rule 12d3-1(b) 
would be in the best interests of the Company's shareholders. 
Applicants will comply with all other requirements of rule 12d3-1. 
Applicants will require each of the Investment Managers to 
contractually agree to be bound by the terms of the conditions of the 
application.

Applicants' Legal Analysis

    1. Section 12(d)(3) of the Act, with limited exceptions, prohibits 
a registered investment company from purchasing or otherwise acquiring 
any securities issued by any person who is a broker, a dealer, is 
engaged in the business of underwriting, or is either an investment 
adviser of a registered investment company or a registered investment 
adviser. Rule 12d3-1 under the Act exempts the acquisition of 
securities of an issuer that derived more than 15% of its gross 
revenues in its most recent fiscal year from ``securities related 
activities,'' provided that, among other things, immediately after the 
acquisition of such issuer's equity or debt securities, (i) the 
acquiring company has invested not more than 5% of the value of its 
total assets in securities of the issuer and (ii) the acquiring company 
owns (a) with respect to that class of the issuer's equity securities, 
not more than 5% of the outstanding securities of that class or (b) 
with respect to the issuer's debt securities, not more than 10% of the 
outstanding principal amount of the issuer's debt securities. Section 
6(c) of the Act provides that the Commission may conditionally or 
unconditionally exempt any person, security or transaction from any 
provision of the Act or any rule thereunder, if and to the extent that 
such exemption is necessary or appropriate in the public interest and 
consistent with the protection of investors and the purposes fairly 
intended by the policy and provisions of the Act.
    2. The Applicants request an order pursuant to section 6(c) of the 
Act exempting the Applicants from the provisions of section 12(d)(3) of 
the Act to the extent necessary to permit the Applicants to invest in 
the equity and debt securities of various Investment Managers, each an 
issuer that derives more than 15% of its gross revenues from 
``securities related activities,'' in excess of the quantitative 
limitations set forth in rule 12d3-1(b).
    3. The Applicants state that section 12(d)(3) was intended (a) to 
prevent investment companies from exposing their assets to the 
entrepreneurial risks of securities related businesses, (b) to prevent 
potential conflicts of interest and to eliminate certain reciprocal 
practices between investment companies and securities related 
businesses, and (c) to ensure that investment companies maintain 
adequate liquidity in their portfolios.
    4. The Applicants believe that the Company's investment in various 
Investment Managers does not raise the same type of entrepreneurial 
risks that may have concerned Congress in enacting section 12(d)(3). 
The Applicants state that the ownership structure of most securities 
related businesses has changed since the time of enactment from 
partnership to a corporate form resulting in the limited liability 
status of these entities. In this case, the Company states that it will 
invest only in Investment Managers organized as corporations or other 
limited liability entities. The Applicants argue that shareholders 
choosing to invest in the Company will have sought exposure to a 
vehicle that that provides a non-diversified investment in one or more 
Investment Managers, and the Company's shareholders will be informed of 
the risks, including entrepreneurial risk, of investing in the Company 
by disclosure in the Company's prospectus in connection with its 
initial public offering and its ongoing disclosure as a public company 
following the offering.
    5. The Applicants also believe that the proposed investments in 
various Investment Managers will not create potential conflicts of 
interest for the Applicants or their respective shareholders. One 
potential conflict could occur if an investment company purchased 
securities or other interests in a broker-dealer to reward that broker-
dealer for selling fund shares, rather than solely on investment merit. 
The Applicants note that, as a condition to the granting of exemptive 
relief, the Investment Managers and their affiliated persons within the 
meaning of section 2(a)(3) of the Act and affiliated persons of such 
affiliated persons (collectively, ``Affiliates'') and the clients of 
the Investment Manager will not buy, sell or otherwise trade any 
securities issued by the Applicants or any of its Affiliates.
    6. Applicant states that another potential conflict of interest is 
that investment advisers could be influenced to recommend to their 
clients certain investment companies that invest in

[[Page 828]]

such investment adviser or its affiliates, thereby using the assets of 
the investment companies to boost the price of the investment adviser's 
securities. Applicant notes that, as a condition to the requested 
order, the Investment Managers and their Affiliates will not sell any 
securities issued by the Applicants as an underwriter, will not make a 
market in any securities issued by the Applicants, will not act as 
agent or a broker in connection with the sale of any shares of the 
Applicants and will not recommend investing in securities of the 
Applicants.
    7. The Applicants state that another purpose of section 12(d)(3) is 
to prevent investment companies from directing brokerage to a broker-
dealer in which the investment company has invested to enhance the 
broker-dealer's profitability or to assist it during financial 
difficulty, even though that broker-dealer may not offer the best price 
and execution. The Company represents that its business is to provide 
specialized debt capital to Investment Managers. The Applicants also 
represent that Investment Managers today typically do not serve as 
underwriters and broker-dealers (except as noted above) and thus it is 
highly unlikely that there would be any opportunity to engage in any 
transaction with an Investment Manager or its Affiliates, other than 
the Company's investment (and any follow-on investment) in such 
Investment Manager. Further, as a condition to the requested order, the 
Applicants will not use any Investment Manager or any Affiliate thereof 
as a broker-dealer for the purchase or sale of any portfolio 
securities.
    8. The Applicants also believe that section 12(d)(3) reflects a 
concern with respect to the liquidity of an investment company's 
portfolio. Because the shareholders that will invest in the Company 
prior to its initial public offering (each of which will be intimately 
familiar with the business of the Company) will have done so for the 
specific purpose of buying and holding a vehicle that would provide for 
an investment in Investment Managers, liquidity of the Company's 
portfolio is not a concern for the Company's shareholders. Furthermore, 
shareholders that invest in the Company during or following the initial 
public offering will receive disclosure (i) in the Company's prospectus 
in connection with its initial public offering and (ii) pursuant to its 
ongoing reporting requirements as a public company following its 
initial public offering. Such disclosure will describe the fact that 
the Company's business (like that of business development companies 
generally) is investing in illiquid investments of small, developing 
companies, and more specifically, purchasing Notes in Investment 
Managers. Moreover, the Company is a closed-end investment company that 
does not offer redeemable securities; therefore, there are no minimum 
liquidity standards applicable to the Company under the Act.
    9. Applicant believes that its proposed acquisitions of the 
securities of various Investment Managers do not present the potential 
for the risks and abuses section 12(d)(3) is intended to eliminate, 
including the risk of reciprocal practices. The Applicants believe that 
the standards set forth in section 6(c) have been met.

Applicants' Conditions

    The Applicants agree that the order granting the requested relief 
will be subject to the following conditions:
    1. Neither of the Applicants and none of their respective 
Affiliates will engage in any transaction with an Investment Manager 
other than (i) the Company's investment in the Investment Manager (and 
any follow-on investment) and (ii) the Company's providing managerial 
assistance to an Investment Manager. The managerial assistance provided 
by the Company or any of its Affiliates will not include any activity 
involving any Investment Manager's investment process or investment 
decisions.
    2. No Investment Manager or its Affiliates or client of an 
Investment Manager or its Affiliates will (i) buy, sell or otherwise 
trade securities issued by the Applicants or any of their respective 
Affiliates, or (ii) buy, sell or otherwise trade securities owned by 
the Applicants or any of their respective Affiliates in transactions 
involving the Applicants or any of their respective Affiliates. Nor 
will any Investment Manager or its Affiliates sell any securities 
issued or owned by the Applicants or any of their respective Affiliates 
as an underwriter, make a market in any securities issued or owned by 
the Applicants or act as agent or as a broker in connection with the 
sale of any securities issued or owned by the Applicants or any of 
their respective Affiliates or recommend to their clients the purchase 
of any such securities.
    3. Neither of the Applicants nor any of their respective Affiliates 
will use any Investment Manager or any Affiliate thereof as a broker-
dealer for the purchase or sale of any portfolio securities.
    4. No Investment Manager or its Affiliates will provide any 
services to the Applicants or any of their respective Affiliates.
    5. No officer of the Applicants or member of the Applicants' board 
of managers (``Board'') will be affiliated with an Investment Manager 
or its Affiliates. The Applicants, their respective Affiliates or their 
officers or directors will not (i) serve on the board of directors of 
an Investment Manager, (ii) participate in the management of an 
Investment Manager (except for providing managerial assistance) or 
(iii) have other indicia of control as defined in the Act (other than 
typical rights of debt holders, including, but not limited to, access 
to certain information). The only affiliation the Applicants (or any of 
their respective officers or members) will have will be as a provider 
of debt capital.
    6. The Applicants' respective Chief Compliance Officers will 
monitor and report to the applicable Applicant's Board no less than 
annually on compliance with these conditions.
    7. The Applicants will comply with the provisions of rule 12d3-1 
under the Act, except for paragraph (b) solely to the extent necessary 
to permit the Company to invest (i) more than 5% of the value of its 
total assets in equity securities issued by a registered investment 
adviser, (ii) in more than 5% of the outstanding equity securities of a 
registered investment adviser, and (iii) in more than 10% of the 
outstanding principal amount of a registered investment adviser's debt 
securities, provided that, (aa) immediately after the Company makes an 
investment permitted by (i) and/or (ii), not more than 50% of the value 
of the Company's total assets will consist of investments permitted by 
(i) and/or (ii), (bb) in no event will the Company acquire more than 
25% of the outstanding voting securities of a registered investment 
adviser or otherwise control a registered investment adviser, and (cc) 
immediately after the Company makes an investment permitted by (iii), 
not more than 10% of the value of the Company's total assets will 
consist of investments permitted by (iii).\5\
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    \5\ For the purposes of this paragraph, the terms ``equity 
security'' and ``debt securities'' have the meanings given them in 
Rule 12d3-1.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-33859 Filed 1-5-12; 8:45 am]
BILLING CODE 8011-01-P