[Federal Register Volume 83, Number 248 (Friday, December 28, 2018)]
[Notices]
[Pages 67447-67451]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-28318]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 33341; File No. 812-14910]


Hercules Capital, Inc.

December 21, 2018.

AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice.

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    Notice of an application for an order under section 6(c) of the 
Investment Company Act of 1940 (the ``Act'') for an exemption from 
sections 23(a), 23(b) and 63 of the Act; under sections 57(a)(4) and 
57(i) of the Act and rule 17d-1 under the Act permitting certain joint 
transactions otherwise prohibited by section 57(a)(4) of the Act; and 
under section 23(c)(3) of the Act for an exemption from section 23(c) 
of the Act.

SUMMARY OF THE APPLICATION:  Hercules Capital, Inc. (``Company'' or 
``Applicant'') requests an order that would permit Applicant to (i) 
issue restricted shares of its common stock (``Restricted Stock'') as 
part of the compensation package for its non-employee directors (the 
``Non-Employee Directors'') \1\ through its 2018 Non-Employee Director 
Plan (the ``Non-Employee Director Plan'') for Non-Employee Director 
Participants, (ii) issue Restricted Stock and Restricted Stock Units 
\2\ (i.e., the right to receive, on the date of settlement, one share 
of common stock or an amount equal to the fair market value of one 
share of common stock) as part of the compensation package for certain 
of its employees, officers and directors, excluding the Non-Employee 
Directors, through its Amended and Restated 2018 Equity Incentive Plan 
(the ``Equity Incentive Plan''), (iii) withhold shares of the 
Applicant's common stock or purchase shares of Applicant's common stock 
from Participants to satisfy tax

[[Page 67448]]

withholding obligations relating to the vesting of Restricted Stock or 
Restricted Stock Units or the exercise of options to purchase shares of 
Applicant's common stock (``Options'') that will be granted pursuant to 
the Equity Incentive Plan \3\ and (iv) permit Participants to pay the 
exercise price of Options that will be granted to them pursuant to the 
Equity Incentive Plan with shares of Applicant's common stock.
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    \1\ Employees, officers and employee directors, together the 
``Employee Participants'' and each an ``Employee Participant.'' The 
Employee Participants and the Non-Employee Directors, together the 
``Participants'' and each, a ``Participant.''
    \2\ Restricted Stock and Restricted Stock Units are collectively 
referred to herein as Restricted Stock.
    \3\ Options will not be granted to Non-Employee Directors and, 
therefore, no relief is sought in the application for the grant of 
Options.

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APPLICANT:  Hercules Capital, Inc.

FILING DATES:  The application was filed on May 29, 2018, and amended 
on September 27, 2018.

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 applicant 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 15, 2019 and should be accompanied by proof of 
service on applicant, in the form of an affidavit, or for lawyers, a 
certificate of service. Pursuant to rule 0-5 under the Act, hearing 
requests should state the nature of the writer's interest, any facts 
bearing upon the desirability of a hearing on the matter, 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. Applicant: Manuel A. Henriquez, Chief 
Executive Officer, Hercules Capital, Inc., 400 Hamilton Avenue, Suite 
310, Palo Alto, California 94301.

FOR FURTHER INFORMATION CONTACT: Elizabeth G. Miller, Senior Counsel, 
at (202) 551-8707, or Aaron Gilbride, Branch Chief, at (202) 551-6825, 
(Division of Investment Management, Chief Counsel's Office).

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

Applicant's Representations

    1. The Company is an internally managed, non-diversified, closed-
end investment company that has elected to be regulated as a business 
development company (``BDC'') under the Act. Applicant represents that 
it is a specialty finance company focused on providing senior secured 
loans to high-growth, innovative venture capital-backed companies in a 
variety of technology, life sciences, and sustainable and renewable 
technology industries. Applicant was incorporated under General 
Corporation Law of the State of Maryland in December 2003. As of March 
31, 2018, Applicant had 64 employees.
    2. Hercules Technology II, L.P. (``HT II''), Hercules Technology 
III, L.P. (``HT III''), and Hercules Technology IV, L.P. (``HT IV'') 
are Delaware limited partnerships that were formed in January 2005, 
September 2009 and December 2010, respectively. HT II and HT III were 
licensed to operate as small business investment companies (``SBICs'') 
under the authority of the Small Business Administration on September 
27, 2006 and May 26, 2010, respectively. HT IV was formed in 
anticipation of receiving an additional SBIC license; however, the 
Company has not received such license and HT IV currently has no 
material assets or liabilities. The Company also formed Hercules 
Technology SBIC Management, LLC (``HTM''), a limited liability company 
in November 2003. HTM is a wholly owned subsidiary of Applicant and 
serves as the limited partner and general partner of HT II and HT III. 
HT II and HT III hold approximately $113.1 million and $285.8 million 
in assets, respectively, and they accounted for approximately 5.7% and 
14.4% of Applicant's total assets, respectively, prior to consolidation 
at March 31, 2018.
    3. Applicant also established wholly own subsidiaries, all of which 
are structured as Delaware corporations and limited liability 
companies, to hold portfolio companies organized as limited liability 
companies (or other forms of pass-through entities).
    4. Applicant currently has an eight-member board of directors (the 
``Board'') of whom seven are Non-Employee Directors or non-interested 
persons of Applicant within the meaning of section 2(a)(19), and one is 
considered an ``interested person'' of Applicant.
    5. Applicant believes that, because the market for superior 
investment professionals is highly competitive, Applicant's successful 
performance depends on its ability to offer fair compensation packages 
to its professionals that are competitive with those offered by other 
investment management businesses. Applicant states that the ability to 
offer equity-based compensation to its employees and Non-Employee 
Directors, which both aligns employee and Board behavior with 
stockholder interests and provides a retention tool, is vital to 
Applicant's future growth and success.
    6. The Applicant's 2006 Non-Employee Director Plan, as amended in 
2007 (the ``2006 Plan'') terminated in accordance with its terms in 
2017, and no new awards are permitted to be granted under the 2006 Plan 
after its termination. The 2006 Plan provided for the grant of Options 
and shares of Restricted Stock subject to certain forfeiture 
restrictions to Non-Employee Directors. As a result of the termination 
of the 2006 Plan, the Non-Employee Director Plan was adopted on May 13, 
2018 by the Board, including the required majority as defined in 
Section 57(o) (the ``Required Majority''),\4\ and will be administered 
by a committee designated by the Board, the composition of which 
consists of ``non-employee directors'' within the meaning of rule 16b-3 
(the ``Compensation Committee'').
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    \4\ Section 57(o) of the Act provides that the term ``required 
majority,'' when used with respect to the approval of a proposed 
transaction, plan, or arrangement, means both a majority of a BDC's 
directors or general partners who have no financial interest in such 
transaction, plan, or arrangement and a majority of such directors 
or general partners who are not interested persons of such company.
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    7. The Non-Employee Plan provides for the grant of Restricted 
Stock, but unlike the 2006 Plan, does not provide for the grant of 
Options. Issuance of the Restricted Stock will allow the Non-Employee 
Directors to become owners of the Applicant's stock with a vested 
interest in value maintenance, income stream and stock appreciation, 
which interests align with those of the Applicant's stockholders.
    8. Shares of Restricted Stock granted automatically under the Non-
Employee Director Plan (i) upon initial election to the Board, are no 
longer subject to forfeiture restrictions, as to one-third immediately 
after the expiration of 33% of the initial three-year term, as to an 
additional one-third immediately after the expiration of 66% of the 
initial three-year term and the remaining one-third on the third 
anniversary of the commencement date of the applicable three-year 
staggered class term, and (ii) upon reelection to the Board, are no 
longer subject to forfeiture restrictions as to one-third of such 
shares on the anniversary of such grant over three years.
    9. The maximum aggregate number of shares of common stock that may 
be authorized for issuance under awards of Restricted Stock under the 
Non-

[[Page 67449]]

Employee Director Plan is 300,000 shares. The maximum number of shares 
of common stock for which any Non-Employee Director may be granted 
awards under the Non-Employee Director Plan in any calendar year is 
20,000 shares.
    10. Shares of Restricted Stock will not be transferable except for 
disposition by will or the laws of descent and distribution or by gift 
to a permitted transferee. If any award of Restricted Stock for any 
reason is forfeited or otherwise terminates, in whole or in part, the 
shares not acquired under such award of Restricted Stock will revert to 
and again become available for issuance under the Non-Employee Director 
Plan on a one-for-one basis.
    11. Unless sooner terminated by the Board, the Non-Employee 
Director Plan will terminate on the day before the tenth anniversary of 
the date the Non-Employee Director Plan is initially adopted by the 
Board or approved by stockholders, whichever is earlier.
    12. The Applicant's Amended and Restated 2004 Equity Incentive Plan 
(the ``2004 EIP'') provides for grants of Options, Restricted Stock, 
restricted stock units (i.e., the right to receive, on the date of 
settlement, one share of common stock or an amount equal to the fair 
market value of one share of common stock) (``Restricted Stock 
Units''), Performance Restricted Stock Units and other performance-
based awards (collectively, ``Awards'') and warrants to Employee 
Participants. Applicant proposes to amend and restate the 2004 EIP, in 
its entirety, as the ``Equity Incentive Plan.'' The Equity Incentive 
Plan was adopted on May 13, 2018 by the Board, including the Required 
Majority, and will be administered by the Compensation Committee.
    13. The Equity Incentive Plan provides for grants of Awards, but, 
unlike the 2004 EIP, does not provide for grants of warrants. The 
Equity Incentive Plan permits Employee Participants, subject to 
approval of the Board and if permitted by law, to pay the exercise 
price of Options with shares of the Applicant's common stock. The 
maximum aggregate number of shares of common stock that may be 
authorized for issuance under Awards granted under the Equity Incentive 
Plan is 9,261,229 shares, less one share for every one share issued 
under the plan after March 31, 2018 and prior to the date the plan is 
approved by stockholders. Notwithstanding anything to the contrary, the 
following shares will not revert to and again be available for 
issuance: (i) Shares tendered by an Employee Participant or withheld by 
the Applicant in payment of the purchase price of an Option; (ii) 
shares tendered by an Employee Participant or withheld by the Applicant 
to satisfy any tax withholding obligation with respect to Options; and 
(iii) shares reacquired by the Applicant on the open market or 
otherwise using cash proceeds from the exercise of Options.
    14. The Board, including the Required Majority, found that the 
issuance of Awards will allow the Applicant to align its business plan, 
stockholder interests and employee interests based on the nature of the 
Applicant's business. Issuance of certain Awards will allow the 
Employee Participants to become owners of the Applicant's stock with a 
vested interest in value maintenance, income stream and stock 
appreciation, which interests align with those of the Applicant's 
stockholders.
    15. Unless sooner terminated by the Board, the Equity Incentive 
Plan will terminate on the day before the tenth anniversary of the date 
the Equity Incentive Plan is initially adopted by the Board or approved 
by stockholders, whichever is earlier.

Applicant's Legal Analysis

Sections 23(a) and (b), Section 63

    1. Under section 63 of the Act, the provisions of section 23(a) of 
the Act generally prohibiting a registered closed-end investment 
company from issuing securities for services or for property other than 
cash or securities are made applicable to BDCs. This provision would 
prohibit the issuance of Restricted Stock as a part of the Plans.
    2. Section 23(b) of the Act generally prohibits a registered 
closed-end investment company from selling any common stock of which it 
is the issuer at a price below its current net asset value. Section 
63(2) of the Act makes section 23(b) applicable to BDCs unless certain 
conditions are met. Because Restricted Stock that would be granted 
under the Plans would not meet the terms of section 63(2), sections 
23(b) and 63 would prevent the issuance of Restricted Stock.
    3. Section 6(c) provides, in part, that the Commission may, by 
order upon application, conditionally or unconditionally exempt any 
person, security, or transaction, or any class or classes thereof, from 
any provision of the Act, if and to the extent that the 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.
    4. Applicant requests an order pursuant to section 6(c) of the Act 
granting an exemption from the provisions of sections 23(a), 23(b) and 
63 of the Act. Applicant states that the Plans would not violate the 
concerns underlying these sections, which include: (a) Preferential 
treatment of investment company insiders and the use of options and 
other rights by insiders to obtain control of the investment company; 
(b) complication of the investment company's structure that made it 
difficult to determine the value of the company's shares; and (c) 
dilution of shareholders' equity in the investment company. Applicant 
asserts that the Restricted Stock element of the Plans does not raise 
concerns about preferential treatment of Applicant's insiders because 
this element is a bona fide compensation plan of the type that is 
common among corporations generally. In addition, section 61(a)(3)(B) 
of the Act permits a BDC to issue to its directors, officers, 
employees, and general partners warrants, options, and rights to 
purchase the BDC's voting securities pursuant to an executive 
compensation plan, subject to certain conditions. Applicant states 
that, for reasons that are unclear, section 61 and its legislative 
history do not address the issuance by a BDC of restricted stock as 
incentive compensation. Applicant believes, however, that the issuance 
of Restricted Stock is substantially similar, for purposes of investor 
protection under the Act, to the issuance of warrants, options, and 
rights as contemplated by section 61. Applicant also asserts that the 
issuance of Restricted Stock would not become a means for insiders to 
obtain control of Applicant because the maximum amount of Restricted 
Stock that may be issued under the Plans and the 2006 Plan at any one 
time will be ten percent of the outstanding shares of common stock of 
Applicant.
    5. Applicant further states that the Restricted Stock feature will 
not unduly complicate Applicant's capital structure because equity-
based incentive compensation arrangements are widely used among 
corporations and commonly known to investors. Applicant notes that the 
Plans will be submitted for approval to the Applicant's stockholders. 
Applicant represents that the proxy materials submitted to Applicant's 
stockholders will contain a concise ``plain English'' description of 
the Plans and their potential dilutive effect. Applicant also states 
that it will comply with the proxy disclosure requirements in Item 10 
of Schedule 14A under the Securities Exchange Act of 1934. Applicant 
further notes that the Plans will be disclosed to

[[Page 67450]]

investors in accordance with the requirements of the Form N-2 
registration statement for closed-end investment companies and pursuant 
to the standards and guidelines adopted by the Financial Accounting 
Standards Board for operating companies. Applicant also will comply 
with the disclosure requirements for executive compensation plans 
applicable to BDCs.\5\ Applicant thus concludes that the Plans will be 
adequately disclosed to investors and appropriately reflected in the 
market value of Applicant's shares.
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    \5\ See Executive Compensation and Related Party Disclosure, 
Securities Act Release No. 8655 (Jan. 27, 2006) (proposed rule); 
Executive Compensation and Related Party Disclosure, Securities Act 
Release No. 8732A (Aug. 29, 2006) (final rule and proposed rule), as 
amended by Executive Compensation Disclosure, Securities Act Release 
No. 8756 (Dec. 22, 2006) (adopted as interim final rules with 
request for comments).
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    6. Applicant acknowledges that awards granted under the Plans may 
have a dilutive effect on the stockholders' equity per share in 
Applicant, but believes that effect would be outweighed by the 
anticipated benefits of the Plans to Applicant and its stockholders. 
Moreover, based on the manner in which the issuance of Restricted Stock 
pursuant to the Plans will be administered, the Restricted Stock will 
be no more dilutive than if Applicant were to issue only Options to 
Participants who are employees, as is permitted by section 61(a)(3) of 
the Act. Applicant asserts that it needs the flexibility to provide the 
requested equity-based compensation in order to be able to compete 
effectively with commercial banks, investment banks, and other publicly 
traded companies that also are not investment companies registered 
under the Act for talented professionals. These professionals, 
Applicant suggests, in turn are likely to increase Applicant's 
performance and stockholder value. Applicant also asserts that equity-
based compensation would more closely align the interests of 
Applicant's employees and Non-Employee Directors with those of its 
stockholders. In addition, Applicant states that its stockholders will 
be further protected by the conditions to the requested order that 
assure continuing oversight of the operation of the Plans by the Board.

Section 57(a)(4), Rule 17d-1

    7. Section 57(a) proscribes certain transactions between a BDC and 
persons related to the BDC in the manner described in section 57(b) 
(``57(b) persons''), absent a Commission order. Section 57(a)(4) 
generally prohibits a 57(b) person from effecting a transaction in 
which the BDC is a joint participant absent such an order. Rule l7d-1, 
made applicable to BDCs by section 57(i), proscribes participation in a 
``joint enterprise or other joint arrangement or profit-sharing plan,'' 
which includes a stock option or purchase plan. Employees and directors 
of a BDC are 57(b) persons. Thus, the issuance of shares of Restricted 
Stock could be deemed to involve a joint transaction involving a BDC 
and a 57(b) person in contravention of section 57(a)(4). Rule 17d-1(b) 
provides that, in considering relief pursuant to the rule, the 
Commission will consider (a) whether the participation of the BDC in a 
joint enterprise is consistent with the policies and purposes of the 
Act and (b) the extent to which such participation is on a basis 
different from or less advantageous than that of other participants.
    8. Applicant requests an order pursuant to sections 57(a)(4) and 
57(i) of the Act and rule 17d-1 under the Act to permit Applicant to 
issue Restricted Stock under the Plans. Applicant acknowledges that its 
role is necessarily different from the other participants because the 
other participants are its directors and employees. It notes, however, 
that the Plans are in the interest of the Applicant's stockholders, 
because the Plans will help align the interests of Applicant's 
employees with those of its stockholders, which will encourage conduct 
on the part of those employees designed to produce a better return for 
Applicant's stockholders. Additionally, section 57(j)(1) of the Act 
expressly permits any director, officer or employee of a BDC to acquire 
warrants, options and rights to purchase voting securities of such BDC, 
and the securities issued upon the exercise or conversion thereof, 
pursuant to an executive compensation plan which meets the requirements 
of section 61(a)(3)(B) of the Act. Applicant submits that the issuance 
of Restricted Stock pursuant to the Plans poses no greater risk to 
stockholders than the issuances permitted by section 57(j)(1) of the 
Act.

Section 23(c)

    9. Section 23(c) of the Act, which is made applicable to BDCs by 
section 63 of the Act, generally prohibits a BDC from purchasing any 
securities of which it is the issuer except in the open market pursuant 
to tenders, or under other circumstances as the Commission may permit 
to ensure that the purchases are made in a manner or on a basis that 
does not unfairly discriminate against any holders of the class or 
classes of securities to be purchased. Applicant states that the 
withholding or purchase of shares of Restricted Stock and common stock 
in payment of applicable withholding tax obligations or of common stock 
in payment for the exercise price of a stock option might be deemed to 
be purchases by the Company of its own securities within the meaning of 
section 23(c) and therefore prohibited by the Act.
    10. Section 23(c)(3) of the Act permits a BDC to purchase 
securities of which it is the issuer in circumstances in which the 
repurchase is made in a manner or on a basis that does not unfairly 
discriminate against any holders of the class or classes of securities 
to be purchased. Applicant believes that the requested relief meets the 
standards of section 23(c)(3).
    11. Applicant submits that these purchases will be made in a manner 
that does not unfairly discriminate against Applicant's stockholders 
because all purchases of Applicant's stock will be at the closing price 
of the common stock on the Nasdaq Global Market (or any primary 
exchange on which its shares of common stock may be traded in the 
future) on the relevant date (i.e., the public market price on the date 
of grant of Restricted Stock and the date of grant of Options). 
Applicant submits that because all transactions with respect to the 
Plans will take place at the public market price for the Applicant's 
common stock, these transactions will not be significantly different 
than could be achieved by any stockholder selling in a market 
transaction. Applicant represents that no transactions will be 
conducted pursuant to the requested order on days where there are no 
reported market transactions involving Applicant's shares.
    12. Applicant represents that the withholding provisions in the 
Plans do not raise concerns about preferential treatment of Applicant's 
insiders because each Plan is a bona fide compensation plan of the type 
that is common among corporations generally. Furthermore, the vesting 
schedule is determined at the time of the initial grant of the 
Restricted Stock and the option exercise price is determined at the 
time of the initial grant of the Options. Applicant represents that all 
purchases may be made only as permitted by the Plans, which will be 
approved by the Applicant's stockholders prior to any application of 
the relief. Applicant believes that granting the requested relief would 
be consistent with the policies underlying the provisions of the Act 
permitting the use of equity compensation as well as prior exemptive 
relief granted by the

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Commission under section 23(c) of the Act.

Applicant's Conditions

    Applicant agrees that the order granting the requested relief will 
be subject to the following conditions:
    1. The Plans will be authorized by Applicant's stockholders.
    2. Each issuance of Restricted Stock to an officer, employee, or 
Non-Employee Director will be approved by the Required Majority of 
Applicant's directors on the basis that such grant is in the best 
interest of Applicant and its stockholders.
    3. The amount of voting securities that would result from the 
exercise of all of Applicant's outstanding warrants, options and 
rights, together with any Restricted Stock issued under the Plans and 
the 2006 Plan, at the time of issuance shall not exceed 25% of the 
outstanding voting securities of the Company, except that if the amount 
of voting securities that would result from the exercise of all of the 
Company's outstanding warrants, options and rights issued to the 
Company's directors, officers and employees, together with any 
Restricted Stock issued pursuant to the Plans and the 2006 Plan, would 
exceed 15% of the outstanding voting securities of the Company, then 
the total amount of voting securities that would result from the 
exercise of all outstanding warrants, options and rights, together with 
any Restricted Stock issued pursuant to the Plans and the 2006 Plan, at 
the time of issuance shall not exceed 20% of the outstanding voting 
securities of the Company.
    4. The amount of Restricted Stock issued and outstanding will not 
at the time of issuance of any shares of Restricted Stock exceed ten 
percent of Applicant's outstanding voting securities.
    5. The Board will review the Plans at least annually. In addition, 
the Board will review periodically the potential impact that the 
issuance of Restricted Stock under the Plans could have on Applicant's 
earnings and net asset value per share, such review to take place prior 
to any decisions to grant Restricted Stock under the Plans, but in no 
event less frequently than annually. Adequate procedures and records 
will be maintained to permit such review. The Board will be authorized 
to take appropriate steps to ensure that the issuance of Restricted 
Stock under the Plans will be in the best interest of Applicant's 
stockholders. This authority will include the authority to prevent or 
limit the granting of additional Restricted Stock under the Plans. All 
records maintained pursuant to this condition will be subject to 
examination by the Commission and its staff.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Brent J. Fields,
Secretary.
[FR Doc. 2018-28318 Filed 12-27-18; 8:45 am]
 BILLING CODE 8011-01-P