[Federal Register Volume 62, Number 230 (Monday, December 1, 1997)]
[Notices]
[Pages 63568-63574]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-31395]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-22902; 812-10870]


Allied Capital Corporation, et al.; Notice of Application

November 21, 1997.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of application for exemption under sections 6(c), 
12(d)(1)(J), 17(b), 57(c), and 57(i) of the Investment Company Act of 
1940 (the ``Act'') and rule 17d-1 under the Act, and under section 
12(h) of the Securities Exchange Act of 1934 (the ``Exchange Act'').

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    Summary of Application: The order would permit two business 
development companies (``BDCs''), a real estate investment trust, and 
the investment adviser to these entities, to merge into a third BDC. In 
addition, the order would permit the surviving BDC and its wholly-owned 
subsidiaries to file reports on a consolidated basis and to engage in 
certain transactions that would otherwise be permitted if the BDC and 
its subsidiaries were one company. The order also would permit asset 
coverage requirements for senior securities issued by the BDC and its 
BDC subsidiaries to apply on a consolidated basis. Further, the order 
would permit certain joint transactions between two of the BDC's 
subsidiaries and two private venture capital partnerships. The 
requested order would supersede any exemption granted to any applicant 
from provisions of the Act and the Exchange Act, effective as of the 
date of the merger.
    Applicants: Allied Capital Corporation (``Allied I''), Allied 
Investment Corporation (``Investment I''), Allied Capital Financial 
Corporation (``Financial I''), Allied Capital Corporation II (``Allied 
II''), Allied Investment Corporation II (``Investment II''), Allied 
Financial Corporation II (``Financial II''), Allied Capital Lending 
Corporation (``Allied Lending''), Allied Capital SBLC Corporation 
(``Allied SBLC''), Allied Capital Advisers, Inc. (``Advisers''), and 
Allied Capital Commercial Corporation (``Allied Commercial'').

FILING DATE: The application was filed on November 21, 1997.
    Hearing or Notification of Hearing: An order granting the 
application will be issued unless the SEC orders a hearing. Interested 
persons may request a hearing by writing to the SEC's Secretary and 
serving applicants with a copy of the request, personally or by mail. 
Hearing requests should be received by the SEC by 5:30 p.m. on December 
15, 1997, and should be accompanied by proof of service on 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 
SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 5th Street, NW., Washington, DC 20549. 
Applicants, 1666 K Street, NW., 9th Floor, Washington, DC 20006-2803.

FOR FURTHER INFORMATION CONTACT:
Elaine M. Boggs, Senior Counsel, at (202) 942-0572, or Mercer E. 
Bullard, Branch Chief, at (202) 942-0564 (Office of Investment Company 
Regulation, Division of Investment Management).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee at the 
SEC's Public Reference Branch, 450 5th Street, NW., Washington, DC 
20549 (telephone (202) 942-8090).

Applicants' Representations

    1. Applicants are all Maryland corporations. Stock of Allied I, 
Allied II, Allied Lending, Allied Commercial, and Advisers (the 
``Participating Companies'') trades over-the-counter on the Nasdaq 
Stock Market's National Market. Allied I, Allied II, and Allied Lending 
have each elected to be regulated as a BDC, as defined under section 
2(a)(48) of the Act.\1\ Allied Development Corporation 
(``Development''), Investment I, and Financial I are wholly-owned 
subsidiaries of Allied I and Investment II and Financial II are wholly-
owned subsidiaries of Allied II. Development, Investment I and II, and 
Financial I and II are registered under the Act as closed-end 
management investment companies. Development is currently inactive. 
Investment I and II are licensed small business investment companies 
(``SBICs'') under the Small Business Investment Act of 1958 (the ``1958 
Act''). Financial I and II are specialized small business investment 
companies (``SSBICs'') under the 1958 Act. Allied Lending participates 
in the Small Business Administration's (``SBA'') general business loan 
program pursuant to section 7(a) of the Small Business Act. Allied SBLC 
and Allied Capital Credit Corporation (``Allied Credit'') are wholly-
owned subsidiaries of Allied Lending. Allied SBLC is a BDC and a small 
business lending company (``SBLC'') participating in the general 
business loan program pursuant to section 7(a) of the Small Business 
Act. Allied Credit is currently inactive. Allied Commercial is a real 
estate investment trust (``REIT'') with three subsidiaries. Advisers is 
registered as an investment adviser under the Investment Advisers Act 
of 1940 (the ``Advisers Act'') and serves as the investment adviser to 
the other Participating Companies. Advisers has one wholly-owned 
subsidiary established for the purpose of holding an office building 
which it plans to sell.
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    \1\ Section 2(a)(48) generally defines a BDC to be any closed-
end investment company that operates for the purpose of making 
investments in securities described in sections 55(a) (1) through 
(3) of the Act and makes available significant managerial assistance 
with respect to the issuers of such securities. Such issuers are 
small companies whose securities typically are illiquid.
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    2. Applicants have proposed a reorganization in which Allied I, 
Allied II, Allied Commercial, and Advisers (collectively, the 
``Acquired Companies'') will merge into Allied Lending and become 
``ACC'' (the ``Consolidation''). ACC will be an adviser registered 
under the Advisers Act and will operate as an internally managed BDC. 
Investment I and Financial I will merge with Investment II and 
Financial II, with Investment I and Financial I as the surviving 
entities (respectively, the ``Surviving SBIC Subsidiary'' and the 
``Surviving SSBIC Subsidiary''). As part of the Consolidation, the SBLC 
Subsidiary will

[[Page 63569]]

become the ``Surviving SBLC Subsidiary.'' Prior to the Consolidation, 
Development will be merged with Allied I and Allied Credit will be 
merged into Allied Lending. In addition, prior to the Consolidation, 
Allied Commercial's three subsidiaries will be merged into ``Equity 
Holdings LLC'' and ``Acceptance LLC,'' Allied Lending will establish a 
REIT subsidiary that will become a subsidiary of ACC following the 
Consolidation (the ``Surviving REIT Subsidiary''), and Advisers' 
wholly-owned subsidiary will be liquidated or merged into ``Property 
LLC,'' which will become a subsidiary of ACC following the 
Consolidation.
    3. Following the Consolidation, ACC will have seven wholly-owned 
subsidiaries (the ``Surviving Subsidiaries''): Equity Holdings LLC, 
Acceptance LLC, and Property LLC, and the Surviving SBLC, SBIC, SSBIC, 
and REIT Subsidiaries. Following the Consolidation, Surviving SBIC and 
SSBIC Subsidiaries will elect BDC status and will no longer operate as 
registered investment companies. Therefore, the Surviving SBIC, SSBIC, 
and SBLC Subsidiaries will all be BDCs (the ``Surviving BDC 
Subsidiaries''). The Surviving REIT Subsidiary, Equity Holdings LLC, 
Acceptance LLC, and Property LLC will not be BDCs or registered 
investment companies. In addition, ACC may in the future create 
additional wholly-owned subsidiaries (the ``Future Subsidiaries'') 
which in some cases may be BDCs (the ``Future BDC Subsidiaries'').
    4. The Consolidation will be effected pursuant to a merger 
agreement dated August 14, 1997, and amended and restated on September 
19, 1997 (the ``Merger Agreement''). The merger is anticipated to occur 
on December 31, 1997 (the ``Effective Date''). On the Effective Date, 
each share of common stock of the Acquired Companies will be converted 
into shares of Allied Lending in the following amounts: (a) Each share 
of Allied I will be converted into 1.07 shares of Allied Lending; (b) 
each share of Allied II will be converted into 1.40 shares of Allied 
Lending; (c) each share of Allied Commercial will be converted into 
1.60 shares of Allied Lending; and (d) each share of Advisers will be 
converted into 0.31 shares of Allied Lending (collectively, the 
``Exchange Ratios''). The Exchange Ratios were based on the relative 
market prices of the Participating Companies' stock, as discussed 
below. The exchange agent for the Consolidation will request that, as 
soon as possible after the Effective Date, shareholders of the Acquired 
Companies surrender their respective shares. Upon the surrender, the 
exchange agent will mail the shareholders a confirmation of ownership 
of ACC common stock. Shares of ACC common stock will be issued in book 
entry form.
    5. The Consolidation will be conditioned on each Participating 
Company receiving a tax opinion from counsel stating that the 
Consolidation will be a tax-free event under the Internal Revenue Code 
of 1986, as amended (the ``Code''). Each Participating Company will be 
responsible for a pro rata portion of expenses related to the 
Consolidation, based on each Company's total market capitalization as 
of August 13, 1997, except that each Company will pay the fees and 
expenses of the financial adviser it engaged to assist it with the 
Consolidation. Estimated total expenses in connection with the 
Consolidation are $672,000 for Allied I, $907,000 for Allied II, and 
$458,000 for Allied Lending. In addition, each of Allied I, Allied II, 
and Allied Lending have paid $120,000 for the services of its 
respective independent financial adviser.
    6. In June 1997, Morgan Stanley & Co. Incorporated (``Morgan 
Stanley'') was retained by each of the Participating Companies as the 
financial adviser to provide advice and assistance with respect to 
defining objectives, performing valuation analysis, structuring and 
planning the Consolidation. In addition, each Participating Company 
retained an independent financial adviser to render an opinion as to 
the fairness of the Exchange Ratios. Each Participating Company also 
obtained independent legal counsel to provide that Company's board of 
directors with legal advice concerning the directors' duties with 
respect to the consideration of the Consolidation.
    7. In determining the relative value of each Participating Company, 
Morgan Stanley approached the Consolidation as a ``merger of equals.'' 
In preparing its analysis, Morgan Stanley, among other things, reviewed 
the strategic rationale for the Consolidation; conducted due diligence 
sessions with the management of Advisers; developed an independent 
valuation model for each of the Participating Companies; developed 
stand-alone valuations of each of the Participating Companies using, 
among other things, market valuation parameters, discounted cash flow 
analysis of projected cash flows and analysis of each Participating 
Company's contribution to ACC; and analyzed the pro forma impact of the 
Consolidation on each Participating Company and its stockholders in 
terms of contributable earnings and market value.
    8. Morgan Stanley also compared the historical price movement of 
the Participating Companies' stock from June 22, 1994 through July 18, 
1997. Morgan Stanley advised the management of Advisers and the board 
of each of the Participating Companies that the thirty-day period from 
June 16, 1997 to July 15, 1997 was the most appropriate period over 
which to measure market value for purposes of developing the Exchange 
Ratios for each of the Participating Companies. Morgan Stanley 
considered that during this period, no unusual events had occurred that 
could have influenced the movement of the Participating Companies' 
stock prices. In addition, July 15, 1997 was chosen as the ending date 
because on July 16, 1997 management of Advisers began to contact the 
independent financial advisers, which increased the number of persons 
with knowledge of the proposed transaction. The market prices for the 
stock of the Participating Companies from June 16, 1997 to July 15, 
1997 formed the basis for Morgan Stanley's recommendation on valuation.
    9. During the period beginning on July 30 and ending on August 5, 
1997, each of the Participating Companies held its regular quarterly 
board of directors meeting, including a session devoted exclusively to 
the Consolidation. At those meetings, the management of Advisers 
provided the reasons for the Consolidation and the business plan for 
ACC. In addition, Morgan Stanley gave its report on its valuation 
analysis. Following the Morgan Stanley presentation, the respective 
Participating Company's independent financial adviser indicated that, 
based on available information provided through that date and subject 
to further analyses and review, the applicable Exchange Ratio appeared 
to be fair to the shareholders from a financial point of view. Further, 
the respective Participating Company's independent legal counsel made a 
presentation concerning the duties of the board of directors to the 
applicable Participating Company and its shareholders in connection 
with the consideration of the Consolidation. No formal action on the 
merger proposal was sought or taken at these board meetings.
    10. Between August 11 and 14, 1997, each Participating Company's 
board of directors met again to consider and approve the Merger 
Agreement. Each meeting was attended by the respective independent 
financial adviser and legal counsel for that Participating Company. The 
independent financial advisers

[[Page 63570]]

presented their opinions that the Exchange Ratio was fair, from a 
financial point of view, to the shareholders of the respective 
Participating Company. After considering the presentation of the 
respective independent financial adviser and after discussion, each of 
the boards, including the directors who are not interested persons of 
the Company under section 2(a)(19) of the Act or officers of or 
otherwise affiliated with any of the other Participating Companies 
(``Independent Directors''), unanimously approved its Participating 
Company's participation in the Consolidation and agreed to the terms of 
the Merger Agreement.
    11. The boards of directors considered, among other things: (a) 
Information concerning the financial performance and condition, 
business operations, capital levels, asset quality and prospects of 
each Participating Company, and its projected future financial 
performance as a separate entity and on a combined basis; (b) current 
industry, economic, and market conditions and trends; (c) the 
importance of economies of scale to competing effectively; (d) the 
Consolidation's structure as a tax-free merger of equals; (e) the 
possibility that achieving cost savings and operating efficiencies as a 
result of the Consolidation might not be the same for each 
Participating Company; (f) the terms and conditions of the Merger 
Agreement; (g) the current and historical market prices of the common 
stock of each Participating Company; (h) the opinions of the respective 
independent financial adviser as to the fairness, from a financial 
point of view, of the respective Exchange Ratios; (i) the portfolio 
holdings, liabilities, management, strategic objectives, competitive 
positions, and prospects of the respective Participating Company; and 
(j) the impact of the Consolidation on the shareholders and portfolios 
of each Participating Company and on the employees of Advisers.
    12. A proxy statement was filed with the Commission on September 
26, 1997. Proxy statements were mailed to shareholders on October 14, 
1997, and shareholder meetings are scheduled for November 26, 1997. At 
least two-thirds of the voting shares of each Participating Company 
will be required to approve the Consolidation.
    13. Applicants request an order to permit the Consolidation. In 
addition, applicants request an order to permit ACC and its Surviving 
and Future BDC Subsidiaries (the ``BDC Subsidiaries'') to file reports 
on a consolidated basis and to engage in certain transactions that 
would otherwise be permitted if ACC and its BDC Subsidiaries were one 
company. The order also would permit modified asset coverage 
requirements for ACC and its BDC Subsidiaries on a consolidated basis 
and for the Surviving SBLC Subsidiary individually. Further, the order 
would permit certain joint transactions between the Surviving SBIC and 
SSBIC Subsidiaries and two private venture capital partnerships.
    14. ACC will own all of the outstanding common voting stock or 
membership interests of the Surviving and Future Subsidiaries (the 
``Subsidiaries''). In addition, the following types of transactions may 
occur among ACC and the Subsidiaries:
    (a) ACC may make additional investments in a Subsidiary, as a 
contribution to capital, purchase of additional stock, or loan.
    (b) A Subsidiary may pay dividends and make other distributions to 
ACC. Each BDC Subsidiary and the Surviving REIT Subsidiary intend to 
qualify as a regulated investment company and a real estate investment 
trust, respectively, pursuant to Subchapter M of the Code. As such, 
each BDC Subsidiary and the Surviving REIT Subsidiary will be required 
to pay to ACC substantially all of its income in the form of a dividend 
in order not to incur any Federal income tax.
    (c) A Subsidiary may make loans or other advances to ACC or another 
Subsidiary. None of the Subsidiaries will purchase or otherwise acquire 
any of the capital stock of ACC.
    (d) One or more of ACC and the Subsidiaries may invest in the 
securities of the same unaffiliated issuer, together or at different 
times, and deal with such investments separately or jointly. In 
addition, ACC and the BDC Subsidiaries may engage in purchase or sale 
transactions with controlled portfolio affiliates of one another.
    (e) ACC may purchase all or some of a portfolio investment held by 
a Subsidiary. Similarly, a Subsidiary may purchase all or some of a 
portfolio investment held by ACC or another Subsidiary.
    (f) One or more of ACC and the Subsidiaries may enter into a 
financial arrangement with a third-party financial institution in which 
one or more of ACC and the Subsidiaries are co-borrowers or guarantors.

Applicants' Legal Analysis

A. The Consolidation

    1. Section 57(a) generally prohibits, with certain exceptions, 
sales or purchases of securities between BDCs and certain of their 
affiliates as described in section 57(b) of the Act. Section 57(b) 
includes the investment adviser to, and any person under common control 
with, the BDC. Allied I, Allied II, and Commercial could be deemed to 
be affiliates of Allied Lending under section 57(b) because all are 
under common control by virtue of having a common investment adviser.
    2. Section 17(a) of the Act generally prohibits sales or purchases 
of securities between a registered investment company and certain 
affiliated persons of the company as described in section 2(a)(3) of 
the Act. Affiliated persons under section 2(a)(3)(C) include persons 
under common control with the investment company. When the assets of 
Investment II and Financial II are transferred to Investment I and 
Financial I, respectively, all four investment companies will be under 
the common control of ACC.
    3. Sections 57(c) and 17(b) of the Act provide that the SEC will 
exempt a proposed transaction from sections 57(a) and 17(a), 
respectively, if the terms of the proposed transaction, including the 
consideration to be paid or received, are reasonable and fair and do 
not involve overreaching on the part of any person concerned; and the 
proposed transaction is consistent with the policy of each registered 
investment company concerned and consistent with the general purposes 
of the Act. Applicants believe that the requested relief from sections 
57(a) and 17(a) meets these standards for the reasons discussed below.
    4. Applicants believe that the Consolidation will benefit 
shareholders of the Participating Companies. Applicants state that 
ACC's increased size, increased portfolio diversity, and mix of current 
and capital gain income will provide increased benefits for all 
shareholders. Applicants state that ACC will have the ability to 
diversify into larger and varied transactions, and that ACC's greater 
size will provide opportunity for lower-cost debt capital and 
institutional ownership of its common stock. In addition, applicants 
believe that the Consolidation will eliminate the need for costly 
duplication of efforts related to maintaining and reporting for five 
separate public entities. Applicants further believe that the mergers 
of Investment II and Financial II into Investment I and Financial I, 
respectively, will result in similar benefits.
    5. Applicants assert that the role of the Independent Directors of 
Allied I and II and Allied Lending, Morgan Stanley's valuation 
analysis, the fairness opinions given by each independent

[[Page 63571]]

financial adviser, and the representation by separate independent 
counsel of Allied I and II and Allied Lending ensure that no 
overreaching on the part of any person will occur in connection with 
the Consolidation. Applicants state that the Consolidation will be 
consistent with the public disclosures of each of the Participating 
Companies and with the general purposes of the Act, as will be the 
merger of Investment II and Financial II into Investment I and 
Financial I, respectively. Further, applicants state that the board of 
directors of each Participating Company has approved the transaction as 
being in the best interests of the Company.
    6. Applicants note that during the process of considering and 
approving the Consolidation, the board of directors of each 
Participating Company specifically considered the participation of 
Advisers in the Consolidation. Applicants state that each board of 
directors concluded that ACC would be a better business model than a 
Participating Company would be individually, in part because ACC will 
be internally managed. Applicants note that with external management, 
Advisers must not only cover its costs, but must earn a profit for its 
shareholders and pay a corporate level income tax. Applicants also note 
that external management creates perceived conflicts of interest 
because the goals of an external adviser may conflict with the goals of 
the fund. Applicants state that the directors concluded that Advisers' 
participation in the Consolidation was fair from a financial point of 
view and that the management of Advisers will receive no financial 
benefit from the consolidation to the detriment of any of the other 
Participating Companies or their shareholders.

B. Operation as One Company

1. Section 12(d)(1)
    a. Section 12(d)(1)(A) of the Act, made applicable to BDCs by 
section 60 of the Act, limits the amount of securities a registered 
investment company or BDC (or company controlled by the registered 
investment company or BDC) may hold of other investment companies. 
Section 12(d)(1)(C) limits the amount of securities of a closed-end 
investment company that may be acquired by an investment company. 
Applicants state that any purchase of the voting stock of the Surviving 
SBLC Subsidiary or a Future BDC Subsidiary by ACC, or a contribution to 
capital of the Surviving SBLC Subsidiary or of a Future BDC Subsidiary 
by ACC, may violate section 12(d)(1).\2\ In addition, applicants state 
that section 12(d)(1) may apply to each of the Subsidiaries with 
respect to their purchase or acquisition of debt securities issued by 
ACC or each other because each will be a BDC or an entity controlled by 
a BDC. Further, applicants state that the making of loans or advances 
by any of the Subsidiaries to ACC or to each other may violate section 
12(d)(1).
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    \2\ Rule 60a-1 under the Act exempts from sections 12(d)(1)(A) 
and (C) the acquisition by a BDC of the securities of a small 
business investment company licensed under the 1958 Act which is 
operated as a wholly-owned subsidiary of the BDC. Applicants state 
that, because the Surviving SBIC and SSBIC Subsidiaries are small 
business investment companies licensed under the 1958 Act, ACC's 
acquisition of shares of the Surviving SBIC and SSBIC Subsidiaries 
will be exempt from sections 12 (d)(1)(A) and (C) under rule 60a-1 
under the Act. Applicants state that sections 12(d)(1)(A) and (C) do 
not apply to the non-BDC Subsidiaries because they are not 
investment companies.
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    b. Applicants request an exemption from sections 12(d)(1)(A) and 
(C) to permit: (a) the acquisition by ACC of any securities of the 
Surviving SBLC Subsidiary and the future BDC Subsidiaries; and (b) the 
acquisition by any of the Subsidiaries of any securities representing 
indebtedness of ACC or of any securities representing indebtedness 
issued by any of the other Subsidiaries. Applicants request the 
exemptions to the extent that the transactions would not be prohibited 
if each Subsidiary were deemed to be part of ACC and not a separate 
company.
    c. Section 12(d)(1)(J) provides that the SEC may exempt persons or 
transactions from any provision of section 12(d)(1) if the exemption is 
consistent with the public interest and the protection of investors. 
For the following reasons, applicants believe that the proposal meets 
this standard.
    d. Applicants assert that section 12(d)(1) is intended to prevent 
certain abuses associated with the pyramiding of investment companies, 
and that the holding company structure will not entail these types of 
abuses. Applicants state that these abuses include the investing fund 
exercising undue influence over the underlying funds, the layering of 
fees, and the creation of overly complex and confusing structures.
    e. Applicants believe that ACC, as the sole shareholder of the 
Subsidiaries, will have no incentive to act contrary to the interests 
of a Subsidiary. Applicants also contend that the Consolidation will 
not result in investors incurring duplicative sales charges or advisory 
fees, and will result in a structure that is less complex than the 
current structure. Applicants also note that the parent/subsidiaries 
structure that will result from the Consolidation will serve a valid 
business purpose by facilitating more efficient public investment in 
the alternative asset class of small business debt securities.
2. Section 12(d)(3)
    a. Section 12(d)(3) of the Act, made applicable to BDCs by section 
60, generally makes it unlawful for any registered investment company 
to purchase any security issued by an investment adviser to an 
investment company. Applicants state that the Consolidation could be 
deemed to involve the purchase or acquisition by Allied I or II, Allied 
Lending, or ACC of securities issued by Advisers. Applicants request an 
exemption to permit the purchase of Advisers in connection with the 
Consolidation.
    b. Section 6(c) of the Act permits the SEC to exempt any person or 
transaction from any provision of the Act, if the exemption is 
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. Applicants believe that the requested relief 
meets the section 6(c) standard for the reasons discussed below.
    c. Applicants state that section 12(d)(3) was intended to limit the 
exposure of registered investment companies to the entrepreneurial 
risks associated with securities related business and to prevent 
potential conflicts of interest and reciprocal practices. Applicants 
state that the Consolidation does not present the potential for these 
abuses. Applicants believe that the procedures and policies adopted by 
ACC with respect to its investment advisory operations will ensure that 
ACC and the Subsidiaries are being operated and managed in the best 
interests of ACC and its shareholders. Applicants also note that ACC 
could engage directly in the business of investment management without 
the need for exemptive relief.
3. Section 18
    a. Section 18(a) of the Act prohibits a registered closed-end 
investment company from issuing any class of senior security unless the 
company complies with the asset coverage requirements set forth in 
section 18(a). Section 18(k) provides for modified asset coverage 
requirements for SBICs. Section 61 makes section 18, with certain 
modifications, applicable to a BDC.
    b. Applicants believe that section 61 may require that ACC and the 
BDC Subsidiaries comply with the asset

[[Page 63572]]

coverage requirements of section 18(a) (as modified by section 61(a)) 
on a consolidated basis because ACC could be deemed to be an indirect 
issuer of any class of senior securities issued by the Subsidiaries. In 
addition, applicants believe that the Surviving SBLC Subsidiary may not 
be permitted to rely on the modified asset coverage requirements of 
section 18(k) because section 18(k) does not apply to an SBLC licensee 
but only to SBIC licensees.
    c. Applicants request an exemption under section 6(c) (a) for the 
Surviving SBLC Subsidiary from sections 18(a)(1)(A) and (B), and (b) 
for ACC to permit senior securities issued by the Surviving BDC 
Subsidiaries that are excluded from the individual asset coverage ratio 
by section 18(k) or this order to be excluded from ACC's consolidated 
asset coverage ratio. Applicants believe the relief satisfied the 
section 6(c) standard for the following reasons.
    d. Applicants state that the Surviving SBLC Subsidiary should be 
treated like an SBIC licensee because SBLCs and SBICs are analogous in 
their common purpose to assist small business in raising capital and 
both are subject to the regulation and oversight of the SBA. Applicants 
assert that policy rationale for the section 18(k) exemption is that 
the SBA's regulation of the permissible leverage of an SBA-licensed 
investment company is an effective substitute for the SEC's regulation 
of asset coverage for senior securities issued by a registered closed-
end company or a BDC. Applicants state that SBICs, SSBICs, and SBLCs 
are SBA-licensed investment companies and subject to the SBA's 
substantive regulations of permissible leverage in their capital 
structure.
    e. Applicants contend that if ACC applies the asset coverage 
requirements of section 18(a) on a consolidated basis, ACC should be 
able to apply the same exemptions available to the Surviving BDC 
Subsidiaries. Applicants also contend that to the extent that the 
Surviving BDC Subsidiaries on a stand-alone basis are entitled to rely 
on section 18(k) for an exemption from the asset coverage requirements 
of section 18(a), there is no policy reason to deny the parent the 
benefit of the exemption when the parent consolidates its assets with 
the Surviving BDC Subsidiaries when testing compliance with section 
18(a).
4. Sections 2(a)(48) and 55(a)
    a. Section 2(a)(48) of the Act generally defines a BDC to be any 
closed-end investment company that operates for the purpose of making 
investments in securities described in sections 55(a) (1) through (3) 
of the Act and makes available significant managerial assistance with 
respect to the issuers of these securities. Section 55(a) of the Act 
requires a BDC to have at least 70% of its assets invested in assets 
described in sections 55(a) (1) through (6) (``Qualifying Assets''). 
Qualifying Assets generally include securities issued by eligible 
portfolio companies as defined in section 2(a)(46) of the Act. Section 
2(a)(46)(B) of this definition generally excludes (a) an investment 
company, as defined under section 3 of the Act, unless the company is 
an SBIC licensed by the SBA to operate under the 1958 Act and is a 
wholly-owned subsidiary of the BDC, and (2) a company that would be an 
investment company but for the exclusion from the definition of 
investment company in section 3(c) of the Act.
    b. Applicants believe that the Surviving SBLC and REIT Subsidiaries 
may not be deemed eligible portfolio companies because the Surviving 
SBLC Subsidiary is not an SBIC licensed by the SBA but an SBLC, and the 
Surviving REIT Subsidiary may be an investment company but for the 
exclusion from the definition of investment company in section 3(c). 
Applicants request relief under section 6(c) from section 55(a) to 
permit ACC to treat the Surviving SBLC Subsidiary as an eligible 
portfolio company within the meaning of section 2(a) (46) solely to the 
extent that the Surviving SBLC Subsidiary may not qualify as an 
eligible portfolio company for reasons stated above. Further, 
applicants request relief from sections 2(a)(48) and 55(a) to permit 
the assets held by the REIT Subsidiary, rather than the REIT Subsidiary 
itself, to be treated as assets held by ACC for purposes of (1) 
determining whether ACC is operated for the purpose of making 
investments in securities described in paragraphs (1) through (3) of 
sections 55(a), (2) determining whether ACC makes available managerial 
assistance to companies as described in section 2(a)(48), and (3) 
applying the 70% test in section 55(a). Applicants believe the relief 
satisfies the section 6(c) standard for the following reasons.
    c. Applicants believe that relief for the Surviving Subsidiary is 
appropriate because the loans to be made by the SBLC will be made to 
the same category of small business borrowers that represent the type 
of securities included in the definition of Qualifying Assets. In 
addition, applicants note that the Surviving SBLC Subsidiary will 
invest all of its assets in Qualifying Assets and itself will be a BDC.
    d. Applicants believe that relief for the REIT Subsidiary is 
appropriate because all of the voting securities of the REIT Subsidiary 
will be held by ACC and ACC will control the operations of the REIT 
Subsidiary, including the acquisition and disposition of its assets. 
Applicants also state the assets of the REIT Subsidiary will be held by 
the REIT Subsidiary and not directly by ACC only for bona fide business 
reasons that are unrelated to the policies underlying the Act and that 
do not reflect a substantive economic difference from the assets being 
held by ACC. Applicants therefore contend that the assets held by the 
REIT Subsidiary are, in economic effect, assets held by ACC, and should 
be treated as such in determining ACC's compliance with the relevant 
provisions of sections 2(a) (48) and 55(a) of the Act.
5. Sections 57(a) (1) and (2)
    a. As discussed above, sections 57(a) (1) and (2) generally 
prohibit, with certain exceptions, sales or purchases of securities 
between BDCs and certain of their affiliates as described in section 
57(b) of the Act. Because they are under the common control of ACC, 
each Subsidiary will be an affiliated person of each other Subsidiary 
within the meaning of section 57(b).
    b. Applicants request relief from sections 57(a) (1) and (2) under 
section 57(c) to exempt any transaction between ACC and any BDC 
Subsidiary and any transaction between any BDC Subsidiaries and any 
Subsidiary with respect to the purchase or sale of securities or other 
property. In addition, applicants request relief from sections 57(a) 
(1) and (2) to exempt any purchase or sale transaction between ACC and 
a controlled portfolio affiliate of a BDC Subsidiary and any purchase 
or sale transaction between a BDC Subsidiary and a controlled portfolio 
affiliate of ACC or of another BDC Subsidiary, but only to the extent 
that any such transaction would not be prohibited if the BDC Subsidiary 
were deemed to be part of ACC and not a separate company. For the 
following reasons, applicants believe that the requested relief 
satisfies the section 57(c) standard.
    c. Applicants state that there may be cases when it is in the 
interest of ACC's shareholders for a BDC Subsidiary to invest in 
securities of an issuer that may be an affiliated person of ACC or for 
ACC to invest in securities of an issuer that may be an affiliated 
person of a BDC Subsidiary. Likewise, applicants state that a BDC 
Subsidiary may want to invest in securities of an issuer that is an 
affiliated person of another BDC

[[Page 63573]]

Subsidiary. Applicants note that the relief would permit ACC and the 
BDC Subsidiaries to do what the Act would otherwise permit if they were 
one company.
6. Sections 21(b) and 57(a)(3)
    A. Section 57(a)(3) generally prohibits the borrowing of money or 
other property by an affiliated person of a BDC, as described in 
section 57(b), from the BDC except as permitted in section 21(b). 
Section 21(b) (made applicable to BDCs by section 62) of the Act 
generally prohibits loans between BDCs and persons controlling or under 
common control with the BDC, except for loans to a company that owns 
all of the outstanding securities of the BDC. As described above, each 
Subsidiary will be under the common control of ACC and, therefore, will 
be affiliated under section 57(b) and subject to section 21(b).
    b. Applicants request relief from section 57(a)(3) under section 
57(c) to exempt any transaction between a BDC Subsidiary and another 
Subsidiary with respect to the borrowing of money or other property and 
any borrowing of money or other property by ACC from a BDC Subsidiary. 
Applicants also request relief from section 21(b) under section 6(c) to 
exempt the lending of money or other property by a BDC Subsidiary to 
ACC or another Subsidiary. For the following reasons, applicants 
believe that the requested relief satisfies the section 57(c) standard.
    c. Applicants state that the proposed transactions will have no 
substantive economic effect because they will either be between ACC and 
its wholly-owned Subsidiaries, or be between Subsidiaries under the 
common ownership of ACC. Applicants note that the relief would permit 
ACC and its Subsidiaries to do what the Act would otherwise permit if 
they were one company.
7. Section 57(a)(4) and Rule 17d-1
    a. Section 17(d) and rule 17d-1 make it unlawful for an affiliated 
person of a registered investment company or any affiliated person of 
an affiliated person, acting as principal, to participate in or effect 
any joint transaction in which the registered company or a company it 
controls participates, unless the transaction has been approved by the 
SEC. Section 57(a)(4) imposes substantially the same prohibitions on 
joint transactions involving BDCs and certain of their affiliates as 
described in section 57(b). Section 57(i) provides that the rules and 
regulations under section 17(d) shall apply to transactions subject to 
section 57(a)(4) in the absence of rules under that section. No rules 
with respect to joint transactions have been adopted under section 
57(a)(4) and, therefore, the standard set forth under rule 17d-1 
governs applicants' request.
    b. Applicants state that a joint transaction in which a BDC 
Subsidiary and ACC or another Subsidiary participates will be deemed to 
be prohibited under section 57(a)(4). Therefore, applicants request 
relief under section 57(i) and rule 17d-1 to permit any joint 
transaction in which a BDC Subsidiary and ACC or another Subsidiary 
participate to the extent that the transaction will not be prohibited 
if the BDC Subsidiary were deemed to be part of ACC and not a separate 
company.
    c. In passing upon applications filed pursuant to rule 17d-1, the 
SEC considers whether the participation of the registered investment 
company in the joint transaction is consistent with the provisions, 
policies and purposes of the Act and the extent to which such 
participation is on a basis different from or less advantageous than 
that of other participants. Applicants believe that this standard is 
satisfied because the request would simply permit ACC and its 
Subsidiaries to conduct their operations as if they were one company.

C. Consolidated Reporting

    1. Section 54 of the Act provides that a closed-end investment 
company may elect BDC treatment under the Act if the company has 
registered or filed a registration statement under section 12 of the 
Exchange Act for a class of its equity securities. Section 13(a) of the 
Exchange Act requires that issuers of securities registered under the 
Exchange Act file certain information and reports with the SEC. 
Applicants request an order that the BDC Subsidiaries be exempt from 
the reporting requirements of section 13(a) of the Exchange Act in 
order to permit them to file consolidated reports with ACC.\3\
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    \3\ Applicants state that there is no separate requirement under 
the Exchange Act that the BDC Subsidiaries register their shares 
because they do not have the requisite number of shareholders under 
the relevant provisions of the Exchange Act.
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    2. Section 12(h) of the Exchange Act provides that the SEC may 
exempt an issuer from section 13 of the Exchange Act if the SEC finds 
that by reason of the number of public investors, amount of trading 
interest in the securities, the nature and extent of the activities of 
the issuer, income or assets of the issuer, or otherwise, the exemption 
is not inconsistent with the public interest or the protection of 
investors. Applicants believe that the requested exemption meets this 
standard for the following reasons.
    3. Applicants state that each BDC Subsidiary will have only one 
investor and no public investors and, therefore, there will be no 
trading in the securities of the BDC Subsidiaries. Applicants further 
state that the nature and extent of the activities of the BDC 
Subsidiaries will be fully disclosed through consolidated reporting in 
accordance with Commission rules and generally accepted accounting 
principles.

D. Co-Investing

    1. Allied Venture Partnership (``Venture'') and Allied Technology 
Partnership (``Technology'') are private venture capital limited 
partnerships organized under the laws of the District of Columbia. They 
are not registered under the Act in reliance on the exemptions provided 
by sections 3(c)(1) and (7) of the Act. After the Consolidation, ACC 
will be the investment adviser to Venture and Technology.
    2. In reliance on certain prior orders (``Prior Orders''), Allied I 
and its wholly-owned subsidiaries, and Allied II and its wholly-owned 
subsidiaries have co-invested with Venture and Technology.\4\ Venture 
and Technology are fully invested in portfolio companies and are not 
expected to raise additional capital or to make new investments (other 
than possible ``follow-on investments'' as permitted by the Prior 
Orders). Venture and Technology are gradually liquidating their 
existing investments in portfolio companies and distributing the 
proceeds to their partners. The Prior Orders were subject to detailed 
conditions regarding liquidation transactions and follow-on investments 
(``Co-investing Conditions'').
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    \4\ Investment Company Act Release Nos. 14694 (Aug. 26, 1985) 
(notice) and 14725 (Sept. 17, 1985) (order); 15787 (June 9, 1987 
(notice) and 15833 (June 30, 1987) (order; and 17124 (Sept. 1, 1989) 
(notice) and 17155 (Sept. 26, 1989) (order).
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    3. As noted above, section 57(a)(4) and rule 17d-1 generally 
prohibit joint transactions involving BDCs and certain of their 
affiliates unless the SEC has approved the transaction. Venture and 
Technology will be affiliated persons of the Surviving SBIC and SSBIC 
Subsidiaries within the meaning of section 57(b) because they all will 
be under the common control of ACC. Because many of the investments 
being liquidated are previous co-investments, the liquidation 
transactions could be deemed to constitute joint transactions otherwise 
prohibited by section 57(a)(4) and rule 17d-1. The Surviving SBIC and 
SSBIC Subsidiaries request an order

[[Page 63574]]

pursuant to section 57(i) and rule 17d-1 to permit them to participate 
in the liquidation transactions and possible follow-on investments with 
Venture and/or Technology, to the extent that the transactions may 
otherwise be prohibited by section 57(a)(4) and rule 17d-1.
    4. Applicants believe that the transactions satisfy rule 17d-1(b)'s 
standard, as described above, and that the Co-investing Conditions are 
unnecessary, because ACC, the parent of the SBIC and SSBIC 
Subsidiaries, will be internally managed; Venture and Technology are in 
the process of liquidation and will not be engaging in a broad range of 
transactions; and Venture and Technology and the SBIC and SSBIC 
Subsidiaries will be treated on an equal basis in any transaction. 
Applicants also contend that the relief is consistent with rule 57b-1, 
which exempts from section 57(a)(4) any transactions in which the BDC 
controls the relevant affiliate. Applicants asset that the SBIC and 
SSBIC Subsidiaries should be deemed to control Venture and Technology, 
for purposes of rule 57b-1, because they are wholly-owned subsidiaries 
of ACC.

Applicants' Conditions

    Applicants agree that the order granting the requested relief will 
be subject to the following conditions:
    1. ACC will at all times own and hold, beneficially and of record, 
all of the outstanding voting capital stock of the Subsidiaries.
    2. No person will serve or act as investment adviser to any 
Subsidiary unless the directors and stockholders of ACC will have taken 
the action with respect thereto also required to be taken by the 
directors and sole stockholder of the Subsidiary.
    3. The Consolidation will not be consummated unless it has been 
approved by the holders of a majority of outstanding common stock of 
Allied I, Allied II, and Allied Lending.
    4. ACC will: (a) file with the Commission, on behalf of itself and 
the Subsidiaries, all information and reports required to be filed with 
the SEC under the Exchange Act and other applicable federal securities 
laws, including information and financial statements prepared solely on 
a consolidated basis as to ACC and the Subsidiaries, these reports to 
be in satisfaction of any separate reporting obligations of the 
Subsidiaries; and (b) provide to its stockholders the information and 
reports required to be disseminated to ACC's stockholders, including 
information and financial statements prepared solely on a consolidated 
basis as to ACC and the Subsidiaries, these reports to be in 
satisfaction of any separate reporting obligations of the Subsidiaries. 
Notwithstanding anything in this condition, ACC will not be relieved of 
any of its reporting obligations, including, but not limited to, any 
consolidating statement setting forth the individual statements of the 
Subsidiaries required by rule 6-03(c) of Regulation S-X.
    5. ACC and the Subsidiaries may file on a consolidated basis under 
condition 4 above only so long as the amount of ACC's total 
consolidated assets invested in assets other than (a) securities issued 
by the Subsidiaries or (b) securities similar to those in which the 
Subsidiaries invest, does not exceed ten percent.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 97-31395 Filed 11-28-97; 8:45 am]
BILLING CODE 8010-01-M