[Federal Register Volume 60, Number 12 (Thursday, January 19, 1995)]
[Notices]
[Pages 3900-3904]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-1289]



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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20831; 34-35225; 812-9028]


MACC Private Equities Inc., et al.; Notice of Application

January 12, 1995.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of Application for Exemption under the Investment 
Company Act of 1940 (the ``Investment Company Act'') and the Securities 
Exchange Act of 1934 (the ``Exchange Act'').

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APPLICANTS: MACC Private Equities Inc. (``Private Equities''), 
MorAmerica Capital Corporation (``MorAmerica Capital''), and 
InvestAmerica Investment Advisors, Inc. (``InvestAmerica'').

RELEVANT ACT SECTIONS: Order requested under sections 17(d) and 
57(a)(4) of the Investment Company Act and rule 17d-1 thereunder 
authorizing certain joint transactions, under section 57(c) of the Act 
for an exemption from sections 57(a) (1), (2), and (3) of the Act, and 
under section 6(c) of the Act for an exemption from sections 12(d), 
18(a), and 61(a) of the Act. Order also requested under section 12(h) 
of the Exchange Act for an exemption from section 13(a) of the Exchange 
Act.

SUMMARY OF APPLICATION: Applicants request an order to permit Private 
Equities to engage in certain transactions with its wholly-owned 
subsidiary, MorAmerica Capital. The order also would permit modified 
asset coverage requirements for Private Equities and MorAmerica 
Capital, and permit Private Equities and MorAmerica Capital to co-
invest with certain affiliated entities. In addition, the order would 
permit Private Equities and MorAmerica Capital to file certain Exchange 
Act reports on a consolidated basis.

FILING DATE: The application was filed on May 31, 1994 and amended on 
August 8, 1994, and November 9, 1994. Applicants have agreed to file an 
additional amendment, the substance of which is incorporated herein, 
during the notice period.

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 February 6, 
1995, 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 may request 
notification of a hearing by writing to the SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 5th Street N.W., Washington, D.C. 20549. 
Applicants, Suite 310, 101 Second Street S.E., Cedar Rapids, Iowa 
52401.

FOR FURTHER INFORMATION CONTACT:
Elaine M. Boggs, Staff Attorney, at (202) 942-0576, or Robert A. 
Robertson, Branch Chief, at (202) 942-0564 (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 for a fee at the 
SEC's Public Reference Branch.

Applicants' Representations

    1. Private Equities and its wholly-owned subsidiary, MorAmerica 
Capital, intend to register under the Investment Company Act as 
business development companies (``BDCs''). The investment objective of 
Private Equities is long-term capital appreciation through venture 
capital investments in small companies (``Portfolio Companies''). 
MorAmerica Capital is licensed to operate as a small business 
investment company (``SBIC'') under the Small Business Investment Act 
of 1958. Applicants chose a two-tier structure so that Private Equities 
could hold certain assets that a SBIC is not permitted to hold.
    2. Private Equities has been formed pursuant to a plan of 
reorganization (the ``Plan'') for the MorAmerica Financial Corporation 
(``MFC``) and Morris Plan Liquidation Company (``Morris Plan''). Under 
the Plan, Private Equities will be the successor by merger to MFC, 
Morris Plan, and certain affiliates. In addition to cash and 
miscellaneous assets, many of which are being held for sale, Private 
Equities' primary asset will be all of the issued and outstanding 
common stock of MorAmerica Capital.
    3. InvestAmerica is the investment adviser for both Private 
Equities and MorAmerica Capital. The principals of InvestAmerica are 
the founders and principals of InvestAmerica Venture Group, Inc. 
(``Venture Group'') (collectively with InvestAmerica, the 
``InvestAmerica Companies''). The Venture Group manages the Iowa 
Venture Capital Fund L.P. (the ``Iowa Fund''), which is a venture 
capital fund that is exempt from the Investment Company Act pursuant to 
section 3(c)(1) of the Act. The Iowa Fund is not presently making any 
new investments but is making distributions to partners as investments 
mature or are sold. The Iowa Fund and MorAmerica Capital presently are 
co-invested in the securities of five Portfolio Companies.
    4. The requested order would permit Private Equities and MorAmerica 
Capital to operate effectively as one company. Specifically, the 
requested relief would permit MorAmerica Capital and Private Equities 
to (a) engage in transactions with each other, (b) engage in 
transactions with Portfolio Companies that would not otherwise be 
prohibited if MorAmerica Capital and Private Equities were one company, 
and (c) allow MorAmerica Capital to have the maximum amount of 
borrowing permitted by the Small Business Investment Act of 1958 and 
the Investment Company Act. The order also would permit MorAmerica 
Capital and/or Private Equities to co-invest with 

[[Page 3901]]
certain affiliated companies. In addition, the order would permit 
Private Equities and MorAmerica Capital to file certain reports 
required by the Exchange Act on a consolidated basis.

Applicants' Legal Analysis

Capital Structure

1. Section 12(d) of the Investment Company Act
    a. Section 12(d)(1) of the Investment Company Act, made applicable 
to BDC's by section 60, limits the amount of securities a registered 
investment company may hold of other investment companies. Rule 60a-1 
exempts a BDC's acquisition of the securities of a wholly-owned SBIC 
from sections 12(d)(1) (A) and (C). Thus, the transfer of assets from 
Private Equities to MorAmerica Capital is exempt from these provisions. 
Section 12(d)(1), however, also applies to the activities of MorAmerica 
Capital, and loans made by Private Equities to MorAmerica Capital may 
violate section 12(d)(1) if such loans were considered purchases by 
MorAmerica Capital of the securities of Private Equities. Accordingly, 
applicants request an exemption from section 12(d)(1) to permit 
MorAmerica Capital's acquisition of those securities of Private 
Equities representing indebtedness.
2. Sections 57(a) (1), (2), and (3)
    a. Sections 57(a) (1), (2), and (3) of the Investment Company Act 
prohibit certain affiliated persons of a BDC from engaging in certain 
transactions with the BDC. Such affiliated persons include, with 
limited exceptions not relevant here, entities which control, are 
controlled by, or under common control with the BDC. Because Private 
Equities is the sole equity holder of MorAmerica Capital, Private 
Equities and MorAmerica Capital are affiliated persons of each other. 
Thus, applicants request an exemption from sections 57(a) (1), (2), and 
(3) for any transaction solely between Private Equities and MorAmerica 
Capital.
    b. In addition, Private Equities and/or MorAmerica Capital may wish 
to invest in certain Portfolio Companies that may be considered 
affiliates of the other investing company as a result of the other's 
ownership of five percent or more of the Portfolio Company's stock. 
Applicants will not in all instances be able to rely on rule 57b-1, 
which exempts from section 57(a) transactions between BDC's and 
specific downstream affiliates. Thus, applicants request an order to 
exempt any transaction from section 57(a) involving Private Equities 
and/or MorAmerica Capital and any Portfolio Company affiliated with 
either or both, but only to the extent that any such transaction would 
not be prohibited if MorAmerica Capital and Private Equities were not 
separate companies.
3. Sections 18 and 61 of the Investment Company Act
    a. Section 18(a) of the Investment Company 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 the section. ``Asset coverage'' is defined in 
section 18(h) to mean the ratio which the value of the total assets of 
an issuer, less all liabilities not represented by senior securities, 
bears to the aggregate amount of senior securities of such issuer. 
Section 61 makes section 18, with certain modifications, applicable to 
a BDC. Private Equities may be required to comply with the asset 
coverage requirements of section 18 on a consolidated basis because it 
may be an indirect issuer of senior securities with respect to 
MorAmerica Capital's indebtedness. Accordingly, applicants request 
relief exempting Private Equities and MorAmerica Capital from section 
18(a) and 61(a) to permit the following transactions: (a) Private 
Equities and MorAmerica Capital to issue and sell to banks, insurance 
companies, and other financial institutions their secured or unsecured 
promissory notes, or other evidences of indebtedness in consideration 
of any loan, or any extension or renewal thereof made by private 
arrangement; (b) MorAmerica Capital to obtain financing that the Small 
Business Administration permits for SBIC's; (c) MorAmerica Capital to 
borrow from Private Equities and Private Equities to borrow from 
MorAmerica Capital; and (d) Private Equities to guarantee any 
borrowings by MorAmerica Capital.
4. Sections 57 (a)(4) and (d) of the Investment Company Act and Rule 
17d-1 Thereunder
    a. Sections 57 (a)(4) and (d) of the Investment Company Act 
prohibit certain affiliated persons specified in section 57 (b) and 
(e), respectively, from participating in joint transactions with a BDC 
in contravention of rules and regulations prescribed by the SEC. Rule 
17d-1 under the Act applies to transactions prohibited under sections 
57 (a)(4) and (d) through section 57(i). Rule 17d-1 prohibits 
affiliated persons of a registered investment company from entering 
into joint transactions with the investment company unless the SEC has 
granted an order permitting such transaction.
    b. Applicants request an order under sections 57 (a)(4) and (d) and 
rule 17d-1 to permit Private Equities or MorAmerica Capital to invest 
in Portfolio Companies in which the other is or proposes to be an 
investor, but only to the extent that such transaction would not be 
prohibited if MorAmerica Capital were deemed to be part of Private 
Equities and not a separate company.

Co-Investing

1. Section 57(a)(4) of the Investment Company Act and Rule 17d-1 
Thereunder
    a. Applicants request an order to permit Private Equities and/or 
MorAmerica Capital to co-invest with companies managed by InvestAmerica 
and the Venture Group, including the Iowa Fund (``Managed Affiliates'') 
now or in the future. Because InvestAmerica and the Venture Group are 
under common control, a Managed Affiliate also would be under common 
control with Private Equities and MorAmerica Capital. Thus, a Managed 
Affiliate would be affiliated with Private Equities and MorAmerica 
Capital under section 2(a)(3) of the Investment Company Act. 
Accordingly, applicants and the Managed Affiliates, absent an exemptive 
order, would be prohibited under section 57(a)(4) of the Investment 
Company Act from engaging in co-investment transactions.

Consolidated Reporting

1. Section 54 of the Investment Company Act and Section 12 of the 
Exchange Act
    a. Section 54 of the Investment Company Act provides that a closed-
end company may elect BDC treatment under the Investment Company Act, 
if the company has either a class of equity securities registered under 
section 12 of the Exchange Act or has filed a registration statement 
pursuant to section 12 of the Exchange Act for a class of its equity 
securities. Section 12(g) of the Exchange Act requires certain issuers 
to register under the Exchange Act. Private Equities will have 
securities registered under section 12 of the Exchange Act. In order to 
elect BDC treatment, MorAmerica Capital must register its securities 
under the Exchange Act, even though it is not required to do so by 
section 12(g) of the Exchange Act.
    b. By filing a registration statement under section 12 of the 
Exchange Act, absent an exemption, MorAmerica Capital would be required 
by section 13(a) of the Exchange Act to file periodically with the SEC, 
even though 

[[Page 3902]]
MorAmerica Capital will have only one equity holder. Accordingly, 
applicants request an order under the Exchange Act exempting MorAmerica 
Capital from the reporting requirements of section 13(a) of the 
Exchange Act to permit it to file consolidated reports with Private 
Equities.

Standards for Relief

    1. Section 6(c) of the Investment Company Act permits the SEC to 
exempt any person or transaction from any provision of the Act, if 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 of the Act. Applicants state that the operation 
of Private Equities as a BDC with a wholly-owned SBIC subsidiary is 
intended to permit Private Equities to expand the scope of its 
operations beyond that which would be permitted to it as an SBIC. 
Applicants further state that the requested exemptions would permit 
Private Equities and MorAmerica Capital to operate effectively as one 
company even though they will be divided into two legal entities. 
Accordingly, applicants believe that the requested exemptions from 
sections 12(d), 18(a), and 61(a) meet the section 6(c) standards.
    2. Section 57(c) permits the SEC to grant an order permitting a 
transaction otherwise prohibited by sections 57(a)(1), (2), and (3) if 
it finds that the participation of such investment company 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 the requested exemptions meet these standards.
    3. Section 57(i) of the Investment Company Act provides that the 
rules and regulations of the SEC under sections 17 (a) and (d) 
applicable to registered closed-end investment companies shall apply to 
transactions subject to sections 57(a) and (d) in the absence of rules 
under sections 57(a) and (d). No rules with respect to joint 
transactions have been adopted under sections 57(a) and (d). Rule 17d-1 
under the Act prohibits affiliated persons of a registered investment 
company from entering into joint transactions with the investment 
company unless the SEC has granted an order permitting the transaction. 
Applicants believe that the requested authorization under sections 
57(a)(4) and (d) and rule 17d-1 is appropriate.
    4. 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, that such 
action is not inconsistent with the public interest or the protection 
of investors. Private Equities is the sole equity holder of MorAmerica 
Capital and applicants represent that there will be no trading in 
MorAmerica securities. Further, applicants state that the nature and 
extent of MorAmerica Capital's activities are such that its activities 
will be fully reported through consolidated reporting in accordance 
with normal accounting rules. Accordingly, applicants believe that the 
requested exemption meets the Exchange Act's section 12(h) standards.

Applicants' Conditions

    Applicants agree that the following conditions will govern 
transactions under the requested order:

Capital Structure Conditions

    1. Private Equities will at all times own and hold beneficially and 
of record all of the outstanding capital stock of MorAmerica Capital.
    2. MorAmerica Capital will have the same fundamental investment 
policies as Private Equities, as set forth in Private Equities' 
registration statement; MorAmerica Capital will not engage in any other 
activities described in section 13(a) of the Investment Company Act, 
except in each case as authorized by the vote of a majority of the 
outstanding voting securities of Private Equities.
    3. No person shall serve or act as investment adviser to MorAmerica 
Capital unless the directors and shareholders of Private Equities shall 
have taken the action with respect thereto also required to be taken by 
the directors and shareholders of MorAmerica Capital.
    4. No person shall serve as a director of MorAmerica Capital unless 
elected as a director of Private Equities at its most recent annual 
meeting, as contemplated by section 16(a) of the Investment Company 
Act. Vacancies on Private Equities' board of directors will be filled 
in the manner provided for in section 16(a). Notwithstanding the 
foregoing, the board of directors of MorAmerica Capital will be elected 
by Private Equities as the sole shareholder of MorAmerica Capital, and 
such board will be composed of the same persons that serve as directors 
of Private Equities.
    5. Private Equities will not itself issue or sell any senior 
security and Private Equities will not cause or permit MorAmerica 
Capital to issue or sell any senior security of which Private Equities 
or MorAmerica Capital is the issuer except to the extent permitted by 
section 18 (as modified for BDCs by section 61) of the Investment 
Company Act; provided that immediately after the issuance or sale of 
any such notes or evidences of indebtedness by either Private Equities 
or MorAmerica Capital, Private Equities and MorAmerica Capital on a 
consolidated basis, and Private Equities individually, shall have the 
required asset coverage, except that, in determining whether Private 
Equities and MorAmerica Capital on a consolidated basis have the asset 
coverage required by section 61(a), any borrowings by MorAmerica 
Capital from Private Equities, for purposes of the definition of 
``asset coverage'' in section 18(h), shall be treated as indebtedness 
not represented by senior securities.
    6. Private Equities will acquire securities of MorAmerica Capital 
representing indebtedness only if, in each case, the prior approval of 
the SBA has been obtained. In addition, Private Equities and MorAmerica 
Capital will purchase and sell portfolio securities between themselves 
only if, in each case, the prior approval of the SBA has been obtained.

Co-Investing Conditions

    1. a. To the extent that Private Equities and MorAmerica Capital 
are considering new investments, InvestAmerica will review investment 
opportunities on their behalf, including investments being considered 
on behalf of the Managed Affiliates. InvestAmerica will determine 
whether a particular investment is eligible for investment by Private 
Equities and/or MorAmerica, as the case may be.
    b. If InvestAmerica deems an investment eligible for investment by 
Private Equities and/or MorAmerica Capital (the ``Investing Company''), 
InvestAmerica will determine what it considers to be an appropriate 
amount that the Investing Company should invest in the particular 
investment. Where the aggregate amount recommended for the Investing 
Company and that sought by the Managed Affiliates is greater than the 
amount available for investment, the amount available for purchase by 
the Investing Company shall be determined on a pro rata basis 
determined by dividing the net assets of the Investing Company by the 
sum of the net assets of the Investing Company and each of the Managed 
Affiliates seeking to make the investment.

[[Page 3903]]

    c. Following the making of the determinations referred to in (a) 
and (b), InvestAmerica will distribute written information concerning 
all eligible investments to the Investing Company's non-interested 
directors. Such information will include the name of each Managed 
Affiliate that proposes to make the investment and the amount of each 
proposed investment.
    d. Information regarding InvestAmerica's preliminary determinations 
will be reviewed by the Investing Company's non-interested directors. 
The Investing Company will only make a joint investment with a Managed 
Affiliate if a required majority (as defined in section 57(o) of the 
investment Company Act) (``Required Majority'') of the Investing 
Company's non-interested directors conclude, prior to the acquisition 
of the investment, that:
    i. the terms of the transaction, including the consideration to be 
paid, are reasonable and fair to the shareholders of Private Equities 
and do not involve overreaching of the Investing Company or such 
shareholders on the part of any person concerned;
    ii. the transaction is consistent with the interests of the 
shareholders of Private Equities and is consistent with the Investing 
Company's investment objectives and policies as recited in filings made 
by the Investing Company under the Securities Act of 1933, as amended, 
its registration statement and reports filed under the Exchange Act, as 
amended, and its reports to shareholders;
    iii. the investments by the Managed Affiliates would not 
disadvantage the Investing Company and that participation by the 
Investing Company would not be on a basis different from or less 
advantageous than that of Managed Affiliates; and
    iv. the proposed investment by the Investing Company will not 
benefit InvestAmerica or any affiliated entity, other than the Managed 
Affiliates making the proposed joint investment, except to the extent 
permitted pursuant to sections 17(e) and 57(k) of the Investment 
Company Act.
    e. An Investing Company may decline to participate in the co-
investment, or may purchase less than its full allocation.
    2. The Investing Company will not make an investment for its 
portfolio if a Managed Affiliate or InvestAmerica or a person 
controlling, controlled by, or under common control with InvestAmerica 
is an existing investor in such company; with the exception of the five 
present co-investments of MorAmerica Capital and the Iowa Fund.
    3. All purchases of securities by the Investing Company effected 
with a Managed Affiliate as a joint participant shall consist of the 
same class of securities, including the same registration rights (if 
any), and other rights related thereto, at the same price and on the 
same terms and conditions, and the settlement dates will be the same.
    4. If one or more Managed Affiliates elect to sell, exchange, or 
otherwise dispose of a security that is also held by the Investing 
Company, InvestAmerica will notify the Investing Company of the 
proposed disposition at the earliest practical time and the Investing 
Company will be given the opportunity to participate in such sale on a 
proportionate basis, at the same price and on the same terms and 
conditions as those applicable to Managed Affiliates. InvestAmerica 
will formulate a recommendation as to participation by the Investing 
Company in such a disposition, and provide a written recommendation to 
the Investing Company's non-interested directors. The Investing Company 
will participate in such disposition to the extent that a Required 
Majority of its non-interested directors determine that it is in the 
Investing Company's best interest. The Investing Company and each 
Managed Affiliate will bear its own expenses associated with the 
disposition of a portfolio security.
    5. If a Managed Affiliate desires to make a ``follow-on'' 
investment (i.e., an additional investment in the same entity) in a 
particular portfolio company whose securities are held by the Investing 
Company or to exercise warrants or other rights to purchase securities 
of such an issuer, InvestAmerica will notify the Investing Company of 
the proposed transaction at the earliest practical time. InvestAmerica 
will formulate a recommendation as to the proposed participation by the 
Investing Company in a follow-on investment, and provide the 
recommendation to the Investing Company's non-interested directors 
along with notice of the total amount of the follow-on investment. The 
Investing Company's non-interested directors will make their own 
determination with respect to follow-on investments. To the extent that 
the amount of a follow-on investment available to a Managed Affiliate 
and the Investing Company is not based on the amount of their initial 
investment, the relative amount of investment by each Managed Affiliate 
participating in a follow-on investment and the Investing Company will 
be based on a ratio derived by comparing the remaining funds available 
for investment by the Investing Company and each such Managed Affiliate 
with the total amount of the follow-on investment. The Investing 
Company will participate in such investment to the extent that a 
Required Majority of its non-interested directors determine that it is 
in the Investing Company's best interest. The acquisition of follow-on 
investments as permitted by this condition will be subject to the other 
conditions set forth in the application.
    6. The Investing Company's non-interested directors will review 
quarterly all information concerning co-investments made by the 
Investing Company, including co-investments in which one or more 
Managed Affiliates declined to participate, so that they may determine 
whether all investments made during the preceding quarter, including 
those investments they declined, complied with the conditions set forth 
above.
    7. The Investing Company will maintain the records required by 
section 57(f)(3) of the Investment Company Act as if each of the 
transactions permitted under these conditions were approved by the 
Investing Company's non-interested directors under section 57(f).
    8. No non-interested director of the Investing Companies will be a 
non-interested director of a Managed Affiliate with which the Investing 
Company co-invests.

Consolidated Reporting Conditions

    1. Private Equities will (a) file with the SEC on behalf of itself 
and MorAmerica Capital, all information and reports required to be 
filed with the SEC under the Exchange Act and other federal securities 
laws, including financial statements prepared solely on a consolidated 
basis as to Private Equities and MorAmerica Capital, such information 
and reports to be in satisfaction of the separate filing obligations of 
MorAmerica Capital; and (b) provide to its shareholders such 
information and reports required to be disseminated to Private 
Equities' shareholders, including financial statements prepared solely 
on a consolidated basis as to Private Equities and MorAmerica Capital, 
such reports to be in satisfaction of the separate filing obligations 
of Private Equities. Notwithstanding anything in this condition, 
Private Equities will not be relieved of any of its reporting 
obligations including, but not limited to, any consolidating statement 
setting forth the individual statement of MorAmerica Capital required 
by rule 6-03(c) of Regulation S-X.

[[Page 3904]]

    2. Private Equities and MorAmerica Capital may file on a 
consolidated basis pursuant to the above condition only so long as the 
amount of Private Equities' total consolidated assets invested in 
assets other than (a) securities issued by MorAmerica Capital or (b) 
securities similar to those in which MorAmerica Capital invests, does 
not exceed 10%.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-1289 Filed 1-18-95; 8:45 am]
BILLING CODE 8010-01-M