[Federal Register Volume 61, Number 119 (Wednesday, June 19, 1996)]
[Notices]
[Pages 31197-31200]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-15578]



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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Rel. No. 22016; 812-10058]


Sirrom Capital Corporation; Notice of Application

June 13, 1996.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of Application under the Investment Company Act of 1940 
(the ``Act'').

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[[Page 31198]]

APPLICANT: Sirrom Capital Corporation (``Sirrom Capital'').

RELEVANT ACT SECTIONS: Applicant requests an order under: Section 6(c) 
of the Act for an exemption from sections 12(d)(1), 18(a), 19(b), 60, 
and 61(a); sections 6(c) and 17(b) of the Act for an exemption from 
section 17(a); section 57(c) of the Act for an exemption from sections 
57(a) (1), (2), and (3); and sections 17(d) and 57(a)(4) and rule 17d-1 
under the Act to permit Sirrom Capital and Sirrom Investments, Inc. 
(``Sirrom Investments'') to effect certain joint transactions.

SUMMARY OF APPLICATION: Applicant requests an order to permit Sirrom 
Capital to establish and operate a wholly-owned subsidiary, Sirrom 
Investments, under the terms of a proposed reorganization in which 
Sirrom Capital will transfer all of its assets, its small business 
investment company (``SBIC'') license, and liabilities, to Sirrom 
Investments in exchange for all of the common stock of Sirrom 
Investments.

FILING DATES: The application was filed on March 2, 1996 and amended on 
June 4, 1996.

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 
applicant with a copy of the request, personally or by mail. Hearing 
requests should be received by the SEC by 5:30 p.m. on July 8, 1996, 
and should be accompanied by proof of service on applicant, 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 the date of a hearing may request notification by writing 
to the SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549. 
Applicant, Sirrom Capital Corporation, 500 Church Street, Suite 200, 
Nashville, Tennessee 37219.

FOR FURTHER INFORMATION CONTACT:
Marianne H. Khawly, Staff Attorney, at (202) 942-0562, or Alison E. 
Baur, 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.

Applicant's Representations

    1. Sirrom Capital is a closed-end management investment company 
that has elected to be regulated as a business development company 
(``BDC'') under the Act. Sirrom Capital also is licensed by the Small 
Business Administration (``SBA'') as an SBIC under the Small Business 
Investment Act of 1958 (the ``1958 Act''). Sirrom Capital's investment 
objective is long-term capital appreciation through venture capital 
investments in small privately-owned companies (``Portfolio 
Companies''). Sirrom Capital has filed a registration statement on Form 
N-2 pursuant to which it will sell up to 2.3 million shares of common 
stock (the ``Public Offering''). The net proceeds of the Public 
Offering will be used to capitalize Sirrom Capital following the 
consummation of the proposed plan of reorganization (the ``Plan'').
    2. Under the Plan, Sirrom Capital intends to transfer all of its 
assets (except the net proceeds of the Public Offering), its SBIC 
license, and its liabilities to a newly-formed and wholly-owned 
subsidiary, Sirrom Investments. In exchange, Sirrom Investments will 
issue to Sirrom Capital all of its outstanding capital stock. After the 
transfer of assets and liabilities, Sirrom Investments will register 
under the Act as an SBIC and will conduct the SBIC activities 
previously conducted by Sirrom Capital. Sirrom Investments would 
operate as a registered closed-end investment company and an SBIC. 
Sirrom Capital will continue to operate as a BDC. Applicants chose a 
two-tier structure so that Sirrom Capital could engage in venture 
capital transactions and other investment opportunities in which SBICs 
cannot participate. In addition, Sirrom Investments will have the same 
fundamental investment policies as Sirrom Capital.
    3. Sirrom Capital may make additional investments in Sirrom 
Investments either as contributions to capital, purchases of additional 
stock, or loans. Sirrom Investments will not purchase or otherwise 
acquire any of the capital stock of Sirrom Capital. Sirrom Investments 
will pay dividends and make other distributions to Sirrom Capital with 
respect to its investments in Sirrom Investments' stock, including 
capital gains dividends subject in each case to the requirements of the 
1958 Act and regulations thereunder. Sirrom Capital intends to cause 
Sirrom Investments to qualify and elect to be taxed as a regulated 
investment company. Accordingly, Sirrom Investments will be required to 
pay out as dividends to Sirrom Capital substantially all of its so-
called ``investment company taxable income'' as defined in section 852 
of the Internal Revenue Code (the ``Code''). Similarly, Sirrom Capital 
intends to continue to qualify and elect to be taxed as a regulated 
investment company as defined by the Code.
    4. Sirrom Investments may make loans or other advances to Sirrom 
Capital other than on account of purchases of Sirrom Investment's 
stock. Sirrom Capital and Sirrom Investments also might invest in 
securities of the same issuer, simultaneously or sequentially, in the 
same or different securities of such issuer, and deal with such 
investments separately or jointly. Sirrom Capital or Sirrom Investments 
also might purchase all or a portion of portfolio investments held by 
the other in order to enhance the liquidity of the selling company.
    5. Sirrom Capital and Sirrom Investments propose 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. Sirrom Capital also intends to 
guarantee any borrowings by Sirrom Investments and vice versa. Sirrom 
Investments proposes to obtain financing that the SBA permits for 
SBICs. Sirrom Investments also intends to borrow from Sirrom Capital 
and vice versa.

Applicant's Legal Analysis

    1. Applicant requests an order under: Section 6(c) of the Act for 
an exemption from sections 12(d)(1), 18(a), 19(b), 60, and 61(a); 
sections 6(c) and 17(b) of the Act for an exemption from section 17(a); 
section 57(c) of the Act for an exemption from sections 57(a) (1), (2), 
and (3); and sections 17(d) and 57(a)(4) and rule 17d-1 under the Act 
to permit Sirrom Capital and Sirrom Investments to effect certain joint 
transactions.
    2. Section 12(d)(1)(A) of the Act provides that no registered 
investment company may acquire securities of another investment company 
if such securities represent more than 3 percent of the acquired 
company's outstanding voting stock, more than 5 percent of the 
acquiring company's total assets, or if such securities, together with 
the securities of any other acquired investment companies, represent 
more than 10 percent of the acquiring company's total assets. Section 
12(d)(1)(C) also provides that no registered company may purchase or 
otherwise acquire any security issued by a registered closed-end 
investment

[[Page 31199]]

company, if immediately after such purchase or acquisition the 
acquiring company owns more than 10 percent of the total outstanding 
voting stock of such closed-end company. Section 60 of the Act states 
that section 12 shall apply to a BDC to the same extent as if it were a 
registered closed-end investment company. 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 Sirrom Capital 
to Sirrom Investments is exempt from these provisions.
    3. Section 12(d)(1), however, also applies to the activities of 
Sirrom Investments, and loans made by Sirrom Capital to Sirrom 
Investments may violate section 12(d)(1) if such loans were considered 
purchases by Sirrom Investments of the securities of Sirrom Capital. 
Similarly, loans made by Sirrom Investments to Sirrom Capital may 
violate section 12(d)(1) if such loans were considered purchases by 
Sirrom Capital of the securities of Sirrom Investments. Accordingly, 
applicant requests an exemption from section 12(d)(1) to permit Sirrom 
Investments' acquisition of those securities representing indebtedness 
of Sirrom Capital.
    4. 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 that 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 18(k) provides an exemption from the asset coverage 
provisions of section 18(a) for SBICs. Section 61 makes section 18, 
with certain modifications, applicable to a BDC.
    5. As it is organized currently, Sirrom Capital is entitled to the 
section 18(k) exclusion for its SBA-guaranteed debt. Following the 
proposed reorganization, Sirrom Investments, as an SBIC, would be 
entitled to the section 18(k) exclusion and thus would not need any 
asset coverage for its SBA-guaranteed debentures. However, Sirrom 
Capital, since it would no longer be an SBIC, would be subject to the 
asset coverage requirements of section 18(a), as modified by section 
61(a), without the benefit of the section 18(k) exclusion with respect 
to senior securities it issued directly as well as those issued by 
Sirrom Investments. Thus, absent the requested relief, Sirrom Capital 
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 Sirrom Investments' indebtedness.
    6. Section 19(b) of the Act prohibits any registered investment 
company from distributing long-term capital gains, as defined in the 
Code, more often than once every twelve months. Sirrom Investment 
proposes to pay dividends and make other distributions to Sirrom 
Capital on a regular basis that may include distribution of long-term 
capital gains within the meaning of section 19(b) of the Act. Applicant 
believes that permitting such distributions more often than once a year 
will allow Sirrom Capital to manage more efficiently its internal cash 
flow and would result in administrative savings.
    7. Section 6(c) of the Act provides that the SEC may exempt persons 
or transactions 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 
and provisions of the Act. Applicant states that the operation of 
Sirrom Capital as a BDC with a wholly-owned SBIC subsidiary is intended 
to permit Sirrom Capital to expand the scope of its operations beyond 
that which would be permitted to it as an SBIC. Applicant further 
states that the requested exemptions would permit Sirrom Capital and 
Sirrom Investments to operate effectively as one company even though 
they will be divided into two legal entities. Accordingly applicant 
believes that the requested exemptions from sections 12(d)(1), 18(a), 
19(b), 60(a), and 61(a) meet the section 6(c) standards.
    8. Section 17(a) of the Act generally prohibits an affiliated 
person of a registered investment company to sell any security or other 
property to such registered investment company, to purchase from such 
registered investment company any security or other property, or to 
borrow money or other property from such registered investment company. 
Sections 57(a) (1), (2), and (3) generally prohibit any person related 
to a business development company from engaging in the transactions 
described in section 17(a). Section 2(a)(3)(A) defines ``affiliated 
person'' of another person as, among other things, any person directly 
or indirectly owning, controlling, or holding with power to vote, 5% or 
more of the outstanding voting securities of such other person. Section 
2(a)(3)(B) defines ``affiliated person'' of another person as, among 
other things, any person 5% or more of whose outstanding voting 
securities are directly or indirectly owned, controlled or held with 
power to vote, by such other person. Thus, Sirrom Capital is an 
affiliated person of Sirrom Investments and vice versa because Sirrom 
Capital owns 100% of Sirrom Investments' voting securities. In 
addition, Portfolio Companies of Sirrom Investments may also be 
affiliated persons of Sirrom Capital and Sirrom Investments by reason 
of ownership of 5% or more of such Portfolio Company's voting 
securities. According, any exchange of securities between Sirrom 
Capital and Sirrom Investments, and between either or both of them and 
their Portfolio Companies, could constitute an affiliated transaction 
prohibited by sections 17(a) and 57(a) of the Act.
    9. Section 17(b) authorizes the SEC to exempt a proposed 
transaction from section 17(a) if evidence establishes that the terms 
of the 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, the transaction is consistent with the policies 
of the registered investment company, and the general purposes of the 
Act. Section 57(c) authorizes the SEC to exempt a proposed transaction 
from sections 57(a) (1), (2), and (3) if it finds that the 
participation of the BDC meets the criteria set forth for registered 
investment companies in section 17(b). Section 57(i) of the Act 
provides, among other things, that the rules and regulations under 
section 17(a) applicable to registered closed-end investment companies 
shall apply to transactions subject to section 57(a) in the absence of 
rules under sections 57(a). No rules with respect to affiliated 
transactions have been adopted under section 57(a).
    10. Rule 57b-1, however, exempts from section 57(a) transactions 
between BDCs and specific downstream affiliates. Thus, applicants 
assert that if Sirrom Capital were to continue to operate as one BDC, 
transactions with portfolio affiliates would be permissible without 
Commission approval by virtue of Rule 57b-1 under the Act. Similarly, 
certain transactions between registered investment companies and their 
downstream affiliates are exempt from the prohibitions of section 17(a) 
of the Act by virtue of rule 17a-6. Applicant believes that Sirrom 
Investments should be permitted to invest in downstream affiliates of 
Sirrom Capital and vice versa to the extent permitted under the Act as 
if they were a single company. Thus, applicant believes that the 
requested exemption from section 17(a)

[[Page 31200]]

meets the standards of sections 6(c) and 17(b) and the requested 
exemption from sections 57(a) (1), (2), and (3) meets the standards of 
section 57(c).
    11. Section 17(d) of the Act prohibits an affiliated person of a 
registered investment company, acting as principal, from effecting any 
transaction in which such investment company is a joint, or joint and 
several, participant with such person unless the SEC has issued an 
order approving the arrangement. Rule 17d-1 states that the Commission 
will consider whether the participation of such registered investment 
company in such joint arrangement, on the basis proposed, is consistent 
with the provisions, policies, and purposes of the Act and the extent 
to which such participation is different from or less advantageous than 
that of other participants. Section 57(a)(4) of the Act applies 
identical standards to BDCs. Since Sirrom Capital and Sirrom 
Investments would be affiliated persons, investments by Sirrom Capital 
in the Portfolio Companies of Sirrom Investments and investments by 
Sirrom Investments in the Portfolio Companies of Sirrom Capital may be 
prohibited by sections 17(d), 57(a)(4) and rule 17d-1.
    12. If Sirrom Capital and Sirrom Investments were operating as one 
registered investment company, rule 17d-1(d)(5) would exempt 
transactions between them and their downstream affiliates from section 
17(d). If they were operating as one BDC, such transactions would be 
exempted from section 57(a)(4) by rule 57b-1. Thus, applicant believes 
that Sirrom Capital and Sirrom Investments should be permitted to 
invest in Portfolio Companies in which the other is or proposed to be 
an investor to the extent that such transaction would not be prohibited 
if Sirrom Investments were deemed to be part of Sirrom Capital and not 
a separate company. Thus applicant believes that requested relief under 
section 17(d) and 57(a)(4) and rule 17d-1 under the Act is consistent 
with the provisions, policies, and purposes of the Act and the 
participation of Sirrom Capital and Sirrom Investments is not different 
from or less advantageous than that of other participants.

Applicant's Conditions

    Applicant agrees that the order granting the requested relief shall 
be subject to the following conditions:
    1. Sirrom Capital at all times will own and hold, beneficially and 
of record, all of the outstanding voting capital stock of Sirrom 
Investments.
    2. Sirrom Investments will have the same fundamental investment 
policies as Sirrom Capital, as set forth in Sirrom Capital's Form N-2 
(Reg. No. 33-95394). Sirrom Capital will not cause or permit Sirrom 
Investments to change any of its fundamental investment policies, or 
take any other action referred to in section 13(a) of the Act, unless 
such action shall have been authorized by Sirrom Capital after approval 
of such action by a vote of a majority, as defined in the Act, of 
outstanding voting securities of Sirrom Capital.
    3. No person shall serve or act as investment adviser to Sirrom 
Investments under circumstances subject to section 15 of the Act, 
unless the directors and shareholders of Sirrom Capital shall have 
taken the action with respect thereto also required to be taken by the 
directors and shareholders of Sirrom Investments.
    4. No person shall serve as director of Sirrom Investments who 
shall not have been elected as a director of Sirrom Capital at its most 
recent annual meeting, as contemplated by section 16(a) of the Act and 
subject to the provisions thereof relating to the filling of vacancies. 
Notwithstanding the foregoing, the board of directors of Sirrom 
Investments will be elected by Sirrom Capital as the sole shareholder 
of Sirrom Investments, and such boards will be composed of the same 
persons that serve as directors of Sirrom Capital.
    5. Sirrom Capital will not itself issue, and Sirrom Capital will 
not cause or permit Sirrom Investments to issue, any senior security or 
sell any senior security of which Sirrom Capital or Sirrom Investments 
is the issuer except as hereinafter set forth: (a) Sirrom Capital and 
Sirrom Investments may 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, 
provided the following conditions are met: (1) such notes or evidences 
of indebtedness are not intended to be publicly distributed, (ii) such 
notes or evidence of indebtedness are not convertible into, 
exchangeable for, or accompanied by any options to acquire any equity 
security (except that, with respect to Sirrom Capital, the restrictions 
in this clause (ii) shall not be applicable except to the extent that 
they are applicable generally to BDCs), and (iii) immediately after the 
issuance or sale of any such notes or evidences of indebtedness, Sirrom 
Capital and Sirrom Investments on a consolidated basis, and Sirrom 
Capital individually, shall have the asset coverage that would be 
required by section 18(a) if Sirrom Capital and Sirrom Investments had 
each selected to become a BDC pursuant to section 54 of the Act. 
(except that, in determining whether Sirrom Capital and Sirrom 
Investments, on a consolidated basis, have the asset coverage required 
by section 18(a), any borrowings by Sirrom Investments pursuant to 
section 18(k) of the Act shall not be considered senior securities and, 
for purposes of the definition of asset coverage in section 18(h), 
shall be treated as indebtedness not represented by senior securities); 
and (b) in addition, (i) Sirrom Investments may obtain financing on 
such basis and in such amount as the SBA may from time to time permit 
for SBICs, (ii) Sirrom Investments may borrow from Sirrom Capital and 
Sirrom Capital may borrow from Sirrom Investments, and (iii) Sirrom 
Investments may guarantee any borrowings of Sirrom Capital, to the 
extent permitted by the SBA. None of the borrowings or other 
arrangements set forth in clause (b) above shall be deemed senior 
securities for purposes of any order issued pursuant to this 
application.\1\
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    \1\ Sirrom Investments will only issue such senior securities as 
are exempt from section 18(a) under section 18(k) of the Act.
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    6. Sirrom Capital will file with the Commission financial 
statements required by the federal securities laws on a consolidated 
basis as to Sirrom Capital and Sirrom Investments, and on an 
unconsolidated basis with respect to Sirrom Investments. Sirrom Capital 
will provide to its shareholders financial statements on a consolidated 
basis as to Sirrom Capital and Sirrom Investments, except when 
unconsolidated financial statements are required under generally 
accepted accounting principles.

    For the SEC, by the Division of Investment Management, under 
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-15578 Filed 6-18-96; 8:45 am]
BILLING CODE 8010-01-M