Document ID: SEC-2013-1725-0001
Agency: sec
Document Type: Notice
Title: Applications: Stellus Capital Investment Corp., et al.
Posted Date: 2013-10-03T04:00Z

[Federal Register Volume 78, Number 192 (Thursday, October 3, 2013)]
[Notices]
[Pages 61404-61407]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-24239]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-30739; File No. 812-14061]

Stellus Capital Investment Corporation, et al.; Notice of 
Application

September 30, 2013.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of application for an order under section 57(a)(4) and 
57(i) of the Investment Company Act of 1940 (the ``Act'') and rule 17d-
1 under the Act to permit certain joint transactions otherwise 
prohibited by section 57(a)(4) of the Act.

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Summary of Application:  Applicants request an order to permit a 
business development company (``BDC'') to co-invest with certain 
affiliated investment funds in portfolio companies.

Applicants:  Stellus Capital Investment Corporation (the ``Company''), 
Stellus Credit Fund I, LP (the ``Existing Fund''), Stellus Credit Fund 
GP, LLC (the ``Fund GP'') and Stellus Capital Management, LLC (the 
``Adviser'').

DATES:  Filing Dates: The application was filed on July 20, 2012, and 
amended on January 10, 2013, May 22, 2013, September 20, 2013, and 
September 26, 2013.

Hearing or Notification of Hearing:  An order granting the requested 
relief will be issued unless the Commission orders a hearing. 
Interested persons may request a hearing by writing to the Commission's 
Secretary and serving applicants with a copy of the request, personally 
or by mail. Hearing requests should be received by the Commission by 
5:30 p.m. on October 22, 2013 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 Commission's Secretary.

ADDRESSES: Elizabeth M. Murphy, Secretary, U.S. Securities and Exchange 
Commission, 100 F St. NE., Washington, DC 20549-1090. Applicants: 
Robert T. Ladd, Stellus Capital Investment Corporation, 4400 Post Oak 
Parkway, Suite 2200, Houston, TX 77027.

FOR FURTHER INFORMATION CONTACT: Barbara T. Heussler, Senior Counsel, 
at (202) 551-6990, or Jennifer L. Sawin, Branch Chief, at (202) 551-
6821 (Exemptive Applications Office, Division of Investment 
Management).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained via the 
Commission's Web site by searching for the file number, or for an 
applicant using the Company name box, at http://www.sec.gov/search/search.htm or by calling (202) 551-8090.
    Applicants' Representations:
    1. The Company is an externally managed, non-diversified, closed-
end management investment company that has elected to be regulated as a 
BDC under the Act.\1\ The Company's investment objective is to maximize 
total return to its stockholders in the form of current income and 
capital appreciation by primarily investing in private middle-market 
companies (typically with $5 million to $50 million of EBITDA) through 
first lien, second lien, unitranche and mezzanine debt financing and 
corresponding equity investments. The Company's board of directors 
currently consists of seven members (the ``Board''), four of whom are 
not ``interested persons'' of the Company within the meaning of section 
2(a)(19) of the Act (the ``Independent Directors'').
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    \1\ Section 2(a)(48) 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 
55(a)(3) of the Act and makes available significant managerial 
assistance with respect to the issuers of such securities.
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    2. The Adviser is registered as an investment adviser under the 
Investment Advisers Act of 1940 (the ``Advisers Act''). The Adviser 
serves as investment adviser to the Company pursuant to an investment 
advisory agreement and also serves as investment adviser to each 
Fund.\2\
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    \2\ ``Fund'' means (i) the Existing Fund and (ii) any Future 
Fund. Future Fund means an entity (i) whose investment adviser is 
the Adviser; and (ii) that would be an investment company but for 
section 3(c)(1) or 3(c)(7) of the Act.
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    3. The Existing Fund was formed as a Delaware limited partnership. 
In reliance on the exclusion from the definition of ``investment 
company'' provided by section 3(c)(1) or 3(c)(7) of the Act, none of 
the Funds will be registered under the Act. The Existing Fund and any 
Future Fund that co-invests with the Company has, or will have, 
investment objectives and strategies that are identical to the 
Company's Objectives and Strategies.\3\
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    \3\ ``Objectives and Strategies'' means the Company's investment 
objectives and strategies, as described in the Company's 
registration statement on Form N-2, other filings the Company has 
made with the Commission under the Securities Act of 1933, as 
amended (the ``1933 Act'') or under the Securities Exchange Act of 
1934, as amended, and the Company's reports to stockholders.

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[[Page 61405]]

    4. Applicants request relief permitting the Company, on the one 
hand, and one or more Funds, on the other hand, to participate in the 
same investment opportunities through a proposed co-investment program 
where such participation would otherwise be prohibited under section 
57(a)(4) and the rules under the Act (the ``Co-Investment 
Program'').\4\ For purposes of the application, a ``Co-Investment 
Transaction'' means any transaction in which the Company or a Wholly-
Owned Investment Sub (as defined below) participated together with one 
or more Funds in reliance on the requested order (the ``Order''). 
``Potential Co-Investment Transaction'' means any investment 
opportunity in which the Company or a Wholly-Owned Investment Sub could 
not participate together with one or more Funds without obtaining and 
relying on the Order.
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    \4\ All existing entities that currently intend to rely on the 
Order (as defined below) have been named as applicants and any 
entities that may rely on the Order in the future will comply with 
the terms and conditions of the application.
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    5. The Company may, from time to time, form one or more Wholly-
Owned Investment Subs.\5\ Such a subsidiary would be prohibited from 
investing in a Co-Investment Transaction with any Fund because it would 
be a company controlled by the Company for purposes of section 57(a)(4) 
and rule 17d-1. Applicants request that each Wholly-Owned Investment 
Sub be permitted to participate in Co-Investment Transactions in lieu 
of the Company and that the Wholly-Owned Investment Sub's participation 
in any such transaction be treated, for purposes of the Order, as 
though the Company were participating directly. Applicants represent 
that this treatment is justified because a Wholly-Owned Investment Sub 
would have no purpose other than serving as a holding vehicle for the 
Company's investments and, therefore, no conflicts of interest could 
arise between the Company and the Wholly-Owned Investment Sub. The 
Board would make all relevant determinations under the conditions with 
regard to a Wholly-Owned Investment Sub's participation in a Co-
Investment Transaction, and the Board would be informed of, and take 
into consideration, any proposed use of a Wholly-Owned Investment Sub 
in the Company's place. If the Company proposes to participate in the 
same Co-Investment Transaction with any of its Wholly-Owned Investment 
Subs, the Board will also be informed of, and take into consideration, 
the relative participation of the Company and the Wholly-Owned 
Investment Sub.
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    \5\ The term ``Wholly-Owned Investment Sub'' means an entity (a) 
whose sole business purpose is to hold one or more investment on 
behalf of the Company (and, in the case of an SBIC Subsidiary (as 
defined below), maintain a license under the SBA Act (as defined 
below) and issue debentures guaranteed by the SBA (as defined 
below)), (b) that is wholly-owned by the Company (with the Company 
at all times holding, beneficially and of record, 100% of the voting 
and economic interests), (c) with respect to which the Board has the 
sole authority to make all determinations with respect to the 
entity's participation under the conditions to the application, and 
(d) that would be an investment company but for section 3(c)(1) or 
3(c)(7) of the Act. All subsidiaries of the Company participating in 
Co-Investment Transactions will be Wholly-Owned Investment Subs and 
will have Objectives and Strategies that are either the same as, or 
a subset of, the Company's Objectives and Strategies. The term 
``SBIC Subsidiary'' means a Wholly-Owned Subsidiary that is licensed 
by the Small Business Administration (the ``SBA'') to operate under 
the Small Business Investment Act of 1958, as amended, (the ``SBA 
Act'') as a small business investment company (an ``SBIC'').
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    6. Each Potential Co-Investment Transaction would be allocated 
among the Company, on the one hand, and the Funds, on the other hand. 
In selecting investments for the Company, the Adviser will consider 
only the investment objective, investment policies, investment 
position, capital available for investment, and other pertinent factors 
applicable to the Company. Likewise, when selecting investments for the 
Funds, the Adviser will select investments considering, in each case, 
only the investment objective, investment policies, investment 
position, capital available for investment, and other pertinent factors 
applicable to that particular investing entity. However, as described 
herein, each of the Funds has, or will have, investment objectives and 
strategies that are identical to the Company's Objectives and 
Strategies. Therefore, for each investment that falls within the 
Objectives and Strategies and is a Potential Co-Investment Transaction, 
the Company intends to co-invest with the Funds, with certain 
exceptions based on available capital or diversification. Each 
Potential Co-Investment Transaction and the proposed allocation of each 
investment opportunity would be approved prior to the actual investment 
by the Required Majority.\6\
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    \6\ ``Required Majority'' has the meaning provided in section 
57(o) of the Act. The term ``Eligible Directors'' means the 
directors who are eligible to vote under section 57(o).
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    7. All subsequent activity (i.e. to sell, exchange or otherwise 
dispose of an investment or to complete a Follow-On Investment (as 
defined below) in respect of an investment acquired in a Co-Investment 
Transaction will also be made in accordance with the terms and 
conditions set forth in the application.\7\ The Company may participate 
in a pro rata disposition or Follow-On Investment without obtaining 
prior approval of the Required Majority, if, among other things: (i) 
The proposed participation of each Fund and the Company in such 
disposition or Follow-On Investment is proportionate to its outstanding 
investments in the issuer immediately preceding the disposition or 
Follow-On Investment, as the case may be; and (ii) the Board has 
approved the Company's participation in pro rata dispositions and 
Follow-On Investments as being in the best interests of the Company. In 
addition, no Independent Director will have any direct or indirect 
financial interest in any Co-Investment Transaction or any interest in 
any portfolio company, other than through an interest (if any) in the 
securities of the Company.
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    \7\ ``Follow-On Investment'' means any additional investment in 
an existing portfolio company, including the exercise of warrants, 
conversion privileges or other similar rights to acquire additional 
securities of the portfolio company.
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    Applicants' Legal Analysis:
    1. Section 57(a)(4) of the Act prohibits certain affiliated persons 
of a BDC from participating in joint transactions with the BDC in 
contravention of rules as prescribed by the Commission. Under section 
57(b)(2) of the Act, any person who is directly or indirectly 
controlling, controlled by, or under common control with a BDC is 
subject to section 57(a)(4). Applicants submit that each of the Funds 
could be deemed to be a person related to the Company in a manner 
described by section 57(b) by virtue of being under common control with 
the Company.
    2. Section 57(i) of the Act provides that, until the Commission 
prescribes rules under section 57(a)(4), the Commission's rules under 
section 17(d) of the Act applicable to registered closed-end investment 
companies will be deemed to apply to BDCs. Because the Commission has 
not adopted any rules under section 57(a)(4), rule 17d-1 applies.
    3. Section 17(d) of the Act and rule 17d-1 under the Act prohibit 
affiliated persons of a registered investment company from 
participating in joint transactions with the company unless the 
Commission has granted an order permitting such transactions. Rule 17d-
1, as made applicable to BDCs by section 57(i), prohibits any person 
who is related to a BDC in a manner described in section 57(b), acting 
as principal, from participating in, or effecting any transaction in 
connection with, any joint enterprise or other joint arrangement or 
profit-sharing plan in

[[Page 61406]]

which the BDC is a participant, absent an order from the Commission. In 
passing upon applications under rule 17d-1, the Commission considers 
whether the company's participation 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.
    4. Applicants state that they expect that co-investment in 
portfolio companies by the Company and the Funds will increase the 
number of favorable investment opportunities for the Company and that 
the Co-Investment Program will be implemented only if the Required 
Majority approves it.
    5. Applicants submit that the Required Majority's approval of each 
Co-Investment Transaction before investment, and other protective 
conditions set forth in the application, will ensure that the Company 
will be treated fairly. Applicants state that the Company's 
participation in the Co-Investment Transactions will be consistent with 
the provisions, policies, and purposes of the Act and on a basis that 
is not different from or less advantageous than that of other 
participants.
    Applicants' Conditions:
    Applicants agree that any order granting the requested relief will 
be subject to the following conditions:
    1. Each time the Adviser considers a Potential Co-Investment 
Transaction for a Fund that falls within the Company's then current 
Objectives and Strategies, the Adviser will make an independent 
determination of the appropriateness of the investment for the Company 
in light of the Company's then-current circumstances.
    2. (a) If the Adviser deems the Company's participation in any 
Potential Co-Investment Transaction to be appropriate for the Company, 
it will then determine an appropriate level of investment for the 
Company.
    (b) If the aggregate amount recommended by the Adviser to be 
invested in the Potential Co-Investment Transaction by the Company, 
together with the amount proposed to be invested by the Funds, 
collectively, in the same transaction, exceeds the amount of the 
investment opportunity, the amount proposed to be invested by each 
party will be allocated among them pro rata based on each party's total 
assets, up to the amount proposed to be invested by each. The Adviser 
will provide the Eligible Directors with information concerning each 
participating Fund's total assets to assist the Eligible Directors with 
their review of the Company's investments for compliance with these 
allocation procedures.
    (c) After making the determinations required in conditions 1 and 
2(a), the Adviser will distribute written information concerning the 
Potential Co-Investment Transaction, (including the amount proposed to 
be invested by each Fund), to the Eligible Directors for their 
consideration. The Company will co-invest with one or more Funds only 
if, prior to participating in the Potential Co-Investment Transaction, 
a Required Majority concludes that:
    (i) The terms of the transaction, including the consideration to be 
paid, are reasonable and fair to the Company and its shareholders and 
do not involve overreaching in respect of the Company or its 
shareholders on the part of any person concerned;
    (ii) the transaction is consistent with
    (A) the interests of the shareholders of the Company; and
    (B) the Company's then-current Objectives and Strategies;
    (iii) the investment by the Funds would not disadvantage the 
Company, and participation by the Company would not be on a basis 
different from or less advantageous than that of the Funds; provided, 
that, if any Fund, but not the Company itself, gains the right to 
nominate a director for election to a portfolio company's board of 
directors or the right to have a board observer or any similar right to 
participate in the governance or management of the portfolio company, 
such event shall not be interpreted to prohibit the Required Majority 
from reaching the conclusions required by this condition (2)(c)(iii), 
if
    (A) the Eligible Directors will have the right to ratify the 
selection of such director or board observer, if any;
    (B) the Adviser agrees to, and does, provide periodic reports to 
the Board with respect to the actions of the director or the 
information received by the board observer or obtained through the 
exercise of any similar right to participate in the governance or 
management of the portfolio company; and
    (C) any fees or other compensation that any Fund or any affiliated 
person of any Fund receives in connection with the right of the Fund to 
nominate a director or appoint a board observer or otherwise to 
participate in the governance or management of the portfolio company 
will be shared proportionately among the participating Funds (who may, 
in turn, share their portion with their affiliated persons) and the 
Company in accordance with the amount of each party's investment; and
    (iv) the proposed investment by the Company will not benefit the 
Adviser or the Funds or any affiliated person of any of them (other 
than the parties to the Co-Investment Transaction), except (A) to the 
extent permitted by condition 13, (B) to the extent permitted by 
section 17(e) or 57(k) of the Act, as applicable, (C) indirectly, as a 
result of an interest in securities issued by one of the parties to the 
Co-Investment Transaction, or (D) in the case of fees or other 
compensation described in condition 2(c)(iii)(C).
    3. The Company has the right to decline to participate in any 
Potential Co-Investment Transaction or to invest less than the amount 
proposed.
    4. The Adviser will present to the Board, on a quarterly basis, a 
record of all investments in Potential Co-Investment Transactions made 
by the Funds during the preceding quarter that fell within the 
Company's then-current Objectives and Strategies that were not made 
available to the Company, and an explanation of why the investment 
opportunities were not offered to the Company. All information 
presented to the Board pursuant to this condition will be kept for the 
life of the Company and at least two years thereafter, and will be 
subject to examination by the Commission and its staff.
    5. Except for Follow-On Investments made in accordance with 
condition 8, the Company will not invest in reliance on the Order in 
any issuer in which any Fund or any affiliated person of the Funds is 
an existing investor.
    6. The Company will not participate in any Potential Co-Investment 
Transaction unless the terms, conditions, price, class of securities to 
be purchased, settlement date, and registration rights will be the same 
for the Company as for each participating Fund. The grant to a Fund, 
but not the Company, of the right to nominate a director for election 
to a portfolio company's board of directors, the right to have an 
observer on the board of directors or similar rights to participate in 
the governance or management of the portfolio company will not be 
interpreted so as to violate this condition 6, if conditions 
2(c)(iii)(A), (B) and (C) are met.
    7. (a) If any Fund elects to sell, exchange, or otherwise dispose 
of an interest in a security that was acquired in a Co-Investment 
Transaction, the Adviser will:
    (i) Notify the Company of the proposed disposition at the earliest 
practical time; and

[[Page 61407]]

    (ii) formulate a recommendation as to participation by the Company 
in the disposition.
    (b) The Company will have the right to participate in such 
disposition on a proportionate basis, at the same price and on the same 
terms and conditions as those applicable to the participating Funds.
    (c) The Company may participate in such disposition without 
obtaining prior approval of the Required Majority if: (i) The proposed 
participation of the Company and each Fund in such disposition is 
proportionate to its outstanding investment in the issuer immediately 
preceding the disposition; (ii) the Board has approved as being in the 
best interests of the Company the ability to participate in such 
dispositions on a pro rata basis (as described in greater detail in the 
application); and (iii) the Board is provided on a quarterly basis with 
a list of all dispositions made in accordance with this condition. In 
all other cases, the Adviser will provide its written recommendation as 
to the Company's participation to the Eligible Directors, and the 
Company will participate in such disposition solely to the extent that 
a Required Majority determines that it is in the Company's best 
interests.
    (d) The Company and each participating Fund will bear its own 
expenses in connection with any such disposition.
    8. (a) If any Fund desires to make a Follow-On Investment in a 
portfolio company whose securities were acquired in a Co-Investment 
Transaction, the Adviser will:
    (i) Notify the Company of the proposed transaction at the earliest 
practical time; and
    (ii) formulate a recommendation as to the proposed participation, 
including the amount of the proposed Follow-On Investment, by the 
Company.
    (b) The Company may participate in such Follow-On Investment 
without obtaining prior approval of the Required Majority if: (i) The 
proposed participation of the Company and each Fund in such investment 
is proportionate to its outstanding investments in the issuer 
immediately preceding the Follow-On Investment; and (ii) the Board has 
approved as being in the best interests of the Company the ability to 
participate in Follow-On Investments on a pro rata basis (as described 
in greater detail in this application). In all other cases, the Adviser 
will provide its written recommendation as to the Company's 
participation to the Eligible Directors, and the Company will 
participate in such Follow-On Investment solely to the extent that a 
Required Majority determines that it is in the Company's best 
interests.
    (c) If, with respect to any Follow-On Investment:
    (i) The amount of the opportunity is not based on the Company's and 
the Funds' outstanding investments immediately preceding the Follow-On 
Investment; and
    (ii) the aggregate amount recommended by the Adviser to be invested 
by the Company in the Follow-On Investment, together with the amount 
proposed to be invested by the participating Funds in the same 
transaction, exceeds the amount of the opportunity;

then the amount invested by each such party will be allocated among 
them pro rata based on each party's total assets, up to the amount 
proposed to be invested by each.
    (d) The acquisition of Follow-On Investments as permitted by this 
condition will be considered a Co-Investment Transaction for all 
purposes and subject to the other conditions set forth in the 
application.
    9. The Independent Directors will be provided quarterly for review 
all information concerning Potential Co-Investment Transactions and Co-
Investment Transactions, including investments made by the Funds that 
the Company considered but declined to participate in, so that the 
Independent Directors may determine whether all investments made during 
the preceding quarter, including those investments that the Company 
considered but declined to participate in, comply with the conditions 
of the order. In addition, the Independent Directors will consider at 
least annually the continued appropriateness for the Company of 
participating in new and existing Co-Investment Transactions.
    10. The Company will maintain the records required by section 
57(f)(3) of the Act as if each of the investments permitted under these 
conditions were approved by the Required Majority under section 57(f).
    11. No Independent Director will also be a director, general 
partner, managing member or principal, or otherwise an ``affiliated 
person'' (as defined in the Act), of any of the Funds.
    12. The expenses, if any, associated with acquiring, holding or 
disposing of any securities acquired in a Co-Investment Transaction 
(including, without limitation, the expenses of the distribution of any 
such securities registered for sale under the 1933 Act) will, to the 
extent not payable by the Adviser under its respective investment 
advisory agreements with the Company and the Funds, be shared by the 
Company and the Funds in proportion to the relative amounts of the 
securities held or being acquired or disposed of, as the case may be.
    13. Any transaction fee (including break-up or commitment fees but 
excluding broker's fees contemplated by section 17(e) or 57(k), as 
applicable) received in connection with a Co-Investment Transaction 
will be distributed to the Company and the participating Funds on a pro 
rata basis based on the amounts they invested or committed, as the case 
may be, in such Co-Investment Transaction. If any transaction fee is to 
be held by the Adviser pending consummation of the transaction, the fee 
will be deposited into an account maintained by the Adviser at a bank 
or banks having the qualifications prescribed in section 26(a)(1), and 
the account will earn a competitive rate of interest that will also be 
divided pro rata among the Company and the participating Funds based on 
the amounts they invest in such Co-Investment Transaction. None of the 
Adviser, the Funds nor any affiliated person of the Company will 
receive additional compensation or remuneration of any kind as a result 
of or in connection with a Co-Investment Transaction (other than (a) in 
the case of the Company and the participating Funds, the pro rata 
transaction fees described above and fees or other compensation 
described in condition 2(c)(iii)(C), and (b) in the case of the 
Adviser, investment advisory fees paid in accordance with the 
respective agreements between the Adviser and the Company or the 
Funds).

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-24239 Filed 10-2-13; 8:45 am]
BILLING CODE 8011-01-P