Document ID: SEC-2012-1101-0001
Agency: sec
Document Type: Notice
Title: Applications: Gladstone Capital Corporation, et al.
Posted Date: 2012-07-09T04:00Z

[Federal Register Volume 77, Number 131 (Monday, July 9, 2012)]
[Notices]
[Pages 40389-40392]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-16626]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-30125; File No. 812-13878]

Gladstone Capital Corporation, et al.; Notice of Application

June 29, 2012.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of application for an order under sections 17(d), 
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 sections 17(d) and 57(a)(4) of the Act and rule 
17d-1 under the Act.

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Summary of Application:  Applicants request an order to permit the 
Investors (as defined below) to co-invest in portfolio companies with 
each other and with an affiliated investment fund.

Applicants:  Gladstone Capital Corporation (``GLAD''), Gladstone 
Investment Corporation (``GAIN''), Gladstone Lending Corporation 
(``Lending,'' and collectively with GLAD and GAIN, the ``Funds''), 
Gladstone Partners Fund, LP (``Partners''), and Gladstone Management 
Corporation (``GMC'').

Filing Dates:  The application was filed on March 10, 2011, and amended 
on December 21, 2011, April 19, 2012, and June 29, 2012.

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 July 25, 2012, 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: Secretary, U.S. Securities and Exchange Commission, 100 F 
St. NE., Washington, DC 20549-1090. Applicants: 1521 Westbranch Dr., 
Suite 200, McLean, VA 22102.

FOR FURTHER INFORMATION CONTACT: Marilyn Mann, Special Counsel, at 
(202) 551-6813 or Mary Kay Frech, Branch Chief, at (202) 551-6821 
(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 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. GLAD and GAIN are closed-end management investment companies 
that have elected to be regulated as business development companies 
(``BDCs'') under the Act. Lending is a closed-end management investment 
company that has filed a notice of intent to elect to be regulated as a 
BDC pursuant to section 6(f) of the Act. Lending was organized on 
December 7, 2009, but has not yet commenced operations. A majority of 
the directors of each of the Funds is or will be persons who are not 
``interested persons'' as defined in section 2(a)(19) of the Act 
(``Non-Interested Directors'').
    2. GMC is registered as an investment adviser under the Investment 
Advisers Act of 1940 (the ``Advisers Act'') and serves as the 
investment adviser to each Fund. From time to time GMC, or an entity 
controlling, controlled by, or under common control with GMC, may serve 
as investment adviser or subadviser to other BDCs or registered closed-
end management investment companies (each, a ``Closed-End Fund,'' and 
together with the Funds, the ``Investors''). Companies subadvised by 
GMC or an entity controlling, controlled by, or under common control 
with GMC are included in the term ``Closed-End Fund'' only if the 
subadviser controls the Closed-End Fund.
    3. GLAD's Objectives and Strategies are to achieve a high level of 
current income by investing in certain debt securities issued by 
private businesses that are family-owned businesses or substantially 
owned by leveraged buyout funds or individual investors.\1\ GAIN's 
Objectives and Strategies are to achieve a high level of current income 
and capital gains by investing in debt and equity securities of private 
businesses. Lending's proposed Objectives and Strategies are to 
generate current income and, to a lesser extent, long-term capital 
appreciation through investing in syndicated and non-syndicated debt 
investments of small to mid-sized corporations that are typically 
larger companies than those in which GLAD or GAIN invest, but which may 
from time to time be similar to the types of investments in which GLAD 
and GAIN invest.
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    \1\ ``Objectives and Strategies'' means the investment 
objectives and strategies of an Investor, as described in the 
Investor's registration statement on Form N-2, other filings the 
Investor has made with the Commission under the Securities Act of 
1933 (``Securities Act''), or under the Securities Exchange Act of 
1934, and the Investor's reports to shareholders.
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    4. Partners is a limited partnership organized under Delaware law 
and is excluded from the definition of investment company by section 
3(c)(1) of the Act. Partners' investment objective is similar to GLAD's 
Objectives and Strategies. GMC is the general partner of Partners and 
serves as its investment adviser.
    5. Applicants seek an order (``Order'') under sections 17(d), 
57(a)(4), and 57(i) of the Act and rule 17d-1 under the Act to permit 
two or more of the Investors and Partners to (a) co-invest with each 
other in securities issued by issuers in private placement transactions 
\2\ in which GMC negotiates terms in addition to price; and (b) make 
additional investments in securities of such issuers, including through 
the exercise of warrants, conversion privileges, and other rights to 
purchase securities of the issuers (such additional investments, 
``Follow-On Investments'').\3\ ``Co-Investment Transaction'' means any 
transaction in which an Investor participated together with Partners 
and/or one or more other Investors in reliance on the Order. 
``Potential Co-Investment Transaction'' means any investment 
opportunity in which an Investor could not participate together with 
Partners and/or one or more other Investors without obtaining and 
relying on the Order. The Order would supersede a previous co-
investment order issued to GLAD, GAIN, Partners, Gladstone General 
Partner, LLC, and GMC.\4\
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    \2\ The term ``private placement transactions'' means 
transactions in which the offer and sale of securities by the issuer 
are exempt from registration under the Securities Act.
    \3\ All existing entities that currently intend to rely upon the 
Order have been named as applicants. Any other existing or future 
entity that subsequently relies on the Order will comply with the 
terms and conditions of the application.
    \4\ Gladstone Capital, Investment Company Act Release Nos. 27120 
(Oct. 25, 2005) (notice) and 27150 (Nov. 22, 2005) (order).
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    6. When considering Potential Co-Investment Transactions for any 
Investor, GMC will consider only the Objectives and Strategies, 
investment policies, investment positions, capital

[[Page 40390]]

available for investment, and other pertinent factors applicable to 
that Investor. Other than pro rata dispositions and Follow-On 
Investments as provided in conditions 7 and 8, and after making the 
determinations required in conditions 1 and 2(a), GMC will present each 
Potential Co-Investment Transaction and the proposed allocation to the 
directors eligible to vote under section 57(o) of the Act (``Eligible 
Directors''), and the ``required majority,'' as defined in section 
57(o) of the Act (``Required Majority'') will approve each Co-
Investment Transaction prior to any investment by the participating 
Investor.
    7. With respect to the pro rata dispositions and Follow-On 
Investments provided in conditions 7 and 8, an Investor 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 Investor and Partners in such 
disposition 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 of directors of the Investor has 
approved that Investor's participation in pro rata dispositions and 
Follow-On Investments as being in the best interests of the Investor. 
If the board does not so approve, any such disposition or Follow-On 
Investment will be submitted to the Investor's Eligible Directors. The 
board of any Investor may at any time rescind, suspend or qualify its 
approval of pro rata dispositions and Follow-On Investments with the 
result that all dispositions and/or Follow-On Investments must be 
submitted to the Eligible Directors.
    8. Applicants state that no Non-Interested Director of an Investor 
will have a financial interest in any Co-Investment Transaction, other 
than through share ownership in one of the Investors.

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 
Investors and Partners could be deemed to be a person related to each 
Investor in a manner described by section 57(b) by virtue of being 
under common control with the Investor. 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 transactions subject to section 57(a)(4). Because the 
Commission has not adopted any rules under section 57(a)(4), rule 17d-1 
also applies to joint transactions with Investors that are BDCs. 
Section 17(d) of the Act and rule 17d-1 under the Act are applicable to 
Investors that are registered closed-end investment companies.
    2. 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. 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.
    3. Applicants state that in the absence of the requested relief, 
the Investors would be, in some circumstances, limited in their ability 
to participate in attractive and appropriate investment opportunities. 
Applicants believe that the proposed terms and conditions will ensure 
that the Co-Investment Transactions are consistent with the protection 
of each Investor's shareholders and with the purposes intended by the 
policies and provisions of the Act. Applicants state that the 
Investors' 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 the Order will be subject to the following 
conditions:
    1. Each time GMC considers a Potential Co-Investment Transaction 
for Partners or another Investor that falls within an Investor's then-
current Objectives and Strategies, GMC will make an independent 
determination of the appropriateness of the investment for the Investor 
in light of the Investor's then-current circumstances.
    2. (a) If GMC deems an Investor's participation in any Potential 
Co-Investment Transaction to be appropriate for the Investor, it will 
then determine an appropriate level of investment for the Investor.
    (b) If the aggregate amount recommended by GMC to be invested in 
the Potential Co-investment Transaction by the Investors and Partners, 
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. GMC will 
provide the Eligible Directors of each participating Investor with 
information concerning each participating party's total assets to 
assist the Eligible Directors with their review of the Investor's 
investments for compliance with these allocation procedures.
    (c) After making the determinations required in conditions 1 and 
2(a), GMC will distribute written information concerning the Potential 
Co-Investment Transaction (including the amount proposed to be invested 
by each Investor and Partners) to the Eligible Directors of each 
participating Investor for their consideration. An Investor will co-
invest with another Investor or Partners 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 Investor and its shareholders and 
do not involve overreaching in respect of the Investor or its 
shareholders on the part of any person concerned;
    (ii) The transaction is consistent with:
    (A) The interests of the shareholders of the Investor; and
    (B) The Investor's then-current Objectives and Strategies;
    (iii) The investment by other Investors or Partners would not 
disadvantage the Investor, and participation by the Investor would not 
be on a basis different from or less advantageous than that of other 
Investors or Partners; provided that, if any other Investor or 
Partners, but not the Investor 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 
will 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;

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    (B) GMC agrees to, and does, provide, periodic reports to the 
Investor's board of directors 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 Partners or any Investor or 
any affiliated person of Partners or any Investor receives in 
connection with the right of Partners or the Investor 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 Partners (who may, in turn, share its portion 
with its affiliated persons) and the participating Investors in 
accordance with the amount of each party's investment; and
    (iv) The proposed investment by the Investor will not benefit GMC, 
Partners or the other Investors 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 the 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. Each Investor has the right to decline to participate in any 
Potential Co-Investment Transaction or to invest less than the amount 
proposed.
    4. GMC will present to the board of directors of each Investor, on 
a quarterly basis, a record of all investments in Potential Co-
Investment Transactions made by any of the other Investors or Partners 
during the preceding quarter that fell within the Investor's then-
current Objectives and Strategies that were not made available to the 
Investor, and an explanation of why the investment opportunities were 
not offered to the Investor. All information presented to the board of 
directors pursuant to this condition will be kept for the life of the 
Investor 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, an Investor will not invest in reliance on the Order in 
any issuer in which another Investor or Partners or any affiliated 
person of such Investor or Partners is an existing investor.
    6. An Investor 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 each participating Investor and Partners. The grant to Partners or 
another Investor, but not the Investor, 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 Partners or any Investor elects to sell, exchange or 
otherwise dispose of an interest in a security that was acquired in a 
Co-Investment Transaction, GMC will:
    (i) Notify each Investor that participated in the Co-Investment 
Transaction of the proposed disposition at the earliest practical time; 
and
    (ii) Formulate a recommendation as to participation by each 
Investor in the disposition.
    (b) Each Investor 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 Partners and any other 
Investor.
    (c) An Investor may participate in such disposition without 
obtaining prior approval of the Required Majority if: (i) The proposed 
participation of each Investor and Partners in such disposition is 
proportionate to its outstanding investments in the issuer immediately 
preceding the disposition; (ii) the board of directors of the Investor 
has approved as being in the best interests of the Investor the ability 
to participate in such dispositions on a pro rata basis (as described 
in greater detail in this application); and (iii) the board of 
directors of the Investor is provided on a quarterly basis with a list 
of all dispositions made in accordance with this condition. In all 
other cases, GMC will provide its written recommendation as to the 
Investor's participation to the Eligible Directors, and the Investor 
will participate in such disposition solely to the extent that a 
Required Majority determines that it is in the Investor's best 
interests.
    (d) Partners and each Investor will bear their own expenses in 
connection with any such disposition.
    8. (a) If Partners or any Investor desires to make a Follow-On 
Investment in a portfolio company whose securities were acquired in a 
Co-Investment Transaction, GMC will:
    (i) Notify each Investor that participated in the Co-Investment 
Transaction 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 each 
Investor.
    (b) An Investor may participate in such Follow-On Investment 
without obtaining prior approval of the Required Majority if: (i) The 
proposed participation of each Investor and Partners in such investment 
is proportionate to its outstanding investments in the issuer 
immediately preceding the Follow-On Investment; and (ii) the board of 
directors of the Investor has approved as being in the best interests 
of the Investor 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, GMC will provide its written recommendation as to 
the Investor's participation to the Eligible Directors, and the 
Investor will participate in such Follow-On Investment solely to the 
extent that a Required Majority determines that it is in the Investor's 
best interests.
    (c) If, with respect to any Follow-On Investment:
    (i) The amount of the opportunity is not based on the Investors' 
and Partners' outstanding investments immediately preceding the Follow-
On Investment; and
    (ii) The aggregate amount recommended by GMC to be invested by each 
Investor in the Follow-On Investment, together with the amount proposed 
to be invested by Partners 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 this 
application.
    9. The Non-Interested Directors of each Investor will be provided 
quarterly for review all information concerning Potential Co-Investment 
Transactions and Co-Investment Transactions, including investments made 
by other Investors or Partners that the Investor considered but 
declined to participate in, so that the Non-Interested Directors may 
determine whether all investments made during the preceding quarter, 
including those investments that the Investor considered but declined 
to participate in, comply with the conditions of the Order. In 
addition, the

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Non-Interested Directors will consider at least annually the continued 
appropriateness for the Investor of participating in new and existing 
Co-Investment Transactions.
    10. Each Investor 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 Non-Interested Director of an Investor will also be a 
director, general partner, managing member or principal, or otherwise 
an ``affiliated person'' (as defined in the Act), of Partners.
    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 Securities Act) will, to 
the extent not payable by GMC under its investment advisory agreements 
with the Investors and Partners, be shared by the Investors and 
Partners 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) of the 
Act, as applicable) received in connection with a Co-Investment 
Transaction will be distributed to the participating Investors and 
Partners 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 GMC pending consummation of the 
transaction, the fee will be deposited into an account maintained by 
GMC at a bank or banks having the qualifications prescribed in section 
26(a)(1) of the Act, and the account will earn a competitive rate of 
interest that will also be divided pro rata among the Investors and 
Partners based on the amounts they invest in such Co-Investment 
Transaction. None of Partners, GMC or any affiliated person of the 
Investors 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 Investors and Partners, 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 GMC, 
investment advisory fees paid in accordance with the agreements between 
GMC and the Investors or Partners).

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-16626 Filed 7-6-12; 8:45 am]
BILLING CODE 8011-01-P