Document ID: SEC-2012-0216-0001
Agency: sec
Document Type: Notice
Title: Applications: Rand Capital Corp., et al.
Posted Date: 2012-02-07T05:00Z

[Federal Register Volume 77, Number 25 (Tuesday, February 7, 2012)]
[Notices]
[Pages 6156-6160]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-2670]

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 29941; 812-13634]

Rand Capital Corporation, et al.; Notice of Application

February 1, 2012.
AGENCY: Securities and Exchange Commission (the ``Commission'').

ACTION: Notice of an application for an order under sections 6(c), 
12(d)(1)(J), and 57(c) of the Investment Company Act of 1940 (``Act'') 
granting exemptions from sections 12(d)(1)(A) and (C), 18(a),

[[Page 6157]]

21(b), 57(a)(1)-(a)(3), and 61(a) of the Act; under section 57(i) of 
the Act and rule 17d-1 under the Act to permit certain joint 
transactions otherwise prohibited by section 57(a)(4) of the Act; and 
under section 12(h) of the Securities Exchange Act of 1934 (``Exchange 
Act'') granting an exemption from section 13(a) of the Exchange Act.

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Applicants: Rand Capital Corporation (``Rand'') and Rand Capital SBIC, 
Inc. (``Rand SBIC'').

Summary of Application: Applicants request an order permitting a parent 
business development company (``BDC'') and its wholly-owned small 
business investment company (``SBIC'') subsidiary and any future 
wholly-owned BDC subsidiaries (``Future Subsidiaries'') to engage in 
certain transactions that otherwise would be permitted if such parent 
BDC and its subsidiaries were one company and to file certain reports 
on a consolidated basis, and permitting such parent BDC to adhere to a 
modified asset coverage requirement.

DATES: Filing Dates: The application was filed on February 6, 2009 and 
amended on August 5, 2009, September 8, 2011 and January 10, 2012.
    Hearing or Notification of Hearing: An order granting the 
application 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 pm on February 27, 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 
Street NE., Washington, DC 20549-1090. Applicants, c/o Allen F. Grum, 
Rand Capital Corporation, 2200 Rand Building, Buffalo, NY 14203.

FOR FURTHER INFORMATION CONTACT: Keith A. Gregory, Senior Counsel, at 
(202) 551-6815, or Mary Kay Frech, Branch Chief, at (202) 551-6821 
(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 via the 
Commission's Web site by searching for the file number, or an applicant 
using the Company name box, at http://www.sec.gov/search/search.htm or 
by calling (202) 551-8090.

Applicants' Representations

    1. Rand, a New York corporation, is an internally managed, non-
diversified, closed-end investment company that has elected to be 
regulated as a BDC under the Act.\1\ Rand's principal business is to 
make venture capital investments in small, early-stage and developing 
enterprises. Rand's principal objective is long-term capital 
appreciation. Rand typically invests in debt securities and 
concurrently acquires equity interests in the form of stock, warrants 
or stock options or the right to convert debt securities into stock. 
Rand has a six member board of directors (``Rand Board''), five of whom 
are not ``interested persons'' of Rand within the meaning of section 
2(a)(19) of the Act. The Rand Board appoints Rand's president and chief 
executive officer and its executive vice president and chief financial 
officer (collectively, the ``Principal Officers''). Subject to the 
oversight of the Rand Board, the Principal Officers make all investment 
decisions for Rand.
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    \1\ Section 2(a)(48) of the Act 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. Rand SBIC, a New York corporation, is an SBIC licensed by the 
Small Business Administration (``SBA'') to operate under the Small 
Business Investment Act of 1958 (``SBA Act''). Rand SBIC is registered 
as an investment company under the Act and will elect to be regulated 
as a BDC prior to relying on the requested order. Rand SBIC has the 
same investment purposes and will invest in the same kinds of 
securities as Rand.
    3. Rand SBIC is a wholly-owned subsidiary of Rand, which owns all 
of its outstanding voting stock. The Rand Board annually elects the 
same persons who comprise the Rand Board to serve on the board of 
directors of Rand SBIC. Pursuant to a by-law provision required by the 
SBA, Rand SBIC is required to maintain an investment committee 
consisting of the Principal Officers that has responsibility for all 
investment decisions by Rand SBIC. Rand SBIC's operations have been and 
will be consolidated with those of Rand for financial reporting and tax 
purposes.
    4. Rand may in the future create wholly-owned Future Subsidiaries 
each of which (i) will be a BDC, and (ii) may be licensed by the SBA to 
operate as an SBIC (collectively with Rand SBIC, the ``SBIC 
Subsidiaries'') or may not be an SBIC.\2\ Any future SBIC Subsidiary 
will be operated in the same manner as Rand SBIC and will be subject to 
the requirements of the SBA Act and the SBA regulations. Rand SBIC, the 
SBIC Subsidiaries and the Future Subsidiaries are collectively referred 
to as the ``Subsidiaries.''
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    \2\ All existing entities that currently intend to rely on 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.
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Applicants' Legal Analysis

    1. Applicants request an order under sections 6(c), 12(d)(1)(J), 
57(c) and 57(i) of the Act and rule 17d-1 under the Act granting 
exemptions from sections 12(d)(1), 18(a), 21(b), 57(a)(1), 57(a)(2), 
57(a)(3), 57(a)(4), and 61(a) of the Act to permit Rand, Rand SBIC and 
any Future Subsidiary to engage in certain transactions that otherwise 
would be permitted if Rand and its Subsidiaries were one company and to 
permit Rand to adhere to a modified asset coverage requirement. 
Applicants also request an exemption under section 12(h) of the 
Exchange Act for an exemption from section 13(a) of the Exchange Act.
    2. Section 12(d)(1)(A) of the Act, made applicable to BDCs by 
section 60 of the Act, limits the amount of securities a registered 
investment company or BDC may hold of other investment companies. 
Section 12(d)(1)(C) of the Act limits the amount of securities of a 
closed-end investment company that may be acquired by an investment 
company. Rule 60a-1 exempts a BDC's acquisition of the securities of a 
wholly-owned SBIC subsidiary from sections 12(d)(1)(A) and (C). 
Accordingly, the acquisition of Rand SBIC securities by Rand will be 
exempt from the provisions of sections 12(d)(1)(A) and 12(d)(1)(C) by 
virtue of rule 60a-1.
    3. Applicants state that section 12(d)(1) would prohibit the 
acquisition by Rand of the debt or equity securities of, or the making 
of loans by Rand to, Future Subsidiaries that are not SBICs. Applicants 
state that section 12(d)(1) would also prohibit the acquisition of debt 
securities of Rand by any such Future Subsidiary since they would each 
be a BDC and an entity controlled by a BDC. Thus, the making of loans 
or advances by Rand SBIC or a Future Subsidiary to Rand might be deemed 
to violate section 12(d)(1) if the loans or

[[Page 6158]]

advances are construed as purchases by the Subsidiary of the securities 
of Rand.
    4. Applicants request an exemption under section 12(d)(1)(J) from 
section 12(d)(1) to permit: (1) The purchase of debt or equity 
securities of, or a contribution to capital to, a Future Subsidiary 
that is not an SBIC by Rand, (ii) the making of loans or advances by 
any Subsidiary to Rand or to any other Subsidiary, and (iii) the 
acquisition by the Subsidiaries of any securities of Rand representing 
indebtedness or any securities representing indebtedness issued by any 
of the other Subsidiaries. Section 12(d)(1)(J) of the Act provides that 
the Commission may exempt persons or transactions from any provision of 
section 12(d)(1) if and to the extent such exception is consistent with 
the public interest and the protection of investors. Applicants state 
that the requested relief meets this standard because the Subsidiaries 
are wholly-owned and this status and the consolidated financial 
reporting with Rand will eliminate the possibility of overreaching and 
prevent confusion as to the financial status of Rand to Rand's 
shareholders, who are the investors that the Act is intended to 
protect.
    5. Section 18(a) prohibits a registered closed-end investment 
company from issuing any class of senior security or selling any such 
security of which it is the issuer unless the company complies with the 
asset coverage requirements set forth in that section. Section 61(a) of 
the Act makes section 18 applicable to BDCs, with certain 
modifications. Section 18(k) exempts an investment company operating as 
an SBIC from the asset coverage requirements of section 18(a)(1)(A) and 
(B) (with respect to senior securities representing indebtedness).
    6. Applicants state that a question exists as to whether Rand must 
comply with the asset coverage requirements of section 18(a) (as 
modified by section 61(a)) on a consolidated basis because Rand may be 
deemed to be an indirect issuer of any class of senior security 
representing indebtedness issued by any Subsidiary. For Rand to comply 
with these asset coverage requirements would mean that, with certain 
exceptions, Rand would treat as its own all assets held directly by 
Rand and the Subsidiaries and any liabilities of the Subsidiaries, 
including liabilities of the Subsidiaries with respect to senior 
securities as to which any of the Subsidiaries is exempt from the asset 
coverage requirements of section 18(a)(1)(A) and (B) by virtue of 
section 18(k). Accordingly, applicants request relief under section 
6(c) of the Act from sections 18(a) and 61(a) to permit Rand to exclude 
from its consolidated asset coverage ratio any SBA preferred stock 
interest in any of the Subsidiaries (if applicable) and any senior 
security representing indebtedness issued by any Subsidiary.
    7. Section 6(c) of the Act, in relevant part, permits the 
Commission to exempt any transaction or class of transactions from any 
provision of the Act if, and to the extent that, 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. Applicants state that the requested relief 
satisfies the section 6(c) standards. Applicants state that, without 
the requested relief from sections 18(a) and 61(a), the ability of an 
SBIC Subsidiary to obtain the kind of financing that would be available 
to Rand if it were to conduct the SBIC operations itself would be 
restricted. Moreover, the exclusion by Rand from its consolidated asset 
coverage ratio of any senior security representing indebtedness that is 
issued by an SBIC Subsidiary would not harm the public interest because 
the SBA regulates the leverage and capital structure of the SBIC 
Subsidiaries.
    8. Sections 57(a)(1) and (2) of the Act generally prohibit, with 
certain exceptions, sales or purchases of any security or other 
property between BDCs and certain of their affiliates as described in 
section 57(b) of the Act. Section 57(b) includes a person, directly or 
indirectly, either controlling, controlled by or under common control 
with the BDC. Applicants state that Rand directly owns all of each 
Subsidiary's outstanding voting stock. Applicants further state that 
each of the Subsidiaries and Rand may be deemed to be under the common 
control of the Rand Board and the Principal Officers. Accordingly, Rand 
and the Subsidiaries are related to each other in the manner described 
in section 57(b). In addition, each Subsidiary would also be a person 
related to each other Subsidiary in a manner described in section 57(b) 
as long as they remain under the common control of Rand.
    9. Applicants state that there may be circumstances when it is in 
the interest of Rand and its shareholders that one or more of the 
Subsidiaries invest in securities of an issuer that may be deemed to be 
a controlled portfolio affiliate of Rand or another Subsidiary or that 
Rand invest in securities of an issuer that may be deemed to be a 
controlled portfolio affiliate of a Subsidiary. Applicants therefore 
request an exemption from sections 57(a)(1) and 57(a)(2) of the Act to 
permit any transaction between Rand and any Subsidiary, and any 
transaction between a Subsidiary and any other Subsidiary, with respect 
to the purchase or sale of securities or other property. Applicants 
also seek an exemption from these provisions to allow any purchase or 
sale transaction between Rand and a controlled portfolio affiliate of 
any Subsidiary, and a purchase or sale transaction between a Subsidiary 
and a controlled portfolio affiliate of Rand or another Subsidiary. 
Applicants state that the requested relief is intended only to permit 
Rand and the Subsidiaries to do that which they otherwise would be 
permitted to do if they were one company.
    10. Section 57(c) provides that the Commission will exempt a 
proposed transaction from the provisions of section 57(a)(1) and (2) of 
the Act if the terms of the proposed transaction, including the 
consideration to be paid or received, are reasonable and fair and do 
not involve overreaching of any person concerned, and the proposed 
transaction is consistent with the policy of the BDC concerned and the 
general purposes of the Act.
    11. Applicants submit that the requested relief from section 
57(a)(1) and (2) meets this standard. Applicants represent that the 
proposed operations as one company will enhance efficient operations of 
Rand and its wholly owned Subsidiaries, and allow them to deal with 
portfolio companies as if Rand and such Subsidiaries were one company. 
Applicants contend that the terms of the proposed transactions are 
reasonable and fair and do not involve overreaching of Rand or its 
stockholders or its stockholders by any person, and that the requested 
order would permit Rand and the Subsidiaries to carry out more 
effectively their purposes and objectives of investing primarily in 
small business concerns. Finally, applicants note that the proposed 
transactions are consistent with the policies of Rand and Rand SBIC as 
specified in filings with the Commission and Rand's reports to 
shareholders, as well as consistent with the policies and provisions of 
the Act.
    12. Section 57(a)(3) of the Act makes it unlawful for certain 
affiliated persons of a BDC, and certain affiliated persons of those 
persons, to borrow money or other property from such BDC or from any 
company controlled by the BDC, except as permitted by section 21(b) or 
section 62. Section 21(b) of the Act (made applicable to BDCs by 
section 62) provides that it shall be unlawful for a BDC to lend any 
money or property, directly or indirectly, to any person that controls 
or is under common control

[[Page 6159]]

with the BDC, except for loans to any company that owns all of the 
outstanding securities of the BDC (other than directors' qualifying 
shares).
    13. Rand is an affiliated person of each of the Subsidiaries by 
reason of its direct ownership of all of the outstanding voting capital 
stock of the Subsidiaries. Each of the Subsidiaries is an affiliated 
person of Rand because they are deemed to be under the control of Rand. 
Each of the Subsidiaries is an affiliated person of each other 
Subsidiary because they are deemed to be under the common control of 
Rand. In addition, each of the directors and Principal Officers of Rand 
are also or will be the directors and principal officers of Rand SBIC 
and the Future Subsidiaries, so that Rand and the Subsidiaries may be 
deemed to be under common control.
    14. Applicants state that there may be instances when it would be 
in the best interests of Rand and its shareholders for Rand to make 
loans to one of more of the Subsidiaries or for the Subsidiaries to 
make loans to Rand or each other. Applicants note that, in the case of 
loans from Rand to the Subsidiaries or loans from the Subsidiaries to 
each other, the loans may be prohibited by section 21(b) because Rand 
and the Subsidiaries may be deemed to be under common control. 
Applicants state that in the case of loans from a Subsidiary to Rand, 
the loans would be prohibited by section 21(b) and section 57(a)(3) 
because the borrower controls the lender and the lender may have 
outstanding securities not owned by the borrower.
    15. Accordingly, applicants request an order under section 6(c) to 
exempt from the provisions of section 21(b) the lending of money or 
other property by Rand to the Subsidiaries and by the Subsidiaries to 
Rand or another Subsidiary. Applicants argue that because these 
transactions are solely between Rand and its wholly-owned Subsidiaries, 
they will have no substantive economic effect and there will be no 
basis for overreaching or harm to the public interest. Applicants also 
request an order under section 57(c) to exempt the borrowing of money 
or other property by Rand or a Subsidiary from any other Subsidiary 
from the provisions of section 57(a)(3). Applicants submit that the 
requested relief meets the standards of section 6(c) and 57(c).
    16. Applicants also request relief from section 21(b) under section 
6(c) to exempt any lending of money or other property by Rand or a 
Subsidiary to portfolio companies of any Subsidiary controlled by the 
Subsidiary or portfolio companies of Rand controlled by Rand. The 
requested exemption is intended to permit Rand and the Subsidiaries to 
do that which they otherwise would be permitted to do if they were one 
company, as opposed to each of the Subsidiaries being a wholly-owned 
Subsidiary of Rand.
    17. Section 17(d) of the Act and rule 17d-1 under the Act (made 
applicable to BDCs by section 57(i)) prohibit affiliated persons of a 
registered investment company, or an affiliated person of such person, 
acting as principal, from participating in any joint transaction or 
arrangement in which the registered company or a company it controls is 
a participant, unless the Commission has issued an order authorizing 
the arrangement. Section 57(a)(4) of the Act imposes substantially the 
same prohibitions on joint transactions involving any BDC and an 
affiliated person of such BDC, or an affiliated person of such 
affiliated person, as specified in section 57(b) of the Act. Section 
57(i) of the Act provides that rules and regulations under section 
17(d) of the Act will apply to transactions subject to section 57(a)(4) 
in the absence of rules under that section. The Commission has not 
adopted rules under section 57(a)(4) with respect to joint transactions 
and, accordingly, the standards set forth in rule 17d-1 govern 
applicants' request for relief.
    18. Applicants request relief under section 57(i) and rule 17d-1 to 
permit any joint transaction that would otherwise be prohibited by 
section 57(a)(4), in which a Subsidiary and Rand or another Subsidiary 
participate, but only to the extent that the transaction would not be 
prohibited if the Subsidiaries were deemed to be a part of Rand and not 
separate companies.
    19. In determining whether to grant an order under section 57(i) 
and rule 17d-1, the Commission considers whether the participation of 
the BDC in the joint transaction is consistent with the provisions, 
policies, and purposes of the Act, and the extent to which such 
participation is on a basis different from or less advantageous than 
that of other participants. Applicants note that the proposed 
transactions are consistent with the policy and provisions of the Act 
and will enhance the interests of Rand and its stockholders while 
retaining the important protections afforded by the Act. In addition, 
because the joint participants will conduct their operations as though 
they comprise one company, the participation of one will not be on a 
basis different from or less advantageous than the others. Accordingly, 
applicants believe that the standard for relief under section 57(i) and 
rule 17d-1 is satisfied.
    20. Section 54 of the Act provides that a closed-end company may 
elect BDC treatment under the 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 issuers with specified assets and a specified 
number of security holders to register under the Exchange Act. Rand has 
elected to be regulated as a BDC and its common stock is deemed 
registered under section 12(g)(1) of the Exchange Act. Rand SBIC will 
elect to be regulated as a BDC under the Act prior to relying on the 
order, and such election will cause Rand SBIC's common stock to be 
registered under the Exchange Act by operation of rule 12g-2 under the 
Exchange Act.
    21. By filing a registration statement under section 12 of the 
Exchange Act, absent an exemption, Rand SBIC and each Future Subsidiary 
would be required by section 13(a) of the Exchange Act to file 
periodically with the Commission, even though their sole shareholder 
will be Rand. Accordingly, applicants request an order under section 
12(h) of the Exchange Act exempting Rand SBIC and each Future 
Subsidiary from the reporting requirements of section 13(a) of the 
Exchange Act to permit the filing of consolidated reports with Rand.
    22. Section 12(h) of the Exchange Act provides that the Commission 
may exempt an issuer from section 13 of the Exchange Act if the 
Commission 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. Each of the Subsidiaries will 
have only one investor, which is itself a reporting company, and no 
public investors. There will be no trading in the Subsidiaries 
securities, so no public interest or investor protective purpose will 
be served by separate Subsidiary reporting. Further, applicants state 
that the nature and extent of the Subsidiaries' activities are such 
that their activities will be fully reported through consolidated 
reporting in accordance with normal accounting rules. Accordingly, 
applicants believe that the requested exemption meets the standards of 
section 12(h) of the Exchange Act.

[[Page 6160]]

Applicants' Conditions

    Applicants agree that the requested order will be subject to the 
following conditions:
    1. Rand will at all times own and hold, beneficially and of record, 
all of the outstanding voting capital stock of each of the 
Subsidiaries.
    2. The Subsidiaries will have investment policies not inconsistent 
with those of Rand, as set forth in Rand's registration statement.
    3. No person shall serve as investment adviser or principal 
underwriter to Rand SBIC or any Subsidiary unless the Rand Board and 
the shareholders of Rand shall have taken the same action with respect 
thereto also required to be taken by the board of directors and the 
sole shareholder of such Subsidiary.
    4. Rand will not itself issue or sell any senior security, and Rand 
will not cause or permit any Subsidiary to issue or sell any senior 
security of which Rand or such Subsidiary is the issuer except to the 
extent permitted by section 18 (as modified for BDCs by section 61) of 
the Act; provided that immediately after the issuance or sale of any 
such senior security by either Rand or any Subsidiary, Rand and its 
Subsidiaries on a consolidated basis, and Rand individually, shall have 
the asset coverage required by section 18(a) (as modified for BDCs by 
section 61(a)), except that, in determining whether Rand and its 
Subsidiaries on a consolidated basis have the asset coverage required 
by section 61(a), any SBA preferred stock interest in any SBIC 
Subsidiary and any borrowings by any SBIC Subsidiary 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.
    5. No person shall serve as a member of any board of directors of 
any Subsidiary unless such person shall also serve as a member of the 
Rand Board. The board of directors of any Subsidiary will be elected by 
Rand as the sole shareholder of such Subsidiary.
    6. Rand and any Subsidiary will acquire securities representing 
indebtedness of Rand SBIC or any SBIC Subsidiary only if, in each case, 
the prior approval of the SBA has been obtained. In addition, the SBIC 
Subsidiaries, on the one hand, and Rand or any other Subsidiary on the 
other hand, will purchase and sell portfolio securities between 
themselves only if, in each case, the prior approval of the SBA has 
been obtained.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-2670 Filed 2-6-12; 8:45 am]
BILLING CODE 8011-01-P