Document ID: SEC-2012-0404-0001
Agency: sec
Document Type: Notice
Title: Applications: Harris and Harris Group, Inc.
Posted Date: 2012-03-13T04:00Z

[Federal Register Volume 77, Number 49 (Tuesday, March 13, 2012)]
[Notices]
[Pages 14839-14842]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-5987]

=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 29976; 812-13313]

Harris & Harris Group, Inc.; Notice of Application

March 7, 2012.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application for an order under section 6(c) of the 
Investment Company Act of 1940 (the ``Act'') for an exemption from 
sections 23(a), 23(b) and 63 of the Act; under sections 57(a)(4) and 
57(i) of the Act and rule 17d-1 under the Act permitting certain joint 
transactions otherwise prohibited by section 57(a)(4) of the Act; and 
under section 23(c)(3) of the Act for an exemption from section 23(c) 
of the Act.

-----------------------------------------------------------------------

SUMMARY OF THE APPLICATION: Harris & Harris Group, Inc. (``Applicant'' 
or ``Company'') requests an order that would permit Applicant to (a) 
issue restricted shares of its common stock (``Restricted Stock'') as 
part of the compensation package for certain participants in its 
Amended and Restated 2012 Equity Incentive Plan (the ``Plan''), (b) 
withhold shares of the Applicant's common stock or purchase shares of 
Applicant's common stock from participants to satisfy tax withholding 
obligations relating to the vesting of Restricted Stock or the exercise 
of options to purchase shares of Applicant's common stock 
(``Options''), and (c) permit participants to pay the exercise price of 
Options with shares of Applicant's common stock.

FILING DATES: The application was filed on July 11, 2006, and amended 
May 24, 2010, October 25, 2011, and February 29, 2012. Applicants have 
agreed to file an amendment during the notice period, the substance of 
which is reflected in this notice.

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 the applicant with a copy of the request, personally or by 
mail. Hearing requests should be received by the Commission by 5:30 
p.m. on April 2, 2012, 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 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. Applicant, 1450 Broadway, 24th 
Floor, New York, NY 10018.

FOR FURTHER INFORMATION CONTACT: Deepak T. Pai, Senior Counsel, at 
(202) 551-6876, 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 for an 
applicant using the Company name box, at http://www.sec.gov/search/search.htm, or by calling (202) 551-8090.

Applicant's Representations

    1. Applicant is an internally managed venture capital company 
specializing in nanotechnology and microsystems that has elected to be 
regulated as a business development company (``BDC'') under the Act.\1\ 
Since 2001, Applicant has

[[Page 14840]]

made initial venture capital investments exclusively in nanotechnology 
and microsystems, which it sometimes refers to as ``tiny technology.'' 
Applicant considers a company to be a tiny technology company if the 
company employs or intends to employ technology that Applicant 
considers to be at the microscale or smaller and if the employment of 
that technology is material to its business plan. Shares of Applicant's 
common stock are traded on the Nasdaq Global Market under the symbol 
``TINY.'' As of December 31, 2011, there were 31,000,601 shares of 
Applicant's common stock outstanding. As of that date, Applicant had 10 
employees.
---------------------------------------------------------------------------

    \1\ Applicant was incorporated under the laws of the state of 
New York in August 1981. In 1995, Applicant elected to become a BDC. 
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.
---------------------------------------------------------------------------

    2. Applicant currently has a ten member board of directors (the 
``Board'') of whom eight are not ``interested persons'' of Applicant 
within the meaning of section 2(a)(19) of the Act, and two are 
considered ``interested persons'' of Applicant. As of June 7, 2012, 
Applicant will have a nine member Board of whom eight will be non-
interested persons of Applicant and one will be considered an 
interested person of Applicant.\2\
---------------------------------------------------------------------------

    \2\ For purposes of the requested relief, Applicant will be 
granting Restricted Stock pursuant to the Plan to the individuals 
who are directors as of June 7, 2012, including the Applicant's 
chief executive officer, who will then be the sole interested 
director.
---------------------------------------------------------------------------

    3. Applicant believes that, because the market for highly qualified 
investment professionals is highly competitive, Applicant's success 
depends on its ability to offer compensation packages to its 
professionals that are competitive with those offered by other venture 
capital firms and investment management businesses. Applicant states 
that the ability to offer equity-based compensation to its 
professionals, which both aligns employee behavior with shareholder 
interests and provides a retention tool, is vital to Applicant's future 
growth and success.
    4. Effective May 4, 2006, Applicant adopted the Harris & Harris 
Group, Inc. 2006 Equity Incentive Plan (the ``2006 Plan''). Applicant 
has issued Options to participants under the 2006 Plan, all of whom 
were employees at the time of the grants, and as of December 31, 2011, 
there were 3,389,117 Options outstanding. Applicant has not issued any 
Restricted Stock pursuant to the 2006 Plan. Applicant proposes to amend 
and restate the 2006 Plan by adopting the Plan, which will supersede 
the 2006 Plan, subject to the issuance of the requested order. The Plan 
authorizes the issuance of Options to its officers and employees, and 
Restricted Stock to its directors, including non-employee directors 
(``Non-Employee Directors''), officers and employees 
(``Participants'').\3\
---------------------------------------------------------------------------

    \3\ Options will not be granted to Non-Employee Directors.
---------------------------------------------------------------------------

    5. The Plan will authorize the issuance of shares of Restricted 
Stock subject to certain forfeiture restrictions. The restrictions may 
relate to continued employment or service as a director (lapsing either 
on an annual or other periodic basis or on a ``cliff'' basis, i.e., at 
the end of a stated period of time), the satisfaction of performance 
goals as stated in the Plan, or other restrictions deemed by the 
Required Majority \4\ and the Compensation Committee \5\ from time to 
time to be appropriate and in the best interests of Applicant and its 
stockholders. Unless otherwise determined by the Board, a Participant 
granted Restricted Stock will have all of the rights of a stockholder 
including, without limitation, the right to vote Restricted Stock and 
the right to receive dividends, including deemed dividends, thereon. 
Restricted Stock may not be transferred, pledged, hypothecated, 
margined, or otherwise encumbered by the Participant during the 
Restricted Period, except for disposition by will or intestacy. Except 
as the Board otherwise determines, upon termination of a Participant's 
employment or director relationship with the Company during the 
applicable restriction period, the Participant's Restricted Stock and 
any accrued but unpaid dividends that are then subject to restrictions 
shall generally be forfeited.\6\
---------------------------------------------------------------------------

    \4\ Section 57(o) of the Act provides that the term ``required 
majority,'' when used with respect to the approval of a proposed 
transaction, plan, or arrangement, means both a majority of a BDC's 
directors or general partners who have no financial interest in such 
transaction, plan, or arrangement and a majority of such directors 
or general partners who are not interested persons of such company.
    \5\ The ``Compensation Committee'' is composed of ``non-employee 
directors'' within the meaning of rule 16b-3, and ``outside 
directors'' within the meaning of section 162(m) of the Internal 
Revenue Code of 1986, as amended.
    \6\ If any shares subject to an award granted under the Plan are 
forfeited, cancelled, exchanged or surrendered or if an award 
terminates or expires without an issuance of shares, those shares 
will again be available for awards under the Plan.
---------------------------------------------------------------------------

    6. Under the Plan, a maximum of twenty percent (20%) of Applicant's 
total shares of common stock issued and outstanding (as of the 
Effective Date) \7\ will be available for awards under the Plan. Under 
the Plan, no more than fifty percent (50%) of the shares of stock 
reserved for the grant of awards under the Plan may be Restricted Stock 
awards at any time during the term of the Plan. Thus, the maximum 
amount of Restricted Stock that may be outstanding at any particular 
time will be ten percent of the Applicant's voting securities.\8\ No 
more than 1,000,000 shares of common stock may be made subject to 
awards under the Plan to any Participant in any year.\9\
---------------------------------------------------------------------------

    \7\ Effective Date is defined in section 2(i) of the Plan as the 
date on which the Plan is approved by Applicant's stockholders.
    \8\ For purposes of calculating compliance with this limit, the 
Company will count as Restricted Stock all shares of its common 
stock that are issued under the Plan less any shares that are 
forfeited back to the Company and cancelled as a result of 
forfeiture restrictions not lapsing.
    \9\ If the Company does not receive the requested order to issue 
Restricted Stock, all shares granted under the Plan may be subject 
to Options. All Option awards will be issued in accordance with 
section 61 of the Act and will not be granted to Non-Employee 
Directors.
---------------------------------------------------------------------------

    7. The Plan will be administered by the Compensation Committee and 
the Board will have the responsibility to ensure that the Plan is 
operated in a manner that best serves the interests of Applicant and 
its stockholders. Restricted Stock will be awarded to certain 
employees, officers and directors, including Non-Employee Directors, 
from time to time as part of the employees', officers' or directors' 
compensation based on their actual or expected performance and value to 
the Company. All awards of Restricted Stock to employees will be 
approved by the Required Majority. Awards of Restricted Stock to Non-
Employee Directors will be made on the schedule described below.
    8. Under the Plan, Non-Employee Directors will each receive a grant 
of up to 2,000 shares of Restricted Stock at the beginning of each one-
year term of service on the Board, for which forfeiture restrictions 
will lapse as to one-third of such shares each year for three years. 
Each grant of Restricted Stock to Non-Employee Directors will be made 
pursuant to this schedule and will not be changed without Commission 
approval.
    9. The Plan provides that the Company is authorized to withhold 
stock (in whole or in part) from any award of Restricted Stock granted 
in satisfaction of a Participant's tax obligations. In addition, as 
discussed more fully in the application, the exercise of Options will 
result in the recipient being deemed to have received compensation in 
the amount by which the fair market value of the shares of the 
Company's common stock, determined as of the date of exercise, exceeds 
the exercise price. Accordingly, Applicant requests relief to withhold 
shares of its common stock or purchase shares of its common stock from 
Participants to satisfy tax withholding obligations related to the 
vesting of Restricted Stock or the exercise of Options that were

[[Page 14841]]

granted under the 2006 Plan or will be granted pursuant to the Plan. 
Applicant also requests an exemption to permit Participants to pay the 
exercise price of Options that were granted under the 2006 Plan or will 
be granted to them pursuant to the Plan with shares of the Company's 
common stock.
    10. The Plan was approved on February 29, 2012, by the Compensation 
Committee and the Board, including the Required Majority. The Plan will 
be submitted for approval to the Company's stockholders, and will 
become effective upon such approval, subject to and following receipt 
of the requested order.

Applicant's Legal Analysis

Sections 23(a) and (b), Section 63

    1. Under section 63 of the Act, the provisions of section 23(a) of 
the Act generally prohibiting a registered closed-end investment 
company from issuing securities for services or for property other than 
cash or securities are made applicable to BDCs. This provision would 
prohibit the issuance of Restricted Stock as a part of the Plan.
    2. Section 23(b) of the Act generally prohibits a registered 
closed-end investment company from selling any common stock of which it 
is the issuer at a price below its current net asset value. Section 
63(2) of the Act makes section 23(b) applicable to BDCs unless certain 
conditions are met. Because Restricted Stock that would be granted 
under the Plan would not meet the terms of section 63(2), sections 
23(b) and 63 would prevent the issuance of Restricted Stock.
    3. Section 6(c) provides, in part, that the Commission may, by 
order upon application, conditionally or unconditionally exempt any 
person, security, or transaction, or any class or classes thereof, from 
any provision of the Act, if and to the extent that the 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.
    4. Applicant requests an order pursuant to section 6(c) of the Act 
granting an exemption from the provisions of sections 23(a), 23(b) and 
63 of the Act. Applicant states that the Plan would not violate the 
concerns underlying these sections, which include: (a) Preferential 
treatment of investment company insiders and the use of options and 
other rights by insiders to obtain control of the investment company; 
(b) complication of the investment company's structure that made it 
difficult to determine the value of the company's shares; and (c) 
dilution of shareholders' equity in the investment company. Applicant 
asserts that the Plan does not raise concerns about preferential 
treatment of Applicant's insiders because the Plan is a bona fide 
compensation plan of the type that is common among corporations 
generally. In addition, section 61(a)(3)(B) of the Act permits a BDC to 
issue to its directors, officers, employees, and general partners 
warrants, options, and rights to purchase the BDC's voting securities 
pursuant to an executive compensation plan, subject to certain 
conditions. Applicant states that, for reasons that are unclear, 
section 61 and its legislative history do not address the issuance by a 
BDC of restricted stock as incentive compensation. Applicant believes, 
however, that the issuance of Restricted Stock is substantially 
similar, for purposes of investor protection under the Act, to the 
issuance of warrants, options, and rights as contemplated by section 
61. Applicant also asserts that the issuance of Restricted Stock would 
not become a means for insiders to obtain control of Applicant because 
the maximum amount of Restricted Stock that may be issued under the 
Plan at any one time will be ten percent of the outstanding shares of 
common stock of Applicant. Moreover, no Participant will be granted 
more than 25% of the shares of stock reserved for issuance under the 
Plan.
    5. Applicant further states that the Plan will not unduly 
complicate Applicant's capital structure because equity-based incentive 
compensation arrangements are widely used among corporations and 
commonly known to investors. Applicant notes that the Plan will be 
submitted for approval to the Company's stockholders. Applicant 
represents that the proxy materials submitted to Applicant's 
stockholders will contain a concise ``plain English'' description of 
the Plan and its potential dilutive effect. Applicant also states that 
it will comply with the proxy disclosure requirements in Item 10 of 
Schedule 14A under the Securities Exchange Act of 1934. Applicant 
further notes that the Plan will be disclosed to investors in 
accordance with the requirements of the Form N-2 registration statement 
for closed-end investment companies and pursuant to the standards and 
guidelines adopted by the Financial Accounting Standards Board for 
operating companies. Applicant also will comply with the disclosure 
requirements for executive compensation plans applicable to BDCs.\10\ 
Applicant thus concludes that the Plan will be adequately disclosed to 
investors and appropriately reflected in the market value of 
Applicant's shares.
---------------------------------------------------------------------------

    \10\ See Executive Compensation and Related Party Disclosure, 
Securities Act Release No. 8655 (Jan. 27, 2006) (proposed rule); 
Executive Compensation and Related Party Disclosure, Securities Act 
Release No. 8732A (Aug. 29, 2006) (final rule and proposed rule), as 
amended by Executive Compensation Disclosure, Securities Act Release 
No. 8756 (Dec. 22, 2006) (adopted as interim final rules with 
request for comments).
---------------------------------------------------------------------------

    6. Applicant acknowledges that awards granted under the Plan may 
have a dilutive effect on the stockholders' equity per share in 
Applicant, but believes that effect would be outweighed by the 
anticipated benefits of the Plan to Applicant and its stockholders. 
Moreover, based on the manner in which the issuance of Restricted Stock 
pursuant to the Plan will be administered, the Restricted Stock will be 
no more dilutive than if Applicant were to issue only Options to 
Participants who are employees, as is permitted by section 61(a)(3) of 
the Act. Applicant asserts that it needs the flexibility to provide the 
requested equity-based compensation in order to be able to compete 
effectively with other venture capital firms for talented 
professionals. These professionals, Applicant suggests, in turn are 
likely to increase Applicant's performance and stockholder value. 
Applicant also asserts that equity-based compensation would more 
closely align the interests of Applicant's employees with those of its 
stockholders. In addition, Applicant states that its stockholders will 
be further protected by the conditions to the requested order that 
assure continuing oversight of the operation of the Plan by the Board.

Section 57(a)(4), Rule 17d-1

    7. Section 57(a) proscribes certain transactions between a BDC and 
persons related to the BDC in the manner described in section 57(b) 
(``57(b) persons''), absent a Commission order. Section 57(a)(4) 
generally prohibits a 57(b) person from effecting a transaction in 
which the BDC is a joint participant absent such an order. Rule l7d-1, 
made applicable to BDCs by section 57(i), proscribes participation in a 
``joint enterprise or other joint arrangement or profit-sharing plan,'' 
which includes a stock option or purchase plan. Employees and directors 
of a BDC are 57(b) persons. Thus, the issuance of shares of Restricted 
Stock could be deemed to involve a joint transaction involving a BDC 
and a 57(b) person in contravention of section 57(a)(4). Rule 17d-1(b) 
provides that, in considering

[[Page 14842]]

relief pursuant to the rule, the Commission will consider (a) whether 
the participation of the BDC in a joint enterprise is consistent with 
the policies and purposes of the Act and (b) the extent to which such 
participation is on a basis different from or less advantageous than 
that of other participants.
    8. Applicant requests an order pursuant to sections 57(a)(4) and 
57(i) of the Act and rule 17d-1 under the Act to permit Applicant to 
issue Restricted Stock under the Plan. Applicant acknowledges that its 
role is necessarily different from the other participants because the 
other participants are its directors and employees. It notes, however, 
that the Plan is in the interest of the Company's stockholders, because 
the Plan will help align the interests of Applicant's employees with 
those of its stockholders, which will encourage conduct on the part of 
those employees designed to produce a better return for Applicant's 
stockholders. Additionally, section 57(j)(1) of the Act expressly 
permits any director, officer or employee of a BDC to acquire warrants, 
options and rights to purchase voting securities of such BDC, and the 
securities issued upon the exercise or conversion thereof, pursuant to 
an executive compensation plan which meets the requirements of section 
61(a)(3)(B) of the Act. Applicant submits that the issuance of 
Restricted Stock pursuant to the Plan poses no greater risk to 
stockholders than the issuances permitted by Section 57(j)(1) of the 
Act.

Section 23(c)

    9. Section 23(c) of the Act, which is made applicable to BDCs by 
section 63 of the Act, generally prohibits a BDC from purchasing any 
securities of which it is the issuer except in the open market pursuant 
to tenders, or under other circumstances as the Commission may permit 
to ensure that the purchases are made in a manner or on a basis that 
does not unfairly discriminate against any holders of the class or 
classes of securities to be purchased. Applicant states that the 
withholding or purchase of shares of Restricted Stock and common stock 
in payment of applicable withholding tax obligations or of common stock 
in payment for the exercise price of a stock option might be deemed to 
be purchases by the Company of its own securities within the meaning of 
section 23(c) and therefore prohibited by the Act.
    10. Section 23(c)(3) of the Act permits a BDC to purchase 
securities of which it is the issuer in circumstances in which the 
repurchase is made in a manner or on a basis that does not unfairly 
discriminate against any holders of the class or classes of securities 
to be purchased. Applicant believes that the requested relief meets the 
standards of section 23(c)(3).
    11. Applicant submits that these purchases will be made in a manner 
that does not unfairly discriminate against Applicant's stockholders 
because all purchases of Applicant's stock will be at the closing price 
of the common stock on the Nasdaq Global Market (or any primary 
exchange on which its shares of common stock may be traded in the 
future) on the relevant date (i.e., the public market price on the date 
of grant of Restricted Stock and the date of grant of Options). 
Applicant submits that because all transactions with respect to the 
Plan will take place at the public market price for the Company's 
common stock, these transactions will not be significantly different 
than could be achieved by any stockholder selling in a market 
transaction. Applicant represents that no transactions will be 
conducted pursuant to the requested order on days where there are no 
reported market transactions involving Applicant's shares.
    12. Applicant represents that the withholding provisions in the 
Plan do not raise concerns about preferential treatment of Applicant's 
insiders because the Plan is a bona fide compensation plan of the type 
that is common among corporations generally. Furthermore, the vesting 
schedule is determined at the time of the initial grant of the 
Restricted Stock and the option exercise price is determined at the 
time of the initial grant of the Options. Applicant represents that all 
purchases may be made only as permitted by the Plan, which will be 
approved by the Company's stockholders prior to any application of the 
relief. Applicant believes that granting the requested relief would be 
consistent with the policies underlying the provisions of the Act 
permitting the use of equity compensation as well as prior exemptive 
relief granted by the Commission under section 23(c) of the Act.

Applicant's Conditions

    Applicant agrees that the order granting the requested relief will 
be subject to the following conditions:
    1. The Plan will be authorized by Applicant's stockholders.
    2. Each issuance of Restricted Stock to an officer or employee will 
be approved by the Required Majority of Applicant's directors on the 
basis that such grant is in the best interest of Applicant and its 
stockholders.
    3. The amount of voting securities that would result from the 
exercise of all of Applicant's outstanding warrants, options and 
rights, together with any Restricted Stock issued and outstanding 
pursuant to the Plan, will not at the time of issuance of any warrant, 
option, right or share of Restricted Stock under the Plan, exceed 20 
percent of Applicant's outstanding voting securities.
    4. The amount of Restricted Stock issued and outstanding will not 
at the time of issuance of any shares of Restricted Stock exceed ten 
percent of Applicant's outstanding voting securities.
    5. The Board will review the Plan at least annually. In addition, 
the Board will review periodically the potential impact that the 
issuance of Restricted Stock under the Plan could have on Applicant's 
earnings and net asset value per share, such review to take place prior 
to any decisions to grant Restricted Stock under the Plan, but in no 
event less frequently than annually. Adequate procedures and records 
will be maintained to permit such review. The Board will be authorized 
to take appropriate steps to ensure that the issuance of Restricted 
Stock under the Plan will be in the best interest of Applicant and its 
stockholders. This authority will include the authority to prevent or 
limit the granting of additional Restricted Stock under the Plan. All 
records maintained pursuant to this condition will be subject to 
examination by the Commission and its staff.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-5987 Filed 3-12-12; 8:45 am]
BILLING CODE 8011-01-P