Document ID: SEC-2005-0176-0001
Agency: sec
Document Type: Notice
Title: Gladstone Capital Corporation, et al.; Notice of Application
Posted Date: 2005-11-01T05:00Z

[Federal Register: November 1, 2005 (Volume 70, Number 210)]
[Notices]               
[Page 65939-65941]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01no05-117]                         

[[Page 65939]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-27120; 812-12934]

 
Gladstone Capital Corporation, et al.; Notice of Application

October 25, 2005.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of application for an order under section 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 and under section 17(d) of the Act and rule 
17d-1 under the Act authorizing certain joint transactions.

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    Summary of Application: Applicants requests an order to permit 
Gladstone Capital Corporation and Gladstone Investment Corporation, 
both business development companies (``BDCs''), and certain registered 
closed-end investment companies, to co-invest with an affiliate in 
portfolio companies.
    Applicants: Gladstone Capital Corporation (``GCC''), Gladstone 
Investment Corporation (``GIC''), Gladstone Partners Fund LP 
(``Partners''), Gladstone Management Corporation (``GMC'') and 
Gladstone General Partner, LLC.
    Filing Dates: The application was filed on February 27, 2003 and 
amended on October 24, 2005.
    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 November 21, 2005, 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 20549-9303. Applicants: c/o R. Charles Miller, 
Esq., Kirkpatrick & Lockhart Nicholson Graham LLP, 1800 Massachusetts 
Avenue, NW., Suite 200, Washington, DC 20036.

FOR FURTHER INFORMATION CONTACT: Marilyn Mann, Senior 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 for a fee at the 
Commission's Public Reference Branch, 100 F St., NE., Washington, DC 
20549-0102 (tel. 202-551-5850).

Applicants' Representations

    1. GCC is a closed-end management investment company that has 
elected to be regulated as a BDC under the Act. GCC's investment 
objective is to achieve a high level of current income by investing in 
debt securities, such as senior notes, senior subordinated notes and 
subordinated notes, with particular emphasis on senior subordinated 
notes, of established private businesses that are backed by leveraged 
buyout funds, venture capital funds or others. In connection with the 
transactions in which GCC would purchase debt securities, it would 
generally expect to receive interests, such as warrants or conversion 
privileges, in the issuers' common equity, which offer the potential of 
long-term appreciation. GCC has entered into a combined investment 
advisory and administration agreement with GMC.
    2. Partners will be organized as a limited liability company, 
limited liability company interests of which will be placed privately 
with institutional investors, and will be excluded from the definition 
of investment company by section 3(c)(1) of the Act. Partners' 
investment objective will be similar to that of GCC. Gladstone General 
Partner, LLC, is the general partner of Partners. Upon completion of 
its private placement, Partners will enter into an advisory agreement 
with GMC and an administration agreement with Gladstone Administration, 
LLC (``Gladstone Administration''), which is a wholly owned subsidiary 
of GMC.
    3. GIC is a recently organized closed-end management investment 
company that has elected to be regulated as a BDC. GIC's investment 
objective is to generate both current income and capital gains through 
debt and equity investments. GIC has entered into an investment 
advisory agreement with GMC and has entered into an administration 
agreement with Gladstone Administration.
    4. GMC is an investment adviser registered under the Investment 
Advisers Act of 1940. The investment advisory agreements between GMC 
and GCC and between GMC and GIC, among other things, require GMC to 
make available significant managerial assistance to the portfolio 
companies of GCC and GIC. GMC may in the future provide investment 
advisory services to other closed-end management investment companies 
that elect to be regulated as BDCs or other registered closed-end 
management investment companies (the ``Future Co-Investors'' and 
together with GIC and GCC, the ``Investors''). The applicants request 
that the relief apply to the Future Co-Investors, which will comply 
with the terms and conditions of the application.
    5. Applicants request relief permitting GCC, GIC and any Future Co-
Investor to make co-investments with Partners (``Co-investment 
Transactions''). The requested order will not extend to any transaction 
in which more than one Investor is a participant.

Applicants' Legal Analysis

    1. Section 57(a)(4) of the Act prohibits certain affiliated persons 
of a BDC from participating in a joint transaction with the BDC in 
contravention of rules as prescribed by the Commission. In addition, 
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 state that Partners is 
under common control with each of the Investors and therefore is 
subject to section 57(a)(4). 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. 
Because the Commission has not adopted any rules under section 
57(a)(4), rule 17d-1 applies.
    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. Because 
certain of the Future Co-Investors may be registered closed-end 
investment companies, section 17(d) and rule 17d-1 apply. In passing 
upon applications under rule 17d-1, the Commission considers whether 
the company's participation in the joint transactions 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 allowing co-investment between GCC or GIC 
and Partners and the Future Co-Investors

[[Page 65940]]

and Partners will provide a substantial benefit to GCC's, GIC's and the 
Future Co-Investors' stockholders by making available greater resources 
that will allow applicants to obtain access to more attractive 
investment opportunities.
    4. Applicants state that the terms and conditions set forth in the 
application ensure that the terms on which co-investments may be made 
will be identical, thus protecting the stockholders of any Investor 
from being disadvantaged. Applicants state that the proposed relief is 
consistent with rule 17d-1 in that the participation of the Investors 
will not be on a basis different from or less advantageous than that of 
Partners.

Applicants' Conditions

    Applicants agree that the order granting the requested relief will 
be subject to the following conditions:
    1. The requested order will not extend to any transaction in which 
more than one Investor is a participant.
    2.(a) If considering an investment opportunity that may constitute 
a Co-investment Transaction, GMC will make an independent determination 
of the appropriateness of the Investor's participation in such 
transaction in light of the Investor's then-current circumstances.
    (b) If GMC deems the Investor's participation in any such 
investment opportunity to be appropriate for the Investor, it will then 
determine an appropriate level of investment for the Investor. If the 
aggregate amount recommended by GMC to be invested by the Investor in 
such Co-investment Transaction, together with the amount proposed to be 
invested by Partners in the same transaction, exceeds the amount of the 
investment opportunity, the amount proposed to be invested by each such 
party will be allocated among them pro rata based on the ratio of each 
party's total assets to the aggregated total assets of both parties, up 
to the amount proposed to be invested by each. GMC will provide the 
required majority (as defined in section 57(o) of the Act) (``Required 
Majority'') with information concerning Partners' total assets to 
assist the Required Majority with their review of the Investor's 
investments for compliance with these allocation procedures.
    (c) After making the determinations required in (a) and (b) above, 
GMC will distribute written information concerning the Co-investment 
Transaction, including the amount proposed to be invested by Partners, 
to the non-interested directors for their consideration. The Investor 
will co-invest with Partners only if, prior to the Investor's 
participation in the Co-investment Transaction, a Required Majority 
concludes that:
    (i) The terms of the transaction, including the consideration to be 
paid, are reasonable and fair and do not involve overreaching of the 
Investor or its stockholders on the part of any person concerned;
    (ii) The transaction is consistent with
    (A) The interests of the stockholders of the Investor; and
    (B) The Investor's investment objectives and strategies (as 
described in the Investor's registration statements on Form N-2 and 
other filings made with the Commission by the Investor under the 
Securities Act of 1933, as amended, any reports filed by the Investor 
with the Commission under the Securities Exchange Act of 1934, as 
amended, and the Investor's reports to stockholders);
    (iii) The investment by Partners would not disadvantage the 
Investor, and participation by the Investor is not on a basis different 
from or less advantageous than that of Partners; provided, that if 
Partners, but not the Investor, 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 Required Majority shall have the right to ratify the 
selection of such director or board observer, if any; and
    (B) GMC agrees to, and does, provide, periodic reports to the 
Investor's Board of Directors with respect to the actions of such 
director or the information received by such board observer or obtained 
through the exercise of any similar right to participate in the 
governance or management of the portfolio company; and
    (iv) The proposed investment by the Investor will not benefit GMC 
or Partners or any affiliated person of either of them (other than 
Partners), except to the extent permitted under sections 17(e) and 
57(k) of the Act.
    (d) The Investor has the right to decline to participate in any Co-
investment Transaction or to invest less than the amount proposed to 
the Investor.
    (e) GMC will present to the Board of Directors, on a quarterly 
basis, a record of all investments made by Partners during the 
preceding quarter that fell within the Investor's then current 
investment objectives 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.
    3. Except for follow-on investments made pursuant to condition 6 
below, the Investor will not invest in any portfolio company in which 
GMC or Partners or any affiliated person of either of them is an 
existing investor.
    4. The Investor will not participate in any 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 Investor and Partners. The grant to Partners, 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 4, if conditions 
2(c)(iii)(A) and (B) are met.
    5. If Partners elects to sell, exchange or otherwise dispose of an 
interest in a security that was acquired by the Investor and Partners 
in a Co-investment Transaction, GMC will
    (a) Notify the Investor of the proposed disposition at the earliest 
practical time; and
    (b) Formulate a recommendation as to participation by the Investor 
in any such disposition and provide a written recommendation to the 
non-interested directors.
    The 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. The Investor will 
participate in such disposition to the extent that a Required Majority 
determines that it is in the Investor's best interests to do so. The 
Investor and Partners will each bear its own expenses in connection 
with any such disposition.
    6. If Partners desires to make a ``follow-on investment'' (i.e., an 
additional investment in the same entity) in a portfolio company whose 
securities were acquired by the Investor and Partners in a Co-
investment Transaction or to exercise warrants or other rights to 
purchase securities of the issuer, GMC will
    (a) Notify the Investor of the proposed transaction at the earliest 
practical time; and

[[Page 65941]]

    (b) Formulate a recommendation as to the proposed participation, 
including the amount of the proposed follow-on investment, by the 
Investor and provide the recommendation to the non-interested 
directors.
    The non-interested directors will make their own determination with 
respect to follow-on investments. To the extent that
    (i) The amount of a follow-on investment opportunity is not based 
on the Investor's and Partners' initial investments; and
    (ii) The aggregate amount recommended by GMC to be invested by the 
Investor in such follow-on investment, together with the amount 
proposed to be invested by Partners in the same transaction, exceeds 
the amount of the follow-on investment opportunity, the amount invested 
by each such party will be allocated among them pro rata based on the 
ratio of each party's total assets to the aggregated total assets of 
both parties, up to the maximum amount to be invested by each. The 
Investor will participate in such investment to the extent that the 
Required Majority determines that it is in the Investor's best 
interest. The acquisition of follow-on investments as permitted by this 
condition will be subject to the other conditions set forth in the 
application.
    7. The non-interested directors will be provided quarterly for 
review all information concerning Co-investment Transactions, including 
investments made by Partners which the Investor considered but declined 
to participate, so that the non-interested directors may determine 
whether all investments made during the preceding quarter, including 
those investments which the Investor considered but declined to 
participate, comply with the conditions of the order. In addition, the 
non-interested directors will consider at least annually the continued 
appropriateness of the standards established for co-investments by the 
Investor, including whether the use of the standards continues to be in 
the best interests of the Investor and its shareholders and does not 
involve overreaching on the part of any person concerned.
    8. The 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 non-interested directors under section 
57(f).
    9. No non-interested director will also be a director, general 
partner or principal, or otherwise an ``affiliated person'' (as defined 
in the Act) of, Partners.
    10. 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 of 1933) 
shall, to the extent not payable solely by GMC under its investment 
advisory agreements with the Investor and Partners, be shared by the 
Investor and Partners in proportion to the relative amounts of their 
securities to be acquired or disposed of, as the case may be, by the 
Investor and Partners.
    11. Any transaction fee (including break-up or commitment fees but 
excluding broker's fees contemplated by section 17(e)(2) of the Act) 
received in connection with a Co-investment Transaction will be 
distributed to the Investor and Partners on a pro rata basis based on 
the amount they invested or committed, as the case may be, in such 
Coinvestment 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 between the Investor and Partners based on the amount 
they invest in such Coinvestment Transaction. Partners, GMC or any 
affiliated person of the Investor will not receive additional 
compensation or remuneration of any kind (other than (i) the pro rata 
transaction fees described above and (ii) investment advisory fees paid 
in accordance with investment advisory agreements with the Investor and 
Partners) as a result of or in connection with a Co-investment 
Transaction.
    12. The Board of Directors of each Investor will satisfy the fund 
governance standards as defined in rule 0-1(a)(7) under the Act by the 
compliance date for the rule.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Jonathan G. Katz,
Secretary.
 [FR Doc. E5-6015 Filed 10-31-05; 8:45 am]

BILLING CODE 8010-01-P