Document ID: SEC-2008-0340-0001
Agency: sec
Document Type: Notice
Title: Patriot Capital Funding, Inc.; Notice of Application
Posted Date: 2008-03-05T05:00Z

[Federal Register: March 5, 2008 (Volume 73, Number 44)]
[Notices]               
[Page 11959-11962]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr05mr08-109]                         

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 28176; 812-13348]

 
Patriot Capital Funding, Inc.; Notice of Application

February 28, 2008.
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, and 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.

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Summary of the Application: Patriot Capital Funding, Inc. 
(``Applicant'') requests an order to permit Applicant to issue 
restricted shares of its common stock under the terms of its employee 
compensation plan.

Filing Dates: The application was filed on November 29, 2006, and 
amended on February 15, 2008. Applicant has agreed to file an amendment 
during the notice period, the substance of which is reflected in the 
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 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 March 24, 2008, 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, c/o Richard P. 
Buckanavage, President and Chief Executive Officer, Patriot Capital 
Funding, Inc., 274 Riverside Avenue, Westport, CT 06880.

FOR FURTHER INFORMATION CONTACT: Shannon Conaty, Senior Counsel, at 
(202) 551-6827, or Janet M. Grossnickle, 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 for a fee at the 
Commission's Public Reference Desk, 100 F Street, NE., Washington, DC 
20549-1520 (tel. 202-551-5850).

Applicant's Representations

    1. Applicant, a Delaware corporation, is an internally managed, 
non-diversified, closed-end investment company that has elected to be 
regulated as a business development company (``BDC'') under the Act.\1\

[[Page 11960]]

Applicant is a specialty finance company that provides customized 
financing solutions to small- and medium-sized companies. Applicant's 
investments are primarily senior secured commercial loans, subordinated 
debt instruments and junior secured term loans. Shares of Applicant's 
common stock are traded on The NASDAQ Stock Market, Inc. Global Select 
Market under the symbol ``PCAP.'' As of December 31, 2007, there were 
20,650,455 shares of Applicant's common stock issued and outstanding. 
As of that date, Applicant had 14 employees, including the employees of 
its one wholly-owned consolidated subsidiary, Patriot Capital Funding 
LLC I.
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    \1\ Applicant was organized on November 4, 2002. When Applicant 
commenced business operations in 2003, its business was conducted 
through two separate entities, Patriot Capital Funding, Inc. and 
Wilton Funding, LLC. On July 27, 2005, Wilton Funding, LLC merged 
with and into Patriot Capital Funding, Inc. and the surviving 
entity, Applicant, elected to be regulated as a BDC. Section 
2(a)(48) defines a BDC to be any closed-end investment company that 
operates for the purpose of making investments in securities 
described in sections 55(a)(1) through 55(a)(3) of the Act and makes 
available significant managerial assistance with respect to the 
issuers of such securities. On August 2, 2005, Applicant completed 
its initial public offering.
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    2. Applicant currently has a six-member board of directors (the 
``Board'') of whom two are ``interested persons'' of Applicant within 
the meaning of section 2(a)(19) of the Act and four are not interested 
persons (the ``non-interested directors''). The four non-interested 
directors are neither employees nor officers of Applicant (the ``non-
employee directors'').
    3. Applicant currently intends, upon receipt of the order, to 
discontinue its stock option plan and offer all employees holding 
outstanding options the opportunity to cancel those options in exchange 
for shares of restricted stock (i.e., stock that, at the time of 
issuance, is subject to certain forfeiture restrictions, and thus is 
restricted as to its transferability until such forfeiture restrictions 
have lapsed) (the ``Restricted Stock''). Conversion of options into 
shares of Restricted Stock will not be mandatory and each employee will 
have the ability to choose to cancel and convert or to keep his or her 
outstanding options. As of December 31, 2007, total outstanding stock 
options represent 11.8% of Applicant's total outstanding shares of 
common stock.\2\ The number of shares of Restricted Stock that will be 
issued in connection with this cancellation and conversion is intended 
to replicate the value of interests the individual has in the stock 
option plan and such valuation will be based on assumptions approved by 
the Board and an appropriate option pricing model (e.g., Black 
Scholes), which will be selected by the Board.\3\
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    \2\ As a result of allowing each individual employee to make the 
choice whether to convert his or her options, Applicant anticipates 
that options will remain outstanding once the cancellation and 
conversion are completed.
    \3\ The opportunity to convert options into shares of Restricted 
Stock will be offered to employees through a tender offer process 
and employees will be provided with the disclosure that is required 
by Schedule TO under the Securities Exchange Act of 1934 (the 
``Exchange Act''). The same pricing model will be used for all of 
Applicant's employees and officers.
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    4. Applicant believes that its successful operation depends on its 
ability to offer compensation packages to its professionals that are 
competitive with those offered by its competitors and other investment 
management businesses. Applicant believes its ability to offer a 
compensation plan providing for the periodic issuance of shares of 
Restricted Stock is vital to its future growth and success. Applicant 
wishes to adopt an equity-based compensation plan (the ``Plan'') for 
its employees as well as employees of its wholly-owned subsidiaries 
(the ``Participants'').
    5. The Plan will authorize the issuance of shares of Restricted 
Stock subject to certain forfeiture restrictions. These restrictions 
may relate to continued employment (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 performance of Applicant, or other 
restrictions deemed by the Board to be appropriate. The Restricted 
Stock will be subject to restrictions on transferability and other 
restrictions as required by the Board. The Restricted Stock will not be 
transferable except for disposition by gift, will or intestacy. Except 
to the extent restricted under the terms of the Plan, a Participant 
granted Restricted Stock will have all the rights of any other 
shareholder, including the right to vote the Restricted Stock and the 
right to receive dividends. During the restriction period, the 
Restricted Stock generally may not be sold, transferred, pledged, 
hypothecated, margined, or otherwise encumbered by the Participant. 
Except as the Board otherwise determines, upon termination of a 
Participant's employment during the applicable restriction period, 
Restricted Stock for which forfeiture restrictions have not lapsed at 
the time of such termination shall be forfeited.
    6. The maximum amount of Restricted Stock that may be issued under 
the Plan will be 10% of the outstanding shares of common stock of 
Applicant on the effective date of the Plan plus 10% of the number of 
shares of Applicant's common stock issued or delivered by Applicant 
(other than pursuant to compensation plans) during the term of the 
Plan.\4\ The Plan limits the total number of shares that may be awarded 
to any single Participant in a single year to 300,000 shares. In 
addition, no Participant may be granted more than 25% of the shares 
reserved for issuance under the Plan. Upon the recommendation of the 
compensation committee of the Board (the ``Committee'') which is 
comprised solely of non-interested directors, the Board will award 
shares of Restricted Stock to the Participants from time to time as 
part of the Participants' compensation based on a Participant's actual 
or expected performance and value to Applicant.
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    \4\ For purposes of calculating compliance with this limit, 
Applicant will count as Restricted Stock all shares of Applicant's 
common stock that are issued pursuant to the Plan (including any 
shares issued in connection with the termination of its stock option 
plan) less any shares that are forfeited back to Applicant and 
cancelled as a result of forfeiture restrictions not lapsing.
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    7. Each issuance of Restricted Stock under the Plan will be 
approved by the required majority, as defined in section 57(o) of the 
Act,\5\ of Applicant's directors on the basis that the issuance is in 
the best interests of Applicant and its shareholders. The date on which 
the required majority approves an issuance of Restricted Stock will be 
deemed the date on which the subject Restricted Stock is granted. The 
Plan will be submitted for approval to Applicant's shareholders and 
will become effective upon such approval, subject to issuance of the 
order.
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    \5\ 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.
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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) generally prohibits a closed-end management 
investment company from selling its common stock at a price below its 
current net asset value (``NAV''). Section 63(2) 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)

[[Page 11961]]

and 63 would prevent the issuance of the Restricted Stock.
    3. Section 6(c) provides that the Commission may, by order upon 
application, conditionally or unconditionally exempt any person, 
security, or transaction, or any class or classes of persons, 
securities or transactions, 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) and (b) and 
section 63 of the Act. Applicant states that the concerns underlying 
those sections include: (i) preferential treatment of investment 
company insiders and the use of options and other rights by insiders to 
obtain control of the investment company; (ii) complication of the 
investment company's structure that makes it difficult to determine the 
value of the company's shares; and (iii) dilution of shareholders' 
equity in the investment company. Applicant states that the Plan does 
not raise the concern about preferential treatment of Applicant's 
insiders because the Plan is a bona fide employee compensation plan of 
the type that is common among corporations generally. In addition, 
section 61(a)(3) of the Act permits a BDC to issue to its officers, 
directors and employees, pursuant to an executive compensation plan, 
warrants, options and rights to purchase the BDC's voting securities, 
subject to certain requirements. 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 states, 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 Plan would not become a 
means for insiders to obtain control of Applicant because the number of 
shares of Applicant issuable under the Plan would be limited as set 
forth in the application. Moreover, no individual Participant could be 
issued more than 25% of the shares reserved for issuance under the 
Plan. Applicant's current intention, subject to the receipt of the 
order, is to discontinue its stock option plan and offer all employees 
holding outstanding options the opportunity to cancel those options in 
exchange for shares of Restricted Stock. If, however, Applicant chooses 
to reinstate the stock option plan (or adopt another such plan) and 
issues stock options in the future, it will do so pursuant to section 
61 and in compliance with the terms and conditions of the application.
    5. Applicant further states that the Plan will not unduly 
complicate Applicant's structure because equity-based employee 
compensation arrangements are widely used among corporations and 
commonly known to investors. Applicant notes that the Plan will be 
submitted to Applicant's shareholders for their approval. Applicant 
represents that a concise, ``plain English'' description of the Plan, 
including its potential dilutive effect, will be provided in the proxy 
materials that will be submitted to Applicant's shareholders. Applicant 
also states that it will comply with the proxy disclosure requirements 
in Item 10 of Schedule 14A under the Exchange Act. 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. In addition, Applicant will comply with the disclosure 
requirements for executive compensation plans under the Exchange 
Act.\6\ Applicant thus concludes that the Plan will be adequately 
disclosed to investors and appropriately reflected in the market value 
of Applicant's shares.
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    \6\ Applicant will comply with the amendments to the disclosure 
requirements for executive and director compensation, related party 
transactions, director independence and other corporate governance 
matters, and security ownership of officers and directors to the 
extent adopted and applicable to BDCs. 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. 8765 (Dec. 22, 2006) (adopted 
as interim final rules with request for comments).
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    6. Applicant acknowledges that, while awards granted under the Plan 
would have a dilutive effect on the shareholders' equity in Applicant, 
that effect would be outweighed by the anticipated benefits of the Plan 
to Applicant and its shareholders. Applicant asserts that it needs the 
flexibility to provide the requested equity-based employee compensation 
in order to be able to compete effectively with other financial 
services firms for talented professionals. These professionals, 
Applicant suggests, in turn are likely to increase Applicant's 
performance and shareholder value. Applicant also asserts that equity-
based compensation would more closely align the interests of 
Applicant's employees with those of Applicant's shareholders. In 
addition, Applicant states that Applicant's shareholders will be 
further protected by the conditions to the requested order that assure 
continuing oversight of the operation of the Plan by Applicant's 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 17d-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 relief pursuant to the rule, the 
Commission will consider (i) whether the participation of the company 
in a joint enterprise is consistent with the Act's policies and 
purposes and (ii) the extent to which that participation is on a basis 
different from or less advantageous than that of other participants.
    8. Applicant requests an order pursuant to section 57(a)(4) and 
rule 17d-1 to permit the Plan. Applicant states that the Plan, although 
benefiting the Participants and Applicant in different ways, are in the 
interests of Applicant's shareholders because the Plan will help 
Applicant attract and retain talented professionals, help align the 
interests of Applicant's employees with those of its shareholders, and 
in turn help produce a better return to Applicant's shareholders.

Applicant's Conditions

    Applicant agrees that the order granting the requested relief will 
be subject to the following conditions:
    1. The Plan will be approved by Applicant's shareholders in 
accordance with section 61(a)(3)(A)(iv) of the Act.
    2. Each issuance of Restricted Stock to officers and employees will 
be approved by the required majority, as defined in section 57(o) of 
the Act, of Applicant's directors on the basis that such issuance

[[Page 11962]]

is in the best interests of Applicant and its shareholders.
    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 pursuant to the Plan, 
at the time of issuance shall not exceed 25% of the outstanding voting 
securities of Applicant, except that if the amount of voting securities 
that would result from the exercise of all of Applicant's outstanding 
warrants, options, and rights issued to Applicant's directors, 
officers, and employees, together with any Restricted Stock issued 
pursuant to the Plan, would exceed 15% of the outstanding voting 
securities of Applicant, then the total amount of voting securities 
that would result from the exercise of all outstanding warrants, 
options, and rights, together with any Restricted Stock issued pursuant 
to the Plan, at the time of issuance shall not exceed 20% of the 
outstanding voting securities of Applicant.
    4. The maximum amount of Restricted Stock that may be issued under 
the Plan will be 10% of the outstanding shares of common stock of 
Applicant on the effective date of the Plan plus 10% of the number of 
shares of Applicant's common stock issued or delivered by Applicant 
(other than pursuant to compensation plans) during the term of the 
Plan.
    5. The Board will review periodically the potential impact that the 
issuance of Restricted Stock under the Plan could have on Applicant's 
earnings and NAV 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 grant of Restricted Stock under 
the Plan would not have an effect contrary to the interests of 
Applicant's shareholders. 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.
Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-4178 Filed 3-4-08; 8:45 am]

BILLING CODE 8011-01-P