Good News Coming Out of the SEC for BDCs (and Hopefully More to Come)

Multi-Share Class Exemptive Relief

BDCs and other 1940 Act funds are restricted in their ability to offer multiple classes of shares with different expense features. In particular, shares with different expense structures could be deemed to create multiple classes of “senior securities” that are common stock, which is generally prohibited by Section 18 of the 1940 Act. 

Prior to 1995, multi-share class arrangements for BDCs and other 1940 Acts funds were prohibited without first obtaining exemptive relief from the SEC. In 1995, the SEC adopted Rule 18f-3 under the 1940 Act to allow mutual funds to offer multiple share classes if certain conditions are met. As a result, a mutual fund can offer multiple share classes that are tailored to the needs of the distribution channels in which the funds are offered. These separate share classes may impose differing fees for distribution services, shareholder services and administrative services, but generally may not impose different advisory fees, custodial fees or other expenses related to the management of the mutual fund’s assets. The process for offering multiple share classes of BDCs and other 1940 Act funds is more complicated because there is no rule similar to Rule 18f-3 that applies to them. As a result, BDCs and other 1940 Act funds can only offer multiple share classes if they first receive exemptive relief from the SEC.

The process for the receipt of multi-share class exemptive relief for registered closed-end funds (“CEFs”) has become so routine that their multi-class exemptive relief applications are eligible for expedited review and approval under the SEC’s “expedited review procedure for routine applications.” A key condition to the receipt of such exemptive relief is that the CEFs must comply with the conditions of Rule 18f-3 under the 1940 Act in connection with their implementation of the multi-share class arrangements. 

Unfortunately, the story has been a little different for BDCs with respect to their ability to obtain multiple share class exemptive relief from the SEC. In this regard, a non-traded publicly offered BDC³ filed an application for the receipt of multi-share class exemptive relief from the SEC in 2014. After a five-year period of back-and-forth with the SEC staff, the SEC ultimately granted the requested exemptive relief in 2020. As a result, non-traded publicly offered BDCs can obtain multi-share class exemptive relief from the SEC, although the SEC staff has still not permitted them to do so on an expedited basis as is the case for CEFs.

In 2022, a number of private BDCs filed applications to receive multi-share class exemptive relief from the SEC. After engaging in rigorous discussions with the SEC staff, these private BDCs were instructed by the SEC staff to withdraw their applications because then-current SEC leadership had determined not to act on the applications, despite the fact that other 1940 Act funds, including mutual funds, CEFs and non-traded publicly offered BDCs, could issue multiple share classes via Rule 18f-3 or the receipt of multi-share class exemptive relief. 

The SEC’s recent action to issue notices of its intent to grant the multi-share class exemptive relief application for seven private BDCs is important because it will permit private BDCs, if the orders are granted, to access different distribution channels (e.g., RIAs, broker-dealers and other high-net-worth investor channels) via the issuance of multiple share classes with differing distribution expense and compensation structures tailored to the particular channel. This development should significantly improve the market reach and capital raising capabilities of private BDCs.

Rule 506(c) Offerings

The offer and sale of securities, including shares of BDCs, are regulated by the Securities Act and by the securities laws of the states in which an offering or sale occurs. In general, to make an offering of securities, the securities must be registered or exempt from registration under the Securities Act and the laws of each state in which such securities are offered for sale.

Certain exemptions from the registration requirements under the Securities Act permit issuers, including BDCs, to offer securities to certain investors subject to limited conditions, while avoiding the registration and prospectus delivery requirements of a registered offering. Offerings exempt under the Securities Act are not necessarily exempt under state securities laws and, as a result, each state’s securities laws must be analyzed to ensure an exemption exists. Through amendments to the Securities Act in 1996, certain offerings exempt from registration under the Securities Act enjoy a fifty-state exemption through a limited preemption of state securities laws.

Rule 506 of Regulation D under the Securities Act tends to be the workhorse exemption used by issuers, including private BDCs. Rule 506 is composed of a safe harbor under Section 4(a)(2)⁴ (that is, Rule 506(b)) and a stand-alone exemption (that is, Rule 506(c)). Specifically, Rule 506(b) provides conditions that an issuer like a private BDC may rely on to meet the requirements of the Section 4(a)(2) exemption. These conditions require that a BDC must not use general solicitation to market the securities as well as impose additional financial sophistication requirements on purchasers of an issuer’s securities that do not qualify as “accredited investors.”

Under Rule 506(c), issuers, including private BDCs, can offer securities through means of general solicitation and general advertising, provided that: (i) all purchasers in the offering are “accredited investors,” (ii) the issuers take reasonable steps to verify their “accredited investor” status (“Verification Requirement”), and (iii) certain other conditions are satisfied. Importantly, Rule 506 offerings are exempt from substantive regulation by states under the limited preemption of state securities laws described above.

Notwithstanding the significant potential benefit of being able to use general solicitation and advertising to market a Rule 506(c) offering, many issuers, including private BDCs, have been reluctant to take advantage of the opportunity because the Verification Requirement was generally viewed as cumbersome for issuers and invasive for investors. However, the SEC has issued a no-action letter which provides guidance that issuers, including private BDCs, can rely on to satisfy the Verification Requirement in connection with a Rule 506(c) offering and, thus, eliminate these historical impediments. Specifically, the SEC staff has agreed that an issuer can reasonably conclude that it has satisfied the Verification Requirement if the following requirements are met:

1. each purchaser agrees to a minimum investment amount of at least $200,000 for natural persons or $1,000,000 for legal entities (“Minimum Investment”);
2. each purchaser makes written representations regarding its status as an accredited investor and that its Minimum Investment is not financed in whole or in part by a third party for the purpose of making such Minimum Investment (items (1) and (2) together, the “Representations”); and
3. the issuer has no actual knowledge of any facts that indicate that the purchaser’s Representations are false.

This new brightline guidance provides private BDCs, which have historically relied on Rule 506(b) to conduct their offerings, with a potential new way (i.e., by relying on Rule 506(c)) to expand their capital raising capabilities via the use of general solicitation and advertising to market the sale of their shares to investors. Such guidance, when coupled with the newfound ability of private BDCs to obtain multi-share class exemptive relief discussed above, may tip the scale towards private BDCs, as compared to non-traded publicly offered BDCs, for investment managers considering launching a new BDC; non-traded publicly offered BDCs do not enjoy the fifty-state exemption through the limited preemption of state securities laws for their offerings described above like private BDCs and private BDCs can now market their shares by using general advertising and implementing multi-share class arrangements similar to non-traded public offered BDCs. 

In relying on Rule 506(c), issuers should consider how general advertising may impact private placement requirements when marketing in non-U.S. jurisdictions and understand that engaging in general solicitation may preclude reliance on Section 4(a)(2) and/or Rule 506(b) in the event the conditions of Rule 506(c) are not met.

Simplified Co-Investment Exemptive Relief

BDCs and their managers have received exemptive relief from the SEC that permits them to make the same investments alongside of their Affiliated Funds as part of a co-investment program, where such participation would otherwise be prohibited by Section 57(a)(4) of the 1940 Act and Rule 17d-1 thereunder. Such co-investment exemptive relief is subject to a number of conditions, including that each initial co-investment transaction, non-pro rata follow-investment transaction and non-pro rata investment disposition transaction requires prior approval by a majority of the independent directors of the BDC’s board.

In the last several weeks, a total of five co-investment exemptive relief applications have been filed with the SEC based on an updated version of the so-called “simplified” co-investment exemptive relief application that was first discussed and filed with the SEC staff back in 2019. The first filing of the 2025 crop of the simplified co-invest exemptive relief applications was made by a Dechert client on February 20, 2025, with clients of other law firms making similar filings in rapid succession thereafter. The orders for these applications, if granted, would greatly simplify and modernize the co-investment process for BDCs. Compared to existing orders, the simplified order would:

• Substantial Reduction in Board Approval Requirements: BDC boards (i.e., a majority of the independent directors) would only be required to approve co-investment transactions for: (i) investments in which an affiliate of the BDC is an existing investor; (ii) participation in non-pro rata follow-on investments; and (iii) participation in non-pro rata dispositions of investments.
• Allocation Decisions: Investment allocations for co-investment transactions would follow approved policies and procedures rather than a process dictated by the procedures set forth in the applications.
• Existing Investments in an Issuer: The applications would permit a BDC to invest in issuers in which an affiliate of the BDC, but not the BDC itself, is an existing investor so long as a majority of the independent directors of the BDC’s board approves its participation therein.
• Expansion of Permissible Co-Investment Entities: The applications would allow BDC joint ventures⁵ and mutual funds to participate in the co-investment program with their affiliated BDCs, CEFs, private funds and proprietary accounts. The existing orders generally do not include mutual funds or BDC joint ventures as permissible co-investment entities. 

While there is no guarantee that the SEC will approve the simplified co-investment relief, Natasha Greiner, the Director of the SEC’s Division of Investment Management, discussed her expectations for timing of the simplified co-investment relief at a conference on March 17, 2025. She indicated that the SEC staff is working quickly and suggested we could see developments soon.