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Venture Capital Firms, Incubators and...BDCs?

June 15, 2000 - Reprinted with Permission, Copyright Post-Newsweek Business Information, Inc.
Reprinted with Permission
Copyright Post-Newsweek Business Information, Inc. 8500 Leesburg Pike, Suite 7500, Vienna, VA 22182, all rights reserved.

WASHINGTON -- The way investment commercials shows things, pretty soon we'll see children taking their lemonade-stand profits to their financial advisors to invest in the latest high-tech initial public offerings (IPO). It isn't that easy, though, to getting in on a pre-IPO deal, which is why these commercials for companies many investors never heard about before the "dot com" revolution began are now widely pushing their services.

But a group of companies this week said they might have the solution, and it doesn't stop with just "mom and pop" investors. A group of business development companies (BDCs), including the country's two largest BDCs based in the Capital area, said they might be the answer for everyone fro you to the largest venture capital firms and incubators. But they need some rules changed first.

The Washington, D.C.-based committee for Modernization of BDC Regulation this week announced its organization and intention to bring BDC regulations into the current day.

BDC groups on the committee include District-based Allied Capital Corp. [NASDAQ: ALLC], Bethesda, Md.-based American Capital Strategies Ltd. [NASDAQ:ACAS], Harris and Harris Group Inc. [NASDAQ:HHGP] of New York City, San Francisco-based MeVC.Com Inc. [NYSE:MVC], Renaissance Capital Growth and Income Fund III Inc. [NASDAQ:RENN] of Dallas and Cleveland, Ohio-based Brantley Capital Corp. [NASDAQ:BBDC].

Congress created BDCs in 1980 to encourage the flow of public capital into private growing businesses, including startups, late-stage companies and pre-IPOs, according to the committee. Sometimes referred to as the "public's private-equity funds," BDCs are more like hybrids between operating companies and investment firms.

By law, BDCs, which typically provide either long-term debt or equity capital, must put 70 percent of their investments into small and middle-market private companies, committee representatives told

"The committee is trying to make it less cumbersome to operate BDCs in order to encourage the growth of the industry, which provides the average retail investor the unique opportunity to invest in private equity with the liquidity of buying any other publicly traded stock," said Steve Boehm, counsel for the committee and a partner at Sutherland Asbill & Brennan in Washington, D.C.

Like other public investment companies, BDCs' shares are typically sold through underwritten offerings and are traded on exchanges. Unlike closed-end funds, however, BDCs' shares may trade at a premium to their net asset values, because they are investing in private companies.

The committee proffers that BDCs also are a viable alternative to high-tech incubators and could have an advantage over them since they don't flirt with violating the 1940 securities act. That act stipulates that any company that has more than 40 percent of its assets invested in firms is classified as a mutual fund, the committee said.

According to the committee, companies such as Pasadena, Calif.-based Idealab! and Wayne, Penn.-based Internet Capital Group [NASDAQ:ICGE] have applied to the Securities and Exchange Commission (SEC) to be exempted from the act.

But there are indications that the SEC will not continue to exempt firms because the companies would then be far less regulated, Boehm and fellow Sutherland Asbill & Brennan partner Cynthia Krus explained. Reforming regulations on BDCs thus can benefit both investors and the SEC, the lawyers contend.

The problem is that current regulations for BDCs, which worked when enacted two decades ago, are now unrealistic for today, the committee said. Specifically, the committee wants to adjust compensation to make it more similar to other private-equity investment vehicles, change financing rules to increase access to public markets and codify exemption relief so companies don't have to start from scratch when working with the SEC, the counselors said.

Meanwhile, the number of companies looking to form BDCs has jumped lately, Boehm and Krus said, with at least five firms filing paperwork since last December. Currently, there are about 50 BDCs in the country, including locally based Allied Capital, the largest BDC in the US with $1.3 billion in market capital, and American Capital Strategies ranking second.

"There has recently been a renewed interest in this unique investment vehicle, particularly in the high-tech industry with the incubator funds," said Bill Walton, Allied Capital chairman and chief executive. "We need to modernize BDC regulations to facilitate access to private investing for the individual investor and to make BDCs more competitive in the capital markets."

Boehm and Krus said the committee is now trying to set up meetings with SEC officials to lobby their viewpoint.

Reprinted with permission,, Copyright 2000 Post-Newsweek Business Information, Inc. All Rights Reserved.
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