Small Business Securities Acts Amendments of 1980

(Reported to Senate from the Committee on Banking, Housing and Urban Affairs with amendment, S. Rept. 96-958)

Small Business Securities Acts Amendments of 1980 - =Title I: Amendments to the Investment Company Act of 1940= - Amends the Investment Company Act to define "eligible portfolio company" as any issuer which: (1) is organized under the laws of and has its principal place of business in any State or States; (2) is neither an investment company (not including certain small business investment companies) nor any other company specifically excluded from the definition of investment company under such Act; and (3) satisfies one of the following: (a) does not have outstanding securities which are eligible for margin purchase under Federal Reserve Board regulations; (b) is controlled by a business development company, including having an affiliated person who is a director of such eligible portfolio company; or (c) meets such other criteria as the Securities and Exchange Commission may establish.

Defines "making available significant managerial assistance" to mean: (1) significant guidance and counsel concerning management, operations, or goals; (2) controlling influence over management or policy; or (3) investment.

Defines "business development company" to mean any closed-end company which: (1) is organized under the laws of, and has its principal place of business in, any State or States; (2) is operated for the purpose of investing in the securities of certain companies; and (3) makes significant managerial assistance available to such companies.

Deems a company's ownership of ten percent or more of an investment company's voting securities to be ownership by one person (rather than by all the shareholders) if at the time of the most recent acquisition the value of all securities owned by such company of all such investment company-issuers does not exceed ten percent of its assets. Directs Commission to prescribe regulations regarding beneficial ownership in situations of involuntary transfer.

Exempts from such Act any closed-end company which: (1) elects to be treated as a business development company; or (2) proposes to make a public offering of its securities as a business development company and to subject itself to such Act within 90 days.

Provides that a contract in violation of such Act (or a related rule) shall be unenforceable by either party or by certain third parties unless enforcement or denial of rescission (for partial or full performance) would be more equitable and not inconsistent with such Act. Stipulates that such enforceability provision shall not apply to the lawful part of an illegal contract to the extent it may be severed from such contract, or to preclude recovery against a person for unjust enrichment.

Authorizes a qualifying investment company to elect to be regulated as a business development company by filing a notification of election with the Commission. Authorizes: (1) the Commission to prescribe the form and manner of such notification; and (2) a company to voluntarily withdraw its election.

Prohibits a business development company from acquiring more than 30 percent of its assets in nonqualifying investments. Sets forth the categories of qualifying investments.

Requires that a majority of a business development company's directors be persons who are not interested parties of such company. Exempts a business development company from such requirements for 90 days (or longer if the Commission so allows) because of the death, disqualification, or resignation of any director(s).

Prohibits certain controlling and noncontrolling persons related to a business development company (and certain affiliated persons) from knowingly: (1) selling any security or other property to such company (or a controlled company) unless the sale involves solely: (a) securities of which the buyer is the issuer or (b) securities of which the seller is the issuer and which are part of a general offering to the holders of a class of securities; (2) purchasing from such company (or a controlled company) any security or other property except securities issued by the seller; (3) borrowing money or other property from such company (or a controlled company) except as permitted under such Act; and (4) effecting any joint transaction with such company (or a controlled company) in contravention of Commission rules. Authorizes: (1) the Commission, upon application, to permit exemptive relief from such prohibitions (excluding joint transactions); and (2) such noncontrolling persons to engage in such prohibited transactions if the required majority (as defined in this title) of the Directors or general partners so approve.

Excludes from such prohibited transaction: (1) ordinary merchandise sales or purchases or a lessor-lessee relationship incident thereto; (2) acquisition of warrants, options, and voting securities purchase rights by a director, officer, general partner, or employee of such company pursuant to an executive compensation plan; and (3) borrowing of money under specified terms by such persons to buy securities pursuant to such plan.

Requires the directors of, or general partners in, the business procedures to monitor the possible involvement of persons (as set forth in this title) subject to such prohibited transactions. States that: (1) until the Commission adopts rules respecting such transactions, those existing rules under such Act regarding closed-end investment companies shall apply; and (2) an ordinary fee or salary paid to a director, officer, or employee of a party to a transaction shall not be considered a "financial interest" or "participation" in such transaction.

Permits a business development company to maintain a profit-sharing plan if: (1) in the case of a plan for officers and employees, it has the approval of the majority of directors or general partners; (2) in the case of a plan which includes directors, has the approval of the Commission; and (3) the aggregate amount of benefits (paid or accrued) does not exceed 20 percent of such company's net income after taxes in any fiscal year. Stipulates that no plan may be established if such company has: (1) outstanding any option, warrant, or right issued as part of an executive compensation plan; or (2) an investment adviser registered under title II of such Act.

Places restrictions on the remunerations that may be received by agents or brokers of a business development company in connection with the sale or purchase of property or securities. Stipulates that the Commission may permit a larger fee if so doing would be in the public interest. Includes specified affiliated persons within such restrictions.

Prohibits a business development company from changing the nature of its business or withdrawing its election as such a company without the authorization of a majority of its outstanding voting securities or partnership interests.

Applies specified provisions of such Act regarding incorporation, functions, capital structure, loans, distribution and purchase of securities, records, and liability of controlling persons to a business development company, notwithstanding the exemption provided for in this Act.

=Title II: Amendments to the Investment Advisers Act of 1940= - Amends the Investment Advisers Act of 1940 to define "business development company" as defined in title I of this Act except that: (1) the company does not have to be a closed-end company; (2) 40 percent of such company's assets may be in nonqualifying investments; and (3) the securities may be purchased from any person.

Excludes certain investment advisers to business development companies that have elected to be regulated under title I of this Act from registration requirements. States that no shareholder, partner, or beneficial owner of such a company shall be considered a client of such an adivser solely by virtue of his/her relationship with such company.

Provides with regard to investment advisory contracts that a performance fee contract between an investment adviser and a business development company is permissible provided that such contract compensation does not exceed 20 percent of the realized capital gains of such company over a specified period of time or as of dates specified in the contract.

=Title III: Capital Formation= - Omnibus Small Business Capital Formation Act of 1980 - Requires the Commission, in consultation with the Small Business Administration, to collect and make available to the public information regarding the capital formation needs and the problems involved with new small, medium-sized, and independent businesses. Directs the Commission to conduct an annual Government-business forum relating to small business capital formation. Authorizes appropriations for such purposes for fiscal years 1982-1985.

Amends the Securities Act of 1933 to authorize the Commission to cooperate with State securities regulatory associations to maximize uniformity in Federal and State securities regulation. Directs the Commission to conduct an annual conference, as well as other meetings as necessary, with such groups. Authorizes appropriations for such purposes for fiscal years 1982-1985.

Directs the Commission to try to reduce the costs incurred by small firms in raising capital through the issuance of securities.

=Title IV: Small Business Issuers' Simplification= - Small Business Issuers' Simplification Act of 1980 - Amends the Securities Act of 1933 to exempt from registration requirements an offer or sale to an "accredited investor" (as defined in this title) where the aggregate offering price does not exceed the limit under such Act and where there is no advertising or public solicitation.

=Title V: Small Offering Exemptions= - Securities Small Offering Improvements Act - Amends the Securities Act of 1933 to increase the aggregate value of securities which may be exempted from registration from $2,000,000 to $5,000,000.

Amends the Trust Indenture Act of 1939 to: (1) increase the maximum aggregate amount of debt securities exempt from such Act; and (2) grant the Commission authority to lower the the amount of debt securities under the revised ceiling amount that may be exempt from such Act.

=Title VI: Securities Investor Protection Act Amendments= - Amends the Securities Investor Protection Act to increase the coverage for: (1) securities from $100,000 to $500,000; and (2) cash from $40,000 to $100,000.