| Regulatory Category | Key Requirement / Provision | Governing Statute / Rule | Description & Key Details |
|---|---|---|---|
| I. Formation & Election | Definition & Structure | Investment Company Act § 2(a)(48) | A BDC must be adomestic, closed-end companythat invests in eligible U.S. businesses and provides them with significant managerial assistance. |
| Election to BDC Status | Investment Company Act § 54(a); Form N-54A | A company must affirmatively elect BDC status by filingForm N-54Awith the SEC, which subjects it to Sections 55-65 of the 1940 Act. | |
| Public Company Prerequisite | Investment Company Act § 54(a) | Before electing BDC status, a company must have a class of its equity securities registered under theSecurities Exchange Act of 1934. | |
| II. Investment & Portfolio Rules | 70% Qualifying Assets Test | Investment Company Act § 55(a) | At the time of any new investment,**at least 70%**of the BDC's total assets must be invested in "qualifying assets". |
| Eligible Portfolio Company | Investment Company Act § 2(a)(46); SEC Rule 2a-46 | Qualifying assets are primarily securities of "eligible portfolio companies"—domestic U.S. operating companies that are either private or have a public market capitalization ofless than $250 million. | |
| Significant Managerial Assistance | Investment Company Act § 2(a)(47) | A BDC is legally obligated to offersignificant guidance and operational counselto the companies in its 70% investment basket, distinguishing it from a passive investment fund. | |
| III. Capital Structure & Leverage | Standard Asset Coverage | Investment Company Act § 61(a) | The default leverage limit is a200% asset coverage ratio, meaning assets must be at least twice the value of senior securities (a 1:1 debt-to-equity ratio). |
| Increased Leverage Option | Small Business Credit Availability Act of 2018 (amending § 61(a)) | A BDC may increase its leverage by reducing its asset coverage requirement to150%(a 2:1 debt-to-equity ratio) with eitherboard approval(effective in one year) orshareholder approval(effective the next day). | |
| Share Issuance Below NAV | Investment Company Act § 63(2) | A BDC is generally prohibited from selling its common stock**below its current Net Asset Value (NAV)**per share unless it obtains specific authorization from its shareholders. | |
| IV. Governance & Compliance | Board Composition | Investment Company Act § 56(a) | A**majority of a BDC's board of directors must be "disinterested persons,"**a stricter independence standard than that for typical public companies. |
| Compliance Program & CCO | SEC Rule 38a-1 | BDCs must adopt a comprehensive written compliance program, have it reviewed annually, and appoint a**Chief Compliance Officer (CCO)**who reports directly to the board. | |
| Code of Ethics | SEC Rule 17j-1 | A BDC must adopt and enforce a code of ethics that governs personal securities trading by its directors, officers, and advisory personnel ("access persons") to prevent conflicts of interest. | |
| V. Affiliated Transactions | General Prohibition | Investment Company Act § 57 | The law broadly prohibits transactions (e.g., sales, purchases, loans) between a BDC and itsaffiliates(such as its investment adviser or funds managed by the adviser) unless an exemption is granted. |
| Co-Investment | SEC Exemptive Order (under § 57 & Rule 17d-1) | To invest in deals alongside affiliated funds, a BDC must obtain aco-investment exemptive orderfrom the SEC, which imposes strict conditions to ensure fairness. | |
| VI. Valuation & Reporting | Fair Value Determination | Investment Company Act § 2(a)(41); SEC Rule 2a-5 | The board of directors is ultimately responsible for thegood-faith fair valuationof the BDC's portfolio assets, which are often illiquid private securities ("Level 3" assets). |
| Periodic Public Reporting | Securities Exchange Act of 1934 | As public companies, BDCs must file**annual reports (Form 10-K), quarterly reports (Form 10-Q), and current reports (Form 8-K)**with the SEC. | |
| Offering Registration | Securities Act of 1933; Form N-2 | Public offerings of BDC securities must be registered usingForm N-2. Recent reforms allow seasoned BDCs to use a more flexible "shelf" registration process. | |
| VII. Taxation | RIC Qualification | Internal Revenue Code, Subchapter M (§§ 851-855) | Nearly all BDCs elect to be treated as a**Regulated Investment Company (RIC)**to achieve pass-through tax treatment and avoid corporate-level income tax. |
| Income & Distribution Tests | IRC § 851(b)(2); IRC § 852(a) | To maintain RIC status, a BDC must derive at least90% of its gross income from qualifying sources(like dividends and interest) and distribute at least90% of its taxable incometo shareholders annually. | |
| Excise Tax | IRC § 4982 | To avoid a4% federal excise tax, a BDC must distribute an even higher percentage of its income:98% of its ordinary incomeand98.2% of its net capital gainson a calendar-year basis. |
| Category | Specific Requirement | Description | Legal Basis |
|---|---|---|---|
| Definition and Structure | BDC Definition | A closed-end investment company electing special treatment under the Investment Company Act of 1940, focused on investing in small and medium-sized U.S. businesses while providing managerial assistance. Must invest at least 70% of assets in qualifying investments. | BDCs are not registered under the 1940 Act but subject to many of its provisions. They are typically organized under state law (e.g., Delaware) and file Form N-54A for election. |
| Formation and Election | Entity Formation and SEC Filings | Organize as a closed-end company under state law; file Form N-54A to elect BDC status; file Form N-6F for notification; for public offerings, file Form N-2 registration statement. Election is irrevocable without SEC approval. | Requires compliance with Securities Act of 1933 for offerings and Securities Exchange Act of 1934 for reporting (Forms 10-K, 10-Q, 8-K). |
| Investment Restrictions | 70% Qualifying Asset Test | At least 70% of total assets must be in qualifying investments in eligible portfolio companies (U.S.-based, non-investment companies meeting size or listing criteria). Remaining 30% can be non-qualifying. | Qualifying assets include private securities, follow-on investments, cash equivalents. Must provide significant managerial assistance. |
| Leverage and Capital Structure | Asset Coverage Ratio | Standard: 200% asset coverage (1:1 debt-to-equity). Can reduce to 150% (2:1 debt-to-equity) with board or shareholder approval. Non-traded BDCs must offer quarterly repurchases if reducing coverage. | Calculated as total assets divided by senior securities. Amended by 2018 Act to allow higher leverage with protections. |
| Affiliated Transactions | Prohibited Transactions | Restrictions on transactions with close affiliates (directors, officers, 5% shareholders) without approval. Remote affiliates may transact with "required majority" board approval. | Prevents conflicts; co-investments often require SEC exemptive relief under Sections 17(d) and 57(i). |
| Governance and Board Composition | Independent Directors | Majority of board must be non-interested persons. Board oversees advisory agreements, valuations, compliance, and affiliated transactions. | "Required majority" for approvals: majority of disinterested directors and majority of all directors. |
| Tax Treatment | RIC Qualification | Elect as Regulated Investment Company (RIC) under Subchapter M for pass-through taxation. Must meet 90% gross income test and asset diversification tests. | Distribute 90% of net investment income annually; subject to 4% excise tax on undistributed income. Disqualification leads to C-corp taxation. |
| Compliance and Reporting | Compliance Program | Written policies under Rule 38a-1; designate Chief Compliance Officer; annual reviews and board reporting. | Covers federal securities laws; includes code of ethics (Rule 17j-1) and insider trading prevention. |
| Valuation Procedures | Fair Value Valuation | Board or designee oversees valuation of illiquid investments (common in BDCs) using methodologies like market or income approach. | Most investments are Level 3 under ASC 820; requires records and backtesting. |
| Management Structure | Internal vs. External Management | Internally managed: Lower expense ratios (2-2.5%); direct employee alignment. Externally managed: Fees 1.75-2% base + 20% incentive; requires annual board approval. | External advisers register under Advisers Act; compliance under Rule 206(4)-7. |
| Capital Raising | Securities Offerings | Use Form N-2 for registration; shelf registration under Rule 415 for seasoned BDCs; ATM offerings and rights offerings allowed with approvals. | Reforms in 2020 allow WKSI status for BDCs with $700M public float. |
| Recent Developments | Leverage and Offering Reforms | 2018 Act allows 150% coverage; 2020 reforms enhance offering flexibility. COVID-19 relief provided temporary co-investment flexibility. | 2025 updates include multi-class share relief and simplified co-investment. |
| Category | Requirement | Key Standards/Thresholds | Legal Authority | Penalties/Consequences |
|---|---|---|---|---|
| Formation & Structure | BDC Election | Must file Form N-54A with SEC | ICA §54 (15 U.S.C. §80a-53) | Loss of BDC status |
| Domestic Organization | Must be organized under U.S. state law with principal place of business in U.S. | ICA §2(a)(48) | Ineligibility for BDC status | |
| Exchange Act Registration | Must register securities under Section 12 | Exchange Act §12 | SEC enforcement, trading suspension | |
| Asset Composition | 70% Qualifying Assets Test | At least 70% of total assets must be in eligible portfolio companies | ICA §55 | Loss of BDC status, forced divestiture |
| Eligible Portfolio Companies | U.S. companies not exchange-listed or <$250M market cap | ICA §2(a)(46), Rule 2a-46 | Non-compliance with 70% test | |
| Managerial Assistance | Must provide significant managerial assistance to portfolio companies | ICA §2(a)(47) | Violation of core BDC requirements | |
| Leverage Limits | Asset Coverage - Standard | 200% (2:1 assets to debt) | ICA §61(a) | Cannot issue new securities or pay dividends during non-compliance |
| Asset Coverage - SBCAA Option | 150% with board/shareholder approval | ICA §61(a) as amended 2018 | Credit facility defaults, SEC enforcement | |
| Non-traded BDC Liquidity | Must offer quarterly repurchases if electing 150% leverage | ICA §61(a)(2)(D)(ii) | Regulatory violation | |
| Tax Requirements | RIC Income Test | 90% of gross income from qualifying sources | IRC §851(b)(2) | Loss of pass-through treatment |
| RIC Distribution Test | Must distribute 90% of taxable income annually | IRC §852 | Corporate-level taxation | |
| Asset Diversification | 50% in diversified holdings (quarterly test) | IRC §851(b)(3) | Loss of RIC status | |
| Excise Tax Avoidance | Distribute 98% ordinary income, 98.2% capital gains | IRC §4982 | 4% excise tax on undistributed amounts | |
| Governance | Board Independence | Majority must be "disinterested" persons | ICA §56(a) | SEC enforcement, governance failures |
| Compliance Program | Written policies, CCO designation, annual review | Rule 38a-1 | Enforcement actions, officer bars | |
| Code of Ethics | Required for access persons | Rule 17j-1 | Personal trading violations | |
| Fidelity Bond | Required with annual board approval | Rule 17g-1 | Asset protection failures | |
| Affiliated Transactions | Close Affiliate Restrictions | Prohibited without exemptive relief | ICA §57 | Voidable transactions, disgorgement |
| Co-investment Limitations | Requires SEC exemptive order | Rule 17d-1 | Transaction voiding, civil penalties | |
| Required Majority Approval | Board approval for certain affiliate transactions | ICA §57(o) | Fiduciary breach claims | |
| Valuation | Fair Value Determination | Board responsibility, may designate under Rule 2a-5 | Rule 2a-5, Rule 31a-4 | SEC enforcement, NAV restatements |
| Independent Valuations | Industry standard: 25-100% quarterly third-party valuations | Best practices | Valuation litigation | |
| Recordkeeping | 6-year retention for valuation documentation | Rule 31a-4 | Recordkeeping violations | |
| SEC Reporting | Form 10-K | Annual report within 60-90 days | Exchange Act §13(a) | Late filing fees, trading suspension |
| Form 10-Q | Quarterly report within 40-45 days | Exchange Act §13(a) | Enforcement actions | |
| Form 8-K | Current report within 4 business days | Exchange Act §13(a) | Disclosure violations | |
| Form N-2 | Registration for public offerings | Securities Act | Offering delays/prohibitions | |
| Share Issuance | Below-NAV Sales | Prohibited without shareholder approval | ICA §63 | Transaction voidable, director liability |
| Shareholder Authorization | Valid for 12 months, typically capped at 25% dilution | ICA §63(2) | Loss of capital raising ability | |
| Distribution Requirements | Section 19(a) Notices | Required when distributions from non-income sources | ICA §19(a) | SEC enforcement |
| Dividend Coverage | Must maintain asset coverage to pay dividends | ICA §61 | Dividend restrictions | |
| Financial Controls | SOX Compliance | CEO/CFO certifications, ICFR | SOX §302/404/906 | Criminal penalties up to $5M/20 years |
| Audit Requirements | Annual integrated audit, PCAOB standards | ICA §32 | Restatements, audit deficiencies | |
| Cybersecurity | 4-day incident reporting, annual risk disclosures | Reg S-K Item 106 | Breach liability, regulatory fines | |
| Custody & Records | Asset Custody | Qualified custodian required | Rule 17f series | Asset freeze orders |
| Books & Records | 6-year retention (most records) | Rules 31a-1, 31a-2 | Obstruction charges | |
| Electronic Storage | Permitted with safeguards, duplicate copies | Rule 31a-2 | SEC examination failures | |
| Marketing | Investment Company Ads | Fair and balanced standard | Rules 156, 482 | False advertising charges |
| Marketing Rule | Performance presentation requirements | Rule 206(4)-1 | Civil penalties up to $1M+ | |
| FINRA Requirements | Rule 2210 for broker communications | FINRA Rules | FINRA fines up to $850,000+ |