10Th Annual BDC Roundtable

DISCUSS AND DISCOVER

10th Annual BDC Roundtable

Wednesday, September 12, 2012

SUTHERLAND ASBILL & BRENNAN LLP www.sutherland.com

AGENDA

SUTHERLAND ASBILL & BRENNAN LLP www.sutherland.com RONALD REAGAN BUILDING AND INTERNATIONAL TRADE CENTER 1300 PENNSYLVANIA AVENUE, NW WASHINGTON, DC 20004 Wednesday, September 12, 2012

GENERAL MEETING AGENDA

8:00 a.m. – 8:30 a.m. Continental Breakfast

8:30 a.m. – 9:15 a.m. 2012 Regulatory, Legislative and Market Overview The BDC industry has continued to evolve along with the complex regulatory landscape. Our panel will discuss where we’ve been this year, how the unsettled economic climate has affected BDCs, what the markets may bring depending on the outcome of the 2012 elections, and what we can expect to achieve legislatively for BDCs and SBICs over the next 12 months.

Panelists: Sam Anderson, Goldman Sachs Steve Boehm, Sutherland Cynthia Krus, Sutherland Brett Palmer, Small Business Investor Alliance

9:15 a.m. – 10:00 a.m. SEC Compliance and Enforcement Actions: Lessons Learned What do you need to know to prepare for an SEC examination? Our panel will provide the perspective of the SEC staff, enforcement attorneys and BDC chief compliance officers. The panel will also discuss recent trends in examinations and enforcement and how they may impact BDCs.

Moderator: Deb Heilizer, Sutherland Panelists: Paula Bosco, New Mountain Finance Corporation Tod Reichert, MCG Capital Corporation Stephanie Paré Sullivan, THL Credit, Inc. John Walsh, Sutherland

10:00 a.m. – 10:45 a.m. Non-Traded BDCs: An Alternative Capital Raising Model Three sponsors of non-traded BDCs talk about why they started a non-traded BDC, their experiences in getting the venture off the ground, the lessons they learned along the away, and where they see the future of this increasingly popular alternative investment vehicle.

Moderator: Harry Pangas, Sutherland Panelists: Tim Keating, Keating Capital, Inc. Joel Kress, CION Investment Corporation Seth Taube, Sierra Income Corporation

10:45 a.m. – 11:00 a.m. Break

RONALD REAGAN BUILDING AND INTERNATIONAL TRADE CENTER 1300 PENNSYLVANIA AVENUE, NW WASHINGTON, DC 20004 Wednesday, September 12, 2012

11:00 a.m. – 11:45 a.m. A Dialogue with the Division Regulatory and disclosure, trends and comments

Moderator: Steve Boehm, Sutherland Panelists: Dalia Blass, Division of Investment Management, U.S. Securities and Exchange Commission Jim Curtis, Division of Investment Management, U.S. Securities and Exchange Commission Cynthia Krus, Sutherland

11:45 a.m. – 1:15 p.m. Lunch Ten tables – ten topics. Join the table of your choice to discuss current developments, challenges and new ideas around one of these subject areas.

 Compliance  Non-Traded BDCs  Outsourcing  Portfolio Investing  Debt Financing  Raising Equity Capital  Exemptive Relief  SBICs  Managing the Board  Tax Matters

1:15 p.m. – 2:15 p.m. Managing Through the Cycles: The C-Suite Perspective Senior BDC executives will discuss their greatest challenges within the model, how they have managed through the economic cycles, and the lessons they have learned from it all.

Moderator: Steve Boehm, Sutherland Panelists: Bernard Berman, Fifth Street Finance Corporation Vincent Foster, Main Street Capital Corporation Robert Hamwee, New Mountain Finance Corporation Michael Reisner, CION Investment Corporation

2:15 p.m. – 3:00 p.m. Negotiating Service Provider Arrangements: Tips and Traps for the Unwary Our panel includes experienced representatives from several typical third- party service providers as well as Sutherland attorneys who routinely advise clients with respect to service provider arrangements. The panelists will discuss the services they provide to BDCs with a focus on the common elements of negotiating service provider arrangements.

Moderator: Cynthia Krus, Partner, Sutherland Panelists: John Czapla, Valuation Research Corporation Scott Hobby, Sutherland Michael Monroe, U.S. Bancorp Fund Services Matthew Schott, Marsh FINPRO

RONALD REAGAN BUILDING AND INTERNATIONAL TRADE CENTER 1300 PENNSYLVANIA AVENUE, NW WASHINGTON, DC 20004 Wednesday, September 12, 2012

3:00 p.m. – 3:45 p.m. Building Your Shareholder Base Those involved in the equity capital raising process discuss the art and science of cultivating and maintaining a shareholder base that will support the BDC - in good times and bad.

Moderator: John Mahon, Sutherland Panelists: Larry Herman, Raymond James Jim Hunt, THL Credit, Inc. Troy Ward, Stifel Nicolaus

3:45 p.m. – 4:00 p.m. Closing Remarks

SPEAKER BIOGRAPHIES

SUTHERLAND ASBILL & BRENNAN LLP www.sutherland.com 10TH ANNUAL BDC ROUNDTABLE Wednesday, September 12, 2012

SPEAKER BIOGRAPHIES

2012 Regulatory, Legislative and Market Overview

Sam Anderson, Vice President, Goldman Sachs Sam Anderson is a senior member of the Goldman Sachs Financial Institutions Group, which provides advisory and capital raising services to insurance, bank, asset management, financial technology and specialty finance companies. Sam leads the Business Development Company coverage effort and has played a leading role in many IPOs, convertible and secondary capital raises. Most recent transactions include the New Mountain Finance, Medley Capital and Oaktree Finance IPOs, as well as the Prospect Capital convertible. In addition, Sam has played a lead role in many of the largest mergers in the specialty finance industry including Sallie Mae’s acquisition of $26 billion of student loan assets from Student Loan Corp. Sam graduated from Bates College in 1999. Prior to joining Goldman Sachs in 2007, Sam worked at Banc of America Securities.

Steve Boehm, Partner, Sutherland Asbill & Brennan LLP Steve Boehm leads the firm’s Capital Markets and Investments Team. He concentrates his practice in the corporate and securities area, with an emphasis on matters involving asset management arising under the jurisdiction of the U.S. Securities and Exchange Commission (SEC). He represents registered and unregistered investment funds and investment advisers on a broad range of regulatory and transactional matters. Steve is a nationally recognized authority on business development companies (BDCs), representing many of the nation’s largest BDCs. His practice also includes representing other types of public vehicles for private equity investing. Steve is also recognized as a leading authority on the organization and operation of Section 529 college tuition savings plans.

Cynthia Krus, Partner, Sutherland Asbill & Brennan LLP Cynthia Krus, who serves as vice chair of Sutherland’s Corporate and Financial Services practices, has been involved in numerous public and private securities offerings and has advised clients in connection with a variety of corporate transactions including mergers and acquisitions, proxy contests, exchange and rights offerings, going-private transactions and reorganizations. She advises companies on the structure and formation of various entities and the establishment and operation of private and public equity, including business development companies (BDCs) and Small Business Investment Companies (SBICs). Cynthia counsels public companies in a broad range of corporate and securities matters, such as the Sarbanes-Oxley Act of 2002, corporate governance, disclosure, executive compensation and shareholder matters.

Brett Palmer, President, Small Business Investor Alliance Brett Palmer was appointed as SBIA’s President in October 2008. He is responsible for the implementation of policies and programs established by the Board of Governors and for the overall management of SBIA staff, activities, and contracts. He is SBIA’s principal liaison with Congress, the Executive Branch, and industry organizations. Brett is also President of the SBIC Funding Corporation and Treasurer and Principal Coordinator of SBIA’s Political Action Committee. Brett has an extensive public policy and advocacy background, having worked with legislative and executive bodies at all levels of government. He most recently served as the Managing Director for the National Association of Insurance Commissioner’s (NAIC) Government Relations Office in Washington, D.C., where he oversaw and executed their state, federal, and international relations. Prior to joining the NAIC, Brett served as Assistant Secretary of Commerce for Legislative and Intergovernmental Affairs and as Deputy Assistant Secretary for Trade Legislation. He worked on Capitol Hill in a number of positions including for the Speaker of the House.

10TH ANNUAL BDC ROUNDTABLE Wednesday, September 12, 2012

SPEAKER BIOGRAPHIES

SEC Compliance and Enforcement Actions: Lessons Learned

Deb Heilizer, Partner, Sutherland Asbill & Brennan LLP Deb Heilizer, a member of Sutherland’s Securities Enforcement, Litigation and Regulation Team, focuses her practice on accounting and financial issues, regulatory enforcement, and litigation involving the U.S. Securities and Exchange Commission (SEC), self-regulatory organizations and private litigants. She also represents public companies and regulated entities, including broker-dealers, investment advisers and individuals in a wide range of securities matters, including state and federal regulatory matters, disclosure issues and compliance matters. Prior to joining the firm, Deb was in-house counsel at the retail brokerage division of a large financial institution, where she handled litigation and regulatory matters. For more than a decade, she also worked at the SEC’s Division of Enforcement conducting and supervising investigations involving potential violations of the federal securities laws.

Paula Bosco, Chief Compliance Officer, New Mountain Finance Corporation Paula Bosco has served as Chief Compliance Officer and Corporate Secretary of New Mountain Finance Corporation since July 2010, of New Mountain Finance Holdings, L.L.C. since September 2010 and of New Mountain Finance AIV Holdings Corporation since May 2011. Ms. Bosco serves as a Managing Director and Chief Compliance Officer of New Mountain Capital and has been in various roles since joining in 2009. Prior to joining New Mountain Capital in 2009, Ms. Bosco served as the Chief Compliance Officer for the advisory division of Lehman Brothers Inc. from 2007 to 2009. From 2005 to 2007, Ms. Bosco served as Senior Vice President and Assistant Director of International & Investment Advisory Services Compliance at Citigroup Global Markets, Inc. Prior to that, Ms. Bosco held a number of senior legal and regulatory compliance positions with investment banks and financial regulators, as well as with a large New York City law firm. Ms. Bosco received her B.A. in Political Science from the State University of New York, her J.D. from the City University of New York School of Law and her M.B.A. in Finance/Investment Management from Pace University. She is admitted to practice law in the U.S. District Court, Eastern and Southern Districts of New York, and the U.S. Court of Appeals, Second Circuit.

Tod Reichert, Executive Vice President, MCG Capital Corporation Tod K. Reichert has served as Executive Vice President of MCG Capital Corporation since March 2012, has served as its General Counsel since August 2011 and as its Chief Compliance Officer and Corporate Secretary since June 2008. Prior to joining MCG Capital, from January 2001 to June 2008, Mr. Reichert served as counsel in the Corporate Practice Group at WilmerHale where he practiced general corporate and securities law, with an emphasis on public offerings, venture capital transactions and mergers and acquisitions for clients in various industries and sectors, including biotechnology, pharmaceutical, software, emerging technologies and financial services. Prior to joining WilmerHale, Mr. Reichert was associated with Buchanan Ingersoll from September 1997 to December 2000. Mr. Reichert received his J.D. from the Rutgers University School of Law — Newark and his B.F.A. from the University of North Carolina.

Stephanie Paré Sullivan, General Counsel, THL Credit, Inc. Stephanie Paré Sullivan is the General Counsel and Chief Compliance Officer of THL Credit, Inc. and THL Credit Advisors and the General Counsel of THL Credit SLS. As a member of senior management, her role includes legal and compliance review of THL Credit’s business operations, investing transactions, regulatory filings and strategic initiatives. Prior to joining THL Credit in early 2010, Ms. Sullivan was a partner in the law firm of Goodwin Procter LLP, where she worked from 1997 to 2010, primarily focusing on mergers and acquisitions, private equity transactions and the representation of early- and later-stage growth companies. While at Goodwin Procter LLP, she worked with THL Credit in connection with its initial formation in 2007 and its continuing operations. Ms. Sullivan received her BA from Williams College and her JD from New York University School of Law. 10TH ANNUAL BDC ROUNDTABLE Wednesday, September 12, 2012

SPEAKER BIOGRAPHIES

SEC Compliance and Enforcement Actions: Lessons Learned (continued)

John Walsh, Partner, Sutherland Asbill & Brennan LLP John H. Walsh is a Partner in Sutherland’s Financial Services Group and a member of the Securities Enforcement and Litigation Team. As a 23-year veteran of the Securities and Exchange Commission (SEC), John played a key role in creating the Office of Compliance Inspections and Examinations (OCIE). At the OCIE, John designed and implemented the SEC’s securities compliance examination practices, first as a Senior Advisor for Compliance Policy and then, most recently, as Associate Director-Chief Counsel. Prior to his tenure at OCIE, John was Special Counsel to former SEC Chairman Arthur Levitt from 1993 to 1995. From 1990 to 1993, he worked in the SEC’s Division of Enforcement, serving first as Senior Counsel and then as Chief of the Branch of Regional Office Assistance where he regularly appeared before the Commission’s Closed Meetings to present and discuss regional office enforcement cases. He also advised the commissioners and staff on securities laws and agency policy. John began his career with the SEC in 1988 as an attorney in the Office of General Counsel.

10TH ANNUAL BDC ROUNDTABLE Wednesday, September 12, 2012

SPEAKER BIOGRAPHIES

Non-Traded BDCs: An Alternative Capital Raising Model

Harry Pangas, Partner, Sutherland Asbill & Brennan LLP Harry S. Pangas represents issuers and investment banks in public and private securities transactions. He also advises corporate clients on matters relating to the securities law, corporate governance, and general corporate matters. Harry is a senior member of Sutherland’s nationally recognized business development company practice and has represented BDCs, investment banks and third-party acquirers in connection with a variety of BDC securities transactions, including initial public offerings, shelf offerings, Rule 144A offerings, recapitalizations, at-the-market offerings, merger and acquisition transactions, and rights offerings. Harry has also developed a niche practice representing cooperatives, including lending and electric generation and transmission cooperatives, in connection with various securities law matters, including Rule 144A offerings and private placement transactions.

Tim Keating, Chief Executive Officer, Keating Capital, Inc. Tim is the Chief Executive Officer of Keating Capital, Inc. and the Founder and President of Keating Investments, LLC. Previously, he held senior management positions in the Equity and Equity Derivatives departments of Bear Stearns, Nomura and Kidder, Peabody in both London and New York.

Joel Kress, Senior Managing Director, CION Investment Corporation Joel S. Kress, Senior Managing Director, joined ICON Capital in August 2005 as Vice President and Associate General Counsel. In February 2006, he was promoted to Senior Vice President and General Counsel of ICON Capital, and in May 2007, he was promoted to his current position with ICON Capital. Previously, from September 2001 to July 2005, Mr. Kress was an attorney with Fried, Frank, Harris, Shriver & Jacobson LLP in New York and London, England, concentrating on mergers and acquisitions, corporate finance and financing transactions (including debt and equity issuances) and private equity investments. Mr. Kress received a J.D. from Boston University School of Law and a B.A. from Connecticut College.

Seth Taube, Chief Executive Officer, Sierra Income Corporation Mr. Taube is a Managing Partner of Medley, a Senior Portfolio Manager of the Medley Opportunity Funds and a member of the Board of Director of Medley Capital Corporation. Prior to forming Medley Mr. Taube was a Partner with CN Opportunity Fund where he was a Portfolio Manager for the firm's global investment fund. Prior to CN Opportunity Fund, Mr. Taube co-founded T3 Group, a principal and advisory firm focused on distressed asset and credit investments. Prior to T3, Mr. Taube worked with Griphon Capital Management, serving as Managing Director of the firm's private investment activities. Prior to Griphon, Mr. Taube was a Vice President with Tiger Management, and held positions with Morgan Stanley & Co. in the Investment Banking and Institutional Equity Divisions. Mr. Taube received a B.A. from Harvard University, an M.Litt. in Economics from St. Andrew's University in Great Britain, where he was a Rotary Foundation Fellow, and an M.B.A. from the Wharton School at the University of Pennsylvania.

10TH ANNUAL BDC ROUNDTABLE Wednesday, September 12, 2012

SPEAKER BIOGRAPHIES

A Dialogue with the Division

Dalia Blass, Assistant Director, Division of Investment Management, U.S. Securities and Exchange Commission Dalia Osman Blass is Assistant Director in the Division of Investment Management’s Office of Investment Company Regulation, where she manages a team responsible for the review of exemptive applications under the Investment Company Act of 1940. She has been a member of a number of interdisciplinary teams that have analyzed a wide variety of industry developments. Ms. Blass was the recipient of the Manuel F. Cohen Award for her work on money market funds during the credit crisis. Prior to joining the Office, Ms. Blass was Senior Counsel in a rulemaking office in the Division where she worked on numerous rulemaking projects, including funds of funds and exchange-traded funds. Before joining the Commission, Ms. Blass practiced with preeminent law firms in London, New York City and Washington, D.C. Ms. Blass has a B.A. from American University and a J.D. from Columbia University School of Law School.

Jim Curtis, Branch Chief, Division of Investment Management, U.S. Securities and Exchange Commission Mr. Curtis currently is a branch chief in the Office of Chief Counsel of the Division of Investment Management. He has served as an attorney with the Securities and Exchange Commission since 1991 and has worked on various projects for offices within the Division of Investment Management, including the issuance of SEC orders permitting the sale of certain exchange traded funds and the new orders providing relief from Section 19(b) of the Investment Company Act to facilitate managed distribution plans. He is the author of “Special Duties of Closed-End Fund Directors,” a chapter in the treatise Fund Governance: Legal Duties of Investment Company Directors, published by the American Lawyer’s Law Journal Press. Prior to his employment with the SEC, Mr. Curtis was in private practice in New York, New York. Mr. Curtis is a graduate of Hamilton College (B.A.), The Amos Tuck School of Business Administration (M.B.A.) and New York University School of Law (J.D.).

10TH ANNUAL BDC ROUNDTABLE Wednesday, September 12, 2012

SPEAKER BIOGRAPHIES

Managing Through the Cycles: The C-Suite Perspective

Bernard Berman, President, Fifth Street Finance Corporation Mr. Berman is the President of Fifth Street Finance Corp. and a member of the Company’s Board of Directors. He is also a partner of our investment adviser, Fifth Street Management LLC, and serves on its investment committee. Mr. Berman is responsible for the operations of the Company. Prior to joining Fifth Street in 2004, Mr. Berman was a corporate attorney from 1995–2004, during which time he negotiated and structured a variety of investment transactions.

Vincent Foster, Chief Executive Officer, Main Street Capital Corporation Vincent D. Foster has served as the Chairman of the Board of Directors, Chief Executive Officer and as a member of the investment committee since 2007 and as a member of the credit committee since 2011. Mr. Foster also currently serves as a founding director of Quanta Services, Inc., and Team, Inc. Mr. Foster also serves on the board of directors of HMS Income Fund, Inc., a non-publicly traded business development company. Mr. Foster, a C.P.A., had a 19 year career with Arthur Andersen, where he was a partner from 1988-1997. Mr. Foster was the director of Andersen’s Corporate Finance and Mergers and Acquisitions practice for the Southwest United States and specialized in working with companies involved in consolidating their respective industries. From 1997, Mr. Foster co-founded and has acted as co- managing partner or chief executive of several Main Street predecessor funds and entities, which are now subsidiaries of ours, including Main Street Mezzanine Fund, LP and its general partner, Main Street Mezzanine Management, LLC, Main Street Capital II, LP and its general partner, Main Street Capital II GP, LLC, and Main Street Capital Partners, LLC.

Robert Hamwee, Managing Director, New Mountain Finance Corporation Robert A. Hamwee, Managing Director, joined New Mountain Capital in 2008. Prior to joining New Mountain, he was President of GSC Group, where he had day-to-day responsibility for managing GSC's control distressed debt funds. He was with Greenwich Street Capital Partners, the predecessor to GSC Group from 1994 to 1999. Prior to that, Mr. Hamwee was with The Blackstone Group from 1992 to 1994, where he worked on a wide range of assignments in the Restructuring and Merchant Banking Departments. Mr. Hamwee has chaired numerous Creditor Committees and Bank Steering Groups, and has been a lead Director for many corporate boards, including Purina Mills, Envirosource, and Viasystems. He graduated Phi Beta Kappa from the University of Michigan with a B.B.A. degree in Finance and Accounting.

10TH ANNUAL BDC ROUNDTABLE Wednesday, September 12, 2012

SPEAKER BIOGRAPHIES

Managing Through the Cycles: The C-Suite Perspective (continued)

Michael Reisner, Chief Executive Officer, CION Investment Corporation Michael A. Reisner is Co-President and Co-Chief Executive Officer of ICON Investments. He additionally holds the title of Co-President and Co- CEO of ICON Capital Corp., ICON Oil & Gas, GP. and CION Investment Management. Mr. Reisner was formerly EVP & Chief Financial Officer of ICON Capital Corp. from January 2007 through April 2008. Prior to that, Mr. Reisner was Executive Vice President — Acquisitions from 2006-2007, wherein he helped source, negotiate and execute in excess of $200 million of transactions in various industries across North America and Europe. He began at ICON in 2001 in the legal department and served as ICON’s General Counsel from 2004 to 2006, wherein he, among other things, supervised all of ICON’s legal and compliance functions. Mr. Reisner started his career as a lawyer, where he worked in private practice in New York from 1996-2001. Mr. Reisner graduated cum laude from New York Law School and received his B.A. degree from the University of Vermont.

10TH ANNUAL BDC ROUNDTABLE Wednesday, September 12, 2012

SPEAKER BIOGRAPHIES

Negotiating Service Provider Arrangements: Tips and Traps for the Unwary

John Czapla, Managing Director, Valuation Research Corporation John D. Czapla is a managing director of Valuation Research Corporation. Mr. Czapla heads the company’s Portfolio Securities Valuation Practice. He has over 18 years of experience valuing business entities, equity instruments, loan portfolios and complex securities. Mr. Czapla is also a senior partner of VRC and a member of VRC’s board of directors. At VRC, he leads experienced teams in the valuation of alternative and illiquid assets and complex securities for many of the leading hedge funds, private equity firms and BDCs. His client list also includes banks, investment banks, public pension funds and other large asset managers. Mr. Czapla’s experience prior to leading the Portfolio Securities Valuation Practice of VRC includes the valuation of business enterprises and their securities, intellectual property and other intangible assets, and due diligence and valuation analyses in support of solvency opinions and fairness opinions. He is a charterholder of the Chartered Financial Analyst (CFA) designation of the CFA Institute, and an Accredited Senior Appraiser (ASA) of The American Society of Appraisers. Mr. Czapla also completed his Bachelor of Science degree in business administration and psychology at the University of Pittsburgh.

Scott Hobby, Partner, Sutherland Asbill & Brennan LLP Scott Hobby leads Sutherland’s Outsourcing and Mergers and Acquisitions practice. He has more than 25 years of experience. His practice focus has three aspects: customer side offshore and onshore outsourcing transactions including business process outsourcing (BPO), information technology outsourcing (ITO), application development and maintenance (AD/M), managed network services (MNS), facilities management outsourcing (FMO) and human resource outsourcing (HRO) arrangements; software systems acquisition and implementation transactions; and the structuring, formation and regulatory compliance of joint ventures in new markets and shared services arrangements. He also has substantial experience in the hospitality, banking, insurance, consumer products, electronics, airline, utility, energy, logistics and online data/analytics industries.

Michael Monroe, Legal Counsel, U.S. Bancorp Fund Services Michael D. Monroe serves as Legal Counsel within U.S. Bancorp Fund Services concentrating on pooled investment products and alternative investment structures, and also manages and oversees the Investor Services department of the Alternative Investments division. Additionally, Mr. Monroe serves as a deputy money laundering compliance officer and deputy money laundering reporting officer for U.S. Bancorp Fund Services. He has six years of both industry experience and tenure with U.S. Bancorp Fund Services. Prior to joining U.S. Bancorp Fund Services, Mr. Monroe served in a consulting capacity specializing in corporate tax structures at Deloitte Tax LLP for two years acting.

10TH ANNUAL BDC ROUNDTABLE Wednesday, September 12, 2012

SPEAKER BIOGRAPHIES

Negotiating Service Provider Arrangements: Tips and Traps for the Unwary (continued)

Matthew Schott, Senior Client Advisor, Marsh FINPRO Matt Schott joined Marsh in 2012 and is a Senior Vice President in the Financial and Professional (FINPRO) Practice for the Mid-Atlantic Partnership which includes the Philadelphia, Washington DC, Richmond and Baltimore areas. Matt is also a senior client advisor to many of the largest companies in the area. He has over 16 years of experience in leading the most complex placements for Directors’ and Officers’ Liability (D&O), Employment Practices Liability (EPL) and Fiduciary Liability. His experience reaches across many industries including real estate, lifesciences, telecommunications, chemical, retail, energy, manufacturing, and technology.

10TH ANNUAL BDC ROUNDTABLE Wednesday, September 12, 2012

SPEAKER BIOGRAPHIES

Building Your Shareholder Base

John Mahon, Partner, Sutherland Asbill & Brennan LLP John Mahon focuses his practice in the areas of securities law and mergers and acquisitions, including advising clients on compliance with the Securities Act of 1933 and the Securities Exchange Act of 1934. He also regularly handles matters relating to the establishment and operation of both public and private closed-end funds and business development companies, including compliance with and exemptions from the Investment Company Act of 1940. Before joining the firm, John worked as an attorney adviser at the U.S. Securities and Exchange Commission (SEC) where he reviewed registration statements, proxy materials and periodic reports relating to public offerings and merger and acquisition transactions, including many involving companies in the oil, natural gas, mining and timber industries. He also spent a significant portion of time at the SEC in the Office of Mergers and Acquisitions, handling issues involving tender offers, proxy solicitations, going-private transactions and beneficial ownership reporting obligations.

Larry Herman, Managing Director, Raymond James Mr. Herman joined Raymond James in 2012 as part of the merger with Morgan Keegan. Prior to joining Morgan Keegan, he was in the investment banking groups of CIBC World Markets and Alex. Brown and was head of corporate development for Radiant Systems, Inc. Mr. Herman received a B.B.A. with high honors in finance from The University of Texas at Austin and an M.B.A. with honors from the Olin School of Business at Washington University.

Jim Hunt, Chief Executive Officer, THL Credit, Inc. Jim Hunt serves as THL Credit, Inc.'s Chairman, CEO and Chief Investment Officer. He also serves as Director, Chief Executive Officer and Chief Investment Officer of THL Credit Advisors LLC and as a Director and Chief Executive Officer of THL Credit Senior Loan Strategies LLC. In 2007, Mr. Hunt founded and led THL Credit, Inc.'s predecessor entities in association with Thomas H. Lee Partners, LP. Jim was most recently Managing Partner and Chief Executive Officer of Bison Capital which he co- founded in 2001. Previously, he was President of SunAmerica Corporate Finance and an Executive Vice President of SunAmerica Investments, Inc. (subsequently, AIG SunAmerica) through 2000. At SunAmerica, he was responsible for high-yielding investments including private placements, acquisition financing, term loans and portfolio purchases, structured finance and corporate acquisitions. He was President and CEO of the Anchor Pathway Funds and SunAmerica Series Trust with assets exceeding $11 billion. Jim joined SunAmerica in 1990 from the Davis Companies, a private equity investment firm, where he was responsible for acquisitions.

Troy Ward, Managing Director, Stifel Nicolaus Troy Ward, Managing Director, has been a Senior Analyst covering BDCs for Stifel Nicolaus since 2007; his research coverage currently includes 24 publicly traded BDCs. Prior to joining Stifel Nicolaus, Mr. Ward was with A.G. Edwards for 11 years, serving eight years as an equity analyst covering a wide range of financial companies including BDCs, small-cap banks, consumer finance and publicly traded partnerships and three years as an investment banking analyst focused on Real Estate Investment Trusts (REITs). Previously, Mr. Ward was an assistant director at the Southern Illinois University Foundation. He received his B.S. in finance from Southern Illinois University at Carbondale and his Master of Business Administration with a concentration in finance from Saint Louis University.

PRESENTATION MATERIALS

SUTHERLAND ASBILL & BRENNAN LLP www.sutherland.com 10TH ANNUAL BDC ROUNDTABLE Wednesday, September 12, 2012

PRESENTATION MATERIALS – INDEX

I. 2012 Regulatory, Legislative and Market Overview

 BDC – Historical Performance & Capital Raising Trends

II. Pending Legislation

 H. R. 5929 – ‘‘Next Steps for Credit Availability Act’’

 S. 2136 – increase the maximum amount of leverage permitted under title III of the Small Business Investment Act of 1958

III. Building Your Shareholder Base

 Institutional Ownership of Public BDCs

BDC – Historical Performance & Capital Raising Trends BDCs Then & Now

Year 2002 Year 2012 Relevant Events between 2002 and 2012

. Housing bubble # of BDCs 8 43 . US & Global Credit Crisis . Capital markets closure, including implosion of ABS market . Wholesale asset devaluation driven primarily Total Assets $5 to $6 Billion $32 to $35 Billion by technical vs. fundamental factors (except for real estate-related assets) . BDC price-to-book ratios plummeted post- crisis leaving few capital raising options Assets at Top 3 BDCs > 60% > 50% (share of Assets) . Increased regulatory oversight on Wall Street . Last 24 months - improving capital market availability, including the issuance of convertible securities, retail long-term note offerings, and selective equity offerings Avg. Price-to-Book 1.5x to 1.7x 1.0x to 1.15x . Dodd-Frank, Volker Rule, Basel III . Impending increased cost of capital for banks . Pending BDC / '40 Act legislation (HR 5929) # of Commercial Banks 7,967 6,222 that proposes to reduce asset coverage ratios (increase leverage to 2:1) and count preferred equity as equity instead of debt . Pending Senate Bill 2316 that would increase the current SBIC program from $225mm (per C&I Loan Book of $935 Billion $1,369 Billion borrower) to $350mm per borrower Commercial Banks

Source: FDIC, Research Reports, SNL Financial; Data as of 6/30/2012 2 Historical BDC Trading Performance

BDC Price Performance (2002 – 2012) BDC Price / Book Value (2002 – 2012)

180.0% 2.00x 1.80x 1.60x 140.0% 1.40x

1.20x 1.15x 100.0% 92.3% 1.00x 0.98x 0.80x 84.5% 0.60x 60.0% 0.40x 0.20x

20.0% 0.00x Aug-02 Aug-03 Aug-04 Aug-05 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 Aug-02 Aug-03 Aug-04 Aug-05 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12

Internally Managed Externally Managed Internally Managed Externally Managed

BDC Dividend Yield (2002 – 2012) BDC Total Return (2002 – 2012)

40.0% 220.0% 200.0% 35.0% 178.3% 180.0% 30.0% 160.0%

25.0% 140.0% 120.0% 126.9% 20.0% 100.0% 15.0% 80.0% 10.1% 10.0% 60.0% 8.5% 40.0% 5.0% 20.0% 0.0% Aug-02 Aug-03 Aug-04 Aug-05 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 Aug-02 Aug-03 Aug-04 Aug-05 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 Internally Managed Externally Managed

Internally Managed Externally Managed

Note: Internally managed: ACAS, HTGC, KCAP, MAIN, MCGC, TCAP Externally managed: AINV, ARCC, BKCC, FSC,FULL, GAIN, GBDC, GSVC, HRZN, MCC, MVC, NGPC, OXLC, PFLT, PNNT, PSEC, SAR SLRC, SUNS, TCRD, TICC 3 Data as of 08/29/2012 Historical BDC Equity Issuance

Historical BDC Issuance ($MM)

$6,000.0

7 IPO, 16 FO 4,811.3

$4,500.0

$3,000.0 4 IPO, 10 FO 3,751.8 2,543.9 1 IPO, 17 FO 3 IPO, 10 FO 5 IPO, 15 FO 2 IPO, 9 FO 2,203.4 2,070.1 1 IPO, 7 FO, 1,942.2 2,032.2 1,082.1 4 RO 1,584.9 6 IPO, 8 FO $1,500.0 1 IPO, 12 FO 378.27 1,2198.8 1,159.6 1,593.4 0 IPO, 14 FO 1,498.3 1 IPO, 5 FO 2 IPO, 5 FO 1,475.3 2,118.6 823.4 656.7 714.3 764.4 1,461.8 0 IPO, 4 FO 1,009.6 1,065.4 384.3 395.6 1,059.5 823.4 215.7 642.1 476.7 466.9 141.2 533.9 330.0 368.8 215.7 84.8 $0.0 150.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 YTD

BDC IPOs BDC Follow-Ons BDC Rights Offerings

1.4 1.4

4 Source: Dealogic ECM Analytics, Thomson Financial. 2011 & 2012 BDC Issuance Activity

2011 & 2012 YTD BDC IPOs Offer Price Performance Amount Post - Deal Amount of Above / Price / Offer / Offer / Offer / Syndicate Structure Institutional Pricing Offered Market Cap Market Cap In Range / N AV 1 Days 7 Days 30 Days Bookrunners Co-Managers Ownership Date Issuer Ticker ($MM) ($MM) (%) Below (%) (%) (%) (%) (#) (#) (%) 04/04/12 TCP Capital Corp TCPC 84.8 314.7 26.9 In Range 98.3 (1.4) (1.7) 0.0 2 7 30.9 06/20/11 Fidus Investment Corp FDUS 80.6 130.9 61.5 In Range 104.0 0.0 (1.0) (6.4) 3 1 12.6 05/19/11 New Mountain Finance Corp NMFC 100.0 583.1 17.2 Below 97.2 (5.5) (4.4) (6.2) 3 3 54.7 04/28/11 NeXt Innovation Corp NEXT 50.0 50.0 100.0 In Range 108.8 (2.7) (8.1) (8.8) 2 6 6.9 04/08/11 PennantPark Floating Rate Capital Ltd PFLT 102.8 100.5 102.2 In Range 106.0 (10.7) (11.0) (8.7) 3 5 25.0 02/24/11 Solar Senior Capital Ltd SUNS 180.0 170.0 105.9 In Range 107.6 (2.0) (3.0) (4.3) 4 3 74.0 01/20/11 Medley Capital Corp MCC 128.7 210.6 61.1 Below 58.7 1.2 (0.7) (1.4) 3 4 43.0 Mean $103.8 $222.8 67.8 97.2 (3.0) (4.3) (5.1) 3 4 35.3 Median $100.0 $170.0 61.5 104.0 (2.0) (3.0) (6.2) 3 4 30.9

2011 & 2012 YTD BDC Follow-Ons

Offer Price Performance Amount Post - Deal Amount of Price / File / Offer / Offer / Syndicate Structure Institutional Pricing Offered Market Cap Market Cap xAD T V N AV Offer 7 Days 30 Days Bookrunners Co-Managers Ownership Date Issuer Ticker ($MM) ($MM) (%) (x) (%) (%) (%) (%) (#) (#) (%) Execution ` 08/22/12 Medley Capital Corp MCC 74.5 294.9 25.3 30.4x 102.8 (2.0) 0.7 -- 4 6 56.4 Overnight 08/17/12 Ares Capital Corp ARCC 435.0 4,261.8 10.2 17.8x 108.4 (3.5) 1.4 -- 3 2 50.5 Bought Deal 08/15/12 TICC Capital Corp TICC 33.3 404.4 8.2 13.3x 101.9 (2.6) 3.4 -- 1 1 24.6 Bought Deal 07/12/12 New Mountain Finance Corp NMFC 75.3 234.6 32.1 65.4x 102.1 (2.5) 0.2 1.5 3 3 65.1 Overnight 06/21/12 Main Street Capital Corp MAIN 97.0 731.8 13.3 16.0x 143.1 (5.1) 4.9 8.9 1 5 23.5 Overnight 04/19/12 Firsthand Technology Value Fund Inc SVVC 136.6 239.3 57.1 76.6x 109.9 19.3 (3.7) (28.6) 2 3 2.8 Fully Marketed 03/16/12 TICC Capital Corp TICC 48.7 386.6 12.6 21.6x 107.1 (4.5) (1.3) (5.7) 2 3 23.9 Overnight 02/23/12 Prospect Capital Corp PSEC 131.4 1,387.8 9.5 9.0x 102.4 (3.9) (1.1) (2.2) 1 0 26.3 Bought Deal 02/17/12 Medley Capital Corp MCC 49.0 196.8 24.9 38.8x 111.3 (2.0) 0.6 2.1 4 3 42.8 Overnight 02/10/12 GSV Capital Corp GSVC 103.5 224.6 46.1 21.1x 113.1 11.7 8.3 20.7 1 5 6.2 Fully Marketed 02/08/12 Triangle Capital Corp TCAP 80.9 510.8 15.8 21.2x 130.2 (1.8) 1.1 4.1 4 3 20.7 Overnight 01/31/12 Golub Capital BDC Inc GBDC 58.7 394.1 14.9 64.0x 105.4 (1.7) 0.0 (0.9) 2 0 31.1 Overnight 01/24/12 PennantPark Investment Corp PNNT 109.2 589.6 18.5 26.0x 104.1 (2.1) (1.0) 6.2 6 0 42.0 Overnight 01/23/12 Fifth Street Finance Corp FSC 101.6 869.9 11.7 12.0x 102.9 (3.8) (2.5) 0.6 2 0 52.0 Bought Deal 01/20/12 Ares Capital Corp ARCC 256.2 3,530.3 7.3 9.3x 103.1 (3.1) 2.0 5.1 2 1 54.0 Bought Deal 01/20/12 Hercules Technology Growth Capital HTGC 48.8 500.3 9.7 19.2x 101.5 (4.9) (1.6) 7.2 1 0 55.1 Bought Deal 10/19/11 Main Street Capital Corp MAIN 60.4 466.8 12.9 25.3x 120.6 (1.8) 0.1 9.0 1 7 29.0 Overnight 09/26/11 GSV Capital Corp GSVC 30.9 74.1 41.7 16.8x 104.3 (27.5) (9.9) 0.5 1 6 26.3 Fully Marketed 08/23/11 Triangle Capital Corp TCAP 69.0 402.9 17.1 29.4x 124.4 (5.8) 0.0 (12.4) 4 2 24.2 Accelerated 06/21/11 Fifth Street Finance Corp FSC 65.2 854.0 7.6 6.3x 112.3 (1.5) (0.5) (3.9) 3 3 52.0 Fully Marketed 06/21/11 Prospect Capital Corp PSEC 116.7 1,148.3 10.2 7.8x 98.3 (5.0) (0.8) (2.6) 1 0 26.3 Bought Deal 04/04/11 Prospect Capital Corp PSEC 104.0 1,182.9 8.8 7.3x 112.7 (4.9) 0.2 3.1 1 0 26.3 Bought Deal 03/31/11 Golub Capital BDC Inc GBDC 62.3 335.4 18.6 99.9x 106.9 (2.5) 1.6 1.8 2 3 39.0 Overnight 03/22/11 Main Street Capital Corp MAIN 73.9 427.8 17.3 46.0x 140.5 (3.8) (0.5) (0.5) 1 4 29.0 Fully Marketed 02/08/11 PennantPark Investment Corp PNNT 114.1 578.2 19.7 23.7x 111.3 (5.0) 1.9 0.8 3 4 52.0 Fully Marketed 02/08/11 Triangle Capital Corp TCAP 66.4 369.8 18.0 27.8x 160.6 (6.0) 0.5 (1.5) 1 4 24.2 Overnight 02/01/11 Fifth Street Finance Corp FSC 145.5 857.5 17.0 19.8x 118.2 (4.0) 4.4 8.9 5 4 52.0 Fully Marketed Mean $101.8 $794.6 18.7 28.6x 113.3 (3.0) 0.3 0.8 2 3 35.5 Median $75.3 $466.8 15.8 21.2x 108.4 (3.5) 0.2 0.6 2 3 29.0

5 Source: Dealogic ECM Analytics, Thomson Financial. BDC Follow-On Offerings

Follow-On Offering Volume ($MM) and Number of Deals Percent of Market Cap and xADTV

$1,250 12 $40 50.0

$972.4 $1,000 40.0 $887.3 9 $30

$750 30.0 6 $20 $462.1 $500 20.0 $285.8 $233.7 3 $10 $250 10.0 $60.4 $100.0

$0 0 $0 0.0 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Current Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Current FO Volume in Millions ($) # of Offerings Average % of Market Cap Average xADTV

Average File / Offer Discount Pricing vs. Net Asset Value (NAV)

0 100% 1.4x

1.3x (2) (1.5) (1.8) (2.1) (2.0) 75% 1.2x (4) (4.0) (3.8) 50% 1.1x (6) (5.8) 1.0x (8) 25% 0.9x (10) Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Current 0% 0.8x Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Current Median File / Offer Discount (%) Above NAV Below NAV Median % of NAV

6 Source: Dealogic ECM Analytics, Thomson Financial. BDC Equity-Linked Offerings

Equity-Linked Offering Volume ($MM) and Number of Deals Coupon vs. Conversion Premium

$800.0 775.0 4 10% 20%

8% $600.0 3 15%

$400.0 2 10% 290.0 4% 225.0 200.0 172.5 $200.0 150.0 162.5 1 5% 127.1 2%

$0.0 0 0% 0% Dec. '10 Jan '11 Feb '11 Mar '11 Apr '11 Mar '12 Apr '12 Aug '12 Dec. '10 Jan '11 Feb '11 Mar '11 Apr '11 Mar '12 Apr '12 Aug '12

CONV Volume in Millions ($) # of Offerings Average Coupon (%) Conversion Premium (%)

Equity-Linked Offerings by BDC Issuers

Amount Post - Deal Amount of Underlying Conversion Pricing Offered Market Cap Market Cap Shares / Coupon Premium Maturity Date Issue r Ticker ($MM) ($MM) (%) ADTV (%) (%) (Years) 08/09/12 Prospect Capital Corp PSEC 200.0 1,347.0 14.8 9.1x 5.75 9.96 6 04/11/12 Prospect Capital Corp PSEC 127.1 1,162.6 10.9 7.4x 5.38 10.00 6 03/08/12 Ares Capital Corp ARCC 162.5 3,646.7 4.5 4.7x 4.88 17.50 5 04/12/11 Hercules Technology Growth Capital HTGC 75.0 449.9 16.7 24.9x 6.00 15.00 5 04/07/11 Fifth Street Finance Corp FSC 150.0 738.9 20.3 1.0x 5.38 10.00 5 03/22/11 Ares Capital Corp ARCC 230.0 3,311.6 6.9 7.2x 5.13 17.50 5 03/11/11 Kohlberg Capital Corp KCAP 60.0 174.9 34.3 65.0x 8.75 10.00 5 02/14/11 Prospect Capital Corp PSEC 172.5 1,023.1 16.9 13.0x 5.50 10.00 6 01/20/11 Apollo Investment Corp AINV 200.0 2,282.0 8.8 9.7x 5.75 17.50 5 01/19/11 Ares Capital Corp ARCC 575.0 3,135.0 18.3 22.0x 5.75 17.50 5 12/16/10 Prospect Capital Corp PSEC 150.0 860.9 17.4 1.0x 6.25 10.00 5 Mean $191.1 $1,648.4 15.4 15.0x 5.86 13.18 5 Median $162.5 $1,162.6 16.7 9.1x 5.75 10.00 5

7 Source: Dealogic ECM Analytics. BDC Initial Public Offerings

Initial Public Offering Volume ($MM) and Number of Deals Pricing vs. Filing Range

$1,200.0 16 100% 1,059.5

$900.0 12 75%

642.1 $600.0 533.9 8 50% 476.7 466.9

$300.0 4 25% 141.2 84.8 0.0 $0.0 0 0% 2005 2006 2007 2008 2009 2010 2011 2012 2005 2006 2007 2008 2009 2010 2011 2012

IPO Volume in Millions ($) # of Offerings Above In Range Below Recent IPOs IPO Offer Size Name Date ($MM) Management Pricing vs. Net Asset Value (NAV) TCP Capital Corp 4/4/2012 84.8 Hugh Wilson (CEO) - Latham & Watkins Offer price/sh: $14.75 Paul Davis (CFO) - TCP Current price/sh: $14.50 Todd Gerch (COO) - Ares Management 100% 1.2x

Fidus Investment Corp. 6/20/2011 80.6 Edward Ross (CEO) - Allied Capital Offer price/sh: $15.00 Cary Schaefer (CFO) - Credit Suisse 75% 1.1x Current price/sh: $14.38

BDCs in Registration Process 50% 1.0x . There are more than 8 BDCs registered to go public with target to raise over $1 billion in equity . The queue is potentially larger with recent filers utilizing the Jobs Act 25% 0.9x

Registered Non-Listed BDCs

0% 0.8x . There are at least 6 BDCs that are non-listed with target of over $5 billion 2005 2006 2007 2008 2009 2010 2011 2012 in assets Above NAV Below NAV Median % of NAV . Several management teams are in the process of establishing new BDC platforms which are expected to be non-listed for foreseeable future

8 Source: Dealogic ECM Analytics. Excludes private BDCs yet to file IPO registrations. BDC Equity Investor Composition

Top Investors in Business Development Companies Top Buyers in Business Development Companies

Investor Total ($MM) ∆ in Position Style Investor Total ($MM) ∆ in Position Style Vanguard Group 782.4 77.7 Index Luxor Capital Group 178.5 178.5 Hedge Fund BlackRock Institutional Trust 517.7 50.1 Index Jupiter Street 129.1 129.1 Other Thornburg Investment Mgmt. 332.8 21.1 Core Value Vanguard Group 782.4 77.7 Index State Street Global Advisors 281.9 9.2 Index Munder Capital Mgmt. 64.9 64.9 Core Growth Fortress Investment Group 197.9 27.2 Specialty BlackRock Institutional Trust 517.7 50.1 Index Luxor Capital Group 178.5 178.5 Hedge Fund SAB Capital Advisors 46.1 46.1 Hedge Fund T. Rowe Price 167.1 0.9 GARP BlueMountain Capital Mgmt. 45.5 45.5 Hedge Fund Artisan Partners 162.4 (1.9) Core Growth Fortress Investment Group 197.9 27.2 Specialty Virginia Retirement System 152.8 (6.7) Core Growth AQR Capital Mgmt. 86.7 22.3 Hedge Fund Advisors Asset Mgmt. 144.9 4.9 Yield Thornburg Investment Mgmt. 332.8 21.1 Core Value Dimensional Fund Advisors 139.6 12.5 Index Business Development Company Investor Composition Morgan Stanley 139.3 4.7 Core Growth Clough Capital 130.4 (17.1) Hedge Fund 16.4% Jupiter Street 129.1 129.1 Other 31.4% Wellington Mgmt. 124.6 (6.9) Core Value 43.5% Confluence Investment Mgmt. 123.0 2.2 Core Growth 15.7% Northern Trust 120.0 6.7 Index 52.4% Two Sigma 119.7 (35.6) Hedge Fund Pine River Capital Mgmt. 111.0 18.0 Hedge Fund 14.8% 21.7% TIAA-CREF 102.0 9.3 GARP Growth Hedge Fund Index Other Value 4.0% Institutional Insider Retail Institutional Ownership Across BDCs 100%

75%

50%

60 25% 57 56 55 51 49 49 48 47 46 43 43 41 39 33 32 26 25 25 24 24 22 21 20 19 19 17 17 0% FSC SAR MVC MCC TICC AINV PFLT GAIN FULL MAIN TCAP SLRC PNNT ACAS GLAD KCAP PSEC OXLC TCRD BKCC SUNS HTGC GSVC HRZN ARCC NGPC GBDC MCGC Institutional Insider Retail

9 Source: Dealogic ECM Analytics, Thomson Financial. BDC Equity Investor Perspectives

Institutional Investors Retail Investors

. Institutional investors remain focused on credit performance, pace of . Investors’ seeking income equity investments continue to allocate originations as well as volume and quality of deal flow towards BDCs . Institutional accounts place significant value on management track . “Lower for longer ” rate environment continues to drive investors to record as well as thoughtful capital deployment and balance sheet BDCs in their search for yield expansion . BDCs are competing with other yield investments such as MLPs, . Overall institutional participation remains thin due to low beta nature of Mortgage REITs and certain Closed End Funds to capture investor BDCs and limited trading liquidity in many names in the sector interest . Transparency of portfolio investments in smaller companies also . Retail investment advisors continue to find BDCs attractive due to impedes institutional interest familiarity with issuers and attractive dividend yield despite limited leverage (<1x) . Entry point remains critical with focus on both yield, price appreciation and discount to book value . Retail system demand for BDC offerings remains robust as observed in recent activity . Seeing some diversification across sector as institutional investors reach concentration limits . Expect continued demand although some systems may show greater selectivity . Access to alternative forms of capital viewed as important differentiator . Retail investors are primarily focused on yield, dividend coverage and . Appetite driven by confidence in ~20% total return through multiple entry point relative to NAV expansion and yield . More patient (sticky) investors and less outspoken with respect to offering expenses in most public offerings

10 BDC Trading Comps

Total Current Market Price / Price / DNOI Dividend Yield Debt / Assets Price Cap Book LTM FY 2012 FY 2013 Current FY 2012 FY 2013 Equity Ticker Company ($MM) ($) ($MM) (x) (x) (x) (x) (%) (%) (%) (x)

BDC's - Internally Managed ACAS American Capital, Ltd. 6,325.0 11.12 3,535.7 0.67 3.8 10.3 11.4 NM 0.0 0.1 0.18 HTGC Hercules Technology Growth Capital, Inc 801.9 11.41 567.6 1.20 12.5 11.7 10.3 8.4 8.4 9.1 0.67 KCAP KCAP Financial, Inc. 306.2 8.52 227.3 1.11 NM 10.1 8.6 11.3 9.9 11.7 0.40 MAIN Main Street Capital Corporation 843.0 26.64 840.7 1.58 8.4 14.2 13.5 6.8 6.7 7.8 0.55 MCGC MCG Capital Corporation 752.3 4.61 340.7 0.88 NM 16.5 10.1 12.1 12.3 10.0 0.87 TCAP Triangle Capital Corporation 705.4 24.40 665.9 1.60 9.8 11.5 10.9 8.5 8.2 8.7 0.68

BDC's - Externally Managed AINV Apollo Investment Corporation 2,885.7 8.09 1,641.4 0.98 NM 9.0 9.9 9.9 13.0 9.9 0.61 ARCC Ares Capital Corporation 5,807.5 17.28 4,285.9 1.11 10.3 10.9 10.3 8.8 8.8 9.3 0.64 BKCC Blackrock Kelso Capital Corporation 1,202.3 9.78 720.7 1.02 11.5 9.8 9.4 10.6 10.6 10.6 0.64 FSC Fifth Street Finance Corp. 1,324.5 10.54 869.7 1.07 31.9 9.6 9.2 10.9 11.1 11.0 0.61 FULL Full Circle Capital Corporation 103.6 8.06 50.1 0.90 12.0 9.6 8.6 11.5 NA NA 0.28 GAIN Gladstone Investment Corporation 350.4 7.64 168.7 0.84 11.4 12.3 12.1 7.9 7.9 7.9 0.73 GBDC Golub Capital BDC, Inc. 711.5 15.45 396.5 1.06 13.9 13.1 11.8 8.3 8.3 8.3 0.88 GLAD Gladstone Capital Corporation 321.7 8.49 178.3 0.95 NM 9.2 9.6 9.9 10.0 10.1 0.70 GSVC GSV Capital Corp. 267.8 8.54 165.0 0.62 NM NM 28.5 NA NA NA 0.00 HRZN Horizon Technology Finance Corporation 209.8 16.56 158.2 0.99 15.3 11.6 10.5 10.9 10.9 11.2 0.63 MCC Medley Capital Corporation 372.8 13.13 302.9 1.04 11.9 10.1 9.0 11.0 9.8 11.1 0.68 MVC MVC Capital, Inc. 480.5 12.63 302.1 0.74 NM NM 49.2 3.8 3.8 3.8 0.12 NGPC NGP Capital Resources Company 284.4 7.30 156.1 0.79 31.7 11.8 8.3 7.1 7.6 9.3 0.41 OXLC Oxford Lane Capital Corp. 42.6 15.47 77.4 0.91 7.7 NA 6.2 14.2 14.9 14.5 0.00 PFLT PennantPark Floating Rate Capital Ltd. 159.6 12.58 86.2 0.90 16.6 13.0 11.1 7.6 7.4 8.7 0.57 PNNT PennantPark Investment Corporation 992.2 10.85 613.2 1.07 49.3 9.8 9.2 10.3 10.4 10.6 0.58 PSEC Prospect Capital Corporation 2,255.3 11.61 1,930.0 1.07 7.0 7.7 8.2 10.5 10.5 10.5 0.44 SAR Saratoga Investment Corp. 137.8 17.06 66.1 0.66 5.8 NA 9.2 NM NA 10.8 0.20 SLRC Solar Capital Ltd. 1,219.9 23.24 898.6 1.03 13.7 10.4 9.1 10.3 10.4 10.6 0.28 SUNS Solar Senior Capital Ltd. 227.6 17.45 165.8 0.94 20.5 12.9 11.8 7.9 7.4 8.5 0.25 TCRD THL Credit, Inc. 341.9 13.94 281.9 1.06 11.5 10.7 9.8 9.2 9.1 9.9 0.26 TICC TICC Capital Corp. 470.1 10.43 430.3 1.10 14.7 8.4 8.8 11.1 10.7 11.2 0.28 BDC's - Internally Managed Median 616.7 1.15 9.1 11.6 10.6 8.5 8.3 8.9 0.61 BDC's - Externally Managed Median 292.0 0.98 12.9 10.2 9.5 10.1 10.0 10.3 0.50

11 Data as of 08/29/2012 I

112TH CONGRESS 2D SESSION H. R. 5929

To amend the Investment Company Act of 1940 to change the asset coverage ratio and treatment of preferred stock for business development companies, to allow business development companies to purchase, otherwise acquire, or hold certain securities, and to direct the Securities and Exchange Commission to revise rules under the Securities Act of 1933 relating to business development companies.

IN THE HOUSE OF REPRESENTATIVES

JUNE 8, 2012 Ms. VELA´ZQUEZ (for herself and Mr. GRIMM) introduced the following bill; which was referred to the Committee on Financial Services

A BILL To amend the Investment Company Act of 1940 to change the asset coverage ratio and treatment of preferred stock for business development companies, to allow business development companies to purchase, otherwise acquire, or hold certain securities, and to direct the Securities and Exchange Commission to revise rules under the Se- curities Act of 1933 relating to business development companies.

1 Be it enacted by the Senate and House of Representa- 2 tives of the United States of America in Congress assembled,

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4 SEC. 2. AMENDMENTS TO PERMIT BUSINESS DEVELOP-

5 MENT COMPANIES TO OWN INVESTMENT AD-

6 VISERS. 7 Section 60 of the Investment Company Act of 1940 8 (15 U.S.C. 80a–59) is amended by striking ‘‘except that 9 the Commission shall not’’ and inserting the following: 10 ‘‘except that— 11 ‘‘(1) section 12 shall not apply to the pur- 12 chasing, otherwise acquiring, or holding by a busi- 13 ness development company of any security issued by, 14 or any other interest in the business of, any person 15 who is an investment adviser registered under title 16 II of this Act or who is an investment adviser to an 17 investment company; and 18 ‘‘(2) the Commission shall not’’.

19 SEC. 3. AMENDMENTS TO EXPAND ACCESS TO CAPITAL FOR

20 BUSINESS DEVELOPMENT COMPANIES. 21 Section 61(a) of the Investment Company Act of 22 1940 (15 U.S.C. 80a–60(a)) is amended— 23 (1) in paragraph (1), by striking ‘‘200’’ and in- 24 serting ‘‘150’’; 25 (2) in paragraph (2), by inserting ‘‘or which is 26 a stock’’ after ‘‘indebtedness’’; and

•HR 5929 IH

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5 SEC. 4. PARITY FOR BUSINESS DEVELOPMENT COMPANIES

6 REGARDING OFFERING RULES.

7 (a) REVISION TO RULES.—Not later than 180 days 8 after the date of enactment of this Act, the Securities and 9 Exchange Commission shall revise any rules (or any suc- 10 cessor rules) to the extent necessary to allow a business 11 development company that has filed an election pursuant 12 to section 54 of the Investment Company Act of 1940 (15 13 U.S.C. 80a–60(a)) to use the securities offering rules that 14 are available to other issuers that are required to file re- 15 ports under section 13 or section 15(d) of the Securities 16 Exchange Act of 1934 (Public Law 73–404; 48 Stat. 17 881). Any action that the Commission takes pursuant to 18 this subsection shall include the following: 19 (1) The Commission shall revise rule 405 under 20 the Securities Act of 1933 (17 C.F.R. 230.405)— 21 (A) to remove the exclusion of a business 22 development company from the definition of a 23 well-known seasoned issuer provided by that 24 rule; and

•HR 5929 IH

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•HR 5929 IH

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•HR 5929 IH

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6 (b) REVISION TO FORM N–2.—The Commission shall 7 revise Form N–2— 8 (1) to include an item or instruction that is 9 similar to item 12 on Form S–3 to provide that a 10 business development company that meets the re- 11 quirements of Form S–3 shall incorporate by ref- 12 erence its reports and documents filed under the Se- 13 curities Exchange Act of 1934 into its registration 14 statement filed on Form N–2; and 15 (2) to include an instruction (that is similar to 16 the instruction regarding automatic shelf offerings 17 by well-known seasoned issuers on Form S–3) to 18 provide that a business development company that is 19 a well-known seasoned issuer may file automatic 20 shelf offerings on Form N–2 (or any successor 21 form). Æ

•HR 5929 IH

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112TH CONGRESS 2D SESSION S. 2136

To increase the maximum amount of leverage permitted under title III of the Small Business Investment Act of 1958, and for other purposes.

IN THE SENATE OF THE UNITED STATES

FEBRUARY 28, 2012 Ms. LANDRIEU (for herself and Ms. SNOWE) introduced the following bill; which was read twice and referred to the Committee on Small Business and Entrepreneurship

A BILL To increase the maximum amount of leverage permitted under title III of the Small Business Investment Act of 1958, and for other purposes.

1 Be it enacted by the Senate and House of Representa- 2 tives of the United States of America in Congress assembled,

3 SECTION 1. MAXIMUM LEVERAGE UNDER TITLE III OF THE

4 SMALL BUSINESS INVESTMENT ACT OF 1958.

5 (a) AUTHORIZATION.—For fiscal year 2013, the Ad- 6 ministrator may make $4,000,000,000 in guarantees of 7 debentures for programs under title III of the Small Busi- 8 ness Investment Act of 1958 (15 U.S.C. 681 et seq.).

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1 (b) FAMILY OF FUNDS.—Section 303(b)(2)(B) of the 2 Small Business Investment Act of 1958 (15 U.S.C. 3 683(b)(2)(B)) is amended by striking ‘‘$225,000,000’’ 4 and inserting ‘‘$350,000,000’’. Æ

•S 2136 IS

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INSTITUTIONAL OWNERSHIP OF PUBLIC BDCS

September 12, 2012

FINANCIAL INSTITUTIONS INVESTMENT BANKING GROUP

1 BDC OWNERSHIP SUMMARY

($ in 000's) Holder Types 08/29/12 Institutional Insider Retail Company Ticker Market Cap. $ Holdings % MCap $ Holdings % MCap $ Holdings % MCap Ares Capital Corp. ARCC $ 3,834,000 $ 2,137,141 55.7% $ 35,532 0.9% $ 1,661,328 43.3% American Capital Ltd. ACAS 3,610,164 2,297,858 63.6% 67,561 1.9% 1,244,745 34.5% Prospect Capital Corp. PSEC 1,930,012 503,677 26.1% 165,052 8.6% 1,261,283 65.4% Apollo Investment Corp. AINV 1,641,388 857,822 52.3% 3,648 0.2% 779,918 47.5% Fifth Street Finance Corp. FSC 869,676 399,879 46.0% 22,312 2.6% 447,485 51.5% Solar Capital Ltd. SLRC 898,621 494,384 55.0% 50,254 5.6% 353,984 39.4% Main Street Capital Corp. MAIN 721,891 196,310 27.2% 85,481 11.8% 440,100 61.0% BlackRock Kelso Capital Corp. BKCC 720,737 335,650 46.6% 14,579 2.0% 370,508 51.4% Triangle Capital Corp. TCAP 665,852 174,983 26.3% 23,523 3.5% 467,346 70.2% PennantPark Investment Corp. PNNT 613,188 321,446 52.4% 9,499 1.5% 282,242 46.0% Hercules Technology Growth Capital Inc. HTGC 567,568 341,574 60.2% 31,274 5.5% 194,719 34.3% Golub Capital BDC Inc. GBDC 396,493 140,420 35.4% 118,271 29.8% 137,803 34.8% TICC Capital Corp. TICC 425,607 108,992 25.6% 10,336 2.4% 306,279 72.0% MCG Capital Corp. MCGC 340,725 143,748 42.2% 21,813 6.4% 175,164 51.4% TCP Capital Corp. TCPC 322,570 99,643 30.9% 66,752 20.7% 156,175 48.4% MVC Capital Inc. MVC 302,072 175,990 58.3% 18,658 6.2% 107,424 35.6% THL Credit Inc. TCRD 281,867 122,611 43.5% 93,394 33.1% 65,862 23.4% Medallion Financial Corp. TAXI 246,495 112,503 45.6% 34,185 13.9% 99,807 40.5% New Mountain Finance Corp. NMFC 235,233 76,619 32.6% 71,595 30.4% 87,019 37.0% Medley Capital Corp. MCC 227,412 136,198 59.9% 18,873 8.3% 72,341 31.8% KCAP Financial Inc KCAP 227,322 66,092 29.1% 56,034 24.6% 105,196 46.3% Gladstone Capital Corp. GLAD 178,290 49,402 27.7% 11,726 6.6% 117,162 65.7% Gladstone Investment Corp. GAIN 168,691 68,837 40.8% 3,116 1.8% 96,739 57.3% Solar Senior Capital Ltd. SUNS 165,775 77,460 46.7% 25,362 15.3% 62,953 38.0% GSV Capital Corp. GSVC 157,307 39,659 25.2% 969 0.6% 116,679 74.2% NGP Capital Resources Co. NGPC 156,059 57,689 37.0% 6,716 4.3% 91,655 58.7% Horizon Technology Finance Corp. HRZN 158,165 35,295 22.3% 22,206 14.0% 100,663 63.6% Fidus Investment Corp. FDUS 150,832 25,486 16.9% 11,634 7.7% 113,712 75.4% Firsthand Technology Value Fund Inc. SVVC 137,409 15,745 11.5% 1,241 0.9% 120,423 87.6% Harris & Harris Group Inc. TINY 112,534 37,105 33.0% 6,360 5.7% 69,069 61.4% PennantPark Floating Rate Capital Ltd. PFLT 86,186 25,311 29.4% 515 0.6% 60,360 70.0% Keating Capital Inc. KIPO 67,943 1,052 1.5% 1,192 1.8% 65,699 96.7% Saratoga Investment Corp. SAR 66,142 9,118 13.8% 24,659 37.3% 32,365 48.9% Full Circle Capital Corp. FULL 50,125 9,033 18.0% 13,338 26.6% 27,754 55.4% Total $ 20,734,348 $ 9,694,732 $ 1,147,656 $ 9,891,960

Source: FactSet as of 08/29/12

2 INSTITUTIONAL OWNERSHIP OF BDCS

($ in 000's) Institutional Holdings 08/29/12 Non-Index Index All Institutional Company Ticker Market Cap. $ Holdings % Total $ Holdings % Total $ Holdings % Total American Capital Ltd. ACAS $ 3,610,164 $ 1,946,286 25.2% $ 351,571 17.8% $ 2,297,858 23.7% Ares Capital Corp. ARCC 3,834,000 1,845,062 23.9% 292,078 14.8% 2,137,141 22.0% Apollo Investment Corp. AINV 1,641,388 621,875 8.1% 235,947 11.9% 857,822 8.8% Prospect Capital Corp. PSEC 1,930,012 300,798 3.9% 202,878 10.3% 503,677 5.2% Solar Capital Ltd. SLRC 898,621 403,342 5.2% 91,042 4.6% 494,384 5.1% Fifth Street Finance Corp. FSC 869,676 295,965 3.8% 103,914 5.3% 399,879 4.1% Hercules Technology Growth Capital Inc. HTGC 567,568 275,152 3.6% 66,422 3.4% 341,574 3.5% BlackRock Kelso Capital Corp. BKCC 720,737 257,227 3.3% 78,423 4.0% 335,650 3.5% PennantPark Investment Corp. PNNT 613,188 251,896 3.3% 69,550 3.5% 321,446 3.3% Main Street Capital Corp. MAIN 721,891 116,287 1.5% 80,023 4.0% 196,310 2.0% MVC Capital Inc. MVC 302,072 144,911 1.9% 31,079 1.6% 175,990 1.8% Triangle Capital Corp. TCAP 665,852 98,558 1.3% 76,425 3.9% 174,983 1.8% MCG Capital Corp. MCGC 340,725 100,484 1.3% 43,264 2.2% 143,748 1.5% Golub Capital BDC Inc. GBDC 396,493 113,910 1.5% 26,509 1.3% 140,420 1.4% Medley Capital Corp. MCC 227,412 119,914 1.6% 16,284 0.8% 136,198 1.4% THL Credit Inc. TCRD 281,867 107,969 1.4% 14,642 0.7% 122,611 1.3% Medallion Financial Corp. TAXI 246,495 89,036 1.2% 23,467 1.2% 112,503 1.2% TICC Capital Corp. TICC 425,607 65,721 0.9% 43,271 2.2% 108,992 1.1% TCP Capital Corp. TCPC 322,570 95,505 1.2% 4,137 0.2% 99,643 1.0% Solar Senior Capital Ltd. SUNS 165,775 69,488 0.9% 7,972 0.4% 77,460 0.8% New Mountain Finance Corp. NMFC 235,233 68,534 0.9% 8,085 0.4% 76,619 0.8% Gladstone Investment Corp. GAIN 168,691 54,244 0.7% 14,592 0.7% 68,837 0.7% KCAP Financial Inc KCAP 227,322 49,183 0.6% 16,909 0.9% 66,092 0.7% NGP Capital Resources Co. NGPC 156,059 43,916 0.6% 13,773 0.7% 57,689 0.6% Gladstone Capital Corp. GLAD 178,290 33,711 0.4% 15,691 0.8% 49,402 0.5% GSV Capital Corp. GSVC 157,307 18,771 0.2% 20,887 1.1% 39,659 0.4% Harris & Harris Group Inc. TINY 112,534 28,034 0.4% 9,071 0.5% 37,105 0.4% Horizon Technology Finance Corp. HRZN 158,165 30,761 0.4% 4,535 0.2% 35,295 0.4% Fidus Investment Corp. FDUS 150,832 17,996 0.2% 7,490 0.4% 25,486 0.3% PennantPark Floating Rate Capital Ltd. PFLT 86,186 25,112 0.3% 199 0.0% 25,311 0.3% Firsthand Technology Value Fund Inc. SVVC 137,409 9,329 0.1% 6,416 0.3% 15,745 0.2% Saratoga Investment Corp. SAR 66,142 9,094 0.1% 24 0.0% 9,118 0.1% Full Circle Capital Corp. FULL 50,125 8,829 0.1% 204 0.0% 9,033 0.1% Keating Capital Inc. KIPO 67,943 915 0.0% 137 0.0% 1,052 0.0% Total $ 20,734,348 $ 7,717,819 100.0% $ 1,976,913 100.0% $ 9,694,732 100.0%

Source: FactSet as of 08/29/12

3 TOP INSTITUTIONAL BDC HOLDERS

($ in 000's) BDC BDCs BDC BDCs Holder Holdings Held Holder Holdings Held The Vanguard Group, Inc.* $ 840,580 28 Mellon Capital Management Corp. $ 83,591 30 BlackRock Fund Advisors* 681,813 34 Knighthead Capital Management LLC 79,458 1 Thornburg Investment Management, Inc. 356,743 3 Russell Investment Management Co. 77,522 25 State Street Global Advisors* 309,719 30 Invesco PowerShares Capital Management LLC 77,289 19 Fortress Investment Group 218,779 1 Deutsche Bank Investment Management, Inc. 75,533 30 Luxor Capital Group LP 197,290 1 Columbia Management Investment Advisers LLC 72,715 30 Northern Trust Investments 194,828 30 Munder Capital Management, Inc. 71,756 1 T. Rowe Price Associates, Inc. 178,002 11 Robeco Investment Management 71,208 6 Artisan Partners LP 175,855 1 Opus Capital Management LLC 67,142 2 Dimensional Fund Advisors, Inc. 172,978 4 JHL Capital Group LLC 65,608 1 Advisors Asset Management, Inc. 156,558 21 Bank of America NA (Private Banking) 60,294 21 Morgan Stanley Smith Barney LLC (Securities) 147,877 30 BMO Asset Management Corp. 60,198 13 Confluence Investment Management LLC 138,421 30 Yorktown Management & Research Co., Inc. 58,550 26 Clough Capital Partners LP 137,747 8 Legg Mason Capital Management LLC 58,337 9 Virginia Retirement Systems 136,021 5 Lombardia Capital Partners LLC 57,394 2 Wellington Management Co. LLP 132,664 11 Loomis, Sayles & Co. LP 57,206 2 Two Sigma Investments LLC 131,533 25 UBS Global Asset Management 52,804 30 Pine River Capital Management LP 122,751 1 BlackRock Advisors LLC 51,967 30 UBS Securities LLC 119,637 31 BlueMountain Capital Management LLC 50,267 1 TIAA-CREF Asset Management LLC 112,450 29 Ares Management LLC 49,419 1 Paulson & Co., Inc. 95,462 1 JPMorgan Investment Management, Inc. 47,432 10 AQR Capital Management LLC 93,800 15 SAB Capital Management 46,480 1 Vaughan Nelson Investment Management LP 92,847 2 JPMorgan Asset Management (UK) Ltd. 46,335 5 Burgundy Asset Management Ltd. 90,262 3 Goldman Sachs Asset Management LP 45,093 17 Fidelity Management & Research Co. 86,169 11 All Other Institutional Holdings 3,004,387 BlackRock Advisors UK Ltd.* 85,963 20 Total Institutional BDC Holdings $ 9,694,732

*Index holdings style Source: FactSet as of 08/29/12

4 TOP INSTITUTIONAL BDC HOLDERS – SUMMARY

($ in 000's) 08/29/12 BDC Holdings by Market Cap. Total BDC % of Total Groupings by 08/29/12 Market Cap. Investor Billion+ Large Medium Small Holdings Top 50 Criteria Billion+ Large Medium Small The Vanguard Group, Inc.* $ 503,491 $ 234,829 $ 81,394 $ 20,866 $ 840,580 12.6% Min Market Cap $1BN $500MM $200MM No Min BlackRock Fund Advisors* 333,821 202,300 94,499 51,192 681,813 10.2% Max Market Cap No Max $999MM $499MM $199MM Thornburg Investment Management, Inc. 269,593 87,150 - - 356,743 5.3% Consituents ACAS BKCC GBDC FDUS State Street Global Advisors* 153,880 95,998 40,432 19,409 309,719 4.6% AINV FSC KCAP FULL Fortress Investment Group 218,779 - - - 218,779 3.3% ARCC HTGC MCC GAIN Luxor Capital Group LP 197,290 - - - 197,290 2.9% PSEC MAIN MCGC GLAD Northern Trust Investments 78,465 68,819 31,730 15,814 194,828 2.9% PNNT MVC GSVC T. Rowe Price Associates, Inc. 106,352 47,886 23,687 77 178,002 2.7% SLRC NMFC HRZN Artisan Partners LP 175,855 - - - 175,855 2.6% TCAP TAXI KIPO Dimensional Fund Advisors, Inc. 121,709 - 45,845 5,423 172,978 2.6% TCPC NGPC Advisors Asset Management, Inc. 49,400 64,601 33,516 9,041 156,558 2.3% TCRD PFLT Morgan Stanley Smith Barney LLC (Securities) 84,506 32,010 19,325 12,035 147,877 2.2% TICC SAR Confluence Investment Management LLC 34,074 40,608 46,585 17,154 138,421 2.1% SUNS Clough Capital Partners LP 41,992 59,915 23,025 12,815 137,747 2.1% SVVC Virginia Retirement Systems 732 135,290 - - 136,021 2.0% TINY Wellington Management Co. LLP 72,102 43,476 11,561 5,525 132,664 2.0% Two Sigma Investments LLC 83,553 29,143 14,643 4,194 131,533 2.0% Pine River Capital Management LP 122,751 - - - 122,751 1.8% UBS Securities LLC 56,858 43,533 13,114 6,132 119,637 1.8% TIAA-CREF Asset Management LLC 60,281 30,826 13,249 8,095 112,450 1.7% Paulson & Co., Inc. 95,462 - - - 95,462 1.4% AQR Capital Management LLC 66,628 18,701 8,168 304 93,800 1.4% Vaughan Nelson Investment Management LP 92,847 - - - 92,847 1.4% Burgundy Asset Management Ltd. 64,209 - - 26,053 90,262 1.3% Fidelity Management & Research Co. 74,958 10,552 660 - 86,169 1.3% BlackRock Advisors UK Ltd.* 44,686 26,831 6,425 8,021 85,963 1.3% Mellon Capital Management Corp. 45,979 23,938 9,857 3,818 83,591 1.2% Knighthead Capital Management LLC 79,458 - - - 79,458 1.2% Russell Investment Management Co. 58,641 16,725 1,792 363 77,522 1.2% Invesco PowerShares Capital Management LLC 47,446 22,576 6,089 1,178 77,289 1.2% Deutsche Bank Investment Management, Inc. 59,357 8,840 7,272 64 75,533 1.1% Columbia Management Investment Advisers LLC 44,822 1,239 26,203 450 72,715 1.1% Munder Capital Management, Inc. 71,756 - - - 71,756 1.1% Robeco Investment Management 10,931 34,139 25,572 565 71,208 1.1% Opus Capital Management LLC 34,094 33,048 - - 67,142 1.0% JHL Capital Group LLC 65,608 - - - 65,608 1.0% Bank of America NA (Private Banking) 56,354 3,627 274 39 60,294 0.9% BMO Asset Management Corp. 58,931 422 641 205 60,198 0.9% Yorktown Management & Research Co., Inc. 11,068 16,966 18,963 11,552 58,550 0.9% Legg Mason Capital Management LLC 54,640 2,084 1,100 513 58,337 0.9% Lombardia Capital Partners LLC 47,028 10,366 - - 57,394 0.9% Loomis, Sayles & Co. LP 42,438 14,768 - - 57,206 0.9% UBS Global Asset Management 27,154 15,769 7,893 1,988 52,804 0.8% BlackRock Advisors LLC 27,904 13,607 6,880 3,575 51,967 0.8% BlueMountain Capital Management LLC 50,267 - - - 50,267 0.8% Ares Management LLC 49,419 - - - 49,419 0.7% JPMorgan Investment Management, Inc. 21,482 21,593 2,259 2,098 47,432 0.7% SAB Capital Management - 46,480 - - 46,480 0.7% JPMorgan Asset Management (UK) Ltd. 45,298 1,037 0 - 46,335 0.7% Goldman Sachs Asset Management LP 2,715 25,162 9,262 7,954 45,093 0.7% Total Top 50 Institutional Investors $ 4,217,065 $ 1,584,852 $ 631,918 $ 256,512 $ 6,690,346 100.0% Top 50 In Index Holdings Style 1,035,879 559,958 222,750 99,488 1,918,075 % of Top 50 In Index Holdings Style 24.6% 35.3% 35.2% 38.8% 28.7%

*Index holdings style Source: FactSet as of 08/29/12

5 TOP INSTITUTIONAL BDC HOLDERS – $1BN+ BDCS

($ in 000's) 08/29/12 $1BN+ BDC Holdings % of Total Investor ACAS AINV ARCC PSEC Total Top 50 The Vanguard Group, Inc.* $ 191,965 $ 80,133 $ 157,810 $ 73,582 $ 503,491 11.5% BlackRock Fund Advisors* 82,039 93,407 72,298 86,077 333,821 7.6% Thornburg Investment Management, Inc. - 150,345 119,248 - 269,593 6.2% Fortress Investment Group 218,779 - - - 218,779 5.0% Luxor Capital Group LP 197,290 - - - 197,290 4.5% Artisan Partners LP - - 175,855 - 175,855 4.0% State Street Global Advisors* 37,147 47,204 41,541 27,988 153,880 3.5% Pine River Capital Management LP 122,751 - - - 122,751 2.8% Dimensional Fund Advisors, Inc. 121,709 - - - 121,709 2.8% T. Rowe Price Associates, Inc. 898 689 104,412 353 106,352 2.4% Paulson & Co., Inc. 95,462 - - - 95,462 2.2% Vaughan Nelson Investment Management LP - 6,734 86,113 - 92,847 2.1% Morgan Stanley Smith Barney LLC (Securities) 8,464 15,085 42,063 18,895 84,506 1.9% Two Sigma Investments LLC 18,844 7,277 41,955 15,477 83,553 1.9% Knighthead Capital Management LLC 79,458 - - - 79,458 1.8% Northern Trust Investments 9,394 34,472 15,866 18,732 78,465 1.8% Fidelity Management & Research Co. 7,534 20,784 46,639 0 74,958 1.7% Wellington Management Co. LLP 10,822 1,554 59,727 - 72,102 1.7% Munder Capital Management, Inc. 71,756 - - - 71,756 1.6% AQR Capital Management LLC 63,007 1,993 996 632 66,628 1.5% JHL Capital Group LLC 65,608 - - - 65,608 1.5% Burgundy Asset Management Ltd. - - 64,209 - 64,209 1.5% TIAA-CREF Asset Management LLC 25,104 11,320 13,649 10,208 60,281 1.4% Deutsche Bank Investment Management, Inc. 23,284 9,269 21,210 5,593 59,357 1.4% BMO Asset Management Corp. 57,610 420 894 7 58,931 1.4% Russell Investment Management Co. 355 32,012 26,218 57 58,641 1.3% UBS Securities LLC 24,149 8,562 15,418 8,729 56,858 1.3% Bank of America NA (Private Banking) 54,179 367 1,728 80 56,354 1.3% Legg Mason Capital Management LLC - 14,796 39,844 - 54,640 1.3% BlueMountain Capital Management LLC 50,267 - - - 50,267 1.2% Ares Management LLC - - 49,419 - 49,419 1.1% Advisors Asset Management, Inc. 6,723 11,242 16,452 14,984 49,400 1.1% Invesco PowerShares Capital Management LLC 19,437 8,547 13,962 5,500 47,446 1.1% Lombardia Capital Partners LLC - - 47,028 - 47,028 1.1% Mellon Capital Management Corp. 15,410 13,264 9,719 7,586 45,979 1.1% JPMorgan Asset Management (UK) Ltd. 40,092 1,630 3,576 - 45,298 1.0% Columbia Management Investment Advisers LLC 2,206 21,745 13,145 7,726 44,822 1.0% BlackRock Advisors UK Ltd.* 16,239 8,119 12,116 8,213 44,686 1.0% Loomis, Sayles & Co. LP - - 42,438 - 42,438 1.0% Clough Capital Partners LP - - 41,992 - 41,992 1.0% Brenner West Capital Advisors LLC 41,128 - - - 41,128 0.9% Citigroup Global Markets (United States) 39,361 888 359 294 40,902 0.9% Opus Capital Management LLC - - 34,094 - 34,094 0.8% Confluence Investment Management LLC 1,240 4,027 28,566 241 34,074 0.8% Merrill Lynch, Pierce, Fenner & Smith, Inc. 4,382 3,747 21,317 316 29,762 0.7% Putnam Investment Management LLC - - 28,379 - 28,379 0.7% BlackRock Advisors LLC 3,278 6,452 13,725 4,449 27,904 0.6% NewSouth Capital Management, Inc. - - 27,511 - 27,511 0.6% UBS Global Asset Management 932 3,500 21,020 1,702 27,154 0.6% D. E. Shaw & Co., Inc. 13,132 500 11,527 1,282 26,441 0.6% Total Top 50 Institutional Investors $ 1,841,437 $ 620,087 $ 1,584,034 $ 318,702 $ 4,364,260 100.0% Top 50 In Index Holdings Style 327,390 228,864 283,765 195,860 1,035,879 % of Top 50 In Index Holdings Style 17.8% 36.9% 17.9% 61.5% 23.7%

*Index holdings style Source: FactSet as of 08/29/12

6 TOP INSTITUTIONAL BDC HOLDERS – LARGE BDCS

($ in 000's) 08/29/12 Large BDC Holdings % of Total Investor BKCC FSC HTGC MAIN PNNT SLRC TCAP Total Top 50 The Vanguard Group, Inc.* $ 34,798 $ 43,557 $ 27,775 $ 35,089 $ 29,236 $ 33,134 $ 31,241 $ 234,829 12.8% BlackRock Fund Advisors* 25,338 36,318 23,038 28,007 25,502 35,960 28,138 202,300 11.1% Virginia Retirement Systems 134,665 211 414 - - - - 135,290 7.4% State Street Global Advisors* 14,784 17,070 11,788 11,047 11,381 17,233 12,694 95,998 5.2% Thornburg Investment Management, Inc. - - - - - 87,150 - 87,150 4.8% Northern Trust Investments 12,999 10,392 13,113 7,541 7,301 10,073 7,401 68,819 3.8% Advisors Asset Management, Inc. 11,183 11,154 12,091 3,886 9,594 13,745 2,948 64,601 3.5% Clough Capital Partners LP - - - - 23,779 36,136 - 59,915 3.3% T. Rowe Price Associates, Inc. 224 - 30,372 - 17,290 - - 47,886 2.6% SAB Capital Management - - - - - 46,480 - 46,480 2.5% UBS Securities LLC 5,483 10,404 3,227 4,220 8,626 8,073 3,500 43,533 2.4% Wellington Management Co. LLP - 6,090 778 - 638 35,970 - 43,476 2.4% Confluence Investment Management LLC 6,410 2,114 6,516 1,411 11,250 6,517 6,390 40,608 2.2% Robeco Investment Management - 17,075 17,064 - - - - 34,139 1.9% Opus Capital Management LLC - 33,048 - - - - - 33,048 1.8% Morgan Stanley Smith Barney LLC (Securities) 3,207 5,578 3,622 1,788 1,673 11,613 4,528 32,010 1.8% TIAA-CREF Asset Management LLC 5,461 4,791 4,297 3,592 3,222 4,044 5,418 30,826 1.7% Two Sigma Investments LLC 2,639 - 5,662 569 5,688 10,821 3,763 29,143 1.6% BlackRock Advisors UK Ltd.* 2,802 5,151 2,711 5,864 2,875 3,832 3,596 26,831 1.5% DePrince, Race & Zollo, Inc. - - 25,581 - - - - 25,581 1.4% Goldman Sachs Asset Management LP 898 134 1,210 - 12,312 10,608 - 25,162 1.4% Mellon Capital Management Corp. 3,785 4,392 2,261 4,199 2,539 3,993 2,768 23,938 1.3% American Century Investment Management, Inc. 2,448 3,514 4,705 - 9,886 - 2,732 23,285 1.3% Cedar Hill Associates LLC - 9,446 - - - 13,649 - 23,096 1.3% Invesco PowerShares Capital Management LLC 2,283 3,108 2,399 2,536 6,623 3,095 2,533 22,576 1.2% JPMorgan Investment Management, Inc. - - - - 21,593 - - 21,593 1.2% Greenlight Capital, Inc. - 21,066 - - - - - 21,066 1.2% Comerica Asset Management - 687 17,868 - 131 1,348 - 20,033 1.1% AQR Capital Management LLC 6,493 - 767 3,139 1,944 4,548 1,810 18,701 1.0% Yorktown Management & Research Co., Inc. 1,203 2,271 2,373 413 2,300 3,672 4,734 16,966 0.9% Russell Investment Management Co. 187 2,910 10,848 36 2,627 41 75 16,725 0.9% LSV Asset Management 3,548 1,710 1,928 3,323 4,250 - 1,318 16,077 0.9% UBS Global Asset Management 1,258 3,074 172 415 10,477 347 26 15,769 0.9% Cardinal Capital Management LLC - - 15,327 - - - - 15,327 0.8% Loomis, Sayles & Co. LP - 14,768 - - - - - 14,768 0.8% BlackRock Advisors LLC 1,618 2,327 1,895 1,679 2,012 2,285 1,791 13,607 0.7% Morgan Stanley & Co. LLC 2,697 2,106 3,359 672 1,530 754 339 11,456 0.6% Security Investors LLC - 11,292 - - 26 - - 11,318 0.6% Wells Fargo Advisors LLC 1,139 1,928 2,951 1,056 1,663 439 1,562 10,738 0.6% Fidelity Management & Research Co. 5,542 3 - 0 3,899 1,108 - 10,552 0.6% BNY Mellon Asset Management 1,646 1,903 1,183 1,353 1,253 1,761 1,417 10,516 0.6% Lombardia Capital Partners LLC - 10,366 - - - - - 10,366 0.6% Texan Capital Management, Inc. 1,857 - - 8,212 - - - 10,068 0.6% IronBridge Capital Management LP - 9,811 - - - - - 9,811 0.5% PENN Capital Management Co., Inc. - - 3,419 - - 5,975 - 9,394 0.5% Deutsche Bank Investment Management, Inc. 131 3,421 2,208 606 2,206 149 119 8,840 0.5% California State Teachers Retirement System 1,285 1,551 1,014 1,142 1,093 1,521 1,189 8,794 0.5% Schroder Investment Management Ltd. - - - 8,674 - - - 8,674 0.5% Pacific Investment Management Co. - - - - - 8,639 - 8,639 0.5% RBC Capital Markets Equity Research 29 4,519 94 1,803 123 277 1,639 8,485 0.5% Total Top 50 Institutional Investors $ 298,039 $ 319,262 $ 264,028 $ 142,272 $ 246,543 $ 424,989 $ 133,668 $ 1,828,801 100.0% Top 50 In Index Holdings Style 77,722 102,095 65,311 80,007 68,995 90,159 75,669 559,958 % of Top 50 In Index Holdings Style 26.1% 32.0% 24.7% 56.2% 28.0% 21.2% 56.6% 30.6%

*Index holdings style Source: FactSet as of 08/29/12

7 TOP INSTITUTIONAL BDC HOLDERS – MEDIUM BDCS

($ in 000's) 08/29/12 Medium BDC Holdings % of Total Investor GBDC KCAP MCC MCGC MVC NMFC TAXI TCPC TCRD TICC Total Top 50 BlackRock Fund Advisors* $ 8,667 $ 7,583 $ 7,926 $ 15,149 $ 11,597 $ 4,926 $ 14,105 $ 2,639 $ 5,722 $ 16,184 $ 94,499 9.9% The Vanguard Group, Inc.* 12,827 4,884 2,885 17,909 13,771 562 5,057 - 5,479 18,020 81,394 8.5% Confluence Investment Management LLC 8,575 2,335 7,890 2,580 7,425 2,248 3,366 3,545 7,260 1,361 46,585 4.9% Dimensional Fund Advisors, Inc. - - - 29,705 - - 16,141 - - - 45,845 4.8% State Street Global Advisors* 3,819 2,602 5,473 7,293 4,694 2,597 3,252 946 3,002 6,754 40,432 4.2% Advisors Asset Management, Inc. 6,286 4,837 - 6,693 2,850 - 4,882 - 1,413 6,555 33,516 3.5% Unitrin Asset Management ------31,809 - - 31,809 3.3% Northern Trust Investments 2,578 1,608 2,697 4,579 7,731 1,515 3,278 1,012 2,083 4,648 31,730 3.3% Columbia Management Investment Advisers LLC 17 27 7,902 45 21 16,001 1,887 6 77 220 26,203 2.7% Robeco Investment Management ------25,572 - 25,572 2.7% Babson Capital Management LLC ------24,083 - - 24,083 2.5% T. Rowe Price Associates, Inc. 13,138 10,424 - 125 ------23,687 2.5% Clough Capital Partners LP 9,298 - 8,876 - - - - - 4,852 - 23,025 2.4% Neuberger Berman LLC 19,924 - - - - 2,261 - - - - 22,185 2.3% Wynnefield Capital Management LLC - - - - 20,527 - - - - - 20,527 2.1% Western Investment LLC - - - - 19,960 - - - - 206 20,166 2.1% Morgan Stanley Smith Barney LLC (Securities) 1,559 1,947 816 160 9,654 260 2,109 - 271 2,550 19,325 2.0% Yorktown Management & Research Co., Inc. 1,808 2,897 3,427 1,692 - 2,242 1,333 1,757 1,826 1,982 18,963 2.0% Omega Advisors, Inc. ------17,691 - 17,691 1.9% C.S. McKee LP - - - - 15,935 - - - - - 15,935 1.7% Two Sigma Investments LLC 3,808 - 3,148 688 958 1,159 2,514 - 1,280 1,089 14,643 1.5% Royce & Associates LLC - - - - 14,244 - - - - - 14,244 1.5% Credit Suisse Securities (USA) LLC (Broker) 6,025 - 692 777 - 5,363 286 - 161 503 13,807 1.4% Columbia Partners LLC Investment Management - - 13,660 83 ------13,743 1.4% TIAA-CREF Asset Management LLC 1,201 - 1,914 2,807 1,664 990 1,042 448 1,020 2,163 13,249 1.4% UBS Securities LLC 1,975 851 1,376 1,679 1,558 660 1,535 15 915 2,550 13,114 1.4% North Run Capital LP - - - 12,984 ------12,984 1.4% AXA Investment Managers (Paris) SA ------12,724 - - 12,724 1.3% Wells Fargo Bank N.A. ------12,041 - - 12,041 1.3% Wellington Management Co. LLP - - - 284 - - - - 11,277 - 11,561 1.2% Alyeska Investment Group LP - - 10,657 ------10,657 1.1% RH Capital Associates LLC - - - - - 10,511 - - - - 10,511 1.1% Mellon Capital Management Corp. 1,063 715 850 2,209 831 592 784 69 1,038 1,707 9,857 1.0% ClearBridge Advisors LLC - - 9,286 ------9,286 1.0% Goldman Sachs Asset Management LP 7,509 - - 213 298 - - - 172 1,070 9,262 1.0% Goldman Sachs & Co. - 5,174 - 254 1,161 - 1,088 450 181 630 8,939 0.9% Dialectic Capital Management LLC - - 8,926 ------8,926 0.9% Peregrine Capital Management, Inc. - - 4,318 - - 3,908 - - - - 8,226 0.9% AQR Capital Management LLC - - - 7,600 - - 148 - - 420 8,168 0.9% Private Management Group, Inc. ------8,095 - 8,095 0.8% UBS Global Asset Management 4,551 2 1,467 24 10 54 144 - 9 1,632 7,893 0.8% Technical Financial Services LLC 1,559 406 1,287 396 - 279 2,328 178 665 357 7,455 0.8% Deutsche Bank Investment Management, Inc. 172 5 2,466 1,596 1,336 4 144 2 26 1,521 7,272 0.8% Waddell & Reed Investment Management Co. ------7,154 - 7,154 0.7% BlackRock Advisors LLC 963 500 610 950 807 345 591 228 838 1,049 6,880 0.7% Millennium Management LLC - - 3,169 - 453 2,027 - - - 939 6,587 0.7% LSV Asset Management - - - 1,042 - - 5,402 - - - 6,445 0.7% BlackRock Advisors UK Ltd.* 993 952 - 1,269 569 - - 552 439 1,651 6,425 0.7% Franklin Advisory Services LLC - 6,423 ------6,423 0.7% River Road Asset Management LLC ------6,189 - - - 6,189 0.6% Total Top 50 Institutional Investors $ 118,314 $ 54,173 $ 111,718 $ 120,783 $ 138,054 $ 58,503 $ 77,604 $ 92,505 $ 108,521 $ 75,760 $ 955,935 100.0% Top 50 In Index Holdings Style 26,307 16,021 16,284 41,620 30,631 8,085 22,413 4,137 14,642 42,610 222,750 % of Top 50 In Index Holdings Style 22.2% 29.6% 14.6% 34.5% 22.2% 13.8% 28.9% 4.5% 13.5% 56.2% 23.3%

*Index holdings style Source: FactSet as of 08/29/12

8 TOP INSTITUTIONAL BDC HOLDERS – SMALL BDCS

($ in 000's) 08/29/12 Small BDC Holdings % of Total Investor FDUS FULL GAIN GLAD GSVC HRZN KIPO NGPC PFLT SAR SUNS SVVC TINY Total Top 50 BlackRock Fund Advisors* $ 4,752 $ 204 $ 8,113 $ 7,415 $ 5,335 $ 3,376 $ 137 $ 7,501 $ 199 $ 24 $ 5,764 $ 4,346 $ 4,025 $ 51,192 13.6% Burgundy Asset Management Ltd. - - 19,217 - - - - 6,835 - - - - - 26,053 6.9% The Vanguard Group, Inc.* 417 - 3,792 3,834 6,045 - - 3,218 - - 208 172 3,180 20,866 5.6% State Street Global Advisors* 1,946 - 2,434 3,592 1,980 1,159 - 2,811 - - 2,000 1,710 1,776 19,409 5.2% Confluence Investment Management LLC 213 1,295 1,695 3,931 - 3,974 - 2,569 2,403 219 855 - - 17,154 4.6% Northern Trust Investments 1,777 - 1,954 2,833 1,900 1,091 - 1,873 - - 1,822 1,136 1,428 15,814 4.2% Clough Capital Partners LP ------1,887 - 10,928 - - 12,815 3.4% Millennium Management LLC - - 150 252 151 - - - 2,435 - 9,305 - 88 12,382 3.3% Morgan Stanley Smith Barney LLC (Securities) - - 282 624 3,128 502 - 179 3,751 173 1,753 969 675 12,035 3.2% Yorktown Management & Research Co., Inc. 1,472 1,499 - - - 3,676 - 1,968 1,434 - 1,502 - - 11,552 3.1% Advisors Asset Management, Inc. - - 4,007 3,035 - - - 2,000 - - - - - 9,041 2.4% TIAA-CREF Asset Management LLC 911 - 1,272 1,492 893 563 - 860 - - 1,007 464 634 8,095 2.2% BlackRock Advisors UK Ltd.* - - - 494 7,527 ------8,021 2.1% Van Berkom & Associates, Inc. - - 7,972 ------7,972 2.1% Goldman Sachs Asset Management LP - - - 833 - - - 1,708 - - 5,413 - - 7,954 2.1% Ulysses Management LLC 6,243 ------6,243 1.7% UBS Securities LLC 882 - 1,017 1,100 208 724 10 825 - 21 766 - 578 6,132 1.6% Mendon Capital Advisors Corp. ------5,694 - - 5,694 1.5% Wellington Management Co. LLP - - - - - 1,608 - - - - 3,918 - - 5,525 1.5% Manulife Asset Management (United States) LLC 72 - 84 83 112 54 - 75 - - 4,988 - 53 5,521 1.5% Dimensional Fund Advisors, Inc. ------5,423 5,423 1.4% Kennedy Capital Management, Inc. - - - 1,685 - - - 3,730 - - - - - 5,415 1.4% Raging Capital Management LLC ------5,272 - - - 5,272 1.4% BNY Mellon Asset Management 300 - 345 412 381 200 - 2,299 - - 331 288 226 4,781 1.3% Putnam Investment Management LLC - - - - - 4,763 ------4,763 1.3% GenSpring Family Offices ------4,624 - - 4,624 1.2% SIAR Capital LLC ------4,465 - - - - 4,465 1.2% Royce & Associates LLC ------1,220 - - - - 3,179 4,399 1.2% Two Sigma Investments LLC 461 - 606 1,348 146 - - 673 - - 569 - 391 4,194 1.1% Mellon Capital Management Corp. 509 - 705 777 131 500 - 579 - - 397 109 109 3,818 1.0% Bridgeway Capital Management, Inc. 550 - 833 1,417 - - - 637 - - - - 376 3,813 1.0% Pacific Investment Management Co. ------3,686 - - 3,686 1.0% Numeric Investors LLC - - 507 169 - 2,659 - 277 - - - - - 3,612 1.0% BlackRock Advisors LLC 404 - 460 478 442 272 - 423 - - 439 361 297 3,575 1.0% Jefferies & Co., Inc. (New York) ------3,548 - - - - 3,548 0.9% Masters Capital Management LLC ------3,368 3,368 0.9% Raymond James & Associates - - - - 385 - - 2,981 - - - - - 3,366 0.9% Magten Asset Management Corp. ------3,350 - - - 3,350 0.9% Davenport & Co. LLC - - 2,417 619 ------3,036 0.8% Zeke GP LP - - - - - 1,408 - - - - 1,579 - - 2,987 0.8% Absolute Return Partners LLP - 2,859 ------2,859 0.8% triple-i Capital AG - 2,715 ------2,715 0.7% Aberdeen Asset Management, Inc. 284 - 138 255 133 1,365 - 129 - - 135 79 112 2,629 0.7% Granahan Investment Management, Inc. ------2,612 2,612 0.7% Shufro, Rose & Co. LLC ------2,410 2,410 0.6% California State Teachers Retirement System 269 - 301 318 295 186 - 283 - - 296 245 201 2,393 0.6% Morgan Stanley & Co. LLC - - 164 115 161 51 - 56 1,620 - 18 59 41 2,285 0.6% Wells Fargo Advisors LLC - - 1,324 50 54 353 - 1 25 1 365 81 5 2,259 0.6% Coe Capital Management LLC ------252 - 1,943 - - 2,195 0.6% Corbyn Investment Management, Inc. ------2,181 - - - - - 2,181 0.6% Total Top 50 Institutional Investors $ 21,463 $ 8,572 $ 59,788 $ 37,160 $ 29,405 $ 28,483 $ 147 $ 47,888 $ 22,018 $ 9,061 $ 70,306 $ 10,021 $ 31,188 $ 375,500 100.0% Top 50 In Index Holdings Style 7,115 204 14,339 15,335 20,887 4,535 137 13,530 199 24 7,972 6,229 8,981 99,488 % of Top 50 In Index Holdings Style 33.2% 2.4% 24.0% 41.3% 71.0% 15.9% 93.3% 28.3% 0.9% 0.3% 11.3% 62.2% 28.8% 26.5%

*Index holdings style Source: FactSet as of 08/29/12

9 CHANGE IN INSTITUTIONAL BDC HOLDERS

($ in 000's) BDC Shares as of 06/30/2012 BDC Shares as of 03/31/2012 BDC Shares as of 12/31/2011 BDC Shares as of 09/30/2011 Investor Position Change Position Change Position Change Position Change The Vanguard Group, Inc.* 71,699,901 3,890,374 67,809,527 4,755,331 63,054,196 260,260 62,793,936 1,298,165 BlackRock Fund Advisors* 60,497,280 4,013,996 56,483,284 1,635,582 54,847,702 2,556,214 52,291,488 (1,387,102) Thornburg Investment Management, Inc. 29,235,007 1,784,786 27,450,221 3,206,459 24,243,762 2,731,630 21,512,132 2,520,500 State Street Global Advisors* 27,448,585 (112,348) 27,560,933 1,698,913 25,862,020 940,128 24,921,892 (663,770) Dimensional Fund Advisors, Inc. 20,287,330 (597,256) 20,884,586 (1,024,162) 21,908,748 (530,560) 22,439,308 (393,498) Fortress Investment Group 19,674,351 - 19,674,351 (2,113,884) 21,788,235 (483,171) 22,271,406 8,870,337 Northern Trust Investments 17,825,345 (96,651) 17,921,996 831,930 17,090,066 (174,587) 17,264,653 875,996 Luxor Capital Group LP 17,741,929 17,741,929 ------Virginia Retirement Systems 15,640,917 (591,251) 16,232,168 (53,466) 16,285,634 (13,100) 16,298,734 35,700 Advisors Asset Management, Inc. 14,203,176 162,550 14,040,626 46,271 13,994,355 (1,083,655) 15,078,010 362,753 T. Rowe Price Associates, Inc. 12,628,570 107,979 12,520,591 575,326 11,945,265 (15,974) 11,961,239 (750,900) Morgan Stanley Smith Barney LLC (Securities) 11,610,851 197,155 11,413,696 1,141,371 10,272,325 (7,922) 10,280,247 902,384 Pine River Capital Management LP 11,038,724 372,148 10,666,576 2,617,769 8,048,807 2,713,724 5,335,083 (3,373,799) Confluence Investment Management LLC 10,956,214 256,504 10,699,710 610,236 10,089,474 607,621 9,481,853 106,567 Artisan Partners LP 10,176,811 126,800 10,050,011 1,701,200 8,348,811 172,087 8,176,724 1,376,400 UBS Securities LLC 10,163,214 (1,184,430) 11,347,644 2,456,112 8,891,532 1,260,705 7,630,827 (1,559,500) Two Sigma Investments LLC 10,008,043 (3,327,159) 13,335,202 5,069,256 8,265,946 7,182,728 1,083,218 (3,264,017) TIAA-CREF Asset Management LLC 9,892,213 574,431 9,317,782 1,398,424 7,919,358 (1,199,174) 9,118,532 763,721 AQR Capital Management LLC 9,061,317 1,225,243 7,836,074 2,168,140 5,667,934 1,041,238 4,626,696 950,030 BlackRock Advisors UK Ltd.* 8,601,814 185,647 8,416,167 272,181 8,143,986 (81,546) 8,225,532 (1,610,265) Paulson & Co., Inc. 8,584,700 (9,614,843) 18,199,543 (13,684,157) 31,883,700 (6,927,159) 38,810,859 (4,914,141) Clough Capital Partners LP 8,578,675 (1,058,223) 9,636,898 (472,671) 10,109,569 (2,192,977) 12,302,546 4,330,438 Wellington Management Co. LLP 8,066,347 (1,065,560) 9,131,907 1,231,025 7,900,882 (680,962) 8,581,844 (353,280) Mellon Capital Management Corp. 7,433,679 (298,468) 7,732,147 207,862 7,524,285 1,481,609 6,042,676 501,263 Russell Investment Management Co. 7,199,710 400,306 6,799,404 2,312,926 4,486,478 28,347 4,458,131 993,972 Burgundy Asset Management Ltd. 7,167,492 112,584 7,054,908 (365,591) 7,420,499 402,925 7,017,574 187,043 Knighthead Capital Management LLC 7,145,502 - 7,145,502 400,525 6,744,977 1,157,000 5,587,977 886,666 Fidelity Management & Research Co. 7,032,627 1,920,069 5,112,558 1,574,833 3,537,725 (746,103) 4,283,828 (351,047) Invesco PowerShares Capital Management LLC 6,750,794 527,311 6,223,483 758,776 5,464,707 (2,515,749) 7,980,456 252,753 Deutsche Bank Investment Management, Inc. 6,537,286 (1,133,088) 7,670,374 (260,350) 7,930,724 (374,286) 8,305,010 (4,121,369) Munder Capital Management, Inc. 6,452,860 6,452,860 - - - (147,805) 147,805 (55,253) Columbia Management Investment Advisers LLC 6,367,890 (4,212,792) 10,580,682 (1,844,561) 12,425,243 974,766 11,450,477 (135,643) Robeco Investment Management 5,989,158 (1,050,496) 7,039,654 423,858 6,615,796 123,926 6,491,870 (301,308) JHL Capital Group LLC 5,900,000 350,000 5,550,000 (295,000) 5,845,000 1,045,000 4,800,000 3,050,000 Vaughan Nelson Investment Management LP 5,815,798 21,375 5,794,423 259,250 5,535,173 (3,109,982) 8,645,155 (4,829,697) BMO Asset Management Corp. 5,410,358 (288,459) 5,698,817 5,395,404 303,413 102,050 201,363 33,987 Bank of America NA (Private Banking) 5,335,372 4,768,234 567,138 307,422 259,716 (13,490) 273,206 (268,314) Opus Capital Management LLC 5,108,479 88,938 5,019,541 457,347 4,562,194 319,223 4,242,971 765,817 Yorktown Management & Research Co., Inc. 4,747,000 1,621,400 3,125,600 1,151,800 1,973,800 542,300 1,431,500 423,400 JPMorgan Investment Management, Inc. 4,591,045 238,944 4,352,101 492,900 3,859,201 213,444 3,645,757 (420,243) BlueMountain Capital Management LLC 4,520,407 4,520,407 ------Legg Mason Capital Management LLC 4,433,405 (671,360) 5,104,765 (1,760,343) 6,865,108 (29,586) 6,894,694 413,067 BlackRock Advisors LLC 4,327,489 219,335 4,108,154 (749,687) 4,857,841 (5,121,304) 9,979,145 4,019,853 UBS Global Asset Management 4,223,632 316,279 3,907,353 506,142 3,401,211 (123,852) 3,525,063 (686,266) JPMorgan Asset Management (UK) Ltd. 4,109,484 262,286 3,847,198 (108,087) 3,955,285 (1,282,649) 5,237,934 2,060,349 Goldman Sachs & Co. 4,065,282 3,016,947 1,048,335 (442,231) 1,490,566 (415,698) 1,906,264 (129,813) BNY Mellon Asset Management 4,016,130 (2,161) 4,018,291 (173,041) 4,191,332 393,172 3,798,160 205,454 American Century Investment Management, Inc. 4,013,249 (671,409) 4,684,658 831,185 3,853,473 (2,891,901) 6,745,374 (2,290,727) Loomis, Sayles & Co. LP 3,857,028 111,193 3,745,835 (77,075) 3,822,910 (41,324) 3,864,234 95,920 Citigroup Global Markets (United States) 3,797,021 428,795 3,368,226 (42,363) 3,410,589 (89,139) 3,499,728 2,339,908 Total Top 50 Institutional Investors 569,969,491 30,040,851 539,928,640 23,029,087 516,899,553 (4,043,558) 520,943,111 6,762,491 Top 50 In Index Holdings Style 168,247,580 7,977,669 160,269,911 8,362,007 151,907,904 3,675,056 148,232,848 (2,362,972) % of Top 50 In Index Holdings Styel 29.5% 29.7% 29.4% 28.5%

*Index holdings style Source: FactSet as of 08/29/12

10 HISTORICAL BDC OWNERSHIP PERCENTAGE BY INVESTOR TYPE

06/30/12 12/31/11 12/31/10 12/31/09 12/31/08 Company Retail Inst.* Index Retail Inst.* Index Retail Inst.* Index Retail Inst.* Index Retail Inst.* Index American Capital Ltd. 34.5% 53.9% 9.7% 41.3% 48.3% 8.7% 44.2% 43.3% 10.5% 71.9% 15.4% 11.1% 57.8% 24.3% 16.1% Apollo Investment Corp. 47.5% 37.9% 14.4% 48.6% 37.3% 13.8% 42.7% 44.0% 13.2% 38.2% 47.7% 13.9% 37.2% 50.8% 11.9% Ares Capital Corp. 43.3% 48.1% 7.6% 42.7% 48.7% 7.6% 41.1% 50.4% 7.7% 10.0% 72.5% 17.2% 13.1% 71.1% 14.2% BlackRock Kelso Capital Corp. 51.4% 35.7% 10.9% 48.6% 38.0% 11.4% 38.5% 46.8% 11.5% 22.4% 69.0% 4.6% 73.4% 18.9% 3.7% Fidus Investment Corp. 75.4% 11.9% 5.0% 84.6% 6.0% 1.7% NA NA NA NA NA NA NA NA NA Fifth Street Finance Corp. 51.5% 34.0% 11.9% 47.5% 37.5% 12.1% 29.5% 55.2% 10.0% 28.8% 55.6% 8.3% 38.0% 46.8% 1.9% Full Circle Capital Corp. 55.4% 17.6% 0.4% 59.3% 13.9% 0.2% 59.6% 13.8% 0.0% NA NA NA NA NA NA Gladstone Investment Corp. 57.3% 32.2% 8.7% 56.1% 33.7% 8.3% 52.5% 38.1% 7.9% 56.1% 35.0% 7.7% 60.0% 33.0% 5.9% Golub Capital BDC Inc. 34.8% 28.7% 6.7% 26.7% 33.2% 4.8% 17.3% 26.6% 3.3% NA NA NA NA NA NA Gladstone Capital Corp. 65.7% 18.9% 8.8% 65.2% 19.8% 8.4% 55.6% 26.0% 12.1% 59.3% 26.5% 8.0% 62.1% 24.7% 7.3% GSV Capital Corp. 74.2% 11.9% 13.3% 91.2% 6.5% 0.2% NA NA NA NA NA NA NA NA NA Horizon Technology Finance Corp. 63.6% 19.4% 2.9% 60.3% 21.9% 0.2% 53.3% 29.2% 0.0% NA NA NA NA NA NA Hercules Technology Growth Capital Inc. 34.3% 48.5% 11.7% 30.8% 50.6% 12.3% 31.9% 50.2% 13.5% 35.5% 47.7% 13.1% 30.4% 55.0% 10.0% KCAP Financial Inc 46.3% 21.6% 7.4% 37.3% 26.5% 7.4% 53.9% 27.1% 2.7% 48.7% 27.6% 7.4% 39.4% 36.7% 6.3% Keating Capital Inc. 96.7% 1.3% 0.2% 96.6% 1.7% 0.0% NA NA NA NA NA NA NA NA NA Main Street Capital Corp. 61.0% 16.1% 11.1% 64.0% 14.2% 9.6% 69.9% 9.6% 5.2% 62.4% 6.8% 2.9% 68.3% 4.0% 0.0% Medley Capital Corp. 31.8% 52.7% 7.2% 51.0% 36.6% 4.1% NA NA NA NA NA NA NA NA NA MCG Capital Corp. 51.4% 29.5% 12.7% 51.6% 29.8% 12.5% 45.8% 39.6% 10.4% 51.7% 36.3% 8.1% 56.6% 32.9% 7.5% MVC Capital Inc. 35.6% 48.0% 10.3% 36.9% 46.8% 10.1% 34.5% 50.1% 9.9% 35.2% 50.3% 9.2% 34.1% 52.7% 8.4% NGP Capital Resources Co. 58.7% 28.1% 8.8% 58.0% 29.9% 7.8% 49.8% 34.7% 11.7% 55.6% 31.4% 9.6% 58.9% 29.3% 8.4% New Mountain Finance Corp. 37.0% 29.1% 3.4% 12.2% 39.0% 3.5% NA NA NA NA NA NA NA NA NA PennantPark Floating Rate Capital Ltd. 70.0% 29.1% 0.2% 74.1% 25.1% 0.2% NA NA NA NA NA NA NA NA NA PennantPark Investment Corp. 46.0% 41.1% 11.3% 46.4% 39.7% 12.0% 42.8% 44.8% 10.1% 31.2% 58.2% 7.8% 33.1% 57.0% 7.2% Prospect Capital Corp. 65.4% 15.6% 10.5% 54.8% 17.7% 14.5% 70.1% 16.6% 10.6% 63.0% 23.5% 10.8% 55.4% 29.0% 12.1% Saratoga Investment Corp. 48.9% 13.7% 0.0% 35.8% 20.1% 0.0% 69.1% 2.7% 0.0% 92.5% 5.5% 0.0% 77.1% 8.3% 0.0% Solar Capital Ltd. 39.4% 44.9% 10.1% 36.2% 47.6% 10.3% 16.9% 71.3% 5.5% NA NA NA NA NA NA Solar Senior Capital Ltd. 38.0% 41.9% 4.8% 32.9% 47.7% 4.1% NA NA NA NA NA NA NA NA NA Firsthand Technology Value Fund Inc. 87.6% 6.8% 4.7% 97.3% 0.5% 0.0% NA NA NA NA NA NA NA NA NA Medallion Financial Corp. 40.5% 36.1% 9.5% 31.3% 40.7% 11.0% 28.4% 45.8% 10.3% 20.2% 54.2% 10.2% 16.5% 59.1% 9.1% Triangle Capital Corp. 70.2% 14.8% 11.5% 69.8% 15.2% 10.7% 71.2% 14.6% 8.6% 78.5% 11.4% 3.9% 82.6% 8.2% 0.0% TCP Capital Corp. 48.4% 29.6% 1.3% NA NA NA NA NA NA NA NA NA NA NA NA THL Credit Inc. 23.4% 38.3% 5.2% 26.4% 36.5% 3.9% 3.5% 38.9% 4.3% NA NA NA NA NA NA TICC Capital Corp. 72.0% 15.4% 10.2% 67.2% 17.1% 12.6% 60.3% 29.4% 7.8% 66.3% 23.3% 7.5% 67.0% 29.0% 1.6% Harris & Harris Group Inc. 61.4% 24.9% 8.1% 62.3% 24.0% 8.0% 65.4% 23.5% 8.0% 62.9% 25.8% 7.8% 66.9% 21.6% 6.5% Market Cap Weighted Average 47.6% 37.5% 9.6% 46.7% 37.8% 9.4% 42.9% 42.7% 9.4% 40.5% 44.9% 11.3% 45.4% 40.9% 9.9%

*Excludes index holdings style Source: FactSet as of 08/29/12

11 BDC SHORT INTEREST

(Shares in 000's) Short Interest Coverage Ave. Daily Shares Institutional Share % Shares % of Inst. Ratio Company Volume Outstanding Float Float % Ownership Inst. % 08/15/12 07/31/12 Change % Change Outstanding % Float Ownership (days) American Capital Ltd. 3,090 324,655 316,091 97.4% 206,642 63.6% 11,861 9,826 2,035 20.7% 3.7% 3.8% 5.7% 3.8 Apollo Investment Corp. 1,601 202,891 196,691 96.9% 106,035 52.3% 7,537 7,928 (391) -4.9% 3.7% 3.8% 7.1% 4.7 Ares Capital Corp. 1,593 221,875 203,519 91.7% 123,677 55.7% 5,240 4,189 1,051 25.1% 2.4% 2.6% 4.2% 3.3 BlackRock Kelso Capital Corp. 367 73,695 56,960 77.3% 34,320 46.6% 2,307 2,399 (91) -3.8% 3.1% 4.1% 6.7% 6.3 Fidus Investment Corp. 59 9,427 8,700 92.3% 1,593 16.9% 320 343 (23) -6.8% 3.4% 3.7% 20.1% 5.4 Fifth Street Finance Corp. 609 82,512 70,318 85.2% 37,939 46.0% 6,740 7,177 (437) -6.1% 8.2% 9.6% 17.8% 11.1 Full Circle Capital Corp. 45 6,219 4,564 73.4% 1,121 18.0% 16 21 (5) -26.1% 0.2% 0.3% 1.4% 0.3 Gladstone Investment Corp. 67 22,080 19,201 87.0% 9,010 40.8% 589 603 (14) -2.4% 2.7% 3.1% 6.5% 8.7 Golub Capital BDC Inc. 73 25,663 12,126 47.2% 9,089 35.4% 542 553 (11) -2.1% 2.1% 4.5% 6.0% 7.4 Gladstone Capital Corp. 84 21,000 19,650 93.6% 5,819 27.7% 628 664 (36) -5.5% 3.0% 3.2% 10.8% 7.5 GSV Capital Corp. 390 18,420 18,309 99.4% 4,644 25.2% 905 833 72 8.6% 4.9% 4.9% 19.5% 2.3 Horizon Technology Finance Corp. 83 9,551 7,959 83.3% 2,131 22.3% 264 218 46 21.3% 2.8% 3.3% 12.4% 3.2 Hercules Technology Growth Capital Inc. 235 49,743 39,697 79.8% 29,936 60.2% 2,396 2,660 (264) -9.9% 4.8% 6.0% 8.0% 10.2 KCAP Financial Inc 209 26,681 9,299 34.9% 7,757 29.1% 693 761 (69) -9.0% 2.6% 7.4% 8.9% 3.3 Keating Capital Inc. 9 9,245 9,122 98.7% 143 1.5% 5 4 1 27.6% 0.1% 0.1% 3.5% 0.5 Main Street Capital Corp. 282 27,098 23,609 87.1% 7,369 27.2% 1,516 1,324 192 14.5% 5.6% 6.4% 20.6% 5.4 Medley Capital Corp. 258 17,320 16,914 97.7% 10,373 59.9% 672 644 28 4.4% 3.9% 4.0% 6.5% 2.6 MCG Capital Corp. 321 73,910 71,772 97.1% 31,182 42.2% 2,334 2,359 (25) -1.1% 3.2% 3.3% 7.5% 7.3 MVC Capital Inc. 59 23,917 22,504 94.1% 13,934 58.3% 805 854 (49) -5.7% 3.4% 3.6% 5.8% 13.7 NGP Capital Resources Co. 69 21,378 20,757 97.1% 7,903 37.0% 586 619 (33) -5.3% 2.7% 2.8% 7.4% 8.5 New Mountain Finance Corp. 143 15,948 11,094 69.6% 5,195 32.6% 393 276 116 42.1% 2.5% 3.5% 7.6% 2.8 PennantPark Floating Rate Capital Ltd. 18 6,851 6,810 99.4% 2,012 29.4% 7 10 (3) -31.1% 0.1% 0.1% 0.4% 0.4 PennantPark Investment Corp. 334 56,515 44,834 79.3% 29,626 52.4% 2,349 2,418 (69) -2.9% 4.2% 5.2% 7.9% 7.0 Prospect Capital Corp. 2,200 166,237 148,665 89.4% 43,383 26.1% 7,717 7,938 (221) -2.8% 4.6% 5.2% 17.8% 3.5 Saratoga Investment Corp. 1 3,877 2,432 62.7% 534 13.8% 6 5 1 10.7% 0.1% 0.2% 1.1% 4.7 Solar Capital Ltd. 205 38,667 30,714 79.4% 21,273 55.0% 1,494 1,468 25 1.7% 3.9% 4.9% 7.0% 7.3 Solar Senior Capital Ltd. 39 9,500 6,243 65.7% 4,439 46.7% 277 324 (47) -14.5% 2.9% 4.4% 6.2% 7.2 Firsthand Technology Value Fund Inc. 111 8,556 8,479 99.1% 980 11.5% 319 352 (33) -9.3% 3.7% 3.8% 32.6% 2.9 Medallion Financial Corp. 128 21,453 14,748 68.7% 9,791 45.6% 536 574 (38) -6.7% 2.5% 3.6% 5.5% 4.2 Triangle Capital Corp. 239 27,289 21,860 80.1% 7,171 26.3% 1,404 1,196 209 17.4% 5.1% 6.4% 19.6% 5.9 TCP Capital Corp. 56 21,476 17,032 79.3% 6,634 30.9% 194 201 (7) -3.6% 0.9% 1.1% 2.9% 3.5 THL Credit Inc. 62 20,220 3,892 19.2% 8,796 43.5% 375 399 (24) -6.0% 1.9% 9.6% 4.3% 6.0 TICC Capital Corp. 319 40,806 31,854 78.1% 10,450 25.6% 1,379 1,238 141 11.4% 3.4% 4.3% 13.2% 4.3 Harris & Harris Group Inc. 98 31,001 30,249 97.6% 10,222 33.0% 985 1,033 (47) -4.6% 3.2% 3.3% 9.6% 10.1 Average 81.7% 36.4% 1.0% 3.1% 4.0% 9.5% 5.4

Source: FactSet as of 08/29/12

12 APPENDIX

Current Ownership By Investor Type

13 CURRENT BDC OWNERSHIP PERCENTAGE BY INVESTOR TYPE

Retail ACAS AINV Insider 10% Institutional* 14%

Index 34%

48%

38% 54% 2%

0% ARCC BKCC

8% 11%

43%

51% 36% 48%

*Excludes index holdings style 1% Source: FactSet as of 08/29/12 2%

14 CURRENT BDC OWNERSHIP PERCENTAGE BY INVESTOR TYPE

Retail FDUS FSC Insider 5% 12% Institutional* 12% Index 8%

51% 34%

75%

3% FULL GAIN

9% 18%

32%

55% 57% 27%

*Excludes index holdings style 2% Source: FactSet as of 08/29/12

15 CURRENT BDC OWNERSHIP PERCENTAGE BY INVESTOR TYPE

Retail GBDC GLAD Insider 7% 9% Institutional*

Index 35% 19% 29%

7% 66%

30%

GSVC HRZN

3% 13%

19%

12%

1% 14% 64% 74%

*Excludes index holdings style Source: FactSet as of 08/29/12

16 CURRENT BDC OWNERSHIP PERCENTAGE BY INVESTOR TYPE

Retail HTGC KCAP Insider

12% 7% Institutional*

Index 34% 22% 46%

48% 6% 25%

KIPO MAIN

2% 1% 0%

11%

16%

61% 12%

97% *Excludes index holdings style Source: FactSet as of 08/29/12

17 CURRENT BDC OWNERSHIP PERCENTAGE BY INVESTOR TYPE

Retail MCC MCGC Insider 7% Institutional* 13%

Index 32%

29% 51%

53% 8%

MVC NGPC

10% 9%

36%

28%

59%

48%

6% 4%

*Excludes index holdings style Source: FactSet as of 08/29/12

18 CURRENT BDC OWNERSHIP PERCENTAGE BY INVESTOR TYPE

Retail NMFC PFLT Insider 0% 3% Institutional*

29% Index 29% 37%

1% 70%

30%

PNNT PSEC

11% 11%

16% 46%

9% 41% 65%

*Excludes index holdings style Source: FactSet as of 08/29/12 2%

19 CURRENT BDC OWNERSHIP PERCENTAGE BY INVESTOR TYPE

Retail SAR SLRC Insider 0% 10% Institutional* 14%

Index 39%

49%

37% 45%

SUNS SVVC

5% 5% 1% 7%

38%

42%

88% 15% *Excludes index holdings style Source: FactSet as of 08/29/12

20 CURRENT BDC OWNERSHIP PERCENTAGE BY INVESTOR TYPE

Retail TAXI TCAP Insider

10% 11% Institutional*

Index 40% 15%

36% 4%

70%

14%

TCPC TCRD

1% 5%

23% 30%

48% 38%

33% 21%

*Excludes index holdings style Source: FactSet as of 08/29/12

21 CURRENT BDC OWNERSHIP PERCENTAGE BY INVESTOR TYPE

Retail TICC TINY Insider 10% 8% Institutional*

Index 15% 25%

61%

72% 6%

*Excludes index holdings style Source: FactSet as of 08/29/12

PUBLICATIONS

SUTHERLAND ASBILL & BRENNAN LLP www.sutherland.com 10TH ANNUAL BDC ROUNDTABLE Wednesday, September 12, 2012

PUBLICATIONS – INDEX

I. The Bad, the Good, and Avoiding the Ugly: How to Help an Exam Go Wrong – and Right By: J. Christopher Jackson and John H. Walsh

II. How are REITs and BDCs Different? By: Cynthia M. Krus and Owen J. Pinkerton

III. The SBIC Program — Is it Right For You? By Cynthia M. Krus and Lisa A. Morgan

IV. Legal Alert: Congress Considering Legislation to Increase BDC and SBIC Access to Capital

V. Legal Alert: A Spotlight on Small Business Investment Companies (SBIC) and Their Role in the Entrepreneurship Ecosystem

VI. Legal Alert: ISS Establishes Policy on Below-NAV Proposals for BDCs

The Bad, the Good, and Avoiding the Ugly: How to Help an Exam Go Wrong – and Right Part 1: The Bad

By: J. Christopher Jackson and John H. Walsh

ompliance professionals spend much of their time on regulatory compliance examinations. Th ey are either planning Cfor the next exam, being examined, or following up on the lessons learned from the last exam. Th is constant attention gives them a depth of experience in the fi eld. Th ey need it because their fi rms look to them for expertise in how to deal with examiners, manage the examination process, and achieve a good result. Chief Compliance Offi cers know that their leadership will play a critical role in determining their fi rm’s experience in its next exam. In this series of articles, two compliance professionals off er practical suggestions on how to manage a regulatory compliance exam. One has J. Christopher Jackson is Senior Vice been a senior legal offi cial with oversight for the compliance function President & General Counsel at Calamos Investments. for many years, and has managed many exams for regulated fi rms. Th e other was a long-time examiner, and has conducted many exams. Often, the authors have observed, an exam’s failure or success does not depend on some technical issue under the securities laws. Instead, common sense plays a critical role. A common sense mistake can push the process in the wrong direction, or a common-sense success can push it in the right. Once pushed, the law of inertia can make it harder and harder for the exam process to change course. With this is mind, what are these common sense mistakes and suc- cesses? In this Part 1, the authors consider the “Top Ten Ways to Help an Exam Go Wrong.” In Part 2, to follow in a future issue, they will consider the “Top Ten Ways to Help an Exam Go Right.”

John H. Walsh is a partner in the Wash- Top Ten Ways to Help an Exam Go Wrong ington, DC Ofﬁ ce of Sutherland Asbill & Brennan LLP. Mr. Walsh was previously on the staff of the Ofﬁ ce of Compliance Inspec- Th e most important rule of managing regulatory compliance exams tions and Examinations of the Securities and is to do no harm. Unfortunately, there are many simple mistakes a Exchange Commission. compliance professional can make that will help push an exam off in

PRACTICAL COMPLIANCE & RISK MANAGEMENT FOR THE SECURITIES INDUSTRY • SEPTEMBER–OCTOBER 2012 5 The Bad, the Good, and Avoiding the Ugly: How to Help an Exam Go Wrong – and Right – Part 1: The Bad

the wrong direction. An easy way to identify them your credibility when the exam team fi rst arrives, is to ask: what would I do if I wanted the exam don’t be surprised if they are less than impressed to go wrong? Seen in this light, there are ten easy when you later try to make substantive points. If ways any compliance professional can make an you accomplish this wrong step, you will increase exam go wrong. A misstep – or said diff erently – your chances that your actions will “permeate” accomplishing one of the following top ten mistakes the entire exam. Any exam involves repeated and – can raise the odds that you will do just that: cause constant interaction with the exam team and there harm to yourself and your fi rm. are often “on-the-spot” decisions that need to be made. By sowing doubt at the beginning, you 10. When the examiners ﬁ rst contact you, can expect more skepticism when you ask for the do your best to act shocked, stunned, and “benefi t of the doubt”; or a little extra time; or completely unaware of the regulatory regime an opportunity to shift from a strict production and the SEC’s oversight responsibility. deadline to a rolling production; or fl exibility in First impressions count. In our daily lives we know scheduling interviews. this instinctively. Within seconds of making a new acquaintance, we start to develop a sense of how Take-away: When the exam team contacts you, or we feel about him or her as a person. Indeed, recent even arrives at your door, act calm and professional research s uggests people form their fi rst impres- and do your best to convey an aura of familiarity sions in fractions of a second. Additional exposure with the regulatory process. Th e impressions you increases confi dence in the snap assessment, but want forming in their subconscious are: “profes- generally does not cause fundamental adjustments. sional,” and “well informed.” One of the fi rst rules of common sense is to remember what you already know. Th e fi rst impres- 9. Produce records as slowly as possible sion a fi rm makes in an exam is a good example. with no explanation. When an exam team calls or walks in your front Time is always of the essence. Th e one resource door, they are certain to be wondering: what kind of the government can use to implement its fi nancial place is this? Small scraps of information can make examination program is people, and it does not have a strong impression. Just as we take in fast impres- a lot of them. Every examiner visiting your fi rm is sions of a new acquaintance – attitude, appearance incurring a signifi cant opportunity cost, because and grooming -- so you can expect the exam team h e or she is looking at you, instead of all the other to quickly take in fi rst impressions of your fi rm. fi rms t he examiner could be examining. Many fi rms place themselves in an unnecessary A good way to help an exam go wrong is to make hole by ignoring this simple lesson. While making your fi rm as expensive as possible for the examiners. their fi rst impression, they go out of their way to That is, run up as much opportunity cost as communicate their indiff erence or hostility to the possible. How do you do this? Slow down, take your regulatory regime. Th e most common approach is time, make them wait. Take any sense of urgency to state that you have a lot of important work to you may possess and pay it no mind in your fi rm’s do, and communicate – in words or tone – that the exam. You’ll know you’ve succeeded when their examiners are not a priority. Some go even farther, supervisor contacts you to see what is going on. By and challenge the examiners: “What do you mean that point the supervisor and the exam team leader an exam, what the heck is that?” Whichever ap- have probably had a conversation along the lines proach you take, this has two primary eff ects. It of: “Why are you still there – are you making good worries the exam team. Indiff erence and ignorance fi ndings?” “No. We’re just waiting.” “Waiting! What rarely lead to good compliance. Moreover, worried do you mean just waiting? I need you at ABC fi rm, examiners usually assuage their anxiety by expand- your next stop.” “We’re still waiting for records.” ing the scope of their review. Even if their fi ndings Your call with the supervisor is an opportunity to end up positive for your fi rm, by sowing doubt you dial up the tension by frustrating the person who have gotten yourself a much more searching review. will review and approve the examination team’s It also hurts when you have a real disagreement fi ndings. If you want to make it a bad exam, don’t with the examiners. If you foolishly undermine miss the opportunity.

6 SEPTEMBER–OCTOBER 2012 • PRACTICAL COMPLIANCE & RISK MANAGEMENT FOR THE SECURITIES INDUSTRY The Bad, the Good, and Avoiding the Ugly: How to Help an Exam Go Wrong – and Right – Part 1: The Bad

To really wreak havoc, be sure to offer no planned vacation, or whatever, that’s personal. You explanation for the delay. If you explain yourself, the would be right. You do not. Th ere is no obligation examiners may decide the delay is reasonable, and to make such a disclosure. Nonetheless, a simple fi nd some way to work with or around it. By keeping explanation is much better than the alternative: them in the dark you can maximize the negative worried examiners wondering what happened to impression of every delay, no matter how short. the missing employees.

Take-away: Th e best course of action is to move quickly and expeditiously to produce the records The most important rule of managing they request (or even to have them ready before- regulatory compliance exams is to hand). Th e second best is t o communicate on t he production status frequently and to make sure they do no harm. fully understand the reasons for any delay. Th e bad course of action is to delay. Th e worst is to delay with no explanation. 7. Use sloppiness and chaos to convince the 8. Make employees mysteriously unavailable. exam team that your ﬁ rm is out of control. By profession, examiners tend to be a suspicious lot. Examiners see very little of your fi rm. Th ey know Th ey also tend to be very observant. If they notice that. Th ey depend on drawing inferences about you that your employees are disappearing as the exam from the small samples they can collect and analyze. proceeds, they are likely to draw negative inferences. Th is is true in everything they review: portfolio Th is is a good approach if you want to make them management, personal trading reports, trade tickets, suspicious, but in a fairly subtle, indirect way. transactions supporting the cash journal, and so Perhaps the most eff ective means of t riggering on. It is a rare exam team that gets to review all of their suspicion is to have the clerical employees dis- anything. Th is is equally true of your compliance appear. Clerical employees are reputed to know the controls. Th e examiners usually have the opportu- facts, and the records, but often lack the necessary nity to review only a sample of your compliance indoctrination in whatever scheme is under way. controls, and then draw inferences from what they Th ey are dangerous to wrongdoers because they are can see. Of course, there is one compliance control prone to making statements that seem innocent, yet they can see more than any other: you. are really incriminating: “Th at account? Oh, that’s It may seem daunting that the examiners are the slush fund. We save it for our political clients. watching you, and judging your fi rm by what Would you like to see the journal of payments?” they see, but it’s true. You personify your fi rm. By removing clerical employees, you will get the Other members of the fi rm may share a few hours exam team wondering what is going on. A compli- with the examiners, in an interview or two, but ance offi cer who believes an exam staff is less than generally a compliance professional has the most fully observant does so at his or her own peril. Rarely, consistent face-time with the team. Th e words if ever, is the case when you will not have at least your executives use about the ‘tone at the top,’ or some senior and experienced examiners assigned to the fi rm’s ‘culture,’ or its ‘attention to compliance,’ your fi rm’s exam team. Often times that’s all you will be tested and assessed most quickly, and most need to push the exam off in a negative direction. often, in reference to you and your conduct during When examiners start to wonder whether there the examination. might be some back-story behind what they can If you want your examination to go wrong, this is see, they will get worried. Again, examiners assuage a real opportunity. Just use sloppiness and chaos to anxiety by expanding the scope of their review. communicate a hidden mess behind the fi ne words. Give the examiners the wrong records; mix up fi les; Take-away: If you have to make staffi ng changes leave them sitting alone when you had agreed to during an exam, explain it to the exam team. You an interview; it’s easy. At some point you will have may be thinking: we don’t have to tell them about them thinking: “In this kind of an atmosphere, the wedding, funeral, engagement party, long- anything could be going on, and no one would

PRACTICAL COMPLIANCE & RISK MANAGEMENT FOR THE SECURITIES INDUSTRY • SEPTEMBER–OCTOBER 2012 7 The Bad, the Good, and Avoiding the Ugly: How to Help an Exam Go Wrong – and Right – Part 1: The Bad

notice.” Th at’s the moment your exam can start to not perfect, that is certainly better than a narrative tip downward. about incompetence or dishonesty. 5. Have employees argue with each other, Take-away: It is impossible to be too organized. challenge each other’s authority, or Th ink of it as symbolic speech. Th e care with which mutually slough off responsibility in you track the requests, organize the production, the examiners’ presence. tie each item produced to a specifi cally requested document or request, reconcile lists, and schedule Every organization in the world has some level of interviews visually demonstrates the seriousness confl ict over turf: who “owns” a given product, with which you – and through you, your fi rm – process, or function? Oddly though, in a reversal of approach compliance. the normal direction of these conversations, when government examiners ask the question, potential 6. Get your facts wrong. owners can suddenly be in short supply. If the Everyone makes mistakes. Unfortunately, however, government is asking, the rule seems to be: it must mistakes with examiners are expensive. Mistakes be somebody else’s responsibility. undermine your credibility (see item number 5), If you want your exam to go wrong, make sure and if you send the exam team off on a wild-goose the examiners hear something of these disputes. chase, they will blame you for the wasted time (see Th e usual way to present this to the exam team item number 2). Th ere is nothing good to say about is for an interviewee to hedge and qualify his mistakes, except one point. Th ere are worse things. responsibility. You know the examiners have Th at honor goes to uncorrected mistakes. heard the issue when they start making state- At this point in our Top Ten List we have ments like: “Sir, we apologize for continuing to reached an important moment. Having dealt ask these questions, but it was our understand- with innocent and thoughtless mistakes that can ing that you were responsible for this area.” Of send the exam off in an unintended direction, course, if you want your exam to go wrong in a we have now entered the realm where conscious really spectacular way, have your managers dis- decisions are made. When a mistake is made, t hen pute responsibility in front of the examination discovered, there will always be a temptation to team. Examiners visit numerous diff erent fi rms, “Let it slide,” because, “Maybe they won’t notice.” with diff erent cultures and styles. Th ey are used Th at is a high stakes gamble. If the examiners to variations. However, without question, fi rms fi nd the mistake, it will make the exam all about where the managers carry their bickering and you (see item number 7) but not in a way you backstabbing directly to the exam team really would like. Th ey will carefully consider how the stand out. Raised voices, fi nger-pointing, or mistake could have benefi ted you or your fi rm mutual claims of incompetence and bad faith, with a premium on creative thinking. Th en the are sure to get their attention. Don’t be surprised question of the day will become: Did you make if you see the examiners taking a lot of notes. a mistake, or are you lying to them? If you ask It has been said that in most things preparation the exam team to choose between incompetence is the key. Th at is no diff erent in an exam. A sure and dishonesty, either way, either choice, you and way to succeed in having your exam go wrong your fi rm lose. is to fail to prepare your fi rm and its employees for the exam. Unprepared, employees can easily Take-away: As painful as it may be, the best strategy avoid owning up to their responsibility, challenge is generally to identify the mistake, explain how each other, and argue with one another in front it happened, and make the correction. Th is will of the examiners. show that you are not perfect. Congratulations, no one is. In fact, with a narrative of how you Take-away: If a happy atmosphere is impossible were double-checking and validating the informa- at your fi rm, at least try for professional while tion already provided, you could actually use it to the examiners are around. Ideally, any turf is- show the exam team the extent of your care and sues should be resolved now, for their own sake, attention to accuracy (see item number 7). While and not in preparation for regulatory oversight.

8 SEPTEMBER–OCTOBER 2012 • PRACTICAL COMPLIANCE & RISK MANAGEMENT FOR THE SECURITIES INDUSTRY The Bad, the Good, and Avoiding the Ugly: How to Help an Exam Go Wrong – and Right – Part 1: The Bad

Be prepared and make sure that each of your 3. Break the promises you make to the employees who will speak to the examiners is examination team, or made to past teams. prepared. Nonetheless, things do come up. Es- No one likes it when old problems suddenly re- tablishing clarity on who is responsible for what appear. Often they seem even worse the second will go a long way toward demonstrating that time around: the original problem is enhanced by you have given careful attention to your control frustration and disappointment that past remedies and supervisory structure. have failed. Karl Marx supposedly said: “History repeats itself, the fi rst time as tragedy, the second 4. Respond to problems with indifference. as farce.” Actually, he got it wrong. Th e fi rst time Th e purpose of an examination is to solve problems. it’s tragedy, the second it’s disaster. Examination After much eff ort the fi nal work product produced fi ndings are no diff erent. by an exam team is usually a letter to the fi rm If you want your exam to go wrong, casually asking it to please fi x whatever problems were make promises, and then casually break them. found. Th e fi rm’s response is voluntary. In almost You can do this during your exam. Tell the every case, however, fi rms rush to fi x the problems exam team whatever they want to hear, and then to avoid the alternative: referral to the Division of don’t deliver. Pretty soon it will sink in that you Enforcement for a possible enforcement action. In cannot be trusted. You’ve just made yourself an enforcement action the remedies are mandatory, higher risk (see all of the items on this list). But public, and often accompanied by penalties and if you want to have a really bad exam, and are other sanctions. willing to wait, when an exam team gives you a If you want your examination to go wrong, letter describing the problems they found, agree and you don’t have time for the other suggestions to everything, and then do nothing. This will in this list, cut right to the core and attack its guarantee you a bad exam next time around. In problem-solving purpose. Let the examiners fact, when the next examiners arrive, and find know you have no intention of fixing the you didn’t keep your promises, you may have an problems they have found. Th e most common opportunity to work with staff from the Division approach is to belittle the importance of their of Enforcement. fi ndings. “Only a b ureaucrat,” you could say, “would worry about something as arcane as the Take-away: View your word as your bond, in Custody Rule.” Better yet, have a member of small matters as well as large. Do not make prom- the senior management team participate in the ises unless you are ready to keep them, and then fi nal interview before the exam team leaves and do so, faithfully. Th e most important message you make similar statements. Another approach is can communicate is that you can be trusted to fi x to assure them that you are far too important to the problems the examiners have found, without spend your time on such things. Th e actual words the need for a formal enforcement action. Like you use are less important than the message: you everything else, trust must be earned. If you want will only fi x the problems if someone makes you. the exam to be a success, fi nd ways to show the Of course, the Commission can make you, in a examiners that you – and through you, your fi rm public enforcement action. -- are as good as your word. Take-away: If you convince the exam team that 2. Withhold responsive records without you will respond only to compulsion, you may get telling the exam team you are doing so. your wish. Indiff erence is never a good response in an exam. Even in those situations where you have Examiners live for books and records. Sculptors a good faith disagreement with the examiners, live for marble, carpenters for wood, tailors for an energetic and attentive response is optimal. wool … You get it. A professional examiner has Document why you believe your answer is better, devoted his or her career to collecting, reviewing, engage with them on it, and carefully consider and analyzing books and records. Indeed, a really their side of the story. In every case, whatever the good examiner goes beyond analysis and develops situation, show the examiners your continuing an intuitive feel for records: what’s good, what’s commitment to solving problems. bad, and what’s missing.

PRACTICAL COMPLIANCE & RISK MANAGEMENT FOR THE SECURITIES INDUSTRY • SEPTEMBER–OCTOBER 2012 9 The Bad, the Good, and Avoiding the Ugly: How to Help an Exam Go Wrong – and Right – Part 1: The Bad

If you want your exam to go wrong, be sure to Dodd Frank Wall Street Reform and Consumer withhold responsive records from the production Protection Act of 2010 and other such reforms, without telling the exam team. As a legal matter, the chances are heightened that any such this could be obstruction, a criminal violation. In misconduct will not go undetected. the realm of making exams go bad, committing a potentially criminal violation is a pretty Take-away: Every examiner and most compliance spectacular approach. Of course, this can happen professionals have had to deal with the question: by accident as well. Examiners know that. It is How were records missed in the regular production? As a good faith mistake , these problems can generally be resolved. Moreover, if records are withheld A misstep – or said differently – on a claim of privilege, or for some other reason, full disclosure to the examiners allows an open and accomplishing one of the … top ten good faith resolution of the issue. Disclosure and mistakes [discussed here] -- can raise dialogue can cure many ills. the odds that you will … cause harm to 1. Falsify or backdate records. yourself and your ﬁ rm. Regulatory compliance examiners’ full contempt and fury are reserved for one of their own gone bad – a compliance professional engaging in a rare document production that does not have affi rmative misconduct. In the cases brought by at least a few laggard records straggling in, late the Commission against compliance professionals, in the process. Th e question is, how were they the integrity of books and records has played an missed in the regular production? Paper copies important role. Compliance professionals have are misfi led. Legacy archives are overlooked. It falsifi ed them, backdated them, created them happens. Treated as a simple mistake, compliance out of whole cloth, or knowingly withheld them professionals can bounce this issue from item from a responsive production. If compliance number 2, all the way back down to item number professionals want to make an exam go wrong, 6. On the other hand, if you really want your and importantly, go wrong for themselves exam to go wrong, you can make a conscious personally, there is no better way than to falsify decision to keep responsive records out of the or backdate records. production. At that point, if the exam team can Th ere is a diff erence between item number 2 and develop supporting evidence, you’ve bounced the this, the single best way to make an exam go wrong. issue up to item number 1. Sometimes there can be a murky line between good When confronting this issue, a compliance faith and bad faith when a record is withheld. Was professional may wonder: how will the examiners a record withheld under a theory of the scope of ever fi nd out? Over the years, various scenarios a request that later proved mistaken? Were the have played out: emails that were produced examiners less than clear about what they wanted? make reference to responsive communications Was the record simply missed? Certainly, when a that were not; an employee has a change of heart record is withheld examiners are likely to consider and tips-off the staff ; or an interviewee mentions whether it was done in knowing bad faith (although something that was withheld. Th e specifi c path of a late production explained as a mistake goes a long discovery matters less than the fact that it is always way to addressing that concern, see item number possible. Moreover, the faithful preservation and 6). Here, however, it is diffi cult to imagine the good production of records is an important function faith falsifi cation of records. Here the examiners are of compliance. In its enforcement actions the likely to fear that one of their own has gone bad. Commission has shown a high level of concern Compliance professionals in this situation should when compliance professionals become part of expect the worst. Th e true compliance professional the problem. With the hiring of more senior can ill aff ord to take this risk. He or she sh ould examiners, the use of specialized experts, the take notice of the enhanced enforcement being advent of the Whistleblower Rule under the undertaken by SEC’s Division of Enforcement,

10 SEPTEMBER–OCTOBER 2012 • PRACTICAL COMPLIANCE & RISK MANAGEMENT FOR THE SECURITIES INDUSTRY The Bad, the Good, and Avoiding the Ugly: How to Help an Exam Go Wrong – and Right – Part 1: The Bad their use of specialized enforcement units as well as Conclusion the specter of Wells Notices. When the worst occurs No compliance professional – at least none who to the compliance offi cer, it is further compounded is sane – would set out to have a bad exam. by the fact that he or she may never be rehired in Sometimes, though, it can seem that way. such a capacity in the future. Hopefully, by keeping in mind the first and most important rule of managing regulatory Take-away: Records say what they say. Sometimes compliance exams – Do No Harm -- compliance that can be an uncomfortable reality. But the alter- professionals will fi nd themselves well on the way native is so much worse. to a successful result.

This article is reprinted with permission from Practical Compliance and Risk Management for the Securities Industry, a professional journal published by Wolters Kluwer Financial Services, Inc. This article may not be further re-published without permission from Wolters Kluwer Financial Services, Inc. For more information on this journal or to order a subscription to Practical Compliance and Risk Management for the Securities Industry, go to onlinestore.cch.com and search keywords “practical compliance”

PRACTICAL COMPLIANCE & RISK MANAGEMENT FOR THE SECURITIES INDUSTRY • SEPTEMBER–OCTOBER 2012 11 August VOLUME 7, ISSUE 3

How are REITs and BDCs Different?

By: Cynthia M. Krus, Esq. and Owen J. Pinkerton, Esq.

Over the last 20 years, the non-traded market for investment products has grown tremendously with a wide array of alternative investment products. Historically, this space has been dominated by non-traded real estate investment trusts, or REITs, but in the past few years, a new product, non-traded business development companies, or BDCs, has gained a foothold. As non-traded BDCs have become more accepted in the non-traded market, a number of questions have arisen about how BDCs fit into the non- traded space and into a typical investor’s portfolio. This article attempts to answer some of these questions by comparing disclosure and regulatory aspects of BDCs and REITs.

Non-traded REITs and non-traded BDCs have very similar business models and structures. Both are characterized as alternative investment vehicles and are designed to provide yield to investors while not being exposed to the vagaries of the public markets. Both enjoy favorable tax treatment under Subchapter M of the Internal Revenue Code of 1986 if they pay a substantial portion of their income as distributions to their stockholders. Both products are generally viewed as complementary pieces in a typical investor’s portfolio that also includes publicly-traded equity securities, bonds, commodities and real estate. As a result, sponsors have found that non-traded REITs and BDCs are accepted in the same distribution channels.

Non-traded BDCs essentially modeled themselves structurally after non-traded REITs in that they include an escrow period, offer limited repurchase or redemption to stockholders and seek to provide a liquidity event to stockholders within five to seven years following the completion of the offering. There are certain regulatory limitations on BDCs that are not applicable to REITs; however, for the most part, BDC sponsors have substantially followed the REIT model.

Despite these similarities, the nature of the portfolio objectives and investments are substantially different, which results in very different regulatory and disclosure requirements. REITs generally invest in real properties or interests in real estate while BDCs primarily invest in debt investments of non-public companies (however, they have the flexibility to invest up and down the capital structure). As an investment company regulated under the Investment Company Act of 1940 (the “1940 Act”), a BDC is subject to substantive regulation akin to a mutual fund, but with some more flexibility in certain areas such as with leverage and performance fees and generally will have an investment adviser that is required to be registered as an investment adviser with the Securities and Exchange Commission (the “SEC”). While REITs often employ investment advisers as well, REITs are not subject to regulation under the 1940 Act and, as a result, their investment advisers are generally have not been required to register with the SEC.

As both products have gained acceptance in the marketplace, we have seen many well-known sponsors of REITs also introduce BDC product offerings. For example, a number of non-traded REIT sponsors who have extensive experience selling alternative investments have either enlisted a sub-adviser or entered into a joint venture agreement with an investment adviser in order to jointly sponsor a non-traded BDC. Such sponsors have seen the appeal of having both REIT and BDC products within their overall business.

As a result of the similar business models but very different regulatory oversight, regulators are just now getting up to speed on how to deal with BDCs vis-à-vis REITs. Below, we have provided an overview of some of the more significant differences between non- traded REITs and non-traded BDCs.

Regulatory Requirements

As investment companies, BDCs are regulated by the 1940 Act which imposes a number of regulatory requirements on BDCs and their investment advisers that are not imposed on REITs or their investment advisers. BDCs are subject to numerous regulatory requirements that affect the governance of the program, such as the requirement that they have majority independent boards of directors. Further, BDCs must maintain a compliance program under Rule 38a-1 of the 1940 Act which is designed to prevent violations of the federal securities laws. As part of the compliance program, the BDC is required to appoint a Chief Compliance Officer that reports directly to and can only be removed by the BDC’s board of directors. Further, BDCs must place and maintain their securities and similar investments in the custody of a bank qualified under the 1940 Act or a broker-dealer. In addition, BDCs must maintain a bond issued by a reputable fidelity insurance company in an amount prescribed by the 1940 Act to protect the BDC against larceny and embezzlement. Such bond must cover each officer and employee with access to securities and funds of the BDC. Finally, the board of directors of a BDC is required to determine the fair value of the BDC’s portfolio on at least a quarterly basis under the guidelines set forth in FASB ASC 820 – Fair Value Measurements and Disclosures. REITs are not subject to this type of substantive regulation under the 1940 Act and are not required to comply with these requirements. In particular, REITs are generally not required to value their investments until a point in time following the conclusion of their offering period, while BDCs are required to publish the value of their portfolios on a quarterly basis in the quarterly reports they file with the SEC.

The SEC and FINRA have grappled with the non-traded model, but the area in which we have seen the most issues is with the various state regulators. At the state level, the securities of non-traded REITs and non-traded BDCs are not listed on a national securities exchange and, as a result, are not considered to be “covered securities” under the National Securities Markets Improvement Act. The consequence is that securities issued by non-traded REITs and non-traded BDCs must be registered in each state or other jurisdiction in which they are offered and sold.

Non-traded REITs must comply with the provisions of the NASAA REIT Guidelines, while non-traded BDCs must comply with the provisions of the NASAA Omnibus Guidelines. Since non-traded BDCs are a newer product class, there has been a wider divergence among the states with respect to how to regulate BDCs at the state level. The NASAA REIT Guidelines were drafted to take into account the corporate structure of a REIT. The NASAA Omnibus Guidelines, on the other hand, were initially drafted to apply to limited partnership offerings and, as a result, a number of its provisions do not apply to a corporate structure. In addition, until recently states were not familiar with the BDC structure. Therefore, there are significant differences between the two guidelines and how they have been interpreted for REITs and BDCs, certain of which are highlighted in the table below:

NASAA Omnibus NASAA REIT Guidelines Guidelines (applied to BDCs)

Governing “Program Agreement” which is Program agreement is the documents not defined, but which we “Declaration of Trust” which is believe should include charter, defined to bylaws and investment include charter, bylaws and any advisory agreement other governing document pursuant to which the REIT is organized

Initial None Lesser of 10% of Capitalization the total net assets at the completion of the offering or $200,000

Sponsor net Greater of either $100,000 or None worth 5% of the first $20 million requirement of both the current offering and any other direct participation offerings during the last 12 months, plus 1% of all amounts in excess of $20 million

Financial An No requirement to statements of audited balance sheet of the include a balance sheet of the the sponsor sponsor sponsor

As a result of the application of the NASAA Omnibus Guidelines, the disclosure and process at the state level is substantially different for REITs and BDCs. NASAA has indicated that it intends to formulate guidelines specific to non-traded BDCs, but it is not clear when these may be in place or whether any interim guidance will be issued by NASAA with respect to the state review of registration statements filed by non-traded BDCs. There is hope that as states become more familiar with BDCs, this process will become more streamlined. Disclosures REIT Registration Statements

The offerings of both REITs and BDCs are registered under the Securities Act of 1933 with the SEC, but the disclosure scheme is considerably different. The process is also different in part because REITs are reviewed by the Division of Corporation Finance at the SEC, while BDCs are reviewed by the Division of Investment Management at the SEC.

REITs are operating companies that file registration statements under the Securities Act of 1933 (the “Securities Act”). As such, the registration statements filed by REITs are, in many ways, similar to registration statements filed by other operating companies, with a few significant differences. Non-traded REITs file registration statements with the SEC using Form S-11, which is a form that may only be used by REITs and other issuers whose business is primarily that of acquiring and holding for investment real estate. The requirements of Form S-11, in most respects, mirror those required by Form S-1, which is the default form for public operating companies. Form S-11, however, includes requirements that are specific to REITs and real estate companies.

In addition, Form S-11 requires disclosure regarding the investment policies of the REIT, including the types of real estate and the geographic areas in which the issuer may invest, the REIT’s method of financing its acquisitions and any investment concentration policies of the REIT. Finally, if the REIT owns properties, information about such properties must be disclosed on both a portfolio basis and an individual property basis. Finally, certain industry-specific data relating to the REIT’s portfolio includes, among other things, occupancy rates, disclosure of major tenants (tenants who occupy at least 10% of the rentable square feet of the property), the principal lease terms of major tenants, the average effective annual rental per square foot during the last five years, and a schedule of lease expirations.

The most significant difference between non-traded REIT registration statements and BDC registration statements, however, is the disclosure mandated by Industry Guide 5 (“Guide 5”). Although Guide 5 ostensibly applies only to real estate partnerships, the SEC staff has taken the position that it applies to all public offerings by limited partnerships as well as “blind pool” REIT offerings. Guide 5 includes a number of requirements not applicable to public offerings by other entities, including REITs whose securities are listed on a national securities exchange, including the following:

Prior Performance. Guide 5 requires extensive disclosure of prior performance, both in tabular and in narrative form, of public and private programs of the sponsor and its affiliates. The tabular performance is designed to show the sponsor’s experience raising capital for its programs, results of prior programs and specific property acquisitions by prior programs. The narrative disclosure includes, among other things, a discussion of major adverse business developments or conditions experienced by a prior program that would be material to investors in the REIT.

Marketing Materials. Guide 5 also requires that all marketing materials intended for investors in the REIT, including materials labeled as being “for broker-dealer use only” must, prior to first use, be provided to the SEC for review and comment. All marketing materials should be consistent with the disclosure in the prospectus and present a balanced discussion of risk and reward.

Undertakings. Guide 5 requires the REIT to include certain undertakings in its registration statement, including to supplement the prospectus each time a property is acquired that is not described in the prospectus and to consolidate all such supplements in a post-effective amendment on a quarterly basis.

BDC Registration Statements

BDCs are investment companies regulated by the 1940 Act. BDCs are subject to the same periodic reporting requirements as operating companies, including REITs, and file their registration statements under the Securities Act, but the disclosure requirements are different in a number of significant ways.

Non-traded BDCs file registration statements with the SEC using Form N-2, which is a form that may only be used by closed-end management investment funds, which include BDCs. The disclosure found in Form N-2 in many respects mirrors the disclosure found in Forms S-1 and S-11, with some notable exceptions. The registration statements filed by BDCs set forth the investment objective and strategy of the BDC. BDCs identify the market in which they intend to invest, which is generally middle market debt. This type of disclosure generally provides the type of investments and the forms of such investments, whether they be senior debt, subordinated debt, equity or some combination of these forms.

In addition, a schedule of investments must be included in each set of financial statements of the BDC which includes, among other things:

• The name of the portfolio company, • The industry in which the portfolio company operates, • The coupon and maturity of debt investments, • The number of equity securities held, • The cost of the investment, and • The fair value of each investment as determined by the BDC’s board of directors.

Further, Form N-2 requires that the BDC include a “Fees and Expenses Table” that provides investors with estimates of the fees and expenses that the BDC expects to incur during the following 12 months, based on its anticipated operations, including its capital raise and the amount of leverage it expects to employ. The Fees and Expenses Table must also include an “Example” that shows the effect of the expenses on a hypothetical $1,000 investment (assuming a 5% annual return) over one year, three years, five years and ten years. In addition, BDCs are required to include tabular information detailing borrowings or other forms of “senior securities” held by them.

Unlike non-traded REITs, non-traded BDCs are not required or permitted to include any prior performance disclosure relating to prior programs of the sponsor. In addition, there are no SEC requirements governing the use of marketing materials similar to those required by Guide 5.

A summary of the disclosure differences are depicted below:

BDCs REITs

Registration form N-2 S-11

Portfolio Investments Schedule Industry-specific of Investments, which disclosure required by include type of security, the Form S-11, supplements cost of the investment that describe property and fair value of the acquisitions investment

Prior Performance None As required by Guide 5

Marketing Materials Not required Required to be to be submitted to the SEC submitted for review and prior to first use, but comment pursuant to typically filed Guide 5 pursuant; to Rule 482

Understanding the nature of REITs vs. BDCs is critical to determining whether to make an investment in one or the other. The differences in the required disclosures are underpinned by the regulatory requirements applicable to each.

Conclusion

Both non-traded REITs and non-traded BDCs cater to investors that seek investments that are intended to provide regular income while not being exposed to the public markets. Based on the more than two decade history of non-traded REIT offerings and the fact that there are approximately [ ] non-traded REITs operating today, this model appears to continue to resonate with investors. While non-traded BDCs have a much shorter history, the number of new entrants to the marketplace continues to rise and more and more non-traded BDCs are showing the ability to raise money which would suggest that the non-traded BDC model is attractive to investors as well. As a result of the growing acceptance of both models, we are seeing more and more overlap between the two industries. There is nothing to suggest that this trend will not continue.

1. Cynthia M. Krus is a partner in the Business Practices Group at Sutherland Asbill & Brennan LLP. Owen J. Pinkerton is a senior associate in the Business Practices Group at Sutherland Asbill & Brennan LLP. Both Ms. Krus and Mr. Pinkerton are active in the representation of alternative investment sponsors, including BDCs and REITs.

2. FINRA is considering whether to require broker-dealers who sell REIT securities to include a value of the securities in their account statements that approximates the net offering price or some other amount. These rules have not yet been adopted by FINRA. See FINRA Notice to Members 11-44 and 12- 14. Vol. 19, No. 7 • July 2012 The SBIC Program — Is it Right For You?

By Cynthia M. Krus and Lisa A. Morgan

small business investment company (SBIC) is a privately owned and operated company that makes long-term investments in US-based small businesses and is licensed by the US Small Business AAdministration (SBA). SBICs are designed to stimulate the flow of private equity capital to eligible small businesses in the form of debt or equity investments. For more than 50 years, the SBA has provided capital to privately owned and operated investment firms, using funds loaned at favorable rates and guaranteed by the US government.

With the current debenture coupon rate at by the SBA should consider the benefits of 2.766 percent,1 the lowest pricing in the history forming an SBIC as a standalone fund or as a of the SBIC program, the SBIC program pro- complement to an existing platform of funds. vides qualifying funds access to low-cost lever- This article provides an overview of the SBIC age. As a result, funds that have investment program as well as the SBIC formation process strategies focused on investments in small and helps answer the question, “Is the SBIC businesses and can commit to comply with program right for you?” the additional rules and regulations imposed What is the SBIC Program?

Cynthia M. Krus is a Partner and is Vice-Chair of The SBIC program was created in 1958 to the Corporate and Financial Services practice and fill the gap between the availability of venture Lisa A. Morgan is Counsel in the Corporate and capital and the needs of small businesses in Financial Services practice at Sutherland Asbill & start-up and growth situations. No tax dollars Brennan LLP. are used to fund the SBIC debenture program (the Debenture Program). Rather, SBIC deben- wake of the financial crisis, which increased tures are pooled periodically and sold in the the maximum leverage available to $150 mil- public markets to private investors in the form lion for one SBIC and $225 million for two or of SBA guaranteed certificates. The amount more SBICs under common control. There is of funds that the SBA may lend to SBICs is also legislation pending that would increase determined by annual Congressional appro- this threshold to $350 million for two or more priations based on the historical loss rates. SBICs under common control. Since inception, the SBIC program has The continued growth and success of the continued to grow in size. In fact, in fiscal SBIC program has led to the recent introduc- year 2011, Congress expanded the resources tion of a new program, the “Early Stage” SBIC available to the SBIC program by $1 billion. Program. The Early Stage SBIC Program was Currently, there are over 300 investment funds created in response to President Obama’s licensed as SBICs. More than 20 SBICs were “Start-Up America” initiative, which is aimed licensed in the past year alone, which was at job creation by promoting high-growth double the average for previous years. In fis- entrepreneurship. This new program also cal year 2011 alone, investments by SBICs marks the SBA’s attempt to create another in small businesses created more than 56,000 program focused on equity investing, similar jobs, according to the SBA. to the previous participating securities pro- Fiscal year 2011 was a banner year for the gram. The SBA intends to commit up to $1 SBIC program and the year-end statistics billion in SBA guaranteed leverage over a highlight the success and growth of the pro- five year period to selected early stage ven- gram. For example, in fiscal year 2011, the ture funds through the Early Stage SBIC level of SBA commitments to funds jumped Program.3 Among other requirements, an to $1.8 billion, the amount of capital put Early Stage SBIC will be required to invest at towards financing small businesses increased least 50 percent of its invested capital in early to $2.8 billion, and 1,339 small businesses stage companies, which are defined as com- were financed. The recent growth in the SBIC panies that have never achieved positive cash program largely is attributable to the growing flow from operations in any fiscal year prior recognition of the benefits the SBIC program to the SBIC’s initial investment.4 Early Stage offers to both the small business community SBICs will be subject to additional regulations (in the form of jobs created and increased in addition to the regulations applicable to a access to capital) as well as the investment traditional SBIC. Many of the new require- community (in the form of access to low-cost ments under the Early Stage SBIC program leverage). were intended to address the deficiencies from The SBIC program has vacillated over time the previous participating securities program. between being a program primarily focused The continued success and growth of the on debt investing and a program focused on SBIC program is proof that the SBIC pro- equity investing. Prior to 2004, in addition to gram fills a void in today’s capital markets by the Debenture Program, the SBA also offered providing capital to those businesses that are a participating securities program, which was a unable to obtain financing from traditional program the SBA created to better match how sources, such as banks and private sources SBICs were funded with the equity needs of of capital. The increase in the number of entrepreneurs. Under the participating securi- SBIC licenses granted last year, coupled ties program, the SBIC shared a portion of its with the attention the program has received profits with the SBA. Although the partici- through new and pending legislation, has pating securities program ceased issuing new helped solidify the SBIC program as a valu- leverage commitments in 2004, the Debenture able program for both the investment com- Program remains fully operational and has munity and the small business community. grown exponentially over the past five years.2 The SBIC program is expected to continue The success of the Debenture Program was to attract new investors and management spurred by the enactment of the American teams as the investment community seeks Recovery and Reinvestment Act of 2009 in the out new, non-traditional sources of leverage

THE INVESTMENT LAWYER 2 and government seeks out solutions to the does make an exception to this rule for an inves- nation’s high unemployment rate. tor that is a traditional investment company. A traditional investment company, as defined by How Do I Get Started? the SBA, may control more than 70 percent of an SBIC’s Regulatory Capital (defined below). SBICs are organized under state law as cor- The SBA permits an existing fund to “drop- porations, limited partnerships or limited liabil- down” a portion of its commitments and funds ity companies. SBICs that are limited liability to an SBIC limited partnership. companies must be organized in Delaware. Although SBICs may be organized in any How Can I Access SBA Leverage? of the forms mentioned above, the SBA pre- fers the limited partnership form of organiza- SBA regulations currently limit the amount tion for SBIC licensees; in fact, the SBA has that SBICs may borrow up to a maximum of adopted special rules to accommodate licensing $150 million when the SBA has at least $75 of limited partnerships and has created a model million in Regulatory Capital, receives a capi- limited partnership form for limited partner- tal commitment from the SBA and has been ships licensed by the SBA to operate as SBICs. through an examination by the SBA subsequent Typically, an SBIC is not registered under the to licensing. An SBIC’s “Regulatory Capital” Investment Company Act of 1940 (the 1940 includes paid-in capital plus unfunded binding Act), but, rather, relies on the exemption from capital commitments from institutional inves- the definition of investment company set forth tors. SBICs may obtain a second license and in Sections 3(c)(1) or 3(c)(7) of the 1940 Act. gain access to an additional $75 million in An SBIC also can be structured as a public leverage when they have at least $37.5 million company or as a wholly owned subsidiary of a in Regulatory Capital, for a maximum of business development company. $225 million combined SBIC leverage. Legislation In addition to the SBIC, a separate entity also has recently been introduced to increase the that will act solely as the general partner of combined leverage capacity for affiliated SBIC the SBIC must also be formed. The general funds from $225 million to $350 million. partner will be responsible for managing the SBICs may obtain leverage by first obtain- SBIC. ing a leverage commitment from the SBA (a Leverage Commitment) and then drawing down How Much Capital Do I Need? leverage from that Leverage Commitment. Leverage Commitments may be obtained at In order to begin the SBIC licensing process, the time of licensing. Leverage Commitments a fund must have anywhere from $15 million may also be obtained periodically during each to $75 million in private capital (or have com- fiscal year. When a Leverage Commitment is mitments in place for such amount). The SBIC issued, the SBIC pays a one percent commit- program offers licensed SBICs up to two tiers ment fee. Leverage Commitments expire on of leverage. As a result, larger funds will have September 30 of the fourth fiscal year following access to a greater amount of leverage. their issuance. The SBA has regulations and policies SBICs may draw down leverage from an designed to assure that an SBIC receives sig- existing Leverage Commitment upon one day’s nificant investments from investors who do not notice through an interim credit facility pro- participate in or otherwise control its manage- vided by the Federal Home Loan Bank of ment. In an effort to ensure that the investor Chicago. A two percent “user” fee payable to the base is diverse, SBA regulations and policies SBA and 37.5 basis points of underwriting fees require that an SBIC must receive at least 30 are deducted from each disbursement under the percent of its private capital from a total of credit facility. The SBIC pays an interim interest three or more investors who are unrelated to the rate on each debenture at the time of issuance. management. Additionally, no single investor Every six months, all debentures issued during may own more than 70 percent of an SBIC’s the prior six-month period are pooled by the Regulatory Capital (defined below). The SBA SBA and a new interest rate is established.

3 Vol. 19, No. 7 • July 2012 What Types of Companies (iv) Businesses that are passive and do not Can I Invest In? carry on an active trade or business. The SBIC program is an origination program for new investments in small businesses. In addition, SBICs are precluded from mak- As a result, existing investments held by another ing investments in a small business if the fund are not permitted to be moved into the investment would give rise to a conflict of SBIC. An SBIC may only invest in small busi- interest. Generally, a conflict of interest may nesses. Under present SBA regulations, eligible arise if an associate of the SBIC has or makes small businesses include businesses that have a an investment in the small business or serves as tangible net worth not exceeding $18 million one of its officers or directors or would other- and have average annual fully taxed net income wise benefit from the financing. Joint investing not exceeding $6 million for the two most with an associate of the SBIC, such as another recent fiscal years. SBA regulations also pro- fund controlled by affiliates5 of the SBIC’s gen- vide alternative size standard criteria to deter- eral partner, may be made on identical terms or mine eligibility, which depend on the industry on terms which are fair to the SBIC. in which the business is engaged and are based Upon closing of a financing, the small busi- on such factors as the number of employees ness is required to sign several forms whereby and gross sales. In addition to investing only the small business certifies that it qualifies as in small businesses, an SBIC must invest at a small business, as such term is defined in the least 25 percent of its invested funds in smaller SBA regulations, and that it will comply with enterprises. A smaller enterprise is a small busi- applicable rules and regulations.6 In addition ness that has a tangible net worth not exceeding to the certifications, the small business must $6 million and has average annual fully taxed provide other information to the SBIC so that net income not exceeding $2 million for the two the SBIC may provide such information to the most recent fiscal years. SBA. Such information includes, among other In addition, an SBIC may not invest more things, number of employees and information than 10 percent of its “total capital” in any sin- regarding minority ownership. gle company. Total capital is the sum of private capital and “the total amount of leverage pro- How Can I Structure My jected by the SBIC in its business plan that was approved by SBA at the time of the grant of the Investments? company’s license.” Since most SBICs project An SBIC may make investments in the form the use of two tiers of leverage (that is, leverage of debt, debt with equity features, or equity equal to two times their private capital), this securities. Debt securities must be issued for calculation is generally equivalent to 30 percent a term of not less than one year and must of private capital, or $22.5 million for an SBIC have amortization not exceeding straight line. with $75 million in Regulatory Capital. The The permissible interest rate on debt securities SBA may approve a larger percentage if neces- depends on whether they are straight debt or sary to protect the SBIC’s investment. debt with equity features. For straight debt, the SBA regulations also preclude investment permitted rate is the higher of (i) 19 percent, in certain types of business, including, among or (ii) 11 percent over the higher of the SBIC’s others: weighted cost of Debenture Leverage or the current interest rate for newly-issued deben- (i) Companies whose principal business is tures. For debt with equity features, the permit- relending or reinvesting (venture capi- ted rate is the higher of (i) 14 percent, or (ii) six tal fi rms, leasing companies, factors, percent over the higher of the SBIC’s weighted banks); cost of Debenture Leverage or the current interest rate for newly-issued debentures. SBA (ii) Real estate projects; regulations define an SBIC’s weighted cost of Debenture Leverage and describe the permitted (iii) Businesses that will use the funds rate when more than one SBIC participates in outside of the United States; and the financings.

THE INVESTMENT LAWYER 4 The applicable interest rate is calculated federally-insured deposits, and deposits in using all points, fees, discounts and other costs “well-capitalized” federally-insured financial of money other than applications and closing institutions). fees of up to five percent of the financing (if If an SBIC uses leverage, it will be required it is debt with equity features) or three percent to avoid “capital impairment” which will be for loans without equity features, that may be considered to exist if the SBIC’s “capital charged in addition to the permitted interest. impairment ratio” (calculated by subtracting In addition, an SBIC may be reimbursed for the SBIC’s realized losses and net unrealized its routine closing costs, including legal fees. depreciation from the SBIC’s paid-in capital An SBIC may require a small business and dividing the result by the SBIC’s paid-in to redeem the SBIC’s equity investment, but capital) exceeds permitted levels detailed in the only after one year, and then only for a price regulations that vary depending on the propor- based on a pre-determined formula based on tion of equity investments made by the SBIC. either the book value and/or earnings of the SBICs using leverage are subject to regulations small business or a third-party appraisal by that provide the SBA with a series of remedies a mutually agreed upon, qualified appraiser. for violations of SBA’s regulations. The rem- Mandatory redemptions not complying with edies are graduated in severity depending on these requirements will be treated as if they the seriousness of the SBIC’s financial condi- were debt securities. However, the small busi- tion or its misconduct. For minor regulatory ness may be required to redeem the SBIC’s infractions, warnings may be given. For seri- equity security if the small business has a ous infractions, restrictions on distributions public offering, has a change of control or and prohibitions on making new investments management or defaults under its investment may be imposed. In several cases, the SBA may agreement. require that an SBIC’s limited partners remove An SBIC may retain its investment in a the SBIC’s general partner or its officers or business that ceases to be small, and may con- directors, and the SBA may obtain appoint- tinue to invest in a “large” business until it has ment of a receiver for the SBIC. a public offering. Following a public offering SBICs are required to file a variety of by such a “large” business, the SBIC still may reports with the SBA. These reports include exercise rights to acquire securities that were annual financial statements that are certified by obtained while the business met the criteria to the SBIC’s independent certified public accoun- be deemed a small business. tants, valuation reports as described above, reports as to changes in the SBIC’s manage- What Regulations Will I Be ment, material litigation, a brief report describing each investment, and copies of reports sent Subject To? to investors and, if applicable, to the Securities The SBA has adopted a number of regula- and Exchange Commission. SBICs are peri- tions concerning operating requirements of odically examined and audited by the SBA to SBICs intended to assure their proper manage- determine compliance with SBA regulations. ment. The principal regulations focus on use Finally, the SBA prohibits, without prior of leverage, valuation of investments, report- SBA approval, a change of control of an SBIC ing requirements and ownership or change or transfers that would result in any person (or of control. For example, the general partner a group of persons acting in concert) owning or board of directors is required to value 10 percent or more of a class of capital stock the SBIC’s assets annually (semi-annually, if of a licensed SBIC. leverage is used) pursuant to valuation guidelines approved by the SBA. In addition, the How Will I Be Compensated? SBA generally requires that an SBIC invest its “idle funds” not invested in small businesses Any management fee or incentive fee paid in liquid, safe, short-term investments speci- by an SBIC must be approved by the SBA. In fied in the regulations (principally, US gov- general, the maximum management fee rate is ernment obligations, repurchase obligations, calculated in the following manner:

5 Vol. 19, No. 7 • July 2012 • If the management fee base is less than Management Assessment Questionnaire or equal to $60 million, then the management fee rate is 2.5 percent. To start the licensing process, an applicant must complete a MAQ. The MAQ consists of • If the management fee base is greater two forms that cover qualitative and quantita- than $60 million and less than $120 mil- tive information on the management team, the lion, then the management rate is: 2.5 proposed strategy for the SBIC and the prin- percent - (.5 percent x ((management fee cipals’ investment track record. The MAQ is base -$60 million)/$60 million)). reviewed by the SBA’s Investment Committee, after which the applicant’s principals are gen- • If the management fee base is greater erally invited to meet with the members of the than or equal to $120 million, then the Investment Committee. management fee rate is 2 percent. The goal of the SBIC licensing process is to confirm that each applicant’s management The SBA’s policies regarding the payment team meets these requirements. In order to be of management fees are set forth in detail in licensed, an applicant’s managers must gener- SBA TechNote 7 and TechNote 7A. ally meet the following criteria: The SBIC may also pay an incentive fee to its investment adviser and/or those individu- • Senior-level decision making experience als that are responsible for the management in a private equity/mezzanine fund; of the SBIC. Both the manner in which the incentive fee is calculated and the distribu- • Demonstrate evidence of strong deal fl ow tion of such fee is closely scrutinized by the in the investment area for the proposed SBA. The SBA expects that those entities fund; or individuals receiving any portion of the incentive fee are actively involved in the man- • Investment experience as a principal agement of the SBIC and that the percentage rather than as an agent; of the incentive fee that they receive is com- mensurate with their level of involvement in • Realized track record of superior re- the SBIC. turns benchmarked against funds of vintage year and style; How Do I Get an SBIC License? • Hands-on experience adding value at In order to obtain access to the SBA’s the portfolio company level; and low-cost debentures, the prospective SBIC must undergo a rigorous licensing process. • Above all, the management team must The licensing process is composed of three be cohesive, with complementary skills, separate phases and typically takes any- history and strong chemistry. where from eight to 13 months to complete. These phases include: (i) the Management Formal Application Assessment Questionnaire (MAQ) (two to three months); (ii) the formal application After meeting with the applicant’s principals, (five to eight months); and (iii) the approval the SBA’s Investment Committee will either process (one to two months). Although the request additional information or issue a “go SBIC licensing process is complicated and forth” letter to the applicant indicating that it has involves a thorough evaluation of the fund’s passed the first part of the application process business plan, once a fund is licensed, the and is now authorized to file a formal application. SBA typically has minimal direct involvement During the formal application process, the SBA in ongoing portfolio management operations. reviews the applicant’s business plan, projections, Generally, the SBA leaves portfolio manage- legal documents, and applicable legal opinions ment and investment decisions to the fund and conducts reference and other background managers. checks on the management team.

THE INVESTMENT LAWYER 6 Pre-Licensing Investments as the Early Stage SBIC program, are helping to introduce the SBIC program to funds that pre- After an application is filed, an applicant viously may not have considered the program. may make pre-licensing investments which will Interested funds must be willing to endure a rig- be included in its Regulatory Capital if they are orous, and sometimes lengthy, licensing process submitted to the SBA for approval prior to the and be willing to work within a regulated envi- investment being made. Once licensed, such pre- ronment. Those funds with strong track records approval of investments is not required. The SBA and the ability (and desire) to tackle a new requires principal members of the management compliance regime should consider whether the team to attend a one-day class run by the SBA SBIC program is available to them and all that and will only permit one pre-licensing investment it has to offer both the investment community to be made prior to at least one person from an and the small business community, including applicant attending the class. access to low-cost leverage, increased access to capital and the creation of jobs.

License Approval Process Notes The SBA license approval process consists 1. The interest rate is established when the debentures of three levels of review. First, the license are issued and is based on the 10-year Treasury rate plus a application is reviewed by a licensing analyst market driven spread. and an SBA attorney. Next, once the licensing 2. Debentures have ten year maturities and may be pre- staff has completed its review, the applica- paid with a five percent penalty in the first year, which tion is presented to the Investment Division penalty rate declines one percent per year (i.e., 5-4-3-2-1%) Licensing Committee. Finally, if the applica- so that the debentures may be prepaid without penalty beginning in the sixth year following issuance. Repayment tion receives a majority vote, it is forwarded of debentures may be subordinated to repayment of loans to the Agency Licensing Committee, which is from other non-associated lenders up to the lesser of $10 comprised of certain senior managers of the million or twice the amount of the SBIC’s Regulatory SBA. Before the application is forwarded to Capital. In addition, it is important to note that the general the Agency Licensing Committee, the appli- partner of the SBIC is not personally liable for the repayment of the debentures. cant must have on deposit at least $2.5 million. Any approved pre-licensing investments, as 3. The SBA has stated that not more than $150 million well as approved organizational and operating of leverage commitments can be reserved in 2012, not more than $200 million of leverage commitments can expenses, can be counted toward this $2.5 mil- be reserved per year from 2013-2015, and not more than lion cash deposit requirement. The applicant’s $250 million of leverage commitments can be reserved bank must certify that the funds are in the in 2016. account and unencumbered. 4. An Early Stage SBIC must be a limited partnership A Capital Certificate evidencing an appli- and must have a minimum of $20 million of Regulatory cant’s Regulatory Capital must be signed and Capital to be licensed. The amount of leverage that can all legal documents must be in “final form” be reserved for draws by an Early Stage SBIC will be prior to consideration by the Agency Licensing limited to the lesser of the SBIC’s Regulatory Capital or $50 million. Access is limited to a single tier of leverage. Committee. If the Agency Licensing Committee Interest on drawn debenture leverage is payable quarterly. approves the license application, as soon as An Early Stage SBIC must reserve the first five years of fully executed copies of all legal documents are interest payments either by (i) having binding unfund- submitted, the application is forwarded to the ed commitments in that amount from its Institutional SBA Administrator for final approval. Investors that can only be drawn to pay that interest or (ii) maintain that amount of cash in a separate bank or investment account. Alternatively, the Early Stage SBICcan draw discounted debentures from which the first Is the SBIC Program Right For Me? five years of interest have been deducted from principal. 5. In general, the SBA defines affiliation as occurring Recently proposed and pending legisla- when one concern or entity controls or has the power to tion and the expansion of the SBIC program control the other, or when a third party has the power to through the addition of new programs, such control both.

7 Vol. 19, No. 7 • July 2012 6. Form 652 is signed by the small business certify- assistance to businesses such as entities participating that it will not discriminate against any person in ing in the SBIC program. Form 480 is signed by the the United States. The SBA asks for the certification small business certifying that its average net income because it is mandated to uphold the provisions of and tangible net worth are at the specified thresholds. the Civil Rights Act of 1964, the Age Discrimination The SBA asks for the certification because it needs Act of 1975 and the provisions of federal law which to ensure that the financial information the SBIC is address nondiscrimination in the financial assistance representing as accurate is corroborated by the small programs of the SBA before it provides government business.

Copyright © 2012 CCH Incorporated. All Rights Reserved Reprinted from The Investment Lawyer July 2012, Volume 19, Number 7, pages 3-10, with permission from Aspen Publishers, Wolters Kluwer Law & Business, New York, NY, 1-800-638-8437, www.aspenpublishers.com

Law & Business LEGAL ALERT

July 2, 2012

Congress Considering Legislation to Increase BDC and SBIC Access to Capital

Overview

Business Development Companies (BDCs) and Small Business Investment Companies (SBICs) are an increasingly important source of financing for privately held small and middle-market companies. As their importance has increased in recent years, BDCs have encountered regulatory hurdles that have stymied their ability to provide access to capital for businesses excluded from traditional sources of financing. Recently, members of Congress have introduced a pair of bills that would increase the amount of funds available for the BDC and SBIC industries to lend to small and middle-market companies. This Legal Alert examines these bills and their implications for BDCs, SBICs, and BDCs that operate SBIC subsidiaries.

On June 8, 2012, Representatives Michael M. Grimm (R-NY) and Nydia M. Velázquez (D-NY) introduced the Next Steps for Credit Availability Act (H.R. 5929) to reform certain aspects of the regulatory regime that governs BDCs. H.R. 5929 is currently in committee. In addition, on February 28, 2012, Sens. Mary L. Landrieu (D-LA) and Olympia J. Snowe (R-ME) introduced Senate Bill 2136 (S. 2136), which would expand the Small Business Administration’s (the SBA) authorization to guarantee loans to SBICs. S. 2136 is also currently in committee.

The Next Steps for Credit Availability Act

H.R. 5929, in its current form, encourages BDC investment in small and middle-market businesses by improving BDCs’ ability to raise capital. It would amend certain sections of the Investment Company Act of 1940 (the 1940 Act) and compel the Securities and Exchange Commission (the SEC) to amend certain of its rules under the Securities Act of 1933 (the 1933 Act). If enacted, the bipartisan bill would:

. Allow BDCs to own registered investment adviser subsidiaries without the need to obtain exemptive relief from the SEC to do so; . Increase the amount of funds BDCs may borrow by reducing asset-to-debt coverage requirements from 2:1 to 1.5:1, exclude preferred stock from the asset-to-debt coverage requirements and allow BDCs to issue multiple classes of preferred stock; . Permit BDCs to file SEC registration statements that incorporate information from already-filed reports by reference; and . Use other streamlined registration processes afforded to operating companies.

BDC Ownership of Registered Investment Advisers

With limited exceptions, the 1940 Act and the rules thereunder currently prohibit BDCs and other investment companies from owning an interest in a registered investment adviser. Historically, BDCs owned unregistered investment advisers by relying on the so-called “private adviser exemption” from registration with the SEC under the Investment Advisers Act of 1940 (the Advisers Act) for investment advisers with fewer than 15 clients. The Dodd-Frank Wall Street Reform and Consumer Protection Act of

© 2012 Sutherland Asbill & Brennan LLP. All Rights Reserved. This communication is for general informational purposes only and is not intended to constitute legal advice or a recommended course of action in any given situation. This communication is not intended to be, and should not be, relied upon by the recipient in making decisions of a legal nature with respect to the issues discussed herein. The recipient is encouraged to consult independent counsel before making any decisions or taking any action concerning the matters in this communication. This communication does not create an attorney-client relationship between Sutherland and the recipient. 1

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2010, however, removed the private adviser exemption, thereby requiring many previously unregistered investment advisers to register with the SEC or with a state securities regulator. Since then, several BDCs have sought and received exemptive relief to own registered investment advisers subject to certain conditions. Section 2 of H.R. 5929, if enacted, would allow all BDCs to own registered investment advisers without the need to obtain exemptive relief.

Measures to Improve the BDC Capital Structure

Asset Coverage Limit Reductions

H.R. 5929 would grant BDCs significantly more flexibility in arranging their capital structures. The 1940 Act limits a BDC’s ability to use leverage by imposing asset coverage requirements for borrowings or “senior securities.” Under these limits, a BDC cannot borrow or issue senior securities unless, immediately after the borrowing or issuance, the BDC’s asset coverage ratio (i.e., the ratio of total assets to debt) is 2:1. In other words, BDCs must hold $2 of assets for every $1 of debt. H.R. 5929 would reduce the asset coverage ratio applicable to BDCs from 2:1 to 1.5:1. Thus, BDCs would only be required to hold $1.50 of assets for every $1 of debt. This amendment would enhance BDCs’ ability to use leverage to increase the breadth and depth of their investments and would make more capital available to small and middle-market companies through BDC investment.

Preferred Stock Issuance

H.R. 5929 would also give BDCs more latitude to offer preferred stock. Sections 18 and 61 of the 1940 Act currently place a number of restrictions on a BDC’s ability to issue preferred stock, which, like debt, is considered to be a “senior security.” In particular, a BDC cannot issue multiple classes of preferred stock, and it cannot issue preferred stock or pay a dividend or distribution on preferred stock if its asset coverage ratio would fall below 2:1 after the issue or payment. H.R. 5929 would permit BDCs to issue multiple classes of preferred stock and would exempt BDCs from the asset coverage ratios discussed above that are otherwise applicable to preferred stock issued by investment companies. This flexibility with regard to preferred stock would provide BDCs with access to additional capital to invest in small and middle-market companies.

Registration and Reporting Parity for BDCs

H.R. 5929 would modify the SEC registration and reporting process for BDCs. BDCs are subject to numerous registration and offering requirements that are not applicable to other 1933 Act and Securities Exchange Act of 1934 registrants of comparable size and vintage because the SEC’s 2005 securities offering reform did not apply to BDCs. H.R. 5929, in effect, extends securities offering reform to BDCs and allows BDCs to rely on the more streamlined and flexible process and rules relied upon by other public companies since 2005 in connection with their registered offerings. Among other amendments, H.R. 5929 would compel the SEC to revise its registration and offering rules to:

. Allow BDCs to be eligible to be “well-known seasoned issuers,” (WKSIs) so that they may take advantage of the streamlined registration requirements for WKSIs, including permitting automatically effective Form N-2 registration statements; . Allow BDCs to file SEC registration statements that incorporate information from already-filed reports by reference; and,

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. Permit BDCs to take advantage of several safe harbors and exemptions related to offerings to more openly communicate with their stockholders and potential investors in connection with registered offerings.

SBIC Enhancements

There have been several legislative initiatives to increase the amount of leverage available under the SBIC program to increase investment in small businesses. On February 2012, Landrieu, chair of the Senate Committee on Small Business and Entrepreneurship, introduced S. 2136, which authorizes the Administrator of the SBA to make $4 billion in guarantees of debentures of SBICs for programs under the Small Business Investment Act of 1958. This proposed legislation also amends the Small Business Investment Act of 1958 to increase the maximum amount of outstanding leverage to be made available by the SBA to two or more commonly controlled SBICs from $225 million to $350 million. If enacted, S. 2136 would provide additional financing to SBICs, including those that are structured as subsidiaries of BDCs.

More SBIC legislation may be on the horizon. Since the introduction of S. 2136, the House Committee on Small Business has held a series of hearings on the state of small business investment. The hearings have examined obstacles to small business growth and job creation, with a focus on access to capital for small businesses. As a result of these hearings, there may be additional legislation to provide SBICs with greater access to capital to invest in small businesses.

Sutherland has been working on behalf of the BDC industry for years to achieve similar changes, including providing comments to the SEC in 2005 when the SEC first introduced proposed offering reforms. We have summarized the provisions of the current House bill that would affect BDCs in the attached chart. Copies of both pending bills, Sutherland’s comment letter, and other relevant information is also available at our practice site at www.publiclytradedprivateequity.com

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If you have any questions about this Legal Alert, please feel free to contact any of the attorneys listed below or the Sutherland attorney with whom you regularly work.

Steven B. Boehm 202.383.0176 [email protected] Cynthia M. Krus 202.383.0218 [email protected] John J. Mahon 202.383.0515 [email protected] Harry S. Pangas 202.383.0805 [email protected]

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Summary of the Next Steps for Credit Availability Act

Section, Rule or Form to Be Amended Impact on BDCs Ownership of Registered Investment Advisers

1940 Act Section 60 Allows BDCs to own registered investment advisers. Asset Coverage Limit Reductions

Lowers the asset coverage requirement for BDCs from 2:1 1940 Act Sections 18 and 61(a) to 1.5:1 and allows BDCs to issue multiple classes of preferred stock. Registration and Reporting Parity

Allows BDCs to incorporate already-filed information by Forward Incorporation (Form N-2) reference.

Allows BDCs to:

• qualify as WKSIs; WKSI Status (Rules 405 and 433) • file automatic shelf registrations; and • use free-writing prospectuses.

Permits BDCs to release factual and forward-looking Flexible Communications (Rules 168 and 169) business information.

Allows BDCs to communicate with investors more freely Prospectus Safe Harbors during the preparation and filing periods for a registration (Rules 134, 163 and 163A) statement.

Allows broker-dealers and other providers of market Research (Rules 138 and 139) research more flexibility to disseminate research on BDCs.

Free-Writing Prospectus Safe Harbor Provides a safe harbor to BDCs for post-filing free-writing (Rule 164) prospectuses.

Allows a BDC to file an N-2 shelf-registration statement for Shelf Registration (Rule 415) continuous or delayed offerings.

Synchronizes BDC prospectus filing requirements with Final Prospectus (Rule 497) those of other registrants under Rule 424(b).

Relieves BDCs of the requirement to provide written Written Confirmation (Rules 172 and 173) confirmations of sales, notifications of allocation, and deliveries of securities.

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LEGAL ALERT

April 6, 2012

JOBS Act to Make It Easier and Less Burdensome to Raise Capital in Securities Offerings

On April 5, 2012, President Obama signed the Jumpstart Our Business Startups Act (JOBS Act) into law.1 The JOBS Act is intended to make it easier and less burdensome for companies to raise capital through securities offerings, including IPOs and private offerings. Some of the JOBS Act’s provisions became effective immediately, while other provisions require rulemaking by the SEC under deadlines that vary from 90 to 270 days after enactment of the law. Appendix A to this legal alert contains a chart that sets forth the effective dates or rulemaking deadlines for the various provisions of the JOBS Act.

Overview

. Effective upon enactment of the JOBS Act, a new category of companies – “emerging growth companies” – will be able to take advantage of relaxed and less burdensome SEC rules in connection with their IPOs and subsequent SEC disclosure obligations for a period of up to five years after their IPOs.

. The prohibitions on general solicitation and general advertising in connection with Rule 506 offerings solely to “accredited investors” and Rule 144A offerings to “qualified institutional buyers” will be eliminated by SEC rulemaking within 90 days after the date of the enactment of the JOBS Act.

. Provisions permitting “crowdfunding” (which is a method of capital formation involving the solicitation of very small investment amounts from individual investors via social media or internet platforms) that will allow businesses to raise up to $1 million without registration under the Securities Act of 1933 (Securities Act) will be required to be put in place by SEC rulemaking within 270 days of the enactment of the JOBS Act.

. The offering amount limit for a new Regulation A-styled exemption will be $50 million upon the completion of SEC rulemaking that has no set deadline under the JOBS Act.

. Effective upon enactment of the JOBS Act, the Section 12(g) registration threshold under the Securities Exchange Act of 1934 (Exchange Act) is increased to either 2,000 record holders or 500 record holders who are non-accredited investors.

Initial Public Offerings

The JOBS Act eases regulatory requirements in connection with IPOs by companies that qualify as “emerging growth companies” and also reduces their SEC disclosure obligations for up to five years following the completion of their IPOs. An “emerging growth company” is defined as an issuer that had less than $1 billion in gross revenues during its most recently completed fiscal year and completed its IPO on or after December 8, 2011. An issuer will retain its status as an emerging growth company following

1 Jumpstart Our Business Startups Act of 2012, H.R. 3606, 112th Cong. (2012).

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the completion of its IPO until the earliest of: (i) the last day of the fiscal year in which the issuer had total annual gross revenues of $1 billion or more; (ii) the last day of the fiscal year following the five-year anniversary of the date of its IPO; (iii) the date on which the issuer has issued more than $1 billion in non- convertible debt in the previous three-year period; or (iv) the date on which the issuer is deemed a “large accelerated filer.”2

An issuer that qualifies as an emerging growth company will be able to take advantage of the following relaxed rules in connection with its IPO and/or the reports it will be required to file with the SEC subsequent to its IPO:

. Reduced Audited Financial Statement and MD&A Disclosure Requirements – An emerging growth company will only be required to include two years (as opposed to three years) of audited financial statements in the registration statement for its IPO and will not be required to provide selected financial data or MD&A disclosure in the registration statement for any period prior to the earliest audited period presented in the registration statement. These same relaxed rules apply to the periodic reports that the emerging growth company will be required to file with the SEC subsequent to the completion of its IPO.

. Exemption from Auditor Attestation on Internal Control over Financial Reporting – An emerging growth company will not be subject to the requirement under Section 404(b) of the Sarbanes-Oxley Act of 2002 that its independent public accounting firm attest to its internal control over financial reporting. Prior to the enactment of the JOBS Act, an emerging growth company was required to include an audit report from its independent public accounting firm on its internal control over financial reporting in the second annual report on Form 10-K that it filed with the SEC subsequent to its IPO, to the extent that the market value of its common equity held by non-affiliates was $75 million or more.

. Reduced Executive Compensation Disclosure – An emerging growth company will be permitted to only include in its SEC filings the scaled disclosures on executive compensation required by “smaller reporting companies” under the SEC’s rules. As a result, an emerging growth company may (i) omit the Compensation Discussion and Analysis, (ii) provide the Summary Compensation Table for two rather than three years, (iii) provide compensation information for three named executive officers rather than five, and (iv) omit most of the compensation tables that supplement the information contained in the Summary Compensation Table.

In addition, an emerging growth company will be exempt from Dodd-Frank Act requirements, which remain subject to future SEC rulemaking, to provide a comparison of executive pay to the company’s financial performance and to the median pay of all other employees.

Furthermore, an emerging growth company will be exempt from the requirements to seek shareholder approval of an advisory vote on its executive compensation arrangements.

2 A “large accelerated filer” is an issuer that meets the following conditions at the end of its fiscal year: (1) had an aggregate worldwide market value of voting and non-voting common equity held by its non-affiliates of $700 million or more, as of the last business date of the issuer’s most recently completed fiscal quarter; (2) has been subject to the requirements of Sections 13(a) and 15(d) of the Exchange Act for the last 12 calendar months; (3) has filed at least one annual report on Form 10-K with the SEC; and (4) is not eligible to use the requirements for smaller reporting companies for its annual reports on Form 10-K and quarterly reports on Form 10-Q.

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. Exemption from New or Revised Accounting Standards and Certain PCAOB Rules – Emerging growth companies do not have to comply with new or revised accounting standards until the date that these standards apply to private companies.

In addition, emerging growth companies do not have to comply with any rules adopted in the future by the Public Company Accounting Oversight Board (PCAOB) requiring mandatory audit firm rotation or a supplement to the report of their independent registered public accounting firms to provide additional information about the audit and the financial statements of the emerging growth company. The PCAOB issued concept releases in 2011 that sought comment on these two provisions.

. Confidential Submission of Initial Public Offering Registration Statement – An emerging growth company can submit a draft registration statement to be used in connection with its IPO to the SEC for confidential review. These confidential submissions will be exempt from the Freedom of Information Act, but will have to be publicly filed with the SEC at least 21 days before the road show for the IPO.

. “Testing the Waters” Provision – Emerging growth companies and persons acting on their behalf will be able to make oral and written offers to sell their securities to “qualified institutional investors,” as such term is defined in Rule 144A under the Securities Act, and institutional “accredited investors,” as such term is defined in Rule 501 of Regulation D under the Securities Act, before the filing, and during the pendency of the SEC review of their registration statements. Prior to the JOBS Act, no oral or written offers to sell securities could be made prior to the filing of the IPO registration statement with the SEC, and no written offers, other than by use of the Section 10 prospectus included in the registration statement or certain free writing prospectuses, could be made subsequent to the filing of the IPO registration statement with the SEC.

. Research Reports – Under the JOBS Act, research reports distributed by broker-dealers, including the underwriter of the IPO, for an emerging growth company that is proposing to file or has filed a registration statement does not constitute an offer to sell a security for purposes of the registration requirements under Section 5 of the Securities Act. Further, the JOBS Act prevents the SEC or a registered national securities association from restricting which members of a broker-dealer may arrange for securities analyst communications with potential investors. Additionally, the JOBS Act allows for securities analysts to participate in meetings with the management of an emerging growth company where broker-dealer personnel who are not acting in a securities analyst role are present.

. Ability to Opt-Out of Rules Applicable to Emerging Growth Companies – An emerging growth company may choose to “opt-out” of the various cost-saving exemptions and scaled disclosure obligations and instead comply with the requirements applicable to non-emerging growth companies. However, an emerging growth company must choose whether it will avail itself of the exemption regarding the extension of time to comply with new or revised accounting standards in connection with the first filing it makes with the SEC.

Private and Exempt Offerings

In addition to the IPO provisions that are only applicable to emerging growth companies, the JOBS Act directs the SEC to relax certain restrictions on private and exempt offerings, and the related requirement of when companies, investment vehicles, and other entities must subject themselves to the periodic and current reporting requirements of the Exchange Act.

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. General Solicitation in Connection with Rule 506 and Rule 144A Offerings – Rule 506 of Regulation D provides a safe harbor from the registration requirements of Section 5 of the Securities Act under which an operating company or investment vehicle can conduct a private placement with no limitation as to dollar amount of the offering. Rule 144A is a safe harbor exemption from the registration requirements of Section 5 of the Securities Act for certain offers and sales of qualifying securities to “qualified institutional buyers” by certain persons other than the issuer of the securities. An issuer wishing to rely on Rule 506 in connection with the sale of its securities, or a person other than the issuer, including an investment banking firm, wishing to rely on Rule 144A in connection with the resale of securities, currently may not offer such securities for sale by any form of general solicitation or advertising.

The SEC will be required to modify Rule 506 to permit general solicitation and advertising in connection with offerings under Rule 506 so long as all purchasers in such offerings are “accredited investors.” Likewise, the SEC will be required to modify Rule 144A to permit general solicitation and advertising in connection with offerings under Rule 144A so long as all purchasers in such offerings are “qualified institutional buyers.”

. Creation of New Regulation A-Styled Exemption – Regulation A currently provides an exemption from registration for transactions by issuers of up to $5 million in any 12-month period. Regulation A may not be relied upon by an issuer that is (i) subject to reporting requirements of Section 13 or Section 15(d) of the Exchange Act; (ii) an investment company registered or required to be registered under the Investment Company Act of 1940 (Investment Company Act), or (iii) a development stage company that either has no specific business plan or purpose or has indicated that its business is to engage in a merger or acquisition with an unidentified company or companies. If an issuer chooses to rely on Regulation A, it will be required to file an offering statement, consisting of a notification, offering circular and exhibits, with the SEC for review. As a practical matter, Regulation A offerings are more akin to registered offerings than exempt offerings.

The JOBS Act amends the Securities Act to create a Regulation A-like exemption from the registration requirements under the Securities Act with the following attributes:

o Permits the aggregate offering threshold of up to $50 million in any 12-month period of equity securities, debt securities or debt securities convertible or exchangeable to equity securities;

o Permits issuers to “test the waters” by soliciting interest in the offering prior to filing any offering statement with the SEC, on such terms and conditions as may be determined by the SEC;

o Will require issuers to annually file audited financial statements with the SEC and grants the SEC additional authority to require issuers relying on the new exemption to make other periodic disclosures;

o Provides that securities can be offered and sold publicly and will not be considered “restricted securities” for purposes of Rule 144 under the Securities Act;

o Provides that certain “bad actors” will not be eligible to rely on the new exemption;

o Provides that the civil liability provision in Section 12(a)(2) of the Securities Act will apply to any person offering or selling securities pursuant to the new exemption; and

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o Preempts the authority of state securities commissioners to require registration and establish offering requirements for certain offerings made pursuant to the new exemption.

. Crowdfunding Exemption – The JOBS Act adds a transactional exemption to Section 4 of the Securities Act for “crowdfunding” which allows issuers to raise up to $1 million without having to comply with Section 5 of the Securities Act. Crowdfunding generally involves raising funds for a common cause or venture through the use of social media to obtain small contributions from many individuals. The crowdfunding transaction must be conducted through a broker or funding portal3 which complies with certain requirements.

To use the crowdfunding exemption, an issuer must have issued less than $1 million of its securities during the 12-month period prior to the transaction. The crowdfunding exemption is only available to non-SEC reporting issuers which are organized in the U.S. and are not investment companies or exempted investment companies under the Investment Company Act.

The JOBS Act limits the amount of money that individuals can invest with a company for the 12- month period prior to the crowdfunding transaction. Investors with an annual income or net worth below $100,000 are limited to investing the greater of $2,000 or 5% of the investor’s annual income or net worth in the issuer’s securities. Investors with annual income or net worth of $100,000 are limited to investing up to 10% of that investor’s annual income or net worth in the issuer’s securities, up to a $100,000 maximum.

Issuers that participate in crowdfunding will required to file with the SEC and disclose to potential investors: (1) the issuer’s name, legal status, physical address and website; (2) the names of the directors, officers and shareholders with more than 20% ownership interest; (3) a description of the issuer and the issuer’s anticipated business plan; (4) a description of the issuer’s financial condition; (5) the intended purpose for the proceeds; (6) the target amount of the offering and the deadline to reach that amount; (7) the price or method of calculating the price of the securities to the public; (8) a description of the ownership and capital structure of the issuer; and (9) any other information that the SEC may require by rule to protect investors.

With the exception of notices to direct investors to the broker or funding portal for the crowdfunding offering, issuers are prohibited from advertising any terms of an offering to investors. Issuers that rely on the crowdfunding exemption will be required to file their financial statements and disclosures about the results of operations with the SEC and provide them to investors on an annual basis.

Crowdfunding transactions must be completed through a broker or funding portal that is registered with the SEC and an applicable self-regulatory organization. As long as a funding portal remains subject to SEC authority, is a member of a national securities association, and meets the requirements that the SEC prescribes, the funding portal need not register as a broker- dealer. However, a funding portal must be a member of a registered national securities association and is still subject to SEC examination, enforcement, rulemakings and any other requirements the SEC deems appropriate.

3 As defined in the JOBS Act, a “funding portal” means any person acting as an intermediary in a transaction involving the offer or sale of securities for the account of others, solely pursuant to section 4(6) of the Securities Act, that does not (A) offer investment advice or recommendations; (B) solicit purchases, sales or offers to buy the securities offered or displayed on its website or portal; (C) compensate employees, agents or other persons for such solicitation or based on the sale of securities displayed or referenced on its website or portal; (D) hold, manage, possess or otherwise handle investor funds or securities; or (E) engage in such other activities as the Commission, by rule, determines appropriate.

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As an intermediary, a broker or funding portal must disclose to investors the risks of the investment as well as any investor education materials that the SEC may require. This intermediary must ensure that the investor reviews the investor-education information and understands the risks, illiquidity, extent of possible loss and nature of the company in which the investor is purchasing securities. The intermediary must also take measures to reduce the risk of fraud with the transaction by completing a background check on the officers, directors and any shareholders with more than a 20% ownership interest. The intermediary must deliver any information received from the issuer to the SEC not later than 21 days prior to the first day on which securities will be sold. The intermediary must also ensure that the aggregate amount of capital raised is equal to or greater than the target offering amount and that investors are allowed to cancel their commitments to invest, and that individual investors do not exceed their respective maximum allowed investments with all issuers, and that the privacy of any investor information collected is protected. Intermediaries are prohibited from compensating promoters, finders or lead generators and must prohibit any director, officer, or partner of the intermediary from having a financial interest in the issuer.

Investors that purchase securities offered pursuant to the crowdfunding exemption have a private right of action against the issuer for rescission based on material misstatements or omissions in connection therewith. For liability purposes, directors, partners, principal executive officers, principal financial and accounting officers, and any person who offers or sells the security in the offering is considered an issuer. An investor that purchases securities pursuant to the crowdfunding exemption may only resell those securities to the issuer, an accredited investor, as part of an SEC registered offering, to a family member, or in connection with death or divorce for one year after the purchase date of securities issued pursuant to the crowdfunding exemption.

While the JOBS Act preempts state securities laws concerning registration, documentation and offering requirements for securities issued pursuant to the crowdfunding exemption, it does not limit or impact states’ enforcement actions concerning fraud, deceit or unlawful conduct of an issuer, funding portal, or any other person or entity using the exemption.

. Increased Threshold Prior to Being Subjected to Periodic Reporting Requirements – In an effort to delay the applicability of the Exchange Act’s registration requirements for private companies and investment funds, the JOBS Act increases the shareholder threshold from securities “held of record” by 500 shareholders to either 2,000 shareholders or 500 non- accredited individual investors. The JOBS Act exempts shareholders who have received their securities pursuant to an employee compensation plan from the “held of record” determination.

Click here to view Appendix A, or scroll to page 7.

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Appendix A

Section Provisions Rulemaking or Report Required Effective Date

Emerging Growth Eligibility Requirements None Effective immediately upon Companies (EGCs) enactment of the JOBS Act. Disclosure Obligations and Available None Effective immediately upon Exemptions for EGCs enactment of the JOBS Act.

Research Reports and Communications None Effective immediately upon about EGCs enactment of the JOBS Act.

Submission of Draft Registration None Effective immediately upon Statements by EGCs enactment of the JOBS Act.

SEC Study and Report of Tick Size Study shall examine the impact that No later than 90 days from the decimalization has had on the enactment of the JOBS Act, number of IPOs since its the SEC must submit a report implementation relative to the period of its findings to Congress. before its implementation, and also shall examine the impact that this NOTE: If the SEC determines change has had on liquidity for small that the securities of EGCs and middle capitalization company should be quoted and traded securities. using a minimum increment greater than $0.01, the SEC may by rule designate a minimum increment between $0.01 and $0.10 – within 180 days of submitting the report to Congress.

SEC Review of Regulation S-K Review shall examine whether there No later than 180 days after is a way to simplify the disclosure the enactment of the JOBS obligations and reduce the costs and Act, the SEC must submit a other burdens for issuers that are report of the review of not EGCs. Regulation S-K to Congress.

The report must provide specific recommendations on how to streamline the registration process.

Crowdfunding All crowdfunding provisions The SEC is required to create rules No later than 270 days after that it deems necessary to enact the the enactment of the JOBS requirements of the crowdfunding Act.

provisions.

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Section Provisions Rulemaking or Report Required Effective Date

Rule 506 of General solicitation and advertising when The SEC is required to revise its Rulemaking is required no Regulation D the purchaser is an accredited investor. rules to allow for general solicitation later than 90 days after the and advertising as long as the date of the enactment of the purchasers are accredited investors. JOBS Act. The rules shall require the issuer to take reasonable steps to determine whether the purchasers are accredited investors. The SEC will provide methods to make this determination.

Rule 144A General solicitation and advertising when The SEC is required to revise its Rulemaking is required no the purchaser is a qualified institutional rules to allow for general solicitation later than 90 days after the buyer. and advertising as long as the seller date of the enactment of the reasonably believes that the JOBS Act. purchasers are qualified institutional buyers.

New Regulation A- Offering threshold to $50 million in any The SEC is required to revise There is no deadline provided Styled Exemption 12-month period. Regulation A accordingly. for this rulemaking.

Study on the Impact on Blue Sky Laws The Comptroller General is required No later than 3 months after on Regulation A Offerings to conduct a study on the impact of the date of the enactment of State laws regulating securities the JOBS Act, the Comptroller offerings made under Regulation A. General must submit a report to Congress on its findings.

Threshold for Increase the Section 12(g) registration None Effective immediately upon Registration threshold under the Exchange Act to enactment of the Act. 2,000 record holders or 500 record holders who are not accredited investors.

The definition of held of record does not The SEC is required to revise the There is no deadline provided include securities held by persons who definition of “held of record.” for this rulemaking. received the securities pursuant to a compensation plan in transactions The SEC is also required to provide exempt from the registration safe harbor provisions that issuers requirements of Section 5 of the can use to determine whether Securities Act. holders of their securities received the securities through a compensation plan.

Enforcement Study The SEC is required to determine The SEC is required to submit whether new enforcement tools are its recommendations under needed to enforce the anti-evasion this study to Congress within provision of Rule 12g5-1 120 days after the date the JOBS Act is enacted.

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  If you have any questions about this Legal Alert, please feel free to contact any of the attorneys listed below or the Sutherland attorney with whom you regularly work.

Steven B. Boehm 202.383.0176 [email protected] James M. Cain 202.383.0180 [email protected] Robert E. Copps 212.389.5045 [email protected] Daphne G. Frydman 202.383.0656 [email protected] Joel J. Hughey 404.853.8090 [email protected] Cynthia M. Krus 202.383.0218 [email protected] John J. Mahon 202.383.0515 [email protected] Harry S. Pangas 202.383.0805 [email protected] Wade H. Stribling 404.853.8194 [email protected] Michael J. Voynich 404.853.8329 [email protected]

www.sutherland.com CLIENT ALERT

March 27, 2012

A Spotlight on Small Business Investment Companies (SBIC) and Their Role in the Entrepreneurship Ecosystem

The U.S. Senate Committee on Small Business and Entrepreneurship (the Committee) held a roundtable on March 22 entitled "A Spotlight on Small Business Investment Companies (SBIC) and Their Role in the Entrepreneurship Ecosystem." The second of three roundtables, this discussion focused on start-ups, entrepreneurship and how to foster the growth of U.S. small businesses.

Committee Chair Sen. Mary Landrieu (D-LA), who had introduced a bill to increase the combined leverage capacity for affiliated SBIC funds from $225 million to $350 million, served as moderator. Several business development companies that also have SBIC licensees participated, including Main Street Capital Corporation, Hercules Technology Growth Capital and Rand Capital Corporation, along with the U.S. Small Business Administration (SBA) and others. SBICs have collectively provided more than $76 billion to more than 100,000 small businesses since the SBIC program began in 1958.

During the roundtable, every participant was supportive of the SBIC program. The SBA representative said that Congressional authorization for the SBIC program has continued to increase and is currently at $3 billion. He noted that the SBA supports an increase to the leverage limits for a family of funds and would support seeking a further increase to the funding authorization, if appropriate. Sen. Landrieu suggested the leverage limit possibly could be increased beyond the $350 million cap currently proposed. She also suggested creating a tiered system, which would reward the best performing SBICs with the availability of a greater amount of leverage.

The discussion concluded with Sen. Landrieu stating that the Committee would develop and introduce a comprehensive bill in the next several months to address the matters discussed in the three roundtables.

You may watch the video of the roundtable to hear the full discussion. (Roundtable begins at 47:12.)

If you have any questions, please contact the attorneys listed below: Steven B. Boehm, Partner 202.383.0176 [email protected] Cynthia M. Krus, Partner 202.383.0218 [email protected] John J. Mahon, Partner 202.383.0515 [email protected] Harry S. Pangas, Partner 202.383.0805 [email protected]

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CLIENT ALERT

January 6, 2012

ISS Establishes Policy on Below-NAV Proposals for BDCs

In its 2012 Corporate Governance Policy Updates (the 2012 Policy Update), Institutional Shareholder Services, Inc. (ISS) recommended for the first time a policy for dealing with proposals by business development companies (BDC) to authorize the issuance of shares of common stock at a price below net asset value per share (NAV). Pursuant to the Investment Company Act of 1940 (the 1940 Act), BDCs are prohibited from selling shares of common stock below NAV with certain exceptions. One such exception permits BDCs to sell shares of common stock below NAV with shareholder approval and with certain determinations made by the BDC's board of directors.

According to the ISS recommendations, BDC proposals seeking shareholder approval authorizing the board of directors to issue shares below NAV should:

. have an expiration date that is less than one year from the date shareholders approve the underlying proposal; . require a majority of independent directors who have no financial interest in the sale to make a determination as to whether such sale would be in the best interests of the company and its shareholders prior to selling shares below NAV; and . demonstrate responsible past use of share issuances by either: o Outperforming peers in its 8-digit GICS group as measured by one and three-year median TSRs; or o Providing disclosure that past share issuances were priced at levels that resulted in only small or moderate discounts to NAV and economic dilution to existing non-participating shareholders.

In the 2012 Policy Update, ISS states this recommendation is intended "to prevent open-ended authorizations to issue stock at a discount, and to ensure that the discounts are not excessive." While the first and second ISS recommendations are consistent with the requirements of Section 63 under the 1940 Act, the third recommendation will require BDCs to evaluate their proxy disclosure if seeking approval to issue shares below NAV. The full text of the ISS 2012 Policy Update is attached for your convenience.

If you have further questions about the ISS recommendations, please contact the attorneys listed below:

Steven B. Boehm, Partner 202.383.0176 [email protected] Cynthia M. Krus, Partner 202.383.0218 [email protected] John J. Mahon, Partner 202.383.0515 [email protected] Harry S. Pangas, Partner 202.383.0805 [email protected]