[Federal Register Volume 59, Number 72 (Thursday, April 14, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-9013]


[[Page Unknown]]

[Federal Register: April 14, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC--20206; 813-122]

 

Morgan Stanley Venture Investors, L.P.; Notice of Application

April 8, 1994.

AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of application for exemption under the Investment 
Company Act of 1940 (the ``Act'').

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APPLICANT: Morgan Stanley Venture Investors, L.P. (the 
``Partnership'').

RELEVANT ACT SECTIONS: Applicant seeks an order under sections 6(b) and 
6(e) granting an exemption from all provisions of the Act except 
section 9, certain provisions of sections 17 and 30, sections 36 
through 53, and the rules and regulations thereunder.

SUMMARY OF APPLICATION: Applicant seeks an order that would grant an 
exemption from most provisions of the Act, and would permit certain 
affiliated and joint transactions. Applicant is an employees' 
securities company within the meaning of section 2(a)(13) of the Act.

FILING DATES: The application was filed on November 19, 1993, and 
amended on March 4, 1994.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the SEC orders a hearing. Interested persons may 
request a hearing by writing to the SEC's Secretary and serving 
applicant with a copy of the request, personally or by mail. Hearing 
requests should be received by the SEC by 5:30 p.m. on May 3, 1994, and 
should be accompanied by proof of service on the applicant, in the form 
of an affidavit or, for lawyers, a certificate of service. Hearing 
requests should state the nature of the writer's interest, the reason 
for the request, and the issues contested. Persons may request 
notification of a hearing by writing to the SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street NW., Washington, DC 20549. 
Applicant, 1251 Avenue of the Americas, New York, New York 10020.

FOR FURTHER INFORMATION CONTACT:
John V. O'Hanlon, Senior Attorney, at (202) 272-3922, or C. David 
Messman, Branch Chief, at (202) 272-3018 (Division of Investment 
Management, Office of Investment Company Regulation).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee at the 
SEC's Public Reference Branch.

Applicant's Representations

    1. Morgan Stanley Group Inc. and its subsidiaries (collectively, 
the ``Morgan Stanley Group'') constitute a global financial services 
firm. Morgan Stanley & Co. Incorporated (``MS&Co.''), a wholly-owned 
subsidiary of Morgan Stanley Group Inc., is the principal broker-dealer 
affiliate of the Morgan Stanley Group and is registered as a broker-
dealer under the Securities Exchange Act of 1934 (the ``Exchange 
Act''). MS&Co. and Morgan Stanley Group Inc. are registered as 
investment advisers under the Investment Advisers Act of 1940 (the 
``Advisers Act'').
    2. The Partnership is a newly-formed Delaware limited partnership 
that was formed for the purpose of enabling certain employees, 
officers, directors, and advisory directors of the Morgan Stanley Group 
to pool their investment resources and to participate in various types 
of investment opportunities, including venture capital and private 
equity investments, without the necessity of each investor seeking to 
identify investments and to analyze their merit. The pooling of 
resources permits diversification and participation in investments that 
usually would not be offered to individual investors. The goal of the 
Partnership is to reward and retain key personnel by enabling them to 
participate in investment opportunities that would not otherwise be 
available to them and to attract other individuals to the Morgan 
Stanley Group.
    3. The Partnership will operate as a non-diversified closed-end 
management investment company. The Partnership will seek to achieve a 
high rate of return through long-term capital appreciation by providing 
expansion capital to a diversified group of private emerging growth 
companies. The Partnership will co-invest alongside two venture capital 
funds (the ``MS Venture Capital Funds'') that recently were organized 
by the Morgan Stanley Group for third party investors. The MS Venture 
Capital Funds are exempt from registration under the Act in reliance 
upon section 3(c)(1) thereunder.
    4. The general partner of the Partnership is Morgan Stanley Venture 
Partners II, L.P. (the ``General Partner''). At present, the sole 
limited partner of the Partnership is Morgan Stanley Venture Capital 
II, Inc. (``MSVC II''), a wholly-owned subsidiary of Morgan Stanley 
Group Inc. The General Partner and MSVC II are registered as investment 
advisers under the Advisers Act. MSVC II is the managing general 
partner of the General Partner.
    5. Interests in the Partnership will be offered without 
registration under a claim of exemption pursuant to section 4(2) of the 
Securities Act of 1933 (the ``Securities Act''). Interests will be 
offered and sold only to ``Eligible Employees'' of the Morgan Stanley 
Group or trusts established by such Eligible Employees for their 
benefit or the benefit of their immediate family. To be an Eligible 
Employee, an individual must currently be an employee, officer, 
director, or advisory director of a member of the Morgan Stanley Group 
and, except for certain individuals who will manage the day-to-day 
affairs of the Partnership, and ``accredited investor'' meeting the 
income requirements set forth in rule 501(a)(6) of Regulation D under 
the Securities Act.\1\ The limitations on the class of persons who may 
acquire interests, in conjunction with other characteristics of the 
Partnership, will qualify the Partnership as an ``employees' securities 
company'' under section 2(a)(13) of the Act.
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    \1\Three of the individuals who will manage the day-to-day 
affairs of the Partnership are not ``accredited investors.'' Each of 
these individuals is a partner of the General Partner, had 
reportable income from all sources in the calendar year immediately 
preceding such person's admission as a partner of the General 
Partner in excess of $120,000, and has a reasonable expectation of 
reportable income in the years in which such person will be required 
to make capital contributions to the General Partner of at least 
$150,000.
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    6. Only a small proportion of the Morgan Stanley Group's employees 
qualify as Eligible Employees. The Eligible Employees are experienced 
professionals in the investment banking, merchant banking, or 
securities business, or in administrative, financial, accounting, or 
operational activities related thereto. No Eligible Employee will be 
required to invest in the Partnership.
    7. The management and control of the Partnership, including all 
investment decisions, is vested exclusively in the General Partner. The 
management and control of the General Partner, in turn, is vested 
exclusively in MSVC II. The business and affairs of MSVC II is managed 
by or under the direction of its board of directors (the ``Board''). 
Thus, the Board indirectly manages and controls the Partnership. The 
Board will, among other things, act as the investment committee of the 
Partnership responsible for approving all investment and valuation 
decisions. Actions by the Board require the vote of a majority of its 
members. The Board is comprised exclusively of directors and senior 
officers of the Morgan Stanley Group, each of whom qualifies as an 
Eligible Employee. Members of the Board who are not partners of the 
General Partner have indicated their intention to participate in the 
Partnership on the same terms as other Eligible Employees.
    8. The day-to-day affairs of the Partnership will be managed by 
certain individuals who are general and limited partners of the General 
Partner. These individuals have primary responsibility for identifying, 
investigating, structuring, and monitoring Partnership investments, and 
making recommendations with respect to investment decisions to the 
Board. All such individuals qualify as Eligible Employees and are 
officers of the Morgan Stanley Group.
    9. The Partnership has obtained subscriptions from a number of 
Eligible Employees to acquire limited partnership interests in the 
Partnership; however, such Eligible Employees have not yet been 
admitted to the Partnership. In connection with the subscriptions, each 
Eligible Employee has deposited an amount equal to 10% of such Eligible 
Employee's capital commitment in a segregated interest-bearing account 
established by MS&Co. (the ``Segregated Account''). Funds held in the 
Segregated Account on behalf of an Eligible Employee (including 
interest) will be returned to such person if admission to the 
Partnership does not occur before June 30, 1994, or if the Eligible 
Employee's subscription for a limited partnership interest is rejected 
by the General Partner for any reason.
    10. Upon the occurrence of certain events (including receipt by the 
Partnership of the requested order), the Eligible Employees will be 
admitted to the Partnership as limited partners (the ``Limited 
Partners''), and all amounts held in the Segregated Account (including 
interest on the deposited amounts) will be paid over to the 
Partnership. Simultaneously with the occurrence of these events, the 
limited partnership interest held by MSVC II will be redeemed by the 
Partnership in full and MSVC II will receive from the Partnership an 
amount equal to the sum of (a) the balance of MSVC II's capital account 
in the Partnership; (b) the expenses and management fee previously 
charged against MSVC II's capital account; and (c) interest on MSVC 
II's capital contributions to the Partnership calculated at an annual 
rate of 3% from the date each such capital contribution was made. Upon 
their admission into the Partnership, the Eligible Employees will be 
treated for all purposes (including without limitation the allocation 
of Partnership profits and losses) as it they had been Limited Partners 
from the initial formation of the Partnership. The date on which 
Eligible Employees are initially admitted to the Partnership is 
hereinafter referred to as the ``Initial Closing.''
    11. The Board, through the General Partner, will determine in its 
sole discretion the amount and timing of capital contributions to be 
made by the General Partner and the Limited Partners to the 
Partnership, subject to certain maximum amounts that may be required 
during specified periods. Capital contributions will fund Partnership 
investments and the payment of Partnership expenses. The capital 
contribution of each Partner, including the General Partner, will be 
applied towards the Partner's pro rata share of each Partnership 
investment and each Partnership expense.
    12. The maximum amount of capital contributions that a Limited 
Partner may be required to make during the life of the Partnership will 
be limited to the Limited Partner's capital commitment. The minimum 
capital commitment of each Limited Partner will be $100,000, subject to 
waiver by the General Partner in its sole discretion. The General 
Partner will be authorized to cause the Partnership to raise additional 
capital after the Initial Closing by admitting, at one or more 
additional closings held not later than June 30, 1994, additional 
Eligible Employees as Limited Partners. An additional Limited Partner 
will be required, at the time of admission to the Partnership, to make 
a capital contribution and to pay an interest charge to the Partnership 
as if such Limited Partner had been admitted to the Partnership at the 
Initial Closing and the Partnership had made a loan to such Limited 
Partner for any capital contribution required during the period from 
the Initial Closing to the admission date. Such interest charge will be 
allocated to the capital accounts of the Partners who had been 
previously admitted to the Partnership.
    13. The General Partner has made a capital commitment to the 
Partnership equal to at least 1% of the Partnership's aggregate capital 
commitments. The partners of the General Partner are obligated to make 
capital contributions to the General Partner as and when the General 
Partner is required to make capital contributions to the Partnership.
    14. The General Partner serves as the sole general partner of one 
MS Venture Capital Fund and a co-general partner (with responsibility 
for investment decisions) of the other MS Venture Capital Fund. The 
management and control of the MS Venture Capital Funds are vested 
exclusively in the General Partner, in its capacity as the general 
partner of such Funds. Thus, as in the case of the Partnership, the 
Board indirectly manages and controls the MS Venture Capital Funds, and 
the individual general and limited partners of the General Partner 
manage the day-to-day affairs of the MS Venture Capital Funds.
    15. The General Partner has made capital commitments to the MS 
Venture Capital Funds in an aggregate amount of approximately 10.6% of 
the aggregate capital commitments of the Funds, of which approximately 
94% will be funded by MSVC II and approximately 6% will be funded by 
the individual general partners and limited partners of the General 
Partner.
    16. The General Partner will be paid an annual management fee equal 
to 2 percent of the Partnership's aggregate capital commitments, 
subject to reduction as specified in the Partnership's limited 
partnership agreement. However, to the extent the General Partner, its 
constituent general partners or its employees receive any officers', 
directors', broken-deal, remunerative or other net fees (i.e., 
excluding expense reimbursement) from portfolio companies, affiliates 
of portfolio companies, and potential portfolio companies, or to the 
extent employees of another member of the Morgan Stanley Group who 
serve as officers or directors of such entities pursuant to rights held 
by the Partnership to designate such officers or directors receive any 
officers' or directors' fees (excluding expense reimbursement), a 
portion of such net fees will reduce the management fee on a dollar-
for-dollar basis.
    17. The General Partner will pay out of the management fee its 
normal operating expenses, including rent, salaries of its personnel, 
expenses incurred by its personnel in investigating investment 
opportunities, and communications and travel expenses. The Partnership 
will pay certain enumerated expenses of the General Partner and the 
Partnership incurred in connection with the organization, operation, 
and dissolution of the Partnership. Expenses borne by the Partnership 
may include the fees, commissions, and expenses of a member of the 
Morgan Stanley Group for services performed by such member to the 
Partnership, including, without limitation, brokerage or clearing 
services.
    18. The General Partner will be entitled to receive a ``carried 
interest'' of 12% of the realized and unrealized gains and losses of 
the Partnership. The remaining 88% will be shared by all Partners in 
proportion to their capital commitments. A ``carried interest'' is an 
allocation to the General Partner of the Partnership's net gains in 
addition to the amount allocable to the General Partner that is in 
proportion to its capital contributions. For purposes of determining he 
Partnership's net gains, management fees and expenses borne by the 
Partnership, in addition to the Partnership's realized and unrealized 
losses, will be netted against the Partnership's realized and 
unrealized gains. The entire 12% carried interest received by the 
General Partner will be paid to the individual general and limited 
partners of the General Partner. The General Partner's carried interest 
is structured to comply with the requirements of rule 205-3 promulgated 
under the Advisers Act.
    19. The Partnership will invest all of its capital in investment 
opportunities in which the MS Venture Capital Funds invest. The 
Partnership will not be permitted to make investments other than co-
investments with the MS Venture Capital Funds. In connection with any 
investment opportunity, except with the consent of an advisory 
committee consisting of limited partners of one or both of the MS 
Venture Capital Funds (the ``Fund Advisory Committee''), the amount of 
the Partnership co-investment generally will bear the same proportion 
to the aggregate investments of the MS Venture Capital Funds and the 
Partnership as the aggregate capital commitments of the Partnership 
bears to the aggregate capital commitments of the MS Venture Capital 
Funds and the Partnership (other than with regard to differences that 
result from the specific expenses incurred by the MS Venture Capital 
Funds and the Partnership). In addition, except with the consent of the 
Fund Advisory Committee, the Partnership will be required to make any 
co-investments on terms no more favorable than those applicable to the 
investments by the MS Venture Capital Funds.\2\
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    \2\ It is anticipated that the economic terms applicable to the 
Partnership's investments will be the same as those applicable to 
the corresponding investments by the MS Venture Capital Funds. It is 
possible, however, that the investment of the MS Venture Capital 
Funds will have more favorable non-economic terms (e.g., the right 
to representation on the board of directors of the portfolio 
company) in light of regulatory or other considerations.
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    20. The co-investments by the Partnership with the MS Venture 
Capital Funds are expected to include:
    (a) Majority or 100% ownership interests in portfolio companies;
    (b) Publicly traded securities; and (c) securities purchased in 
growth company buyouts.
    21. The Partnership will not invest more than 15% of its assets in 
securities issued by registered investment companies (with the 
exception of temporary investments in money market funds), and the 
Partnership will not acquire any security issued by a registered 
investment company if immediately after such acquisition the 
Partnership will own more than 3% of the outstanding voting stock of 
the registered investment company.
    22. An ``MS Related Person,'' as defined below, will not, until the 
MS Venture Capital Funds and the Partnership are fully invested, be 
permitted to make certain types of equity investments in private 
emerging growth companies without first having offered the opportunity 
to make the investment to the MS Venture Capital Funds and the 
Partnership. An ``MS Related Person'' means the General Partner, Morgan 
Stanley Group Inc., any other person at least 80% of which is 
beneficially owned directly or indirectly by Morgan Stanley Group Inc., 
and any investment fund managed by any of the foregoing. Certain 
investments, however, are not subject to the ``obligation to offer'' 
described above. These investments include (a) an investment made by an 
MS Related Person pursuant to an offer available only to Morgan Stanley 
Group Inc. or one of its affiliates; (b) an investment that constitutes 
compensation for providing investment banking or other services to any 
person or entity; (c) an investment relating to an acquisition of a 
business or assets to be operated or used in connection with the 
existing, or a new line of, business of Morgan Stanley Group Inc. or 
one of its affiliates (other than the General Partner); (d) an 
investment made by any MS Related Person in its underwriting capacity 
or in connection with broker-dealer activities; (e) an investment made 
with an aggregate purchase price of less than $1 million; (f) an 
investment made by or in connection with an existing investment fund as 
a follow-on investment in one of its portfolio companies; and (g) an 
investment made in connection with the purchase of a portfolio of 
securities from another person or entity, subject to certain 
limitations.
    23. No individual general or limited partner of the General 
Partner, and no employee on the General Partner's staff, will be 
permitted to co-invest with the Partnership in any investment 
opportunity, except:
    (a) Through an MS Venture Capital Fund as a partner of the General 
Partner;
    (b) As a Limited Partner; or
    (c) Through the exercise of stock options or warrants granted, on 
the same terms and amount, to all outside directors of the entities in 
which the Partnership invests.
    24. Except for the prohibitions described in paragraph 23 above, 
any member of the Morgan Stanley Group or any client of such member may 
co-invest with the MS Venture Capital Funds and the Partnership in 
connection with any investment opportunity in which the MS Venture 
Capital Funds and the Partnership participate. Such co-investments will 
be made on terms no more favorable than the terms applicable to the 
investments by the MS Venture Capital Funds and the Partnership; 
however, members will be permitted to invest on more favorable terms if 
and to the extent such terms are:
    (a) In full or partial satisfaction of a fee that such members 
would otherwise be entitled to receive for providing financial advisory 
or other services in connection with such co-investment (other than 
services provided by the General Partner);
    (b) The product of agreements or arrangements entered into by such 
members (other than the General Partner) with portfolio companies 
before the formation of the MS Venture Capital Funds and the 
Partnership; or
    (c) Obtained through the exercise of officer's, director's, or 
similar options or warrants.
    25. If, in connection with any investment opportunity, there are 
securities available for investment (determined after taking into 
account the proposed investments by the Partnership, the MS Venture 
Capital Funds and certain other persons, including other members of the 
Morgan Stanley Group), such remaining securities will be offered to 
limited partners of the MS Venture Capital Funds for co-investment 
outside the MS Venture Capital Funds.
    26. The Partnership and the MS Venture Capital Funds will not be 
permitted, except with the consent of the Fund Advisory Committee, to 
invest for the first time in portfolio companies in which a member of 
the Morgan Stanley Group has previously made an investment, or in which 
a member is a director or officer. The Partnership and the MS Venture 
Capital Funds also will not be permitted, except with the consent of 
the Fund Advisory Committee, to make a follow-on investment in a 
portfolio company previously participated in by a member of the Morgan 
Stanley Group if, in such round, the member is acquiring more or less 
than its pro rata position from the previous round.
    27. Except as described below, the Partnership will be given the 
opportunity to sell or otherwise dispose of its investments at the same 
time and on the same terms as the MS Venture Capital Funds. The General 
Partner does not intend to make distributions-in-kind to the Partners 
of portfolio securities that are subject to restrictions on sale (other 
than pursuant to rule 144(k) of the Securities Act) or that cannot be 
sold due to sales volume limitations, except in connection with 
distributions upon the dissolution of the Partnership. Because the 
Limited Partners generally will be affiliates of Morgan Stanley Group 
Inc., the General Partner may elect not to make distributions-in-kind 
of portfolio securities to the Limited Partners even though, in its 
capacity as general partner of the MS Venture Capital Funds, it has 
decided that a distribution-in-kind of portfolio securities of the same 
class as those held by the Partnership is appropriate for the MS 
Venture Capital Funds. Proceeds from the sale or other disposition of 
any Partnership investment may be reinvested by the General Partner in 
Partnership investments, subject to certain limitations.
    28. Subject to the limitations described above, the Partnership 
will be permitted to enter into transactions involving:
    (a) A member of the Morgan Stanley Group (including without 
limitation an MS Venture Capital Fund);
    (b) Any entity in which the Partnership and/or the MS Venture 
Capital Funds make investments;
    (c) Any partner of an MS Venture Capital Fund that is not a member 
of the Morgan Stanley Group (together with the affiliates of such 
partner, a ``Non-MS Venture Fund Partner''); or
    (d) Any Partner or person or entity related to any Partner. Any 
such transaction, however, must be on terms no less favorable to the 
Partnership than are generally afforded to unrelated third parties in 
comparable transactions. Such transactions include, without limitation, 
the purchase or sale by the Partnership of an investment, or an 
interest therein, from or to any member of the Morgan Stanley Group, 
acting as principal. With respect to any investment purchased by the 
Partnership from a member of the Morgan Stanley Group, acting as 
principal, the Partnership will acquire the investment for no more than 
the fair value at the time of purchase, plus carrying costs and certain 
organizational expenses. The fair value at the time of such purchase 
may be more or less than the price paid by the member, depending on the 
appreciation or depreciation in the particular investment.
    29. A member of the Morgan Stanley Group may provide investment 
banking, management, or other services and receive fees or other 
compensation and expense reimbursement in connection therewith from 
entities in which the Partnership makes an investment or competitors of 
such entities. Such fees or other compensation may include, without 
limitation, advisory fees, organization or success fees, financing 
fees, management fees, performance-based fees, fees for brokerage and 
clearing services, and compensation in the form of carried interests 
entitling the member to share disproportionately in income or capital 
gains or similar compensation. The Morgan Stanley Group reserves the 
right not to charge or to waive all or part of any such fees or other 
compensation or expense reimbursement that the Partnership otherwise 
might incur or bear indirectly. However, except as described in 
paragraph 16 above, any such fees or other compensation or expense 
reimbursement received by a member of the Morgan Stanley Group will not 
be shared with the Partnership.
    30. The Partnership may make distributions to the Partners at such 
times and in such amounts as determined by the General Partner in its 
sole discretion. Until the Limited Partners have received distributions 
equal to their respective capital contributions (disregarding, for this 
purpose, any distributions to enable Partners to pay taxes with respect 
to the Partnership's net taxable income allocated to them during any 
fiscal year), all discretionary distributions will be made to the 
Partners in proportion to their respective capital contributions. 
Thereafter, such distributions generally will be made 12% to the 
General Partner and 88% to the Partners, subject to certain 
limitations. When distributing cash or securities or both to the 
Partners, the General Partner will be required to distribute the cash 
and securities to all Partners in the same proportions; however, the 
General Partner will have the right, with the consent of Limited 
Partners representing at least two-thirds of the aggregate capital 
commitments, to make fair non-ratable distributions in kind. Such non-
ratable distributions would be made in the event a Limited Partner 
notifies a General Partner that the receipt by such Limited Partner of 
a specific portfolio security would violate any law, regulation, or 
government order applicable to such Limited Partner. No distribution 
may be made to a Partner to the extent that such distribution would (a) 
create or increase a deficit balance in such Partner's account, or (b) 
render such Partner liable for a return of such distribution under the 
Delaware Revised Uniform Limited Partnership Act.
    31. The General Partner will conduct a valuation of the 
Partnership's assets each time items of Partnership profit or loss 
(including unrealized gains and losses) are to be allocated to the 
capital accounts of the Partners; at the time of any distribution in 
kind to the Partners; and in connection with the preparation of 
periodic reports to the Partners. The General Partner's valuation of 
any securities will be conclusive and binding on all parties; however, 
if Limited Partners representing at least a majority of the aggregate 
capital commitments object to any valuation, a procedure exists for 
submitting the valuation to arbitration. The rules applicable to the 
valuation of Partnership assets are the same as those applicable to the 
valuation of assets of the MS Venture Capital Funds.
    32. The Partnership will be permitted to borrow money, subject to 
limitations as to the aggregate principal amount and maturity of 
indebtedness that may be incurred by the Partnership. It is not 
anticipated that a member of the Morgan Stanley Group will advance 
funds to the Partnership but, if any such advances are made, the terms 
thereof will be no less favorable to the Partnership than would be 
obtained on an arm's-length basis.
    33. Pending investment of capital contributions from the Partners 
and any distribution of proceeds to the Partners, the Partnership's 
funds may be invested in short-term money market or other comparable 
investments, including money market funds that may be advised by a 
member of the Morgan Stanley Group.
    34. The term of the Partnership will expire on the tenth 
anniversary of the date on which capital contributions are first made 
to the Partnership. The term may be extended by the General Partner, 
with the consent of Limited Partners representing specified percentages 
(depending upon the extension being sought) of the aggregate capital 
commitments. The Partnership may be dissolved prior to the expiration 
of the term with the approval of Partners representing at least two-
thirds of the aggregate capital commitments. In addition, the 
Partnership may be dissolved upon the occurrence of certain events.
    35. A Limited Partner may not withdraw from the Partnership prior 
to the dissolution of the Partnership, except under certain limited 
circumstances. The General Partner may require a Limited Partner to 
withdraw (a) if the Limited Partner is a Defaulting Partner (as defined 
below); (b) if the Limited Partner violates the restrictions on 
transfer described below; or (c) if the General Partner determines in 
its reasonable discretion that continued membership of the Limited 
Partner in the Partnership would subject the Partnership to material 
onerous legal or other regulatory requirements that cannot reasonably 
be avoided. A Limited Partner may not withdraw in any event until the 
first anniversary of such Limited Partner's admission to the 
Partnership.
    36. If any Limited Partner fails to make any required capital 
contribution when due or called by the General Partner (a ``Defaulting 
Partner''), the General Partner may elect in its discretion any one or 
more of the following alternatives:
    (a) Cause the Partnership to bring an action against the Defaulting 
Partner to collect the due and unpaid payment plus interest;
    (b) Cause the Defaulting Partner to forfeit up to 50% of the value 
of such Defaulting Partner's capital account (as valued at the date the 
capital contribution was originally due), which forfeited portion will 
be allocated among the other Partners in proportion to their respective 
capital contributions, provided that the General Partner will not elect 
this alternative if the Defaulting Partner is suffering from, or will 
suffer, severe hardship;
    (c) Determine that the Defaulting Partner will not be permitted to 
make additional capital contributions; and/or
    (d) Reduce the Defaulting Partner's share of the Partnership's 
future profits by up to 50% of the amount that such Defaulting Partner 
would otherwise have been entitled to receive had it not defaulted. 
These rights and remedies are cumulative, and the General Partner may 
pursue any other remedies available to it or the Partnership to enforce 
the obligation of the Defaulting Partner. The Defaulting Partner is 
liable for all costs of the Partnership, including attorney's fees, 
incurred with respect to the collection of any of the capital 
contributions and the enforcement of any of the rights of the 
Partnership.
    37. Interests in the Partnership will be non-transferable except 
with the prior written consent of the General Partner, which consent 
may be withheld in its sole discretion, and in any event, will not be 
transferable to persons other than (a) other Partners; (b) trusts 
established by the transferor Limited Partner for the benefit of such 
Limited Partner or such Limited Partner's immediate family; or (c) by 
succession or testamentary disposition upon the death of the transferor 
Limited Partner. A Limited Partner's interest will not be redeemable 
upon, and will not be affected by, such Limited Partner's termination 
of employment from the Morgan Stanley Group.
    38. During the existence of the Partnership, books of account will 
be kept, in which the General Partner will enter, or cause to be 
entered, all business transacted by the Partnership, all moneys and 
other things received, advanced, paid out, or delivered on behalf of 
the Partnership, the results of the Partnership's operations, and each 
Partner's capital. Such books will at all times be accessible to all 
Partners. In addition, for each fiscal year of the Partnership, the 
General Partner will cause an examination of the financial statements 
of the Partnership to be made in accordance with generally accepted 
auditing standards by a nationally recognized firm of certified public 
accountants. A copy of the accountants' report with respect to each 
fiscal year will be furnished to each Partner within a specified period 
after the end of such fiscal year. The General Partner will also 
furnish certain information to the Partners on a quarterly basis. The 
scope and nature of the information furnished to the Limited Partners 
is the same as that furnished to the third party investors of the MS 
Venture Capital Funds.

Applicant's Legal Analysis

    1. Applicant requests an exemption under sections 6(b) and 6(e) of 
the Act from all provisions of the Act, and the rules and regulations 
thereunder, except section 9, sections 17 and 30 (except as described 
below), sections 36 through 53, and the rules and regulations 
thereunder.
    2. Applicant requests an exemption from section 17(a) of the Act to 
the extent necessary to (a) permit a member of the Morgan Stanley 
Group, acting as principal, to engage in any transaction directly or 
indirectly with the Partnership or any company controlled by the 
Partnership; (b) permit the Partnership to invest in or engage in any 
transaction with any entity, acting as principal, (i) in which the 
Partnership, any company controlled by the Partnership, or any member 
of the Morgan Stanley Group has invested or will invest, or (ii) with 
which the Partnership, any company controlled by the Partnership, or 
any member of the Morgan Stanley Group is or will become otherwise 
affiliated; and (c) permit a Non-MS Venture Fund Partner, acting as 
principal, to engage in any transaction directly or indirectly with the 
Partnership or any company controlled by the Partnership. The 
transactions to which the Partnership is a party will be effected only 
after a determination by the Board that the requirements of Condition 1 
below have been satisfied. In addition, these transactions will be 
effected only to the extent not prohibited by the limited partnership 
agreements of the MS Venture Capital Funds and the Partnership.
    3. The principal reason for the requested exemption is to ensure 
that the Partnership will be able to invest in companies, properties, 
or vehicles in which a member of the Morgan Stanley Group (including 
without limitation an MS Venture Capital Fund), or the member's 
employees, officers, directors, or advisory directors, or the partners 
of an MS Venture Capital Fund, may make or have already made an 
investment. The relief is also requested to permit the Partnership the 
flexibility to deal with its portfolio investments in the manner the 
General Partner deems most advantageous to all Partners or as required 
by the MS Venture Capital Funds or the Partnership's other co-
investors. Furthermore, the requested exemption is sought to ensure 
that a Non-MS Venture Fund Partner will not directly or indirectly 
become subject to a burden, restriction, or other adverse effect by 
virtue of the Partnership's participation in an investment opportunity.
    4. The Partners will have been fully informed of the possible 
extent of the partnership's dealings with an MS Venture Capital Fund or 
another member of the Morgan Stanley Group or with a Non-MS Venture 
Partner and, as professionals employed in the securities business, will 
be able to understand and evaluate the attendant risks. Applicant 
asserts that the community of interest among the Partners, on the one 
hand, and an MS Venture Capital Fund or another member of the Morgan 
Stanley Group or the Non-MS Venture Fund Partners, on the other hand, 
is the best insurance against any risk of abuse.
    5. Applicant states that the Partnership will not make loans to an 
MS Venture Capital Fund or any other member of the Morgan Stanley 
Group, or to any employee, officer, director, or advisory director of 
the Morgan Stanley Group, with the exception of short-term repurchase 
agreements or other fully secured loans to a member of the Morgan 
Stanley Group. In addition, the Partnership will not sell or lease any 
property to an MS Venture Capital Fund or any other member of the 
Morgan Stanley Group except on terms at least as favorable as those 
obtainable from unaffiliated third parties.
    6. Applicant requests an exemption from section 17(d) and rule 17d-
1 thereunder to the extent necessary to permit affiliated persons of 
the Partnership (including without limitation the General Partner, the 
MS Venture Capital Funds, and other members of the Morgan Stanley 
Group) or affiliated persons of any of these persons (including without 
limitation the Non-MS Venture Fund Partners) to participate in, or 
effect any transaction in connection with, any joint enterprise or 
other joint arrangement or profit-sharing plan in which the Partnership 
or a company controlled by the Partnership is a participant. The 
exemption requested would permit, among other things, co-investments by 
the Partnership and individual partners or employees, officers, 
directors, or advisory directors of the Morgan Stanley Group making 
their own individual investment decisions apart from the Morgan Stanley 
Group.
    7. Compliance with section 17(d) would prevent the Partnership from 
achieving its principal purpose. Because of the number and 
sophistication of the potential Partners and persons affiliated with 
such Partners, strict compliance with section 17(d) would cause the 
Partnership to forego investment opportunities simply because a Partner 
or other affiliated person of the Partnership (or any affiliate of such 
a person) also had, or contemplated making, a similar investment. In 
addition, attractive investment opportunities of the types considered 
by the Partnership often require each participant in the transaction to 
make available funds in an amount that may be substantially greater 
than may be available to the Partnership alone. As a result, the only 
way in which the Partnership may be able to participate in such 
opportunities may be to co-invest with other persons, including its 
affiliates. The requested exemption also is sought to ensure that a 
Non-MS Venture Fund Partner will not directly or indirectly become 
subject to a burden, restriction, or other adverse effect by virtue of 
the Partnership's participation in an investment opportunity. The 
flexibility to structure co-investments and joint investments in the 
manner described above will not involve abuses of the type section 
17(d) and rule 17d-1 were designed to prevent. The concern that 
permitting co-investments or joint investments by an MS Venture Capital 
Fund or another member of the Morgan Stanley Group or by the Non-MS 
Venture Fund Partners on the one hand, and the Partnership on the 
other, might lead to less advantageous treatment of the Partnership 
should be mitigated by the fact that (a) the Morgan Stanley Group, in 
addition to its substantial stake as a general partner in the MS 
Venture Capital Funds and investments in the Partnership and in the 
portfolio companies in which the Partnership invests, will be acutely 
concerned with its relationship with the key personnel who invest in 
the Partnership; and (b) senior officers and directors of the Morgan 
Stanley Group will be investing in the Partnership.
    8. Applicant requests an exemption from section 17(f) and rule 17f-
1 to the extent necessary to permit a member of the Morgan Stanley 
Group to act as custodian without a written contract. Because there is 
such a close association between the Partnership and the Morgan Stanley 
Group, requiring a detailed written contract would expose the 
Partnership to unnecessary burden and expense. Furthermore, any 
securities of the Partnership held by the Morgan Stanley Group will 
have the protection of fidelity bonds. An exemption is requested from 
the terms of rule 17f-1(b)(4), as applicant does not believe the 
expense of retaining an independent accountant to conduct periodic 
verifications is warranted given the community of interest of all the 
parties involved and the existing requirement for an independent annual 
audit.
    9. Applicant requests an exemption from section 17(g) and rule 17g-
1 to the extent necessary to permit the Partnership to comply with rule 
17g-1 by having a majority of the members of the Board take such 
actions and make such approvals as are set forth in rule 17g-1.
    10. Applicant requests an exemption from Section 17(j) and rule 
17j-1 (except rule 17j-1(a)) because the requirements contained therein 
are burdensome and unnecessary in the context of the Partnership. 
Requiring the Partnership to adopt a written code of ethics and 
requiring access persons to report each of their securities 
transactions would be time consuming and expensive, and would serve 
little purpose in light of, among other things, the community of 
interest among the Partners by virtue of their common association in 
the Morgan Stanley Group; the substantial and largely overlapping 
protections afforded by the conditions with which the Applicant has 
agreed to comply; the concern of the Morgan Stanley Group that 
personnel who participate in the Partnership actually receive the 
benefits they expect to receive when investing in the Partnership; and 
the fact that the investments of the Partnership will be investments 
that usually would not be offered to the Partners, including those 
Partners who would be deemed access persons, as individual investors. 
Accordingly, the requested exemption is consistent with the purposes of 
the Act, because the dangers against which section 17(j) and rule 17j-1 
are intended to guard are not present in the case of the Partnership.
    11. Sections 30(a), 30(b) and 30(d), and the rules under those 
sections, generally require that registered investment companies 
prepare and file with the Commission and mail to their shareholders 
certain periodic reports and financial statements. The forms prescribed 
by the Commission for periodic reports have little relevance to the 
Partnership and would entail administrative and legal costs that 
outweigh any benefit to the Limited Partners. Exemptive relief is 
requested to the extent necessary to permit the partnership to report 
annually to its Partners in the manner described above in paragraph 37. 
An exemption also is requested from section 30(f) to the extent 
necessary to exempt the General Partner, MSVC II, members of the Board, 
and any other persons who may be deemed members of an advisory board of 
the Partnership from filing Forms 3, 4 and 5 under section 16 of the 
Exchange Act with respect to their ownership of interests in the 
Partnership.
    12. Applicant submits that the exemptions requested are consistent 
with the protection of investors in view of the substantial community 
of interest among all the parties and the fact that the Partnership is 
an ``employees' securities company'' as defined in section 2(a)(13). 
The Partnership was conceived and will be organized and managed by 
person who will be investing in the Partnership, and will not be 
promoted by persons seeking to profit from fees or investment advice or 
from the distribution of securities. Applicant also submits that the 
terms of the proposed affiliated transactions will be reasonable and 
fair and free from overreaching.

Applicant's Conditions

    Applicant agrees that the order granting the requested relief shall 
be subject to the following conditions:
    1. Each proposed transaction otherwise prohibited by section 17(a) 
or section 17(d) and rule 17d-1 to which the Partnership is a party 
(the ``Section 17 Transactions'') will be effected only if the Board, 
through the General Partner, determines that:
    a. The terms of the transaction, including the consideration to be 
paid or received, are fair and reasonable to the Partners and do not 
involve overreaching of the Partnership or its Partners on the part of 
any person concerned; and
    b. The transaction is consistent with the interests of the 
Partners, the Partnership's organizational documents and the 
Partnership's reports to its Partners.
    In addition, the General Partner will record and preserve a 
description of such affiliated transactions, their findings, the 
information or materials upon which their findings are based and the 
basis therefor. All such records will be maintained for the life of the 
Partnership and at least two years thereafter, and will be subject to 
examination by the Commission and its staff.\3\
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    \3\The Partnership will preserve the accounts, books and other 
documents required to be maintained in an easily accessible place 
for the first two years.
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    2. In connection with the Section 17 Transactions, the Board, 
through the General Partner, will adopt, and periodically review and 
update, procedures designed to ensure that reasonable inquiry is made, 
prior to the consummation of any such transaction, with respect to the 
possible involvement in the transaction of any affiliated person or 
promoter of or principal underwriter for the Partnership, or any 
affiliated person of such a person, promoter, or principal underwriter.
    3. The General Partner will not invest the funds of the Partnership 
in any investment in which a ``Co-Investor,'' as defined below, has or 
proposes to acquire the same class of securities of the same issuer, 
where the investment involves a joint enterprise or other joint 
arrangement within the meaning of rule 17d-1 in which the Partnership 
and the Co-Investor are participants, unless any such Co-Investor, 
prior to disposing of all or part of its investment, (a) gives the 
General Partner sufficient, but not less than one day's, notice of its 
intent to dispose of its investment; and (b) refrains from disposing of 
its investment unless the Partnership has the opportunity to dispose of 
the Partnership's investment prior to or concurrently with, and on the 
same terms as, and pro rata with the Co-Investor. The term ``Co-
Investor'' means any person who is:
    (a) An ``affiliated person'' (as such term is defined in the Act) 
of the Partnership;
    (b) A member of the Morgan Stanley Group;
    (c) An officer or director of a member of the Morgan Stanley Group; 
or
    (d) A company in which the General Partner acts as a general 
partner or has a similar capacity to control the sale or other 
disposition of the company's securities (including without limitation 
each MS Venture Capital Fund). The restrictions contained in this 
condition, however, shall not be deemed to limit or prevent the 
disposition of an investment by a Co-Investor:
    (a) To its direct or indirect wholly-owned subsidiary, to any 
company (a ``parent'') of which the Co-Investor is a direct or indirect 
wholly-owned subsidiary, or to a direct or indirect wholly-owned 
subsidiary of its parent;
    (b) To immediate family members of the Co-Investor or a trust 
established for any such family member;
    (c) When the investment is comprised of securities that are listed 
on any exchange registered as a national securities exchange under 
section 6 of the Exchange Act; or
    (d) When the investment is comprised of securities that are 
national market system securities pursuant to section 11A(a)(2) of the 
Exchange Act and rule 11Aa2-1 thereunder.
    4. The Partnership and the General Partner will maintain and 
preserve, for the life of the Partnership and at least two years 
thereafter, such accounts, books, and other documents as constitute the 
record forming the basis for the audited financial statements that are 
to be provided to the Partners, and each annual report of the 
Partnership required to be sent to the Partners, and agree that all 
such records will be subject to examination by the Commission and its 
staff.\4\
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    \4\The Partnership will preserve the accounts, books and other 
documents required to be maintained in an easily accessible place 
for the first two years.
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    5. The General Partner will send to each Partner who had an 
interest in each capital account of the Partnership at any time during 
the fiscal year then ended Partnership financial statements audited by 
the Partnership's independent accountants. At the end of each fiscal 
year, the General Partner will make a valuation or have a valuation 
made of all of the assets of the Partnership as of such fiscal year 
end. In addition, within 90 days after the end of each fiscal year of 
the Partnership or as soon as practicable thereafter, the General 
Partner shall send a report to each person who was a partner at any 
time during the fiscal year then ended, setting forth such tax 
information as shall be necessary for the preparation by the partner of 
his or its federal and state income tax returns and a report of the 
investment activities of the Partnership during such year.
    6. In any case where purchases or sales are made by the Partnership 
from or to an entity affiliated with the Partnership by reason of a 5% 
or more investment in such entity by a Morgan Stanley Group advisory 
director, director, officer, or employee, such individual will not 
participate in the Partnership's determination of whether or not to 
effect such purchases or sale.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-9013 Filed 4-13-94; 8:45 am]
BILLING CODE 8010-01-M