[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