[Federal Register Volume 61, Number 158 (Wednesday, August 14, 1996)]
[Notices]
[Pages 42295-42297]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-20715]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22128; 812-9890]


Southeast Interactive Technology Fund I, LLC, et al.; Notice of 
Application

August 9, 1996.
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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APPLICANTS: Southeast Interactive Technology Fund I, LLC (the 
``Fund''), One Room Systems, Inc. (the ``Company''), and E. Lee Bryan 
(``Mr. Bryan'').

RELEVANT ACT SECTIONS: Order requested under section 17(b) of the Act 
for an exemption from sections 17(a)(1) and (3) of the Act.

SUMMARY OF APPLICATION: Applicants request an order that would permit 
the Fund to provide a revolving line of credit to an affiliated person 
of an affiliated person of the Fund.

FILING DATES: The application was filed on December 13, 1995 and 
amended on June 19, 1996 and July 29, 1996.

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 
applicants with a copy of the request, personally or by mail. Hearing 
requests should be received by the SEC by 5:30 p.m. on August 29, 1996, 
and should be accompanied by proof of service on applicants, 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 who wish to be 
notified of a hearing may request notification by writing to the SEC's 
Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C. 
20549. Applicants: the Fund, 2200 West Main Street, Suite 900, Durham, 
North Carolina 27705; the Company, 2525 Meridian Parkway, Suite 220, 
Durham, North Carolina 27713; and Mr. Bryan 2525 Meridian Parkway, 
Suite 350, Durham, North Carolina 27713.

FOR FURTHER INFORMATION CONTACT: Marianne H. Khawly, Staff Attorney, at 
(202) 942-0562, or Alison E. Baur, Branch Chief, at (202) 942-0564 
(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.

Applicants' Representations

    1. The Fund, a North Carolina limited liability company, is a 
closed-end management investment company that is registered under the 
Act. The Fund's investment objective is to seek long-term capital 
appreciation by investing primarily in equity and equity-related 
securities of interactive information and visual technology companies 
located in the southeastern United States. On June 13, 1995, the Fund 
issued 244 shares of membership interest (``Shares'') at a purchase 
price of $25,000 per Share to 168 ``accredited investors'' in a private 
offering conducted in accordance with the provisions of Regulation D 
under the Securities Act of 1933 (the ``Securities Act'').
    2. Montrose Venture Partners, LLC, an investment adviser that is 
registered under the Investment Advisers Act of 1940, serves as 
investment adviser to the Fund (the ``Adviser''). Three of the five 
principals of the Adviser comprise the board of directors (the 
``Board'') of the Fund.
    3. The Company is a North Carolina corporation that develops and

[[Page 42296]]

distributes multimedia educational and entertainment products.
    4. Mr. Bryan owns one Share of the Fund and is one of the members 
of the Board of the Fund. Mr. Bryan also is one of the principals of 
the Adviser. In addition, Mr. Bryan is the Company's founder and owns 
76% of the Company's outstanding capital stock.
    5. On November 2, 1995, the Adviser caused the Fund to enter into 
an agreement (the ``Agreement'') with the Company, subject to the 
Commission's approval, that provides that the Fund will extend a 
revolving line of credit to the Company of up to $600,000 (the 
``Loan''). Applicants represent that Mr. Bryan did not participate in 
the Adviser's decision to cause the Fund to enter into the Agreement. 
In addition, as more fully described below, the Loan has substantially 
similar terms to a bridge financing arrangement (the ``Bank Facility'') 
between the Company and an unaffiliated lender, First Union National 
Bank of North Carolina (the ``Bank'').
    6. The Loan is payable in full on the date one year from the date 
the first advance is made or such earlier date as the Loan may become 
due because the Fund elects to accelerate the Loan upon an event of 
default. The Loan has an interest rate of 10% per year and is fully 
secured with a first priority security interest in substantially all of 
the Company's receivables. Mr. Bryan, who has a personal net worth in 
excess of the Loan amount, will personally guarantee the Loan. As long 
as there is an outstanding loan balance, the Company will maintain a 
life insurance policy on Mr. Bryan of $250,000 with the Fund as the 
primary beneficiary, and the Fund may require an increase in such 
coverage as a condition to advances in excess of $250,000.
    7. In addition, the Fund will hold an option that permits it to 
convert the principal balance of the loan to shares of common stock 
(``Common Stock'') of the Company at the ``Conversion Price'' described 
below. The Conversion Price initially will be $1.00 per share and is 
based upon the Company currently having 6,234,302 shares of Common 
Stock issued and outstanding. The Conversion Price will adjust 
proportionately upon any stock splits, combinations, dividends, or 
similar changes to the capital structure.
    8. The Fund also will be issued a warrant to purchase additional 
shares (a ``Warrant'') at the Conversion Price at the time the Warrant 
is exercised. The Warrant may be exercised only once and only from the 
date of its issuance through the date seven years after its issuance. 
If the Company registers securities under the Securities Act, the Fund 
will have ``piggyback'' registration rights with respect to any Common 
Stock acquired upon conversion of the Loan or exercise of the Warrant 
that will enable the Fund to sell Common Stock pro rata with the shares 
of any other selling shareholders.
    9. In the event the Company plans to sell stock through a private 
or public offering, at a price per share of Common Stock of at least 
twice the Conversion Price, or otherwise obtain a capital infusion of 
at least $2,000,000 (the ``Equity Infusion''), the Company will be 
obligated to notify the Fund at least 45 days prior to the anticipated 
closing date of such offering. On or before the closing, the Fund may 
elect to convert the Loan into Common Stock.
    10. Furthermore, for the one year period following closing of the 
Agreement, the Fund and the Company will agree upon a budget (the 
``Budget'') for the Company. The proceeds of the Loan will be used only 
for payment of expenses and costs in accordance with the Budget. The 
Budget will be modified only with the consent of the Fund. Finally, as 
long as the Loan is outstanding, the Company is required to provide 
financial reports to the Fund.

Applicants' Legal Analysis

    1. Applicants request an order under section 17(b) of the Act for 
an exemption from sections 17(a) (1) and (3) of the Act. The Order 
would permit the Fund to provide a revolving line of credit to an 
affiliated person, the Company, of an affiliated person, Mr. Bryan, of 
the Fund.
    2. Section 17(a)(1) of the Act generally prohibits an affiliated 
person of a registered investment company or any affiliated person of 
such a person, acting as principal, knowingly to sell any security or 
other property to such registered company. Section 17(a)(3) generally 
prohibits an affiliated person of a registered investment company or 
any affiliated person of such a person, acting as principal, to borrow 
money or other property from such registered company.
    3. Section 2(a)(3)(B) of the Act defines an ``affiliated person'' 
of another person to be any person 5% or more of whose outstanding 
voting securities are directly or indirectly owned, controlled, or held 
with power to vote, by such other person. Because 76% of the 
outstanding capital stock of the Company is owned by Mr. Bryan, the 
Company is an affiliated person of Mr. Bryan. Section 2(a)(3)(D) states 
that an ``affiliated person'' of another person includes any officer, 
director, partner, copartner, or employee of such other person. Because 
Mr. Bryan is a member of the Board of the fund, he is an affiliated 
person of the Fund. Accordingly, the Company is an affiliated person of 
an affiliated person of the Fund.
    4. Section 17(b) provides that the SEC shall exempt a proposed 
transaction from section 17(a) if evidence establishes that: (a) the 
terms of the proposed transaction are reasonable and fair and do not 
involve overreaching; (b) the proposed transaction is consistent with 
the policies of the registered investment company involved; and (c) the 
proposed transaction is consistent with the general provisions of the 
Act.
    5. In approving the Loan, the Fund, including the disinterested 
directors, considered that the Company entered into the Bank Facility 
with the Bank. The terms of the Bank Facility do not differ materially 
from the terms of the Agreement except that the Bank, Facility does not 
include any equity conversion feature and was not accompanied by a 
warrant. In addition, the Bank Facility will be repaid in full by the 
Company with the proceeds of the Loan. Upon repayment of the Bank 
Facility, the Bank will release any security interests it has in the 
Company's assets. Thus, applicants believe that the Bank Facility 
demonstrates that the terms of the Loan are equivalent to an arms-
length transaction and are therefore reasonable and fair to the Fund.
    6. In addition, the Board considered the fact that the Loan is 
secured by substantially all the receivables of the Company and an 
assignment of certain contract rights that are pre-approved by the 
Fund. Accordingly, the Board determined that the Loan is adequately 
secured and that its terms are reasonable and fair and do not involve 
overreaching on the part of the Company or Mr. Bryan.
    7. Applicants state that the Fund's registration statement 
specifically provides that it will lend money to companies located in 
the southeastern United States, in which a principal of the Adviser has 
a controlling interest, that develop interactive information and visual 
technologies. Thus, applicants assert that the Loan is consistent with 
the investment policy of the Fund. Applicants also believe that because 
of the numerous safeguards present in the terms of the Loan, the Loan 
does not pose any of the abuses contemplated by section 17(a) and 
therefore is consistent with general purposes of the Act.


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    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-20715 Filed 8-13-96; 8:45 am]
BILLING CODE 8010-01-M