[Federal Register Volume 62, Number 207 (Monday, October 27, 1997)]
[Notices]
[Pages 55660-55663]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-28365]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-22846; 812-10544]


Brantley Capital Corporation, et al.; Notice of Application

October 21, 1997.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of application for an order under sections 6(c) and 
57(i) of the Investment Company Act of 1940 (the ``Act''), and under 
rule 17d-1 under the Act permitting certain joint transactions 
otherwise prohibited by section 57(a)(4) of the Act.

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SUMMARY: Applicants request an order to permit a business development 
company to co-invest with certain affiliates in portfolio companies.

APPLICANTS: Brantley Capital Corporation (the ``Company''), Brantley 
Capital Management, LLC (the ``Investment Adviser''), Brantley Venture 
Partners II, LP (``BVP II''), Brantley Venture Partners III, LP (``BVP 
III'') (BVP II and BVP III, the ``BVP entities''), and any entities 
currently or in the future advised by the Investment Adviser or by 
entities controlling, controlled by, or under common control with the 
Investment Adviser (together with the BVP entities, ``Company 
Affiliates'').\1\

    \1\ All existing entities that currently intend to rely on the 
order have been named as applicants, and any other existing or 
future entities that subsequently rely on the order will comply with 
the terms and conditions in the application.
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Filing Dates: The application was filed on March 6, 1997 and amended on 
August 26, 1997, and on October 10, 1997. 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 November 17, 1997, 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, DC 
20549. Applicants, 20600 Chagrin Blvd., Suite 1150, Cleveland, OH 
44122.

FOR FURTHER INFORMATION CONTACT:
Lisa McCrea, Attorney Adviser (202) 942-0562, or Mercer E. Bullard, 
Branch Chief, (202) 942-0564 (Office of Investment Company Regulation, 
Division of Investment Management).

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, 450 5th Street N.W., Washington, DC 
20549 (tel. 202-942-8090).

Applicants' Representations

    1. The Company, a Maryland corporation, is a non-diversified 
closed-end investment company that has elected to be regulated as a 
business development company (a ``BDC'') under the Act.\2\ The Company 
filed a registration statement on Form N-2 that became effective on 
November 26, 1996.
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    \2\ Section 2(a) (48) provides that a business development 
company is any closed-end company which is operated for the purpose 
of making investments in securities described in section 55(a) of 
the Act and makes available significant managerial assistance with 
respect to the issuers of these securities, and which elects BDC 
status under section 54(a).
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    2. The Company was formed to invest primarily in the equity 
securities and

[[Page 55661]]

equity-linked debt securities of private companies, and makes available 
significant managerial assistance to the issuers of such securities. 
The Company seeks to enable its stockholders to participate in 
investments not typically available to the public due to the private 
nature of a substantial majority of the Company's portfolio companies, 
the size of the financial commitment often required in order to 
participate in such investments, or the experience, skill and time 
commitment required to identify and take advantage of these investment 
opportunities.
    3. At June 30, 1997, the Company had total assets valued at $40 
million, which was primarily invested in short-term U.S. government 
securities pending investment in portfolio companies. The Company 
intends to invest a portion of its assets in equity securities of post-
venture small-cap public companies. A post-venture company is a company 
that has received venture capital or private equity financing either 
(a) during the early stages of the company's business or the early 
stages of the development of a new product or service, or (b) as part 
of a restructuring or recapitalization of the company. The Company 
intends to limit its post-venture investments to companies which within 
the prior 10 years have received an investment of venture or private 
equity capital, have sold or distributed securities to venture or 
private equity capital investors, or have completed an initial public 
offering of equity securities.
    4. The Company's investment objective is the realization of long-
term capital appreciation in the value of its investments. In addition, 
whenever feasible in light of market conditions and the cash flow 
characteristics of the issuers of the securities in which it invests 
(collectively, the ``portfolio companies''), the Company will seek to 
provide an element of current income primarily from interest, dividends 
and fees paid by its portfolio companies.
    5. The BVP entities are venture capital limited partnerships not 
registered under the Act in reliance on sections 3(c)(1) and/or 3(c)(7) 
of the Act. The BVP entities, during the period from 1981 through 1996, 
in the aggregate have made investments in 32 small businesses, each 
with up to $20 million in annual revenue, either as part of early-stage 
financings, expansion financings, acquisition or buyout financings or 
special situations. The BVP entities generally have made venture 
capital investments similar to the investments to be made by the 
Company in private companies.
    6. BVP II, a Delaware limited partnership, has committed capital of 
approximately $30 million from 14 limited partners representing 
primarily corporate and public pension funds which has been fully 
invested in 15 portfolio companies. Although its committed capital is 
fully invested, BVP II may elect to reinvest from time to time, rather 
than to distribute immediately, the cash proceeds from the harvest of 
existing investments prior to its scheduled final distribution in April 
2000. The sole general partner of the controlling general partner and 
two other general partners of the Delaware limited partnership which is 
BVP II's managing general partner are executive officers of the Company 
and are principals of the Investment Adviser.
    7. BVP III, a Delaware limited partnership, has committed capital 
of approximately $60 million from 16 limited partners representing 
primarily corporate and public pension funds. The committed capital 
currently is less than 40% invested in 9 portfolio companies. BVP III 
is not scheduled for final distribution until December 2003. The sole 
general partner of the controlling general partner and two other 
general partners of the Delaware limited partnership which is BVP III's 
managing general partner are executive officers of the Company and 
principals of the Investment Adviser.
    8. The Investment Adviser is registered with the SEC as an 
investment adviser under the Investment Advisers Act of 1940. The 
Investment Adviser was named originally as ``Brantley Capital 
Management, Ltd.'', and organized originally as a Delaware corporation 
on February 9, 1995. The Investment Adviser was reorganized as a 
Delaware limited liability company on November 25, 1996. The Investment 
Adviser is privately owned by its members, including certain executive 
officers of the Company who are principals of the Investment Adviser. 
The Investment Adviser currently provides investment advisory services 
solely to the Company. However, certain of the Investment Adviser's 
principals are also principals of several management companies 
organized as limited partnerships, each of which is the managing 
general partner in one of the BVP entities.
    9. Applicants request an order under section 57(i) of the Act and 
under rule 17d-1 to permit the Company and Company Affiliates to co-
invest in portfolio companies.

Applicants' Legal Analysis

    1. Section 57(a)(4) of the Act prohibits certain affiliated persons 
from participating in a joint transaction with a BDC in contravention 
of rules as prescribed by the SEC. Under section 57(b)(1) of the Act, 
persons who are affiliated persons of the directors or officers of a 
BDC within the meaning of section 2(a)(3)(C) of the Act are subject to 
section 57(a)(4). Under section 2(a)(3)(C), an affiliated person of 
another person includes any person directly or indirectly controlled by 
such other person.
    2. Section 57(i) of the Act provides that, until the SEC prescribes 
rules under section 57(a)(4), the SEC's rules under sections 17(a) and 
17(d) of the Act applicable to closed-end investment companies shall be 
deemed to apply to sections 57(a) and 57(d). Because the SEC has not 
adopted any rules under section 57(a)(4), rule 17d-1 applies.
    3. Rule 17d-1 under the Act generally prohibits affiliated persons 
of an investment company from entering into joint transactions with the 
company without prior SEC authorization. In passing upon applications 
under rule 17d-1(b), the SEC will consider whether the participation by 
the BDC in such joint transaction is consistent with the provisions, 
policies, and purposes of the Act and the extent to which such 
participation is on a basis different from or less advantageous than 
that of other participants.
    4. Applicants state that, because the BVP entities may be deemed to 
be under common control with the Investment Adviser through the common 
ownership of the BVP entities' respective managing general partners 
with the Investment Adviser and also through the common identity of 
certain principals of the BVP entities' managing general partners and 
the Investment Adviser, the BVP entities may be persons affiliated with 
the Company under section 57(b) of the Act and therefore may be 
prohibited by section 57(a)(4) of the Act and rule 17d-1 from 
participating in the proposed co-investment program without exemptive 
relief.
    5. Applicants expect that co-investment in portfolio companies by 
the Company and Company Affiliates will increase favorable investment 
opportunities for the Company. Applicants state that an investment 
company that makes venture capital investments typically limits its 
participation in any one transaction to a specific dollar amount. 
Applicants state that, when the Investment identifies venture capital 
investment opportunities requiring larger capital commitments, it must 
seek the participation of other venture capital entities. Applicants 
believe that the availability of the Company Affiliates as investing 
partners of the Company may

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alleviate that necessity in certain circumstances.
    6. The Investment Adviser believes that it will be advantageous for 
the Company to co-invest with the investment objectives, policies, and 
restrictions of the Company. The Investment Adviser also believes that 
co-investment by the Company and the Company Affiliates will provide 
the opportunity for achieving greater diversification and exercising 
greater influence on the portfolio companies in which the Company and 
Company Affiliates co-invest.
    7. Applicants submit that the formula for the allocation of co-
investment opportunities among the Company on the one hand and the 
Company Affiliates on the other and the advance approvals of the 
required majority (within the meaning of section 57(o) of the Act) of 
directors of the Company, as provided in condition 1 below, will ensure 
that the Company will be treated fairly. Applicants also contend that 
the conditions to which the requested relief will be subject are 
designed to ensure that principals of the Investment Adviser would not 
be able to favor the Company Affiliates over the Company through the 
allocation of investment opportunities among them.

Applicants' Conditions

    Applicants agree that the requested order shall be subject to the 
following conditions:
    1. (a) To the extent that the Company is considering new 
investments, the Investment Adviser will review investment 
opportunities on behalf of the Company, including investments being 
considered on behalf of any Company Affiliate. The Investment Adviser 
will determine whether an investment being considered on behalf of a 
Company Affiliate (``Company Affiliate Investment'') is eligible for 
investment by the Company.
    (b) If the Investment Adviser deems a Company Affiliate Investment 
eligible for the Company (a ``co-investment opportunity''), the 
Investment Adviser will determine what it considers to be an 
appropriate amount that the Company should invest. When the aggregate 
amount recommended for the Company and that sought by a Company 
Affiliate exceeds the amount of the co-investment opportunity, the 
amount invested by the Company shall be based on the ratio of the net 
assets of the Company to the aggregate net assets of the Company and 
the Company Affiliate seeking to make the investment.
    (c) Following the making of the determinations referred to in (a) 
and (b), the Investment Adviser will distribute written information 
concerning all co-investment opportunities to the Company's directors 
who are not ``interested persons'' as defined under section 2(a) (19) 
of the Act (``Independent Directors''). The information will include 
the amount the Company Affiliate proposes to invest.
    (d) Information regarding the Investment Adviser's preliminary 
determinations will be reviewed by the Company's Independent Directors. 
The Company will co-invest with a Company Affiliate only if a required 
majority (as defined in section 57(o) of the Act) (``Required 
Majority'') of the Company's Independent Directors conclude, prior to 
the acquisition of the investment, that:
    (i) The terms of the transaction, including the consideration to be 
paid, are reasonable and fair to the shareholders of the Company and do 
not involve overreaching of the Company or such shareholders on the 
part of any person concerned;
    (ii) The transaction is consistent with the interests of 
shareholders of the Company and is consistent with the Company's 
investment objectives and policies as recited in filings made by the 
Company under the Securities Act of 1933, as amended, its registration 
statement and reports filed under the Securities Exchange Act of 1934, 
as amended, and its reports to shareholders;
    (iii) The investment by the Company Affiliate would not 
disadvantage the Company, and that participation by the Company would 
not be on a basis different from or less advantageous than that of the 
Company Affiliate; and
    (iv) The proposed investment by the Company will not benefit the 
Investment Adviser or any affiliated entity thereof, other than the 
Company Affiliate making the coinvestment, except to the extent 
permitted pursuant to sections 17(e) and 57(k) of the Act.
    (e) The Company has the right to decline to participate in the co-
investment opportunity or purchase less than its full allocation.
    2. The Company will not make an investment for is portfolio if any 
Company Affiliate, the Investment for its portfolio if any Company 
Affiliate, the Investment Adviser, or a person controlling, controlled 
by, or under common control with the Investment Adviser is an existing 
investor in such issuer, with the exception of a follow-on investment 
that complies with condition number 5.
    3. For any purchase of securities by the Company in which a Company 
Affiliate is a joint participant, the terms, conditions, price, class 
of securities, settlement date, and registration right shall be the 
same for the Company and the Company Affiliate.
    4. If a Company Affiliate elects to sell, exchange, or otherwise 
dispose of an interest in a security that is also held by the Company, 
the Investment Adviser will notify the Company of the proposed 
disposition at the earliest practical time and the Company will be 
given the opportunity to participate in the disposition on a 
proportionate basis, at the same price and on the same terms and 
conditions as those applicable to the Company Affiliate. The Investment 
Adviser will formulate a recommendation as to participation by the 
Company in the proposed disposition, and provide a written 
recommendation to the Company's Independent Directors. The Company will 
participate in the disposition to the extent that a Required Majority 
of its Independent Directors determine that it is in the Company's best 
interest. Each of the Company and the Company Affiliate will bear its 
own expenses associated with any such disposition of a portfolio 
security.
    5. If a Company Affiliate desires to make a ``follow-on'' 
investment (i.e., an additional investment in the same entity) in a 
portfolio company whose securities are held by the Company or to 
exercise warrants or other rights to purchase securities of the issuer, 
the Investment Adviser will notify the Company of the proposed 
transaction at the earliest practical time. The Investment Adviser will 
formulate a recommendation as to the proposed participation by the 
Company in a follow-on investment and provide the recommendation to the 
Company's Independent Directors along with notice of the total amount 
of the follow-on investment. The Company's Independent Directors will 
make their own determination with respect to follow-on investment. To 
the extent that the amount of a follow-on investment opportunity is not 
based on the amount of the Company's and the Company Affiliate's 
initial investments, the relative amount of investment by the Company 
Affiliate and the Company will be based on the ratio of the Company's 
remaining funds available for investment to the aggregate of the 
Company's and the Company Affiliate's remaining funds available for 
investment. The Company will participate in the investment to the 
extent that a Required Majority of its Independent Directors determine 
that it is in the Company's best interest. The acquisition of follow-on 
investments as permitted by this condition will be

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subject to the other conditions in the application.
    6. The Company's Independent Directors will review quarterly all 
information concerning co-investment opportunities during the preceding 
quarter to determine whether the conditions in the application were 
complied with.
    7. The Company will maintain the records required by section 
57(f)(3) of the Act as if each of the investments permitted under these 
conditions were approved by the Company's Independent Directors under 
section 57(f).
    8. No Independent Director of the Company will be a director or 
general partner of any Company Affiliate with which the Company co-
invests.

    For the SEC, by the Division of Investment Management, under 
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-28365 Filed 10-24-97; 8:45 am]
BILLING CODE 8010-01-M