Venture capital funds have traditionally been available only to institutions and wealthy individuals through private placements. Fund managers were traditionally limited in designing fund structures for investors who did not meet the definition of a “qualified purchaser” (generally, individuals with assets of less than $2.1 million) or funds that have more than 100 investors. These requirements are discussed in greater detail on our private ICO and crypto funds page.
Business Development Companies (BDCs) are a form of a closed-end, publicly-traded fund that is registered with the Securities and Exchange Commission (SEC) under to the Investment Company Act of 1940 (the Company Act). BDCs assist with the facilitation of raising capital for financially troubled, small and developing companies who have in the past lacked access to the public capital markets. As such, they may be used as a publicly traded vehicle for investing in a portfolio of securities tokens issued by “eligible portfolio companies” (defined below).
BDCs may be thought of as publicly traded venture capital funds. They are typically structured as closed end funds: they issue shares to the public, and then invest the proceeds in venture capital investments in a portfolio of private companies. Their shares trade in the public markets and rise and fall like any other stock. This is in contrast to an open-end fund (i.e., a mutual fund), where new shares are continually available for purchase from the fund, and may be sold back to the fund, at the current net asset value per share of the fund.
BDCs are required to provide “significant managerial assistance” to the businesses that they invest in, including operational and management assistance. This means that BDCs are not the “passive” investment vehicles. Instead BDCs make their investments through equity capital or long-term debt with the aim of generating current income or capital appreciation. In the last few years, a variety of the private-equity managers have launched the BDCs as a way to access pubic capital. Examples include BDCs from Apollo, Ares and BlackRock.
Can a BDC invest in ICO Tokens?
For the time being, no. In January 2018, the SEC’s Director of the Division of Investment Management issued a “Staff Letter: Engaging on Fund Innovation and Cryptocurrency-related Holdings” to investment company market associations analyzing a number of unsolved questions relating to the registration of investment companies that invest in cryptocurrencies and tokens. The letter concluded:
Until the questions identified above can be addressed satisfactorily, we do not believe that it is appropriate for fund sponsors to initiate registration of funds that intend to invest substantially in cryptocurrency and related products, and we have asked sponsors that have registration statements filed for such products to withdraw them.
The staff letter is discussed in greater detail on our blog post.
When these industry issues have been addressed and the SEC clears investment companies for registration, ICO BDCs should be come a reality.