File
No.
U.S.
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
APPLICATION
FOR AN ORDER PURSUANT TO SECTIONS 17(d) AND 57(i) OF THE INVESTMENT COMPANY ACT OF 1940 AND RULE 17d-1 UNDER THE ACT TO PERMIT
CERTAIN JOINT TRANSACTIONS OTHERWISE PROHIBITED BY SECTIONS 17(d) AND 57(a)(4) OF THE ACT AND RULE 17d-l UNDER THE ACT
RAND
CAPITAL CORPORATION, RAND CAPITAL MANAGEMENT, LLC AND RAND CAPITAL SBIC, INC.
2200
Rand Building
Buffalo,
NY 14203
(716) 853-0802
CALLODINE
CAPITAL MANAGEMENT, LP, BLUEARC MEZZANINE PARTNERS I, LP, RAND CAPITAL CREDIT, LLC, CALLODINE CAPITAL MASTER FUND, LP AND CALLODINE
SPECIAL OPPORTUNITY FUND, LP
Two
International Place, Suite 1830
Boston,
MA 02110
(617)
880-7480
All
Communications, Notices and Orders to:
James
Morrow
Callodine
Capital Management, LP
Two
International Place, Suite 1830
Boston,
MA 02110
(617)
880-7480
bcollins@callodine.com
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Allen
F. Grum
Rand
Capital Corporation
2200
Rand Building
Buffalo,
NY 14203
(716)
853-0802
pgrum@randcapital.com
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Copies
to:
Cynthia
M. Krus, Esq.
Stephani
M. Hildebrandt, Esq.
Anne
G. Oberndorf, Esq.
Eversheds
Sutherland (US) LLP
700
Sixth Street, N.W.
Washington,
D.C. 20001
(202)
383-0100
(202)
637-3593 (fax)
October
29, 2020
UNITED
STATES OF AMERICA
Before
the
SECURITIES
AND EXCHANGE COMMISSION
In the Matter
of
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RAND
CAPITAL CORPORATION, RAND CAPITAL MANAGEMENT, LLC AND RAND CAPITAL SBIC, INC.
2200
Rand Building
Buffalo,
NY 14203
(716)
853-0802
CALLODINE
CAPITAL MANAGEMENT, LP, BLUEARC MEZZANINE PARTNERS I, LP, RAND CAPITAL CREDIT, LLC, CALLODINE CAPITAL MASTER FUND, LP
AND CALLODINE SPECIAL OPPORTUNITY FUND, LP
Two
International Place, Suite 1830
Boston,
MA 02110
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APPLICATION
FOR AN ORDER PURSUANT TO SECTIONS 17(d) AND 57(i) OF THE INVESTMENT COMPANY ACT OF 1940 AND RULE 17d-1 UNDER
THE ACT TO PERMIT CERTAIN JOINT TRANSACTIONS OTHERWISE PROHIBITED BY SECTIONS 17(d) AND 57(a)(4) OF THE ACT AND
RULE 17d-1 UNDER THE ACT
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File
No.
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Investment
Company Act of 1940
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Rand
Capital Corporation and its related entities identified in Section I.B. below, hereby request an order (the “Order”)
pursuant to Sections 17(d) and 57(i) of the Investment Company Act of 1940, as amended (the “Act”)1
and Rule 17d-1 thereunder2 authorizing certain joint transactions that otherwise would be prohibited by either
or both of Sections 17(d) and 57(a)(4) as modified by the exemptive rules adopted by the U.S. Securities and Exchange Commission
(the “Commission”) under the Act.
In
particular, the relief requested in this application (the “Application”) would allow one or more Regulated
Funds (as defined below) (including one or more BDC Downstream Funds (as defined below)) and/or
one or more Affiliated Funds (as defined below) to participate in the same investment opportunities through a proposed
co-investment program where such participation would otherwise be prohibited under Section 17(d) or Section 57(a)(4) and the rules
under the Act (the “Co-Investment Program”). All existing entities that currently intend to rely on
the Order have been named as Applicants (defined below) and any existing or future entities that may rely on the Order in the
future will comply with the terms and Conditions (defined below) set forth in this Application.
The
Order sought by this Application would supersede an exemptive order issued by the Commission to Rand Capital Corporation, et al.
on October 7, 2020 under Sections 17(d) and 57(i) of the Act and Rule 17d-1 under the Act permitting
certain joint transactions otherwise prohibited by Sections 17(d) and 57(a)(4) of the Act and Rule 17d-1 under
the Act (the “Prior Order”), with the result that no person will continue to rely on the Prior Order
if the Order is granted.3 The Company is seeking this Order because Callodine
Group, LLC (“Callodine”) intends to enter into an agreement with East Asset Management, LLC (“East”)
whereby East will assign its controlling interest in each of BDC Adviser (as defined below) and RCC Adviser (as defined below)
to Callodine (the “Transaction”). As a result, after the Transaction is completed, Callodine will be
deemed to control each of BDC Adviser and RCC Adviser post-Transaction, and thus, the facts on which the relief in the Prior Order
was based will no longer be true.
1
Unless otherwise indicated, all section references herein are to the Act.
2
Unless otherwise indicated, all rule references herein are to rules under the Act.
3
Rand Capital Corporation, et al. (File No. 812-15108) Investment
Company Act Rel. Nos. 34006 (September 11, 2020) (notice) and Release No. 34046 (October 7, 2020) (order).
B.
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Applicants
Seeking Relief
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Rand
Capital Corporation (the “Company”), a corporation formed under the laws of the State of New York,
is an externally-managed, diversified, closed-end management investment company that has elected to be regulated as a business
development company (“BDC”) under the Act;
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Rand
Capital SBIC, Inc. (the “Existing Wholly-Owned Subsidiary”), which is a separate and distinct legal
entity and a Wholly-Owned Investment Sub (as defined below);
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Rand
Capital Management, LLC, the Company’s investment adviser (“BDC Adviser”), on behalf of itself
and its successors;4
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Rand
Capital Credit, LLC, the investment adviser to BlueArc (as defined below) (“RCC Adviser”), on behalf
of itself and its successors;
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Callodine
Capital Master Fund, LP (“Callodine Capital Master Fund”), a Cayman limited partnership, and Callodine
Special Opportunity Fund, LP (“Callodine Special Opportunity Fund”), a Delaware limited partnership,
each of which would be an investment company but for Section 3(c)(7) (collectively, the “Callodine Private Funds”);
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Callodine
Capital Management, LP, (the “Callodine Adviser” and, together
with BDC Adviser and RCC Adviser, the “Existing Advisers”),
the investment adviser to the Callodine Private Funds;
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BlueArc
Mezzanine Partners I, LP, a limited partnership that would be an investment company but for Section 3(c)(1) (“BlueArc”
and, together with the Callodine Private Funds, the “Existing Affiliated Funds” and, together with
the Company, the Existing Wholly-Owned Subsidiary and the Existing Advisers, the “Applicants”).
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“Adviser”
means the Existing Advisers together with any future investment adviser that (i) is directly or indirectly controlled by
Callodine, (ii) (a) is registered as an investment adviser under the Investment Advisers Act of 1940 (the “Advisers
Act”) or (b) is an exempt reporting adviser pursuant to Rule 203(m) of the Advisers Act (“Exempt Reporting
Adviser”), and (iii) is not a Regulated Fund (defined below) or a subsidiary of a Regulated Fund.
“Affiliated
Fund” means the Existing Affiliated Funds, any Future Affiliated Fund or any Callodine Proprietary Account (as defined
below). No Existing Affiliated Fund is a BDC Downstream Fund.
“BDC”
means a business development company under the Act. Section 2(a)(48) defines a BDC to be any closed-end investment company that
operates for the purpose of making investments in securities described in Section 55(a)(1) through 55(a)(3) and makes available
significant managerial assistance with respect to the issuers of such securities.
4
The term successor, as applied to each Adviser, means an entity which results from a reorganization into another jurisdiction
or change in the type of business organization.
“BDC
Downstream Fund” means, with respect to any Regulated Fund that is a BDC, an entity (i) that the BDC directly or
indirectly controls, (ii) that is not controlled by any person other than the BDC (except a person that indirectly controls the
entity solely because it controls the BDC), (iii) that would be an investment company but for Section 3(c)(1) or 3(c)(7) of the
Act, (iv) whose investment adviser (and sub-adviser(s), if any) are an Adviser, (v) that is not a Wholly-Owned Investment Sub,
and (vi) that intends to participate in the Co-Investment Program.
“Board”
means (i) with respect to a Regulated Fund other than a BDC Downstream Fund, the board of directors (or the equivalent) of the
Regulated Fund and (ii) with respect to a BDC Downstream Fund, the Independent Party of the BDC Downstream Fund.
“Board-Established
Criteria” means criteria that the Board of a Regulated Fund may establish from time to time to describe the characteristics
of Potential Co-Investment Transactions regarding which the Adviser to such Regulated Fund should be notified under Condition
1. The Board-Established Criteria will be consistent with the Regulated Fund’s Objectives and Strategies (defined below).
If no Board-Established Criteria are in effect, then the Regulated Fund’s Adviser will be notified of all Potential Co-Investment
Transactions that fall within the Regulated Fund’s then-current Objectives and Strategies. Board-Established Criteria will
be objective and testable, meaning that they will be based on observable information, such as industry/sector of the issuer, minimum
EBITDA of the issuer, asset class of the investment opportunity or required commitment size, and not on characteristics that involve
a discretionary assessment. The Adviser to the Regulated Fund may from time to time recommend criteria for the Board’s consideration,
but Board-Established Criteria will only become effective if approved by a majority of the Independent Directors (defined below).
The Independent Directors of a Regulated Fund may at any time rescind, suspend or qualify their approval of any Board-Established
Criteria, though Applicants anticipate that, under normal circumstances, the Board would not modify these criteria more often
than quarterly.
“Close
Affiliate” means the Advisers, the Regulated Funds, the Affiliated Funds and any other person described in Section
57(b) (after giving effect to Rule 57b-1) in respect of any Regulated Fund (treating any registered investment company or series
thereof as a BDC for this purpose) except for limited partners included solely by reason of the reference in Section 57(b) to
Section 2(a)(3)(D).
“Co-Investment
Transaction” means any transaction in which one or more Regulated Funds (or its Wholly-Owned Investment Sub (defined
below)) participated together with one or more Affiliated Funds and/or one or more other Regulated Funds in reliance on the Order.
“Disposition”
means the sale, exchange or other disposition of an interest in a security of an issuer.
“Callodine
Proprietary Account” means any direct or indirect, wholly- or majority-owned subsidiary of Callodine or any Adviser
that, from time to time, may hold various financial assets in a principal capacity.
“Eligible
Directors” means, with respect to a Regulated Fund and a Potential Co-Investment Transaction, the members of the
Regulated Fund’s Board eligible to vote on that Potential Co-Investment Transaction under Section 57(o) of the Act.
“Follow-On
Investment” means an additional investment in the same issuer, including, but not limited to, through the exercise
of warrants, conversion privileges or other rights to purchase securities of the issuer.
“Future
Affiliated Fund” means any entity (a) whose investment adviser (and sub-adviser(s), if any) are an Adviser, (b)
that would be an investment company but for Section 3(c)(1), 3(c)(5)(C) or 3(c)(7) of the Act, (c) that intends to participate
in the Co-Investment Program, and (d) that is not a BDC Downstream Fund.
“Future
Regulated Fund” means a closed-end management investment company (a) that is registered under the Act or has elected
to be regulated as a BDC, (b) whose investment adviser (and sub-adviser(s), if any) are an Adviser, and (c) that intends to participate
in the Co-Investment Program.
“Independent
Director” means a member of the Board of any relevant entity who is not an “interested person” as defined
in Section 2(a)(19) of the Act. No Independent Director of a Regulated Fund (including any non-interested member of an Independent
Party) will have a financial interest in any Co-Investment Transaction, other than indirectly through share ownership in one of
the Regulated Funds.
“Independent
Party” means, with respect to a BDC Downstream Fund, (i) if the BDC Downstream Fund has a board of directors (or
the equivalent), the board or (ii) if the BDC Downstream Fund does not have a board of directors (or the equivalent), a transaction
committee or advisory committee of the BDC Downstream Fund.
“JT
No-Action Letters” means SMC Capital, Inc., SEC No-Action Letter (pub. avail. Sept. 5, 1995) and Massachusetts
Mutual Life Insurance Company, SEC No-Action Letter (pub. avail. June 7, 2000).
“Objectives
and Strategies” means (i) with respect to any Regulated Fund other than a BDC Downstream Fund, its investment objectives
and strategies, as described in its most current registration statement on Form N-2, other current filings with the Commission
under the Securities Act of 1933 (the “Securities Act”) or under the Securities Exchange Act of 1934, as amended,
and its most current report to stockholders, and (ii) with respect to any BDC Downstream Fund, those investment objectives and
strategies described in its disclosure documents (including private placement memoranda and reports to equity holders) and organizational
documents (including operating agreements).
“Potential
Co-Investment Transaction” means any investment opportunity in which a Regulated Fund (or its Wholly-Owned Investment
Sub) could not participate together with one or more Affiliated Funds and/or one or more other Regulated Funds without obtaining
and relying on the Order.
“Pre-Boarding
Investments” are investments in an issuer held by a Regulated Fund as well as one or more Affiliated Funds and/or
one or more other Regulated Funds that were acquired prior to participating in any Co-Investment Transaction:
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i.)
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in
transactions in which the only term negotiated by or on behalf of such funds was price in reliance on one of the JT No-Action
Letters; or
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ii.)
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in
transactions occurring at least 90 days apart and without coordination between the Regulated Fund and any Affiliated Fund
or other Regulated Fund.
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“Regulated
Funds” means the Company, the Future Regulated Funds and the BDC Downstream Funds.
“Related
Party” means (i) any Close Affiliate and (ii) in respect of matters as to which any Adviser has knowledge, any Remote
Affiliate.
“Remote
Affiliate” means any person described in Section 57(e) in respect of any Regulated Fund (treating any registered
investment company or series thereof as a BDC for this purpose) and any limited partner holding 5% or more of the relevant limited
partner interests that would be a Close Affiliate but for the exclusion in that definition.
“Required
Majority” means a required majority, as defined in Section 57(o) of the Act.5
“Tradable
Security” means a security that meets the following criteria at the time of Disposition:
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(i)
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it
trades on a national securities exchange or designated offshore securities market as defined in rule 902(b) under the Securities
Act;
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(ii)
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it
is not subject to restrictive agreements with the issuer or other security holders; and
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5
In the case of a Regulated Fund that is a registered closed-end fund, the Board members that make up the Required Majority
will be determined as if the Regulated Fund were a BDC subject to Section 57(o). In the case of a BDC Downstream Fund with
a board of directors (or the equivalent), the members that make up the Required Majority will be determined as if the BDC Downstream
Fund were a BDC subject to Section 57(o). In the case of a BDC Downstream Fund with a transaction committee or advisory committee,
the committee members that make up the Required Majority will be determined as if the BDC Downstream Fund were a BDC subject to
Section 57(o) and as if the committee members were directors of the fund.
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(iii)
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it
trades with sufficient volume and liquidity (findings as to which are documented by the Advisers to any Regulated Funds holding
investments in the issuer and retained for the life of the Regulated Fund) to allow each Regulated Fund to dispose of its
entire position remaining after the proposed Disposition within a short period of time not exceeding 30 days at approximately
the value (as defined by Section 2(a)(41) of the Act) at which the Regulated Fund has valued the investment.
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“Wholly-Owned
Investment Sub” means an entity (i) that is a wholly-owned subsidiary6 of a Regulated Fund (with such
Regulated Fund at all times holding, beneficially and of record, 95% or more of the voting and economic interests); (ii) whose
sole business purpose is to hold one or more investments on behalf of such Regulated Fund (and, in the case of an SBIC Subsidiary
(defined below), maintains a license under the SBA Act (defined below) and issues debentures guaranteed by the SBA (defined below));
(iii) with respect to which such Regulated Fund’s Board has the sole authority to make all determinations with respect to
the entity’s participation under the Conditions to this Application; and (iv) (A) that would be an investment company but
for Section 3(c)(1), 3(c)(5)(C), or 3(c)(7) of the Act, or (B) that qualifies as a real estate investment trust (“REIT”)
within the meaning of Section 856 of the Internal Revenue Code of 1986, as amended (“Code”) because
substantially all of its assets would consist of real properties. The term “SBIC Subsidiary” means a
Wholly-Owned Investment Sub that is licensed by the Small Business Administration (the “SBA”) to operate
under the Small Business Investment Act of 1958, as amended, (the “SBA Act”) as a small business investment
company. The Existing Wholly-Owned Subsidiary is a Wholly-Owned Investment Sub.
Each
applicant below may be deemed to be directly or indirectly controlled by Callodine. Callodine owns a controlling interest in each
of the Existing Advisers, and thus may be deemed to control the Company and the Existing Affiliated Funds. Callodine, however,
is a holding company and does not currently offer investment advisory services to any person and is not expected to do so in the
future. Accordingly, Callodine has not been included as an Applicant.
The
Company was organized as a corporation under the laws of the State of New York in February 1969 and completed its initial public
offering in 1971 as an internally managed, closed-end, diversified, investment management company. The Company elected to be regulated
as a BDC under the Act and thus is required to comply with certain regulatory requirements as provided for in the Act and the
rules and regulations promulgated thereunder. On November 8, 2019, the company entered into an Investment Advisory and Management
Agreement (the “ Initial Advisory Agreement”) with the BDC Adviser pursuant to which the BDC Adviser
would serve as Company’s external investment adviser. However, the completion of the Transaction will result in a change
in control of the BDC Adviser and therefore an assignment of the Initial Advisory Agreement under the Act, which will result in
the termination of the Initial Advisory Agreement. As a result, the shareholders of the Company will be asked to approve (“Shareholder
Approval”) a new investment advisory agreement (the “New Advisory Agreement”) between
the Company and BDC Adviser. The Company intends to seek Shareholder Approval prior to the anticipated Order and will not rely
on the Order until Shareholder Approval is obtained. Additionally, the Company intends to elect to be treated for tax purposes
as a regulated investment company (“RIC”), under Subchapter M of the Code.
The
Company’s Objectives and Strategies are to maximize total return to its shareholders with current income combined with capital
appreciation. The Company’s investments are expected to be made primarily in investments that generate current income combined
with equity options, in the form of warrants or preferred equity. The Company has a five member Board, of which three members
are Independent Directors.
6
A “wholly-owned subsidiary” of a person is as defined in Section 2(a)(43) of the Act and means a company 95%
or more of the outstanding voting securities of which are owned by such person.
B.
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The
Existing Wholly-Owned Subsidiary
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The
Existing Wholly-Owned Subsidiary is a Wholly-Owned Investment Sub of the Company and is structured as a New York corporation.
The Existing Wholly-Owned Subsidiary has received a license from the SBA to operate as a small business investment company (“SBIC”)
under Section 301(c) of the SBA Act.
BDC
Adviser is a Delaware limited liability company and is registered as an investment adviser under the Advisers Act. BDC Adviser
serves as the investment adviser to the Company and manages the Company’s portfolio in accordance with its Objectives and
Strategies. BDC Adviser makes investment decisions for the Company, including identifying and negotiating the structure of the
investments it makes and otherwise managing the day-to-day operations of the Company, subject to the oversight of the Company’s
Board.
RCC
Adviser is a Delaware limited liability company and is an Exempt Reporting Adviser. RCC Adviser serves as investment adviser to
BlueArc.
BlueArc
is a Georgia limited partnership that would be an investment company but for Section 3(c)(1). RCC Adviser is the investment adviser
to BlueArc.
The
Callodine Adviser is a Massachusetts limited partnership and is registered as an investment adviser under the Advisers Act. Callodine
Adviser serves as investment adviser to each of the Callodine Private Funds pursuant to their respective investment advisory agreements.
G.
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Callodine
Private Funds
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Callodine
Capital Master Fund is a Cayman limited partnership that would be investment companies but for Section 3(c)(7). Callodine Special
Opportunity Fund is a Delaware limited partnership that would be an investment company but for Section 3(c)(7). The Callodine
Adviser is the investment adviser to the Callodine Private Funds.
H.
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Callodine
Proprietary Accounts
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The
Callodine Proprietary Accounts will hold various financial assets in a principal capacity. Callodine and the Advisers have various
business lines that they may operate through direct or indirect, wholly- or majority-owned subsidiaries. Currently, there are
no existing Callodine Proprietary Accounts.
Applicants
respectfully request an Order of the Commission under Sections 17(d) and 57(i) and Rule 17d-1 thereunder to permit, subject to
the terms and conditions set forth below in this Application (the “Conditions”), a Regulated Fund and
one or more other Regulated Funds and/or one or more Affiliated Funds to enter into Co-Investment Transactions with each other.
The
Regulated Funds and the Affiliated Funds seek relief to enter into Co-Investment Transactions because such Co-Investment Transactions
would otherwise be prohibited by either or both of Section 17(d) or Section 57(a)(4) and the Rules under the Act. This Application
seeks relief in order to (i) enable the Regulated Funds and Affiliated Funds to avoid, among other things, the practical commercial
and/or economic difficulties of trying to structure, negotiate and persuade counterparties to enter into transactions while awaiting
the granting of the relief requested in individual applications with respect to each Co-Investment Transaction that arises in
the future and (ii) enable the Regulated Funds and the Affiliated Funds to avoid the significant legal and other expenses that
would be incurred in preparing such individual applications.
Applicants
include the BDC Adviser, RCC Adviser, and Callodine Adviser, which currently manage the Company, BlueArc and the Callodine Private
Funds, respectively, with aggregate assets in excess of $200 million as of September 30, 2020. Each of the Existing Advisers manage
the assets entrusted to it by its clients in accordance with its fiduciary duty to those clients and, in the case of the Company,
the Act.
The
Existing Advisers have established rigorous processes for allocating initial investment opportunities, opportunities for subsequent
investments in an issuer and dispositions of securities holdings reasonably designed to treat all clients fairly and equitably.
As discussed below, these processes will be extended and modified in a manner reasonably designed to ensure that the additional
transactions permitted under the Order will both (i) be fair and equitable to the Regulated Funds and the Affiliated Funds and
(ii) comply with the Conditions contained in the Order.
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1.
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The
Investment Process
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The
investment process consists of three stages: (i) the identification and consideration of investment opportunities (including follow-on
investment opportunities); (ii) order placement and allocation; and (iii) consideration by each applicable Regulated Fund’s
Board when a Potential Co-Investment Transaction is being considered by one or more Regulated Funds, as provided by the Order.
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(a)
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Identification
and Consideration of Investment Opportunities
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Opportunities
for Potential Co-Investment Transactions may arise when investment advisory personnel of an Adviser become aware of investment
opportunities that may be appropriate for one or more Regulated Funds and one or more Affiliated Funds. If the requested Order
is granted, the Advisers will establish, maintain and implement policies and procedures reasonably designed to ensure that, when
such opportunities arise, the Advisers to the relevant Regulated Funds are promptly notified and receive the same information
about the opportunity as any other Adviser considering the opportunity for its clients. In particular, consistent with Condition
1, if a Potential Co-Investment Transaction falls within the then-current Objectives and Strategies and any Board-Established
Criteria of a Regulated Fund, the policies and procedures will require that the Adviser to such Regulated Fund receive sufficient
information to allow such Adviser’s investment committee to make its independent determination and recommendations under
Conditions 1, 2(a), 6, 7, 8 and 9 (as applicable).7 In addition, the policies and procedures will specify the individuals
or roles responsible for carrying out the policies and procedures, including ensuring that the Advisers receive such information.
After receiving notification of a Potential Co-Investment Transaction under Condition 1(a), the Adviser to each applicable Regulated
Fund will then make an independent determination of the appropriateness of the investment for the Regulated Fund in light of the
Regulated Fund’s then-current circumstances.
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Representatives from each Adviser to a Regulated Fund will be members of each investment committee or otherwise entitled
to participate in each meeting of any investment committee that is expected to approve or reject recommended investment opportunities
falling within its Regulated Funds’ Objectives and Strategies and Board- Established Criteria. Accordingly, the policies
and procedures may provide, for example, that an Adviser will receive the information required under Condition 1 in conjunction
with its representatives’ participation in the relevant investment committee’s meetings. The allocation memorandum
for each Potential Co-Investment Transaction will document the recommendations by the investment committee.
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(b)
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Order
Placement and Allocation
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General.
If the Adviser to a Regulated Fund deems the Regulated Fund’s participation in any Potential Co-Investment Transaction to
be appropriate, it will formulate a recommendation regarding the proposed order amount for the Regulated Fund. In doing so, the
Adviser may consider such factors, among others, as investment guidelines, issuer, industry and geographical concentration, availability
of cash and other opportunities for which cash is needed, tax considerations, leverage covenants, regulatory constraints (such
as requirements under the Act), investment horizon, potential liquidity needs, and the Regulated Fund’s risk concentration
policies.
Allocation
Procedure. For each Regulated Fund and Affiliated Fund whose Adviser recommends participating in a Potential Co-Investment
Transaction, such Adviser’s investment committee will approve an investment amount to be allocated to each Regulated Fund
and/or Affiliated Fund participating in the Potential Co-Investment Transaction. Prior to the External Submission (as defined
below), each proposed order amount may be reviewed and adjusted, in accordance with the applicable Adviser’s written allocation
policies and procedures, by the applicable Adviser’s investment committee.8 The order of a Regulated Fund or
Affiliated Fund resulting from this process is referred to as its “Internal Order”. The Internal Order
will be submitted for approval by the Required Majority of any participating Regulated Funds in accordance with the Conditions
and as discussed in section III.A.1.c. below.
If
the aggregate Internal Orders for a Potential Co-Investment Transaction do not exceed the size of the investment opportunity immediately
prior to the submission of the orders to the underwriter, broker, dealer or issuer, as applicable (the “External Submission”),
then each Internal Order will be fulfilled as placed. If, on the other hand, the aggregate Internal Orders for a Potential Co-Investment
Transaction exceed the size of the investment opportunity immediately prior to the External Submission, then the allocation of
the opportunity will be made pro rata on the basis of the size of the Internal Orders.9 If, subsequent to such External
Submission, the size of the opportunity is increased or decreased, or if the terms of such opportunity, or the facts and circumstances
applicable to the Regulated Funds’ or the Affiliated Funds’ consideration of the opportunity, change, the participants
will be permitted to submit revised Internal Orders in accordance with written allocation policies and procedures that the Advisers
will establish, implement and maintain. The Board of the Regulated Fund will then either approve or disapprove of the investment
opportunity in accordance with Condition 2, 6, 7, 8 or 9, as applicable.
Compliance.
Applicants represent that the Advisers’ allocation review process will be a robust process designed as part of their overall
compliance policies and procedures to ensure that every client is treated fairly and that the Advisers are following their allocation
policies. The entire allocation process will be monitored and reviewed by the compliance team, led by the chief compliance officer,
and approved by the Board of each Regulated Fund.
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(c)
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Approval
of Potential Co-Investment Transactions
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A
Regulated Fund will enter into a Potential Co-Investment Transaction with one or more other Regulated Funds and/or Affiliated
Funds only if, prior to the Regulated Fund’s participation in the Potential Co-Investment Transaction, the Required Majority
approves it in accordance with the Conditions of this Order.
In
the case of a BDC Downstream Fund with an Independent Party consisting of a transaction committee or advisory committee, the individuals
on the committee would possess experience and training comparable to that of the directors of the parent Regulated Fund and sufficient
to permit them to make informed decisions on behalf of the applicable BDC Downstream Fund. Applicants represent that the Independent
Parties of the BDC Downstream Funds would be bound (by law or by contract) by fiduciary duties comparable to those applicable
to the directors of the parent Regulated Fund, including a duty to act in the best interests of their respective funds when approving
transactions. These duties would apply in the case of all Potential Co-Investment Transactions, including transactions that could
present a conflict of interest.
8
The reason for any such adjustment to a proposed order amount will be documented in writing and preserved in the records
of each Adviser.
9
Each Adviser will maintain records of all proposed order amounts, Internal Orders and External Submissions in conjunction
with Potential Co-Investment Transactions. Each applicable Adviser will provide the Eligible Directors with information concerning
the Affiliated Funds’ and Regulated Funds’ order sizes to assist the Eligible Directors with their review of the applicable
Regulated Fund’s investments for compliance with the Conditions.
Further,
Applicants believe that the existence of differing routes of approval between the BDC Downstream Funds and other Regulated Funds
would not result in Applicants investing through the BDC Downstream Funds in order to avoid obtaining the approval of a Regulated
Fund’s Board. Each Regulated Fund and BDC Downstream Fund has its own Objectives and Strategies and may have its own Board-Established
Criteria, the implementation of which depends on the specific circumstances of the entity’s portfolio at the time an investment
opportunity is presented. As noted above, consistent with its duty to its BDC Downstream Funds, the Independent Party must reach
a conclusion on whether or not an investment is in the best interest of its relevant BDC Downstream Funds. An investment made
solely to avoid an approval requirement at the Regulated Fund level should not be viewed as in the best interest of the entity
in question and, thus, would not be approved by the Independent Party.
A
Regulated Fund may participate in Pro Rata Dispositions (defined below) and Pro Rata Follow-On Investments (defined below) without
obtaining prior approval of the Required Majority in accordance with Conditions 6(c)(i) and 8(b)(i).
All
Regulated Funds and Affiliated Funds participating in a Co-Investment Transaction will invest at the same time, for the same price
and with the same terms, conditions, class, registration rights and any other rights, so that none of them receives terms more
favorable than any other. However, the settlement date for an Affiliated Fund in a Co-Investment Transaction may occur up to ten
business days after the settlement date for the Regulated Fund, and vice versa. Nevertheless, in all cases, (i) the date on which
the commitment of the Affiliated Funds and Regulated Funds is made will be the same even where the settlement date is not and
(ii) the earliest settlement date and the latest settlement date of any Affiliated Fund or Regulated Fund participating in the
transaction will occur within ten business days of each other.
|
3.
|
Permitted
Follow-On Investments and Approval of Follow-On Investments
|
From
time to time the Regulated Funds and Affiliated Funds may have opportunities to make Follow-On Investments in an issuer in which
a Regulated Fund and one or more other Regulated Funds and/or Affiliated Funds previously have invested and continue to hold an
investment. If the Order is granted, Follow-On Investments will be made in a manner that, over time, is fair and equitable to
all of the Regulated Funds and Affiliated Funds and in accordance with the proposed procedures discussed above and with the Conditions
of the Order.
The
Order would divide Follow-On Investments into two categories depending on whether the Regulated Funds and Affiliated Funds holding
investments in the issuer previously participated in a Co-Investment Transaction with respect to the issuer and continue to hold
any securities acquired in a Co-Investment Transaction for that issuer. If such Regulated Funds and Affiliated Funds have previously
participated in a Co-Investment Transaction with respect to the issuer, then the terms and approval of the Follow-On Investment
would be subject to the process discussed in section III.A.3.a. below and governed by Condition 8. These Follow-On Investments
are referred to as “Standard Review Follow-Ons.” If such Regulated Funds and Affiliated Funds have not
previously participated in a Co-Investment Transaction with respect to the issuer, then the terms and approval of the Follow-On
Investment would be subject to the “onboarding process” discussed in section III.A.3.b. below and governed by Condition
9. These Follow-On Investments are referred to as “Enhanced Review Follow-Ons.”
|
(a)
|
Standard
Review Follow-Ons
|
A
Regulated Fund may invest in Standard Review Follow-Ons either with the approval of the Required Majority using the procedures
required under Condition 8(c) or, where certain additional requirements are met, without Board approval under Condition 8(b).
A
Regulated Fund may participate in a Standard Review Follow-On without obtaining the prior approval of the Required Majority if
it is (i) a Pro Rata Follow-On Investment or (ii) a Non-Negotiated Follow-On Investment.
A
“Pro Rata Follow-On Investment” is a Follow-On Investment (i) in which the participation of each Affiliated
Fund and each Regulated Fund is proportionate to its outstanding investments in the issuer or security, as appropriate,10
immediately preceding the Follow-On Investment, and (ii) in the case of a Regulated Fund, a majority of the Board has approved
the Regulated Fund’s participation in the pro rata Follow-On Investments as being in the best interests of the Regulated
Fund. The Regulated Fund’s Board may refuse to approve, or at any time rescind, suspend or qualify, its approval of Pro
Rata Follow-On Investments, in which case all subsequent Follow-On Investments will be submitted to the Regulated Fund’s
Eligible Directors in accordance with Condition 8(c).
A
“Non-Negotiated Follow-On Investment” is a Follow-On Investment in which a Regulated Fund participates
together with one or more Affiliated Funds and/or one or more other Regulated Funds (i) in which the only term negotiated by or
on behalf of the funds is price and (ii) with respect to which, if the transaction were considered on its own, the funds would
be entitled to rely on one of the JT No-Action Letters.
Applicants
believe that these Pro Rata and Non-Negotiated Follow-On Investments do not present a significant opportunity for overreaching
on the part of any Adviser and thus do not warrant the time or the attention of the Board. Pro Rata Follow-On Investments and
Non-Negotiated Follow-On Investments remain subject to the Board’s periodic review in accordance with Condition 10.
|
(b)
|
Enhanced
Review Follow-Ons
|
One
or more Regulated Funds and/or one or more Affiliated Funds holding Pre-Boarding Investments may have the opportunity to make
a Follow-On Investment that is a Potential Co-Investment Transaction in an issuer with respect to which they have not previously
participated in a Co-Investment Transaction. In these cases, the Regulated Funds and Affiliated Funds may rely on the Order to
make such Follow-On Investment subject to the requirements of Condition 9. These enhanced review requirements constitute an “onboarding
process” whereby Regulated Funds and Affiliated Funds may utilize the Order to participate in Co-Investment Transactions
even though they already hold Pre-Boarding Investments. For a given issuer, the participating Regulated Funds and Affiliated Funds
need to comply with these requirements only for the first Co-Investment Transaction. Subsequent Co-Investment Transactions with
respect to the issuer will be governed by Condition 8 under the standard review process.
The
Regulated Funds and Affiliated Funds may be presented with opportunities to sell, exchange or otherwise dispose of securities
in a transaction that would be prohibited by Rule 17d-1 or Section 57(a)(4), as applicable. If the Order is granted, such Dispositions
will be made in a manner that, over time, is fair and equitable to all of the Regulated and Affiliated Funds and in accordance
with procedures set forth in the proposed Conditions to the Order and discussed below.
The
Order would divide these Dispositions into two categories: (i) if the Regulated Funds and Affiliated Funds holding investments
in the issuer have previously participated in a Co-Investment Transaction with respect to the issuer and continue to hold any
securities acquired in a Co-Investment Transaction for such issuer, then the terms and approval of the Disposition (hereinafter
referred to as “Standard Review Dispositions”) would be subject to the process discussed in section
III.A.4.a. below and governed by Condition 6; and (ii) if the Regulated Funds and Affiliated Funds have not previously participated
in a Co-Investment Transaction with respect to the issuer, then the terms and approval of the Disposition (hereinafter referred
to as “Enhanced Review Dispositions”) would be subject to the same “onboarding process”
discussed in section III.A.4.b. below and governed by Condition 7.
10
See note 29, below.
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(a)
|
Standard
Review Dispositions
|
A
Regulated Fund may participate in a Standard Review Disposition either with the approval of the Required Majority using the standard
procedures required under Condition 6(d) or, where certain additional requirements are met, without Board approval under Condition
6(c).
A
Regulated Fund may participate in a Standard Review Disposition without obtaining the prior approval of the Required Majority
if (i) the Disposition is a Pro Rata Disposition or (ii) the securities are Tradable Securities and the Disposition meets the
other requirements of Condition 6(c)(ii).
A
“Pro Rata Disposition” is a Disposition (i) in which the participation of each Affiliated Fund and each
Regulated Fund is proportionate to its outstanding investment in the security subject to Disposition immediately preceding the
Disposition;11 and (ii) in the case of a Regulated Fund, a majority of the Board has approved the Regulated Fund’s
participation in pro rata Dispositions as being in the best interests of the Regulated Fund. The Regulated Fund’s Board
may refuse to approve, or at any time rescind, suspend or qualify, its approval of Pro Rata Dispositions, in which case all subsequent
Dispositions will be submitted to the Regulated Fund’s Eligible Directors.
In
the case of a Tradable Security, approval of the required majority is not required for the Disposition if: (x) the Disposition
is not to the issuer or any affiliated person of the issuer;12 and (y) the security is sold for cash in a transaction
in which the only term negotiated by or on behalf of the participating Regulated Funds and Affiliated Funds is price. Pro Rata
Dispositions and Dispositions of a Tradable Security remain subject to the Board’s periodic review in accordance with Condition
10.
|
(b)
|
Enhanced
Review Dispositions
|
One
or more Regulated Funds and one or more Affiliated Funds that have not previously participated in a Co-Investment Transaction
with respect to an issuer may have the opportunity to make a Disposition of Pre-Boarding Investments in a Potential Co-Investment
Transaction. In these cases, the Regulated Funds and Affiliated Funds may rely on the Order to make such Disposition subject to
the requirements of Condition 7. As discussed above, with respect to investment in a given issuer, the participating Regulated
Funds and Affiliated Funds need only complete the onboarding process for the first Co-Investment Transaction, which may be an
Enhanced Review Follow-On or an Enhanced Review Disposition.13 Subsequent Co-Investment Transactions with respect to
the issuer will be governed by Condition 6 or 8 under the standard review process.
11
See note 27, below.
12
In the case of a Tradable Security, Dispositions to the issuer or an affiliated person of the issuer are not permitted so
that funds participating in the Disposition do not benefit to the detriment of Regulated Funds that remain invested in the issuer.
For example, if a Disposition of a Tradable Security were permitted to be made to the issuer, the issuer may be reducing its short
term assets (i.e., cash) to pay down long term liabilities.
13
However, with respect to an issuer, if a Regulated Fund’s first Co-Investment Transaction is an Enhanced Review Disposition,
and the Regulated Fund does not dispose of its entire position in the Enhanced Review Disposition, then before such Regulated
Fund may complete its first Standard Review Follow-On in such issuer, the Eligible Directors must review the proposed Follow-On
Investment not only on a stand-alone basis but also in relation to the total economic exposure in such issuer (i.e., in combination
with the portion of the Pre-Boarding Investment not disposed of in the Enhanced Review Disposition), and the other terms of the
investments. This additional review is required because such findings were not required in connection with the prior Enhanced
Review Disposition, but they would have been required had the first Co-Investment Transaction been an Enhanced Review Follow-On.
|
5.
|
Use
of Wholly-Owned Investment Subs
|
A
Regulated Fund may, from time to time, form one or more Wholly-Owned Investment Subs. Such a subsidiary may be prohibited from
investing in a Co-Investment Transaction with a Regulated Fund (other than its parent) or any Affiliated Fund because it would
be a company controlled by its parent Regulated Fund for purposes of Section 57(a)(4) and Rule 17d-1. Applicants request that
each Wholly-Owned Investment Sub be permitted to participate in Co-Investment Transactions in lieu of the applicable parent Regulated
Fund that owns it and that the Wholly-Owned Investment Sub’s participation in any such transaction be treated, for purposes
of the Order, as though the parent Regulated Fund were participating directly.
Applicants
note that an entity could not be both a Wholly-Owned Investment Sub and a BDC Downstream Fund because, in the former case, the
Board of the parent Regulated Fund makes any determinations regarding the subsidiary’s investments while, in the latter
case, the Independent Party makes such determinations.
|
1.
|
Section
17(d) and Section 57(a)(4)
|
Section
17(d) of the Act generally prohibits an affiliated person (as defined in Section 2(a)(3) of the Act), or an affiliated person
of such affiliated person, of a registered investment company acting as principal, from effecting any transaction in which the
registered investment company is a joint or a joint and several participant, in contravention of such rules as the Commission
may prescribe for the purpose of limiting or preventing participation by the registered investment company on a basis different
from or less advantageous than that of such other participant.
Similarly,
with regard to BDCs, Section 57(a)(4) prohibits certain persons specified in Section 57(b) from participating in a joint transaction
with the BDC, or a company controlled by the BDC, in contravention of rules as prescribed by the Commission. In particular, Section
57(a)(4) applies to:
|
●
|
Any
director, officer, employee, or member of an advisory board of a BDC or any person (other than the BDC itself) who is an affiliated
person of the forgoing pursuant to Section 2(a)(3)(C); or
|
|
|
|
|
●
|
Any
investment adviser or promoter of, general partner in, principal underwriter for, or person directly or indirectly either
controlling, controlled by, or under common control with, a BDC (except the BDC itself and any person who, if it were not
directly or indirectly controlled by the BDC, would not be directly or indirectly under the control of a person who controls
the BDC);14 or any person who is an affiliated person of any of the forgoing within the meaning of Section 2(a)(3)(C)
or (D).
|
Pursuant
to the foregoing application of Section 57(a)(4), BDC Downstream Funds on the one hand and other Regulated Funds and Affiliated
Funds on the other, may not co-invest absent an exemptive order because the BDC Downstream Funds are controlled by a BDC and the
Affiliated Funds and other Regulated Funds are included in Section 57(b).
Section
2(a)(3)(C) defines an “affiliated person” of another person to include any person directly or indirectly controlling,
controlled by, or under common control with, such other person. Section 2(a)(3)(D) defines “any officer, director, partner,
copartner, or employee” of an affiliated person as an affiliated person. Section 2(a)(9) defines “control” as
the power to exercise a controlling influence over the management or policies of a company, unless such power is solely the result
of an official position with that company. Under Section 2(a)(9) a person who beneficially owns, either directly or through one
or more controlled companies, more than 25% of the voting securities of a company is presumed to control such company. The Commission
and its staff have indicated on a number of occasions their belief that an investment adviser that provides discretionary investment
management services to a fund and that sponsored, selected the initial directors, and provides administrative or other non-advisory
services to the fund, controls such fund, absent compelling evidence to the contrary.15
14
Also excluded from this category by Rule 57b-1 is any person who would otherwise be included (a) solely because that
person is directly or indirectly controlled by a business development company, or (b) solely because that person is, within
the meaning of Section 2(a)(3)(C) or (D), an affiliated person of a person described in (a) above.
15
See, e.g., SEC Rel. No. IC-4697 (Sept. 8, 1966) (“For purposes of Section 2(a)(3)(C), affiliation
based upon control would depend on the facts of the given situation, including such factors as extensive interlocks of officers,
directors or key personnel, common investment advisers or underwriters, etc.”); Lazard Freres Asset Management, SEC No-Action
Letter (pub. avail. Jan. 10, 1997) (“While, in some circumstances, the nature of an advisory relationship may give an adviser
control over its client’s management or policies, whether an investment company and another entity are under common control
is a factual question…”).
Rule
17d-1 generally prohibits an affiliated person (as defined in Section 2(a)(3)), or an affiliated person of such affiliated person,
of a registered investment company acting as principal, from effecting any transaction in which the registered investment company,
or a company controlled by such registered company, is a joint or a joint and several participant, in contravention of such rules
as the Commission may prescribe for the purpose of limiting or preventing participation by the registered investment company on
a basis different from or less advantageous than that of such first or second tier affiliate. Rule 17d-1 generally prohibits participation
by a registered investment company and an affiliated person (as defined in Section 2(a)(3)) or principal underwriter for that
investment company, or an affiliated person of such affiliated person or principal underwriter, in any “joint enterprise
or other joint arrangement or profit-sharing plan,” as defined in the rule, without prior approval by the Commission by
order upon application.
Rule
17d-1 was promulgated by the Commission pursuant to Section 17(d) and made applicable to persons subject to Sections 57(a) and
(d) by Section 57(i) to the extent specified therein. Section 57(i) provides that, until the Commission prescribes rules under
Sections 57(a) and (d), the Commission’s rules under Section 17(d) applicable to registered closed-end investment companies
will be deemed to apply to persons subject to the prohibitions of Section 57(a) or (d). Because the Commission has not adopted
any rules under Section 57(a) or (d), Rule 17d-1 applies to persons subject to the prohibitions of Section 57(a) or (d).
Applicants
seek relief pursuant to Rule 17d-1, which permits the Commission to authorize joint transactions upon application. In passing
upon applications filed pursuant to Rule 17d-1, the Commission is directed by Rule 17d-1(b) to consider whether the participation
of a registered investment company or controlled company thereof in the joint enterprise or joint arrangement under scrutiny is
consistent with 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.
The
Commission has stated that Section 17(d), upon which Rule 17d-1 is based, and upon which Section 57(a)(4) was modeled, was designed
to protect investment companies from self-dealing and overreaching by insiders. The Commission has also taken notice that there
may be transactions subject to these prohibitions that do not present the dangers of overreaching.16 The Court of Appeals
for the Second Circuit has enunciated a like rationale for the purpose behind Section 17(d): “The objective of [Section]
17(d)…is to prevent…injuring the interest of stockholders of registered investment companies by causing the company
to participate on a basis different from or less advantageous than that of such other participants.”17 Furthermore,
Congress acknowledged that the protective system established by the enactment of Section 57 is “similar to that applicable
to registered investment companies under Section 17, and rules thereunder, but is modified to address concerns relating to unique
characteristics presented by business development companies.”18
16
See Protecting Investors: A Half-Century of Investment Company Regulation, 1504 Fed. Sec. L. Rep., Extra Edition
(May 29, 1992) at 488 et seq.
17
Securities and Exchange Commission v. Talley Industries, Inc., 399 F.2d 396, 405 (2d Cir. 1968), cert. denied,
393 U.S. 1015 (1969).
18
H.Rep. No. 96-1341, 96th Cong., 2d Sess. 45 (1980) reprinted in 1980 U.S.C.C.A.N. 4827.
Applicants
believe that the Conditions would ensure that the conflicts of interest that Section 17(d) and Section 57(a)(4) were designed
to prevent would be addressed and the standards for an order under Rule 17d-1 and Section 57(i) would be met.
Co-Investment
Transactions are prohibited by either or both of Rule 17d-1 and Section 57(a)(4) without a prior exemptive order of the Commission
to the extent that the Affiliated Funds and the Regulated Funds participating in such transactions fall within the category of
persons described by Rule 17d-1 and/or Section 57(b), as modified by Rule 57b-1 thereunder, as applicable, vis-à-vis each
participating Regulated Fund.
Each
of the participating Regulated Funds and Affiliated Funds may be deemed to be affiliated persons vis-à-vis a Regulated
Fund within the meaning of Section 2(a)(3) by reason of common control because all of the Regulated Funds and Affiliated Funds,
including the Callodine Proprietary Accounts, are directly or indirectly controlled by Callodine. This is because (i) RCC
Adviser manages and may be deemed to control BlueArc, (ii) Callodine Adviser manages and may be deemed to control the Callodine
Private Funds, (iii) an Adviser will manage and may be deemed to control any Future Affiliated Fund, (iv) BDC Adviser manages
and may be deemed to control the Company pursuant to the Advisory Agreement, (v) any future Regulated Fund will be managed by
and may be deemed to be controlled by an Adviser, (iv) each BDC Downstream Fund will
be deemed to be controlled by its BDC parent and/or its BDC parent’s investment adviser and (vii) the Advisers, including
the Existing Advisers, will be directly or indirectly controlled by Callodine. Thus, each of the Affiliated Funds could be deemed
to be a person related to the Regulated Funds that are BDCs, including the Company and any BDC Downstream Fund, in a manner described
by Section 57(b) and related to Future Regulated Funds that are registered investment companies in a manner described by Rule
17d-1; and therefore the prohibitions of Rule 17d-1 and Section 57(a)(4) would apply respectively to prohibit the Affiliated Funds
from participating in Co-Investment Transactions with the Regulated Funds. Each Regulated Fund would also be related to each other
Regulated Fund in a manner described by 57(b) or Rule 17d-1, as applicable, and thus prohibited from participating in Co-Investment
Transactions with each other. Further, because the Wholly-Owned Investment Subs are controlled by the Regulated Funds, the Wholly-Owned
Investment Subs are subject to Section 57(a)(4) (or Section 17(d) in the case of Wholly-Owned Investment Subs controlled by Regulated
Funds that are registered under the Act), and thus also subject to the provisions of Rule 17d-1, and therefore would be prohibited
from participating in Co-Investment Transactions.
In
addition, because the Callodine Proprietary Accounts are directly or indirectly controlled by Callodine, and, therefore, may be
under common control with the Company, the Advisers, and any Future Regulated Funds, the Callodine Proprietary Accounts could
be deemed to be persons related to the Regulated Funds (or a company controlled by the Regulated Funds) in a manner described
by Section 57(b) and also prohibited from participating in the Co-Investment Program.
The
Commission has issued numerous exemptive orders under the Act permitting registered investment companies and BDCs to co-invest
with affiliated persons.19 Although the various precedents involved somewhat different formulae, the Commission has
accepted, as a basis for relief from the prohibitions on joint transactions, use of allocation and approval procedures to protect
the interests of investors in the BDCs and registered investment companies. Applicants submit that the allocation procedures set
forth in the Conditions for relief are consistent with and expand the range of investor protections found in the orders we cite.
19
See, e.g., Rand Capital Corporation, et al. (File No. 812-15108) Release No. IC-34006 (September 11, 2020)
(notice), Release No. IC-34046 (October 7, 2020) (order); 1WS Credit Income Fund, et al. (File No. 812-14997) Release No.
IC-33959A (September 4, 2020) (notice), Release No. IC-34036 (September 30, 2020) (order); Morgan Stanley Direct Lending Fund,
et al. (File No. 812-15057) IC-33958A (August 28, 2020) (notice), Release No. IC-34016 (September 18, 2020) (order); FS
Global Credit Opportunities Fund, et al. (File No. 812-14987) Release No. IC-33927 (July 15, 2020) (notice), Release No. IC-33968
(August 11, 2020) (order); Runway Growth Credit Fund, Inc., et al. (File No. 812-15105) Release No. IC-33925 (July 13,
2020) (notice), Release No. IC-33967 (August 10, 2020) (order); OFS Capital Corp., et al. (File No. 812-14909) Release
No. IC-33922 (July 8, 2020) (notice), Release No. IC-33962 (August 4, 2020) (order).
Applicants
believe that the relief requested herein is consistent with the policy underlying the prior application of Rand Capital Corporation,
for which as order was issued on October 7, 2020,20 New Mountain Finance Corporation and its affiliates, for which
an order was issued on October 8, 201921 and Stellus Capital Investment Corporation and its affiliates, for which an
order was issued on December 4, 2018,22 as well as co-investment relief granted by the Commission to other BDCs and
to registered closed-end funds.
The
Commission also has issued orders extending co-investment relief to proprietary accounts.23
IV.
|
STATEMENT
IN SUPPORT OF RELIEF REQUESTED
|
In
accordance with Rule 17d-1 (made applicable to transactions subject to Section 57(a) by Section 57(i)), the Commission may grant
the requested relief as to any particular joint transaction if it finds that the participation of the Regulated Funds in the joint
transaction is consistent with the provisions, policies and purposes of the Act and is not on a basis different from or less advantageous
than that of other participants. Applicants submit that allowing the Co-Investment Transactions described in this Application
is justified on the basis of (i) the potential benefits to the Regulated Funds and the shareholders thereof and (ii) the protections
found in the Conditions.
As
required by Rule 17d-1(b), the Conditions ensure that the terms on which Co-Investment Transactions may be made will be consistent
with the participation of the Regulated Funds being on a basis that it is neither different from nor less advantageous than other
participants, thus protecting the equity holders of any participant from being disadvantaged. The Conditions ensure that all Co-Investment
Transactions are reasonable and fair to the Regulated Funds and their shareholders and do not involve overreaching by any person
concerned, including the Advisers.
In
the absence of the relief sought hereby, in many circumstances, the Regulated Funds would be limited in their ability to participate
in attractive and appropriate investment opportunities. Section 17(d), Section 57(a)(4) and Rule 17d-1 should not prevent BDCs
and registered closed-end investment companies from making investments that are in the best interests of their shareholders.
Each
Regulated Fund and its shareholders will benefit from the ability to participate in Co-Investment Transactions. The Board, including
the Required Majority, of each Regulated Fund will determine that it is in the best interests of the Regulated Fund to participate
in Co-Investment Transactions because, among other matters, (i) the Regulated Fund should be able to participate in a larger number
and greater variety of transactions; (ii) the Regulated Fund should be able to participate in larger transactions; (iii) the Regulated
Fund should be able to participate in all opportunities approved by a Required Majority or otherwise permissible under the Order
rather than risk underperformance through rotational allocation of opportunities among the Regulated Funds; (iv) the Regulated
Fund and any other Regulated Funds participating in the proposed investment should have greater bargaining power, more control
over the investment and less need to bring in other external investors or structure investments to satisfy the different needs
of external investors; (v) the Regulated Fund should be able to obtain greater attention and better deal flow from investment
bankers and others who act as sources of investments; and (vi) the Conditions are fair to the Regulated Funds and their shareholders.
20
Rand Capital Corporation, et al. (File No. 812-15108) Release No. IC-34046 (October 7, 2020) (order), Release
No. IC-34006 (September 11, 2020) (notice).
21
New Mountain Finance Corporation, et al. (File No. 812-15030) Release No. IC-33656 (October 8, 2019) (order), Release
No. IC-33624 (September 12, 2019) (notice).
22
Stellus Capital Investment Corporation, et al. (File No. 812-14855) Release No. IC-33289 (November 6, 2018)
(order), Release No. IC-33316 (December 4, 2018) (notice).
23
See, e.g., Rand Capital Corporation, et al. (File No. 812-15108)
Release No. IC-34006 (September 11, 2020) (notice), Release No. IC-34046 (October 7, 2020) (order); FS Global Credit Opportunities
Fund, et al. (File No. 812-14987) Release No. IC-33927 (July 15, 2020) (notice), Release No. IC-33968 (August 11, 2020) (order);
Runway Growth Credit Fund, Inc., et al. (File No. 812-15105) Release No. IC-33925 (July 13, 2020) (notice), Release No.
IC-33967 (August 10, 2020) (order); OFS Capital Corp., et al. (File No. 812-14909) Release No. IC-33922 (July 8, 2020)
(notice), Release No. IC-33962 (August 4, 2020) (order); Varagon Capital Corporation, et al. (File No. 812-15059) Release
No. IC-33867 (May 18, 2020) (notice), Release No. IC-33892 (June 15, 2020) (order).
B.
|
Protective
Representations And Conditions
|
The
Conditions ensure that the proposed Co-Investment Transactions are consistent with the protection of each Regulated Fund’s
shareholders and with the purposes intended by the policies and provisions of the Act. Specifically, the Conditions incorporate
the following critical protections: (i) all Regulated Funds participating in the Co-Investment Transactions will invest at the
same time (except that, subject to the limitations in the Conditions, the settlement date for an Affiliated Fund in a Co-Investment
Transaction may occur up to ten business days after the settlement date for the Regulated Fund, and vice versa), for the same
price and with the same terms, conditions, class, registration rights and any other rights, so that none of them receives terms
more favorable than any other; (ii) a Required Majority of each Regulated Fund must approve various investment decisions (not
including transactions completed on a pro rata basis pursuant to Conditions 6(c)(i) and 8(b)(i) or otherwise not requiring Board
approval) with respect to such Regulated Fund in accordance with the Conditions; and (iii) the Regulated Funds are required to
retain and maintain certain records.
Applicants
believe that participation by the Regulated Funds in Pro Rata Follow-On Investments and Pro Rata Dispositions, as provided in
Conditions 6(c)(i) and 8(b)(i), is consistent with the provisions, policies and purposes of the Act and will not be made on a
basis different from or less advantageous than that of other participants. A formulaic approach, such as pro rata investment or
disposition eliminates the possibility for overreaching and unnecessary prior review by the Board. Applicants note that the Commission
has adopted a similar pro rata approach in the context of Rule 23c-2, which relates to the redemption by a closed-end investment
company of less than all of a class of its securities, indicating the general fairness and lack of overreaching that such approach
provides.
Applicants
also believe that the participation by the Regulated Funds in Non-Negotiated Follow-On Investments and in Dispositions of Tradable
Securities without the approval of a Required Majority is consistent with the provisions, policies and purposes of the Act as
there is no opportunity for overreaching by affiliates.
If
an Adviser, its principals, or any person controlling, controlled by, or under common control with the Adviser or its principals,
and the Affiliated Funds (collectively, the “Holders”) own in the aggregate more than 25 percent of
the outstanding voting shares of a Regulated Fund (the “Shares”), then the Holders will vote such Shares
as required under Condition 15.
In
sum, Applicants believe that the Conditions would ensure that each Regulated Fund that participates in any type of Co-Investment
Transaction does not participate on a basis different from, or less advantageous than, that of such other participants for purposes
of Section 17(d) or Section 57(a)(4) and the Rules under the Act. As a result, Applicants believe that the participation of the
Regulated Funds in Co-Investment Transactions in accordance with the Conditions would be consistent with the provisions, policies,
and purposes of the Act, and would be done in a manner that was not different from, or less advantageous than, the other participants.
Applicants
agree that any Order granting the requested relief shall be subject to the following Conditions:
|
1.
|
Identification
and Referral of Potential Co-Investment Transactions
|
(a)
The Advisers will establish, maintain and implement policies and procedures reasonably designed to ensure that each Adviser is
promptly notified of all Potential Co-Investment Transactions that fall within the then-current Objectives and Strategies and
Board-Established Criteria of any Regulated Fund the Adviser manages.
(b)
When an Adviser to a Regulated Fund is notified of a Potential Co-Investment Transaction under Condition 1(a), the Adviser will
make an independent determination of the appropriateness of the investment for the Regulated Fund in light of the Regulated Fund’s
then-current circumstances.
|
2.
|
Board
Approvals of Co-Investment Transactions
|
(a)
If the Adviser deems a Regulated Fund’s participation in any Potential Co-Investment Transaction to be appropriate for the
Regulated Fund, it will then determine an appropriate level of investment for the Regulated Fund.
(b)
If the aggregate amount recommended by the Advisers to be invested in the Potential Co-Investment Transaction by the participating
Regulated Funds and any participating Affiliated Funds, collectively, exceeds the amount of the investment opportunity, the investment
opportunity will be allocated among them pro rata based on the size of the Internal Orders, as described in section III.A.1.b.
above. Each Adviser to a participating Regulated Fund will promptly notify and provide the Eligible Directors with information
concerning the Affiliated Funds’ and Regulated Funds’ order sizes to assist the Eligible Directors with their review
of the applicable Regulated Fund’s investments for compliance with these Conditions.
(c)
After making the determinations required in Condition 1(b) above, each Adviser to a participating Regulated Fund will distribute
written information concerning the Potential Co-Investment Transaction (including the amount proposed to be invested by each participating
Regulated Fund and each participating Affiliated Fund) to the Eligible Directors of its participating Regulated Fund(s) for their
consideration. A Regulated Fund will enter into a Co-Investment Transaction with one or more other Regulated Funds or Affiliated
Funds only if, prior to the Regulated Fund’s participation in the Potential Co-Investment Transaction, a Required Majority
concludes that:
(i)
the terms of the transaction, including the consideration to be paid, are reasonable and fair to the Regulated Fund and its equity
holders and do not involve overreaching in respect of the Regulated Fund or its equity holders on the part of any person concerned;
(ii)
the transaction is consistent with:
(A)
the interests of the Regulated Fund’s equity holders; and
(B)
the Regulated Fund’s then-current Objectives and Strategies;
(iii)
the investment by any other Regulated Fund(s) or Affiliated Fund(s) would not disadvantage the Regulated Fund, and participation
by the Regulated Fund would not be on a basis different from, or less advantageous than, that of any other Regulated Fund(s) or
Affiliated Fund(s) participating in the transaction; provided that the Required Majority shall not be prohibited from reaching
the conclusions required by this Condition 2(c)(iii) if:
(A)
the settlement date for another Regulated Fund or an Affiliated Fund in a Co-Investment Transaction is later than the settlement
date for the Regulated Fund by no more than ten business days or earlier than the settlement date for the Regulated Fund by no
more than ten business days, in either case, so long as: (x) the date on which the commitment of the Affiliated Funds and Regulated
Funds is made is the same; and (y) the earliest settlement date and the latest settlement date of any Affiliated Fund or Regulated
Fund participating in the transaction will occur within ten business days of each other; or
(B)
any other Regulated Fund or Affiliated Fund, but not the Regulated Fund itself, gains the right to nominate a director for election
to a portfolio company’s board of directors, the right to have a board observer or any similar right to participate in the
governance or management of the portfolio company so long as: (x) the Eligible Directors will have the right to ratify the selection
of such director or board observer, if any; (y) the Adviser agrees to, and does, provide periodic reports to the Regulated Fund’s
Board with respect to the actions of such director or the information received by such board observer or obtained through the
exercise of any similar right to participate in the governance or management of the portfolio company; and (z) any fees or other
compensation that any other Regulated Fund or Affiliated Fund or any affiliated person of any other Regulated Fund or Affiliated
Fund receives in connection with the right of one or more Regulated Funds or Affiliated Funds to nominate a director or appoint
a board observer or otherwise to participate in the governance or management of the portfolio company will be shared proportionately
among any participating Affiliated Funds (who may, in turn, share their portion with their affiliated persons) and any participating
Regulated Fund(s) in accordance with the amount of each such party’s investment; and
(iv)
the proposed investment by the Regulated Fund will not involve compensation, remuneration or a direct or indirect24
financial benefit to the Advisers, any other Regulated Fund, the Affiliated Funds or any affiliated person of any of them (other
than the parties to the Co-Investment Transaction), except (A) to the extent permitted by Condition 14, (B) to the extent permitted
by Section 17(e) or 57(k), as applicable, (C) indirectly, as a result of an interest in the securities issued by one of the parties
to the Co-Investment Transaction, or (D) in the case of fees or other compensation described in Condition 2(c)(iii)(B)(z).
3.
Right to Decline. Each Regulated Fund has the right to decline to participate in any Potential Co-Investment Transaction
or to invest less than the amount proposed.
4.
General Limitation. Except for Follow-On Investments made in accordance with Conditions 8 and 9 below,25 a Regulated
Fund will not invest in reliance on the Order in any issuer in which a Related Party has an investment.
5.
Same Terms and Conditions. A Regulated Fund will not participate in any Potential Co-Investment Transaction unless
(i) the terms, conditions, price, class of securities to be purchased, date on which the commitment is entered into and registration
rights (if any) will be the same for each participating Regulated Fund and Affiliated Fund and (ii) the earliest settlement date
and the latest settlement date of any participating Regulated Fund or Affiliated Fund will occur as close in time as practicable
and in no event more than ten business days apart. The grant to one or more Regulated Funds or Affiliated Funds, but not the respective
Regulated Fund, of the right to nominate a director for election to a portfolio company’s board of directors, the right
to have an observer on the board of directors or similar rights to participate in the governance or management of the portfolio
company will not be interpreted so as to violate this Condition 5, if Condition 2(c)(iii)(B) is met.
6.
Standard Review Dispositions.
(a)
General. If any Regulated Fund or Affiliated Fund elects to sell, exchange or otherwise dispose of an interest in a security
and one or more Regulated Funds and Affiliated Funds have previously participated in a Co-Investment Transaction with respect
to the issuer, then:
(i)
the Adviser to such Regulated Fund or Affiliated Fund26 will notify each Regulated Fund that holds an investment in
the issuer of the proposed Disposition at the earliest practical time; and
(ii)
the Adviser to each Regulated Fund that holds an investment in the issuer will formulate a recommendation as to participation
by such Regulated Fund in the Disposition.
(b)
Same Terms and Conditions. Each Regulated Fund will have the right to participate in such Disposition on a proportionate
basis, at the same price and on the same terms and conditions as those applicable to the Affiliated Funds and any other Regulated
Fund.
(c)
No Board Approval Required. A Regulated Fund may participate in such a Disposition without obtaining prior approval of
the Required Majority if:
(i)
(A) the participation of each Regulated Fund and Affiliated Fund in such Disposition is proportionate to its then-current holding
of the security (or securities) of the issuer that is (or are) the subject of the Disposition;27 (B) the Board of the
Regulated Fund has approved as being in the best interests of the Regulated Fund the ability to participate in such Dispositions
on a pro rata basis (as described in greater detail in the Application); and (C) the Board of the Regulated Fund is provided on
a quarterly basis with a list of all Dispositions made in accordance with this Condition; or
24
For example, procuring the Regulated Fund’s investment in a Potential Co-Investment Transaction to permit an affiliate
to complete or obtain better terms in a separate transaction would constitute an indirect financial benefit.
25
This exception applies only to Follow-On Investments by a Regulated Fund in issuers in which that Regulated Fund already
holds investments.
26
Any Callodine Proprietary Account that is not advised by an Adviser is itself deemed to be an Adviser for purposes of Conditions
6(a)(i), 7(a)(i), 8(a)(i) and 9(a)(i).
27
In the case of any Disposition, proportionality will be measured by each participating Regulated Fund’s and Affiliated
Fund’s outstanding investment in the security in question immediately preceding the Disposition.
(ii)
each security is a Tradable Security and (A) the Disposition is not to the issuer or any affiliated person of the issuer; and
(B) the security is sold for cash in a transaction in which the only term negotiated by or on behalf of the participating Regulated
Funds and Affiliated Funds is price.
(d)
Standard Board Approval. In all other cases, the Adviser will provide its written recommendation as to the Regulated Fund’s
participation to the Eligible Directors and the Regulated Fund will participate in such Disposition solely to the extent that
a Required Majority determines that it is in the Regulated Fund’s best interests.
|
7.
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Enhanced
Review Dispositions.
|
(a)
General. If any Regulated Fund or Affiliated Fund elects to sell, exchange or otherwise dispose of a Pre-Boarding Investment
in a Potential Co-Investment Transaction and the Regulated Funds and Affiliated Funds have not previously participated in a Co-Investment
Transaction with respect to the issuer:
(i)
the Adviser to such Regulated Fund or Affiliated Fund will notify each Regulated Fund that holds an investment in the issuer of
the proposed Disposition at the earliest practical time;
(ii)
the Adviser to each Regulated Fund that holds an investment in the issuer will formulate a recommendation as to participation
by such Regulated Fund in the Disposition; and
(iii)
the Advisers will provide to the Board of each Regulated Fund that holds an investment in the issuer all information relating
to the existing investments in the issuer of the Regulated Funds and Affiliated Funds, including the terms of such investments
and how they were made, that is necessary for the Required Majority to make the findings required by this Condition.
(b)
Enhanced Board Approval. The Adviser will provide its written recommendation as to the Regulated Fund’s participation
to the Eligible Directors, and the Regulated Fund will participate in such Disposition solely to the extent that a Required Majority
determines that:
(i)
the Disposition complies with Condition 2(c)(i), (ii), (iii)(A), and (iv); and
(ii)
the making and holding of the Pre-Boarding Investments were not prohibited by Section 57 or Rule 17d-1, as applicable, and records
the basis for the finding in the Board minutes.
(c)
Additional Requirements: The Disposition may only be completed in reliance on the Order if:
(i)
Same Terms and Conditions. Each Regulated Fund has the right to participate in such Disposition on a proportionate basis,
at the same price and on the same terms and Conditions as those applicable to the Affiliated Funds and any other Regulated Fund;
(ii)
Original Investments. All of the Affiliated Funds’ and Regulated Funds’ investments in the issuer are Pre-Boarding
Investments;
(iii)
Advice of counsel. Independent counsel to the Board advises that the making and holding of the investments in the Pre-Boarding
Investments were not prohibited by Section 57 (as modified by Rule 57b-1) or Rule 17d-1, as applicable;
(iv)
Multiple Classes of Securities. All Regulated Funds and Affiliated Funds that hold Pre-Boarding Investments in the issuer
immediately before the time of completion of the Co-Investment Transaction hold the same security or securities of the issuer.
For the purpose of determining whether the Regulated Funds and Affiliated Funds hold the same security or securities, they may
disregard any security held by some but not all of them if, prior to relying on the Order, the Required Majority is presented
with all information necessary to make a finding, and finds, that: (x) any Regulated Fund’s or Affiliated Fund’s holding
of a different class of securities (including for this purpose a security with a different maturity date) is immaterial28
in amount, including immaterial relative to the size of the issuer; and (y) the Board records the basis for any such finding
in its minutes. In addition, securities that differ only in respect of issuance date, currency, or denominations may be treated
as the same security; and
28
In determining whether a holding is “immaterial” for purposes of the Order, the Required Majority will consider
whether the nature and extent of the interest in the transaction or arrangement is sufficiently small that a reasonable person
would not believe that the interest affected the determination of whether to enter into the transaction or arrangement or the
terms of the transaction or arrangement.
(v)
No control. The Affiliated Funds, the other Regulated Funds and their affiliated persons (within the meaning of Section
2(a)(3)(C) of the Act), individually or in the aggregate, do not control the issuer of the securities (within the meaning of Section
2(a)(9) of the Act).
|
8.
|
Standard
Review Follow-Ons.
|
(a)
General. If any Regulated Fund or Affiliated Fund desires to make a Follow-On Investment in an issuer and the Regulated
Funds and Affiliated Funds holding investments in the issuer previously participated in a Co-Investment Transaction with respect
to the issuer:
(i)
the Adviser to each such Regulated Fund or Affiliated Fund will notify each Regulated Fund that holds securities of the portfolio
company of the proposed transaction at the earliest practical time; and
(ii)
the Adviser to each Regulated Fund that holds an investment in the issuer will formulate a recommendation as to the proposed participation,
including the amount of the proposed investment, by such Regulated Fund.
(b)
No Board Approval Required. A Regulated Fund may participate in the Follow-On Investment without obtaining prior approval
of the Required Majority if:
(i)
(A) the proposed participation of each Regulated Fund and each Affiliated Fund in such investment is proportionate to its outstanding
investments in the issuer or the security at issue, as appropriate,29 immediately preceding the Follow-On Investment;
and (B) the Board of the Regulated Fund has approved as being in the best interests of the Regulated Fund the ability to participate
in Follow-On Investments on a pro rata basis (as described in greater detail in this Application); or
(ii)
it is a Non-Negotiated Follow-On Investment.
(c)
Standard Board Approval. In all other cases, the Adviser will provide its written recommendation as to the Regulated Fund’s
participation to the Eligible Directors and the Regulated Fund will participate in such Follow-On Investment solely to the extent
that a Required Majority makes the determinations set forth in Condition 2(c). If the only previous Co-Investment Transaction
with respect to the issuer was an Enhanced Review Disposition the Eligible Directors must complete this review of the proposed
Follow-On Investment both on a stand-alone basis and together with the Pre-Boarding Investments in relation to the total economic
exposure and other terms of the investment.
(d)
Allocation. If, with respect to any such Follow-On Investment:
(i)
the amount of the opportunity proposed to be made available to any Regulated Fund is not based on the Regulated Funds’ and
the Affiliated Funds’ outstanding investments in the issuer or the security at issue, as appropriate, immediately preceding
the Follow-On Investment; and
(ii)
the aggregate amount recommended by the Advisers to be invested in the Follow-On Investment by the participating Regulated Funds
and any participating Affiliated Funds, collectively, exceeds the amount of the investment opportunity, then the Follow-On Investment
opportunity will be allocated among them pro rata based on the size of the Internal Orders, as described in section III.A.1.b.
above.
(e)
Other Conditions. The acquisition of Follow-On Investments as permitted by this Condition will be considered a Co-Investment
Transaction for all purposes and subject to the other Conditions set forth in this application.
29
To the extent that a Follow-On Investment opportunity is in a security or arises in respect of a security held by the participating
Regulated Funds and Affiliated Funds, proportionality will be measured by each participating Regulated Fund’s and Affiliated
Fund’s outstanding investment in the security in question immediately preceding the Follow-On Investment using the most
recent available valuation thereof. To the extent that a Follow-On Investment opportunity relates to an opportunity to invest
in a security that is not in respect of any security held by any of the participating Regulated Funds or Affiliated Funds, proportionality
will be measured by each participating Regulated Fund’s and Affiliated Fund’s outstanding investment in the issuer
immediately preceding the Follow-On Investment using the most recent available valuation thereof.
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9.
|
Enhanced
Review Follow-Ons.
|
(a)
General. If any Regulated Fund or Affiliated Fund desires to make a Follow-On Investment in an issuer that is a Potential
Co-Investment Transaction and the Regulated Funds and Affiliated Funds holding investments in the issuer have not previously participated
in a Co-Investment Transaction with respect to the issuer:
(i)
the Adviser to each such Regulated Fund or Affiliated Fund will notify each Regulated Fund that holds securities of the portfolio
company of the proposed transaction at the earliest practical time;
(ii)
the Adviser to each Regulated Fund that holds an investment in the issuer will formulate a recommendation as to the proposed participation,
including the amount of the proposed investment, by such Regulated Fund; and
(iii)
the Advisers will provide to the Board of each Regulated Fund that holds an investment in the issuer all information relating
to the existing investments in the issuer of the Regulated Funds and Affiliated Funds, including the terms of such investments
and how they were made, that is necessary for the Required Majority to make the findings required by this Condition.
(b)
Enhanced Board Approval. The Adviser will provide its written recommendation as to the Regulated Fund’s participation
to the Eligible Directors, and the Regulated Fund will participate in such Follow-On Investment solely to the extent that a Required
Majority reviews the proposed Follow-On Investment both on a stand-alone basis and together with the Pre-Boarding Investments
in relation to the total economic exposure and other terms and makes the determinations set forth in Condition 2(c). In addition,
the Follow-On Investment may only be completed in reliance on the Order if the Required Majority of each participating Regulated
Fund determines that the making and holding of the Pre-Boarding Investments were not prohibited by Section 57 (as modified by
Rule 57b-1) or Rule 17d-1, as applicable. The basis for the Board’s findings will be recorded in its minutes.
(c)
Additional Requirements. The Follow-On Investment may only be completed in reliance on the Order if:
(i)
Original Investments. All of the Affiliated Funds’ and Regulated Funds’ investments in the issuer are Pre-Boarding
Investments;
(ii)
Advice of counsel. Independent counsel to the Board advises that the making and holding of the investments in the Pre-Boarding
Investments were not prohibited by Section 57 (as modified by Rule 57b-1) or Rule 17d-1, as applicable;
(iii)
Multiple Classes of Securities. All Regulated Funds and Affiliated Funds that hold Pre-Boarding Investments in the issuer
immediately before the time of completion of the Co-Investment Transaction hold the same security or securities of the issuer.
For the purpose of determining whether the Regulated Funds and Affiliated Funds hold the same security or securities, they may
disregard any security held by some but not all of them if, prior to relying on the Order, the Required Majority is presented
with all information necessary to make a finding, and finds, that: (x) any Regulated Fund’s or Affiliated Fund’s holding
of a different class of securities (including for this purpose a security with a different maturity date) is immaterial in amount,
including immaterial relative to the size of the issuer; and (y) the Board records the basis for any such finding in its minutes.
In addition, securities that differ only in respect of issuance date, currency, or denominations may be treated as the same security;
and
(iv)
No control. The Affiliated Funds, the other Regulated Funds and their affiliated persons (within the meaning of Section
2(a)(3)(C) of the Act), individually or in the aggregate, do not control the issuer of the securities (within the meaning of Section
2(a)(9) of the Act).
(d)
Allocation. If, with respect to any such Follow-On Investment:
(i)
the amount of the opportunity proposed to be made available to any Regulated Fund is not based on the Regulated Funds’ and
the Affiliated Funds’ outstanding investments in the issuer or the security at issue, as appropriate, immediately preceding
the Follow-On Investment; and
(ii)
the aggregate amount recommended by the Advisers to be invested in the Follow-On Investment by the participating Regulated Funds
and any participating Affiliated Funds, collectively, exceeds the amount of the investment opportunity, then the Follow-On Investment
opportunity will be allocated among them pro rata based on the size of the Internal Orders, as described in section III.A.1.b.
above.
(e)
Other Conditions. The acquisition of Follow-On Investments as permitted by this Condition will be considered a Co-Investment
Transaction for all purposes and subject to the other Conditions set forth in this application.
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10.
|
Board
Reporting, Compliance and Annual Re-Approval
|
(a)
Each Adviser to a Regulated Fund will present to the Board of each Regulated Fund, on a quarterly basis, and at such other times
as the Board may request, (i) a record of all investments in Potential Co-Investment Transactions made by any of the other Regulated
Funds or any of the Affiliated Funds during the preceding quarter that fell within the Regulated Fund’s then-current Objectives
and Strategies and Board-Established Criteria that were not made available to the Regulated Fund, and an explanation of why such
investment opportunities were not made available to the Regulated Fund; (ii) a record of all Follow-On Investments in and Dispositions
of investments in any issuer in which the Regulated Fund holds any investments by any Affiliated Fund or other Regulated Fund
during the prior quarter; and (iii) all information concerning Potential Co-Investment Transactions and Co-Investment Transactions,
including investments made by other Regulated Funds or Affiliated Funds that the Regulated Fund considered but declined to participate
in, so that the Independent Directors, may determine whether all Potential Co-Investment Transactions and Co-Investment Transactions
during the preceding quarter, including those investments that the Regulated Fund considered but declined to participate in, comply
with the Conditions.
(b)
All information presented to the Regulated Fund’s Board pursuant to this Condition will be kept for the life of the Regulated
Fund and at least two years thereafter, and will be subject to examination by the Commission and its staff.
(c)
Each Regulated Fund’s chief compliance officer, as defined in rule 38a-1(a)(4), will prepare an annual report for its Board
each year that evaluates (and documents the basis of that evaluation) the Regulated Fund’s compliance with the terms and
Conditions of the application and the procedures established to achieve such compliance. In the case of a BDC Downstream Fund
that does not have a chief compliance officer, the chief compliance officer of the BDC that controls the BDC Downstream Fund will
prepare the report for the relevant Independent Party.
(d)
The Independent Directors (including the non-interested members of each Independent Party) will consider at least annually whether
continued participation in new and existing Co-Investment Transactions is in the Regulated Fund’s best interests.
11.
Record Keeping. Each Regulated Fund will maintain the records required by Section 57(f)(3) of the Act as if each of the
Regulated Funds were a BDC and each of the investments permitted under these Conditions were approved by the Required Majority
under Section 57(f).
12.
Director Independence. No Independent Director (including the non-interested members of each Independent Party) of a Regulated
Fund will also be a director, general partner, managing member or principal, or otherwise be an “affiliated person”
(as defined in the Act) of any Affiliated Fund.
13.
Expenses. The expenses, if any, associated with acquiring, holding or disposing of any securities acquired in a Co-Investment
Transaction (including, without limitation, the expenses of the distribution of any such securities registered for sale under
the Securities Act) will, to the extent not payable by the Advisers under their respective advisory agreements with the Regulated
Funds and the Affiliated Funds, be shared by the Regulated Funds and the participating Affiliated Funds in proportion to the relative
amounts of the securities held or being acquired or disposed of, as the case may be.
14.
Transaction Fees.30 Any transaction fee (including break-up, structuring, monitoring or commitment fees but
excluding brokerage or underwriting compensation permitted by Section 17(e) or 57(k)) received in connection with any Co-Investment
Transaction will be distributed to the participants on a pro rata basis based on the amounts they invested or committed, as the
case may be, in such Co-Investment Transaction. If any transaction fee is to be held by an Adviser pending consummation of the
transaction, the fee will be deposited into an account maintained by the Adviser at a bank or banks having the qualifications
prescribed in Section 26(a)(1), and the account will earn a competitive rate of interest that will also be divided pro rata
among the participants. None of the Advisers, the Affiliated Funds, the other Regulated Funds or any affiliated person of the
Affiliated Funds or the Regulated Funds will receive any additional compensation or remuneration of any kind as a result of or
in connection with a Co-Investment Transaction other than (i) in the case of the Regulated Funds and the Affiliated Funds,
the pro rata transaction fees described above and fees or other compensation described in Condition 2(c)(iii)(B)(z), (ii) brokerage
or underwriting compensation permitted by Section 17(e) or 57(k) or (iii) in the case of the Advisers, investment advisory
compensation paid in accordance with investment advisory agreements between the applicable Regulated Fund(s) or Affiliated Fund(s)
and its Adviser.
15.
Independence. If the Holders own in the aggregate more than 25 percent of the Shares of a Regulated Fund, then the Holders
will vote such Shares in the same percentages as the Regulated Fund’s other shareholders (not including the Holders) when
voting on (1) the election of directors; (2) the removal of one or more directors; or (3) any other matter under either the Act
or applicable State law affecting the Board’s composition, size or manner of election.
Please
address all communications concerning this Application and the Notice and Order to:
James
Morrow
Callodine
Capital Management, LP
Two
International Place, Suite 1830
Boston,
MA 02110
(617)
880-7480
bcollins@callodine.com
|
|
Allen
F. Grum
Rand
Capital Corporation
2200
Rand Building
Buffalo,
NY 14203
(716)
853-0802
pgrum@randcapital.com
|
Please
address any questions, and a copy of any communications, concerning this Application, the Notice and Order to:
Cynthia
M. Krus, Esq.
Stephani
M. Hildebrandt, Esq.
Anne
G. Oberndorf, Esq.
Eversheds
Sutherland (US) LLP
700
Sixth Street, NW, Suite 700
Washington,
DC 20001-3980
(202)
383-0100
Pursuant
to Rule 0-2, each person executing the Application on behalf of an Applicant says that he or she has duly executed the Application
for and on behalf of such Applicant; that he or she is authorized to execute the Application pursuant to the terms of an operating
agreement, management agreement or otherwise; and that all actions by members, directors or other bodies necessary to authorize
each person to execute and file the Application have been taken.
The
verifications required by Rule 0-2(d) and the authorizations required by Rule 0-2(c) are attached hereto as Appendix A
and Appendix B.
Applicants
request that any questions regarding this Application be directed to the persons listed on the facing page of this Application.
30
Applicants are not requesting and the Commission is not providing any relief for transaction fees received in connection
with any Co-Investment Transaction.
All
requirements for the execution and filing of this Application in the name and on behalf of each Applicant by the undersigned have
been complied with and the undersigned is fully authorized to do so and has duly executed this Application as of this 29th
day of October, 2020.
|
RAND
CAPITAL CORPORATION
|
|
|
|
|
By:
|
/s/
Allen F. Grum
|
|
Name:
|
Allen
F. Grum
|
|
Title:
|
Chief
Executive Officer
|
|
|
|
|
RAND
CAPITAL MANAGEMENT, LLC
|
|
|
|
By:
CB Advisor LLC, its Managing Member
|
|
|
|
|
By:
|
/s/
Brian Collins
|
|
Name:
|
Brian Collins
|
|
Title:
|
Sole Equity
Member
|
|
|
|
|
RAND
CAPITAL SBIC, Inc.
|
|
|
|
|
By:
|
/s/
Allen F. Grum
|
|
Name:
|
Allen F. Grum
|
|
Title:
|
Chief Executive
Officer
|
|
|
|
|
CALLODINE
CAPITAL MANAGEMENT, LP
|
|
|
|
By:
|
/s/
Austin McClintock
|
|
Name:
|
Austin
McClintock
|
|
Title:
|
Chief
Financial Officer and Chief Operating Officer
|
|
|
|
|
CALLODINE
CAPITAL MASTER FUND, LP
|
|
|
|
|
By:
|
/s/
Austin McClintock
|
|
Name:
|
Austin
McClintock
|
|
Title:
|
Authorized
Person
|
|
|
|
|
CALLODINE
SPECIAL OPPORTUNITY FUND, LP
|
|
|
|
By:
|
/s/
Austin McClintock
|
|
Name:
|
Austin
McClintock
|
|
Title:
|
Authorized
Person
|
|
|
|
|
BLUEARC
MEZZANINE PARTNERS I, LP
|
|
|
|
By:
BlueArc Mezzanine GP, LLC, its General Partner
|
|
|
|
|
By:
|
/s/
Oliver Scott Barfield
|
|
Name:
|
Oliver
Scott Barfield
|
|
Title:
|
Manager
|
|
|
|
|
RAND
CAPITAL CREDIT, LLC
|
|
|
|
|
By:
CB Advisor LLC, its Managing Member
|
|
|
|
By:
|
/s/
Brian Collins
|
|
Name:
|
Brian
Collins
|
|
Title:
|
Sole
Equity Member
|
APPENDIX
A
VERIFICATION
The
undersigned states that he has duly executed the attached application, dated October 29, 2020 for and on behalf of RAND CAPITAL
CORPORATION, RAND CAPITAL MANAGEMENT, LLC, RAND CAPITAL SBIC, INC., CALLODINE CAPITAL MANAGEMENT, LP, CALLODINE CAPITAL MASTER
FUND, LP, CALLODINE SPECIAL OPPORTUNITY FUND, LP, BLUEARC MEZZANINE PARTNERS I, LP and RAND CAPITAL CREDIT LLC that he holds the
office with each such entity as indicated below, and that all actions by stockholders, directors, members, and other bodies necessary
to authorize the undersigned to execute and file such instrument has been taken. The undersigned further states that he is
familiar with such instrument, and the contents thereof, and that the facts set forth are true to the best of his knowledge, information
and belief.
|
RAND
CAPITAL CORPORATION
|
|
|
|
|
By:
|
/s/
Allen F. Grum
|
|
Name:
|
Allen
F. Grum
|
|
Title:
|
Chief
Executive Officer
|
|
|
|
|
RAND
CAPITAL MANAGEMENT, LLC
|
|
|
|
By:
CB Advisor LLC, its Managing Member
|
|
|
|
|
By:
|
/s/
Brian Collins
|
|
Name:
|
Brian Collins
|
|
Title:
|
Sole Equity
Member
|
|
|
|
|
RAND
CAPITAL SBIC, Inc.
|
|
|
|
|
By:
|
/s/
Allen F. Grum
|
|
Name:
|
Allen F. Grum
|
|
Title:
|
Chief Executive
Officer
|
|
|
|
|
CALLODINE
CAPITAL MANAGEMENT, LP
|
|
|
|
By:
|
/s/
Austin McClintock
|
|
Name:
|
Austin
McClintock
|
|
Title:
|
Chief
Financial Officer and Chief Operating Officer
|
|
|
|
|
CALLODINE
CAPITAL MASTER FUND, LP
|
|
|
|
|
By:
|
/s/
Austin McClintock
|
|
Name:
|
Austin
McClintock
|
|
Title:
|
Authorized
Person
|
|
|
|
|
CALLODINE
SPECIAL OPPORTUNITY FUND, LP
|
|
|
|
By:
|
/s/
Austin McClintock
|
|
Name:
|
Austin
McClintock
|
|
Title:
|
Authorized
Person
|
|
|
|
|
BLUEARC
MEZZANINE PARTNERS I, LP
|
|
|
|
By:
BlueArc Mezzanine GP, LLC, its General Partner
|
|
|
|
|
By:
|
/s/
Oliver Scott Barfield
|
|
Name:
|
Oliver
Scott Barfield
|
|
Title:
|
Manager
|
|
|
|
|
RAND
CAPITAL CREDIT, LLC
|
|
|
|
|
By:
CB Advisor LLC, its Managing Member
|
|
|
|
By:
|
/s/
Brian Collins
|
|
Name:
|
Brian
Collins
|
|
Title:
|
Sole
Equity Member
|
Appendix
B
Resolutions
of the Board of Directors of Rand Capital Corporation (the “Company”)
WHEREAS,
the Board has reviewed the Company’s Co-Investment Exemptive Application (the “Exemptive Application”), a copy
of which is attached hereto as Exhibit A, for an order of the SEC pursuant to Sections 17(d) and 57(i) of the 1940 Act, and Rule
17d-1 under the 1940 Act to permit certain joint transactions otherwise prohibited by Sections 17(d) and 57(a)(4) of the 1940
Act and Rule 17d-l under the 1940 Act; and
WHEREAS,
the Board deems it advisable and in the best interest of the Company that the Company file the Co-Investment Exemptive Application.
NOW,
THEREFORE, BE IT RESOLVED, that the Authorized Officers, shall be, and each of them individually hereby is, authorized, empowered
and directed, in the name and on behalf of the Company, to cause to be executed, delivered and filed with the SEC the Exemptive
Application, in substantially the form attached hereto; and
FURTHER
RESOLVED, that the Authorized Officers shall be, and each of them individually hereby is, authorized, empowered and directed,
in the name and on behalf of the Company, to cause to be made, executed, delivered and filed with the SEC any amendments to the
Exemptive Application and any additional applications for exemptive relief as are determined necessary, advisable or appropriate
by any of the Authorized Officers in order to effectuate the foregoing resolutions, such determination to be conclusively evidenced
by the taking of any such action; and
FURTHER
RESOLVED, that all acts and things previously done by any of the Authorized Officers, on or prior to the date hereof, in the
name and on behalf of the Company in connection with the foregoing resolutions are in all respects authorized, ratified, approved,
confirmed and adopted as the acts and deeds by and on behalf of the Company; and
FURTHER
RESOLVED, that the Authorized Officers be, and each of them hereby is, authorized, empowered and directed to certify and deliver
copies of these resolutions to such governmental bodies, agencies, persons, firms or corporations as the Authorized Officers may
deem necessary and to identify by his or her signature or certificate, or in such form as may be required, the documents and instruments
presented to and approved herein and to furnish evidence of the approval, by an officer authorized to give such approval, of any
document, instrument or provision or any addition, deletion or change in any document or instrument.
(Adopted
by the Board of Directors on October 29, 2020)
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