Business Development Companies-The Basics

Abstract

Business Development Companies (“BDCs”) are a type of closed end investment company, created when Congress amended the Investment Company Act of 1940 in 1980. BDCs were first created to make it easier to invest in venture capital pools and private equity investments. Over the past decade, interest in BDCs has increased. BDCs provide funding to small and mid-sized businesses. Following the financial crisis, BDCs were able to provide loans to businesses that may not have been able to receive financing from more traditional sources. In 2009, the first non-traded public BDCs were issued, raising almost $100 million that year. The following year, sales more than tripled to $369 million. Non-traded BDCs hit their peak in 2014, raising $5.5 billion. In 2020, broker-dealers sold only $362.3 million of non-traded BDCs, the lowest volume since 2010. This article describes the regulations that govern BDCs: federal, state, and SRO. Next, the article examines recent enforcement actions concerning the sale of BDCs by broker-dealers. Finally, the article discusses concerns raised by the sale of non-traded BDCs to investors.