

[Federal Register: November 8, 2005 (Volume 70, Number 215)]
[Notices]               
[Page 67762-67765]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08no05-66]                         

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 27140; 812-13190]

 
Special Situations Fund III, L.P., et al., Notice of Application

November 2, 2005.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of application for an order under section 17(b) of the 
Investment Company Act of 1940 (the ``Act'') for an exemption from 
section 17(a) of the Act.

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    Applicants: Special Situations Fund III, L.P. (``SSF III''), 
Special Situations Fund III QP, L.P. (``SSF QP,'' and together with SSF 
III, the ``Funds'') and MGP Advisers Limited Partnership (``Adviser'').
    Summary of Application: Applicants request an order to permit 
certain purchase and sale transactions in connection with a proposed 
division of a registered closed-end management investment company into 
two separate companies (the ``Transaction'').
    Filing Dates: The application was filed on May 19, 2005, and 
amended on November 2, 2005.
    Hearing or Notification of Hearing: An order granting the 
application will be issued unless the Commission orders a hearing. 
Interested persons may request a hearing by writing to the Commission's 
Secretary and serving applicants with a copy of the request, personally 
or by mail. Hearing requests should be received by the Commission by 
5:30 p.m. on November 25, 2005, and should be accompanied by proof of 
service on the applicants, in the form of an affidavit or, for lawyers, 
a certificate of service. Hearing requests should state the nature of 
the writer's interest, the reason for the request, and the issues 
contested. Persons may request notification of a hearing by writing to 
the Commission's Secretary.

ADDRESSES: Secretary, U.S. Securities and Exchange Commission, 100 F 
Street, NE., Washington, DC 20549-0609. Applicants, c/o Austin W. 
Marxe, MGP Advisers Limited Partnership, 153 East 53rd Street, 55th 
Floor, New York, NY 10022.

FOR FURTHER INFORMATION CONTACT: Bruce R. MacNeil, Senior Counsel (202-
551-6817), or Stacy L. Fuller, Branch Chief (202-551-6821) (Office of 
Investment Company Regulation, Division of Investment Management).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee from 
the Commission's Public Reference Branch, 100 F Street, NE., 
Washington, DC 20549-0102 (202-551-5850).

Applicants' Representations

    1. SSF III, a Delaware limited partnership, is a closed-end 
management investment company that is registered under the Act and 
operates as an ``interval fund'' under rule 23e-3 under the Act. 
Partnership interests (``Units'') in SSF III are not registered under 
the Securities Act of 1933 (``1933 Act'') and are sold in private 
offerings pursuant to Regulation D under the 1933 Act generally to 
``accredited investors,'' as defined in Regulation D. Each investor in 
SSF III that pays the Adviser an incentive allocation is also a 
``qualified client,'' as defined in rule 205-3 under the Investment 
Advisers Act of 1940, as amended (``Advisers

[[Page 67763]]

Act''). Under SSF III's fundamental policies and rule 23c-3, as well as 
its partnership agreement (the ``Partnership Agreement''), SSF III 
conducts semi-annual repurchase offers for between 10% and 25% of 
outstanding Units, as determined by the individual general partners of 
SSF III (each, an ``Individual General Partner,'' collectively, the 
``Board,'' and the Board together with the Adviser, the ``General 
Partners''), who are responsible for the overall management and 
supervision of SSF III. SSF III may also sell Units to existing Unit 
holders with a limited partnership interest (``Limited Partners,'' and 
together with the General Partners, ``Partners'') and other investors 
in the future. SSF III's investment objectives are to maximize long-
term capital appreciation by investing primarily in equity securities 
and securities with equity features, which are traded on a national 
securities exchange or Nasdaq. As of June 30, 2005, SSF III had 
approximately 451 Unit holders (92% of whom were qualified purchasers, 
as defined in section 2(a)(51) of the Act (``Qualified Purchasers,'' 
and such Unit holders, ``Qualified Purchaser Unit Holders'')) and 
approximately $500 million in assets. SSF III's fees and expenses for 
the year ended December 31, 2004, as a percentage of average net 
assets, totaled 5.41% (including the Adviser's incentive allocation of 
20% of net profits).\1\
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    \1\ Excluding the Adviser's incentive allocation, SSF III's fees 
totaled approximately .84% of average net assets. The Adviser's 
incentive allocation is subject to a high water mark.
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    2. SSF QP, a Delaware limited partnership that was formed on May 
17, 2005 to effect the Transaction is excluded from regulation under 
the Act pursuant to section 3(c)(7) of the Act.\2\ SSF QP has the same 
investment objectives as SSF III. SSF QP will have no assets until 
after the consummation of the Transaction. SSF QP will have the same 
administration fee and incentive allocation structure as SSF III. 
Applicants estimate that the fees and expenses for SSF QP (excluding 
any incentive allocation to the Adviser but including all other fees) 
would have been on a pro forma basis approximately 0.81% of average net 
assets for the calendar year ended December 31, 2004.\3\ Beginning June 
30, 2006, limited partners of SSF QP may redeem their Units of SSF QP 
semi-annually on June 30 and December 31 of each calendar year, by 
providing written notice to the Adviser on or before June 15 or 
December 15, respectively, of such calendar year. The Adviser has the 
right to limit the aggregate redemptions of Units of SSF QP by limited 
partners in any semi-annual fiscal period to 10% of the outstanding 
Units at the last day of the period (after the redetermination of Units 
to reflect SSF QP's profit or loss as of the end of such period).
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    \2\ SSF QP has been formed in compliance with, and will be bound 
by the terms and conditions of, the application.
    \3\ For purposes of projecting the effects of the Transaction, 
the Applicants have assumed the Cash Repurchase Offer and the 
Exchange Tender Offer (each as defined below) were consummated as 
follows (collectively, the ``Transaction Participation 
Assumptions''): (a) All Qualified Purchaser Unit Holders other than 
the Adviser and the Principals (as defined below) fully participated 
in the Exchange Tender Offer; (b) approximately 4.2% of the 
outstanding Units of SSF III (representing half of the Units of non-
Qualified Purchaser Unit Holders (as defined below)) participated in 
the Cash Repurchase Offer; (c) the Adviser did not participate in 
the Cash Repurchase Offer; (d) the Adviser, and two Principals, 
Austin Marxe and David Greenhouse, participated in the Exchange 
Tender Offer in the same proportion as other Limited Partners, as 
further described below; and (e) Adam Stettner, a Principal, did not 
participate in the Cash Repurchase Offer or the Exchange Tender 
Offer. The net result of the Transaction Participation Assumptions 
is that approximately 91.3% of SSF III's outstanding Units would be 
exchanged for Units of SSF QP, approximately 4.5% would remain in 
SSF III, and approximately 4.2% would be repurchased for cash. There 
can be no assurance that participation in the Cash Repurchase Offer 
and the Exchange Tender Offer will be similar to the Transaction 
Participation Assumptions.
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    3. The Adviser, a Delaware limited partnership, is registered as an 
investment adviser under the Advisers Act. The Adviser is the 
investment adviser to the Funds. The Adviser is also a General Partner 
of SSF III and will be the general partner of SSF QP upon completion of 
the Transaction. AWM Investment Company, Inc. (``AWM'') is the general 
partner of the Adviser and Austin W. Marxe, David Greenhouse and Adam 
Stettner are limited partners of the Adviser (each, including AWM, a 
``Principal''). The Adviser and Mr. Marxe each own a general 
partnership interest in SSF III totaling in the aggregate approximately 
7% of outstanding Units. The other Principals each own a limited 
partnership interest in SSF III totaling approximately less than 1% of 
outstanding Units.
    4. A provision in the applicable Treasury regulations,\4\ which has 
allowed SSF III to operate as a registered investment company but not 
be taxed as a publicly traded partnership for federal income tax 
purposes (``Grandfather Clause''), will expire on December 31, 2005.\5\ 
Unless SSF III satisfies a safe harbor in the Treasury regulations, any 
future determination of whether it would be taxed as a publicly traded 
partnership would be made by applying a facts-and-circumstances test. 
To continue to rely on a safe harbor and thereby avoid the uncertainty 
of a facts-and-circumstances test, SSF III may amend its repurchase 
policies to, among other things, reduce the repurchase offer amount on 
a semi-annual and annual basis to, respectively, 5% and 10% of 
outstanding Units.\6\ Amending the repurchase policies as applicants 
intend to do to qualify for the safe harbor is not satisfactory to the 
largest Limited Partners, all of whom are Qualified Purchasers, because 
of the resulting decrease in the liquidity of their Units.
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    \4\ 26 CFR 1.7704-1.
    \5\ A publicly traded partnership is generally taxed as a 
corporation, i.e. subject to a double level of taxation.
    \6\ Changes to SSF III's repurchase policies will be subject to 
the approval of a majority of the outstanding Units held by Limited 
Partners after completion of the Offers, as defined below.
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    5. Applicants propose to conduct the Transaction to divide SSF III 
into two separate companies to accommodate the needs of the Qualified 
Purchaser Unit Holders and those Unit holders that are not Qualified 
Purchasers (``non-Qualified Purchaser Unit Holders'').\7\ Pursuant to 
the Transaction, SSF III would conduct an exchange offer for the Units 
of Qualified Purchaser Unit Holders in which they may tender their 
Units of SSF III and receive, in exchange, Units of SSF QP (``Exchange 
Tender Offer''). The Exchange Tender Offer will not be a taxable 
transaction for the Funds. In the Transaction, (a) SSF III would accept 
from Qualified Purchaser Unit Holders who elect to participate in the 
Exchange Tender Offer (``Exchanging Holders'') Units of SSF III, (b) 
SSF III would transfer to SSF QP, on a strict pro rata basis, portfolio 
securities having a total net asset value (``NAV'') equal to the total 
NAV of the SSF III Units, as calculated on December 30, 2005 (the 
``Valuation Date''), tendered in the Exchange Tender Offer, (c) SSF III 
would receive Units of SSF QP having a total NAV equal to both the 
total NAV of the SSF III Units tendered by Exchanging Holders and the 
total NAV of the portfolio securities transferred from SSF III to SSF 
QP,\8\ and (d) SSF III would distribute the SSF QP Units to Exchanging 
Holders on a pro rata basis.\9\
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    \7\ The Transaction is subject to the approval of a majority of 
the outstanding Units held by Limited Partners.
    \8\ SSF III is a Qualified Purchaser.
    \9\ Limited Partners and General Partners that tender in the 
Exchange Tender Offer will receive, respectively, limited and 
general partnership Units of SSF QP. The Adviser and two Principals 
will participate in the Exchange Tender Offer, tendering the same 
percentage of the Units they hold as all other Limited Partners 
tender of the Units they hold.
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    6. Simultaneous with the Exchange Tender Offer, SSF III would 
conduct a

[[Page 67764]]

cash repurchase offer (``Cash Repurchase Offer,'' and together with the 
Exchange Tender Offer, the ``Offers''), which would constitute the 
semi-annual cash repurchase offer currently required by rule 23c-3 and 
SSF III's fundamental policies, as well as by the Partnership 
Agreement. The Cash Repurchase Offer would enable all Unit holders to 
tender their Units to SSF III in exchange for a cash payment equal to 
the NAV of the Units on the Valuation Date. The Cash Repurchase Offer 
would not be limited by the Exchange Tender Offer. The Cash Repurchase 
Offer would be for 10% of SSF III's outstanding Units. If Limited 
Partners tender for repurchase in the Cash Repurchase Offer more than 
10% of the outstanding Units, the Board would exercise its discretion 
to increase the Cash Repurchase Offer by 2% (for a total of 12% of 
Units outstanding). If Limited Partners tender more than 12% of the 
outstanding Units in the Cash Repurchase Offer, SSF III will repurchase 
Units tendered on a pro rata basis.\10\ The Individual General 
Partners, Adviser and Principals will not participate in the Cash 
Repurchase Offer. Applicants believe that any non-Qualified Purchaser 
Unit Holder who tenders Units in the Cash Repurchase Offer will be able 
to receive cash for all Units tendered. The Adviser and two of its 
Principals, Austin Marxe and David Greenhouse (in their individual 
capacities), will participate in the Exchange Tender Offer in the same 
proportion as the Limited Partners after giving effect to the Cash 
Repurchase Offer, that is, they will exchange Units in the same 
proportion as the Units held by all Limited Partners (other than Mr. 
Greenhouse) are exchanged, subject to the Adviser and the Individual 
General Partners holding collectively at least 1% of SSF III's 
outstanding Units. Making the Transaction Participation Assumptions, 
following the Transaction, the Adviser and the Principals collectively 
would own approximately 7.7% of SSF III's outstanding Units.
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    \10\ In the semi-annual repurchase offers made by SSF III over 
the last five years, which have typically been for 10% of 
outstanding Units, Limited Partners have never tendered for 
repurchase more than 4.13% of outstanding Units. In connection with 
SSF III's most recent cash repurchase offer, after having received 
notice from SSF III of the expiration of the Grandfather Clause and 
the effect thereof on the operations of SSF III, SSF III Unit 
holders tendered less than 2% of outstanding Units for repurchase. 
Requests for repurchase have exceeded 5% of outstanding Units on a 
semi-annual basis and 10% of outstanding Units on an annual basis 
three times, in all cases resulting from significant tenders by the 
Adviser.
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    7. Applicants propose for the Offers to begin on November 17, 2005, 
and expire on December 16, 2005. For purposes of both Offers, the NAV 
of SSF III's Units would be determined on the Valuation Date. 
Applicants intend to complete the Transaction on December 31, 2005, and 
to distribute proceeds of the Cash Repurchase Offer by January 6, 2006. 
Any and all costs and expenses incurred by SSF III in connection with 
the Cash Repurchase Offer will be incurred before SSF III calculates 
its NAV, and therefore will be reflected in the NAV, on the Valuation 
Date. All expenses associated with the Transaction will be paid by the 
Adviser or SSF QP. No repurchase fees, brokerage commissions, fees or 
other remuneration will be paid by SSF III, SSF QP or any Unit holder 
in connection with the Transaction. The Transaction will not be 
consummated until the Commission has issued an order relating to the 
application. Applicants have agreed not to make any material changes to 
the Transaction without prior approval of the Commission or its staff.
    8. On May 2, 2005, the Board, including a majority of the 
Individual General Partners who are not ``interested persons,'' as 
defined in section 2(a)(19) of the Act (``Independent General 
Partners''), approved the Transaction on behalf of SSF III, subject to 
the Commission issuing an order pursuant to the application. Prior to 
approving the Transaction, the Board considered other alternatives. 
Specifically, the Board considered converting SSF III into a 
``regulated investment company'' under the Internal Revenue Code of 
1986, as amended, but rejected the alternative as inconsistent with its 
operations, including its treatment of operating losses and net capital 
losses. The Board also considered liquidating SSF III, but rejected the 
alternative in light of, among other things, the likelihood of 
liquidation causing Limited Partners to recognize taxable gain. In 
approving the Transaction, the Board concluded that: (a) The 
Transaction is consistent with the policies of SSF III, as recited in 
its registration statement, (b) the terms of the Transaction, including 
the consideration to be received by the Funds, are reasonable and fair 
and do not involve overreaching on the part of any person concerned, 
and (c) participation in the Transaction is in the best interests of 
SSF III and its Limited Partners, and the interests of existing Limited 
Partners of SSF III will not be diluted as a result of the Transaction. 
Applicants state that the Board, in reaching its conclusions, 
considered that SSF III is likely to be significantly smaller after the 
Transaction and that there may, as a result, be a material increase in 
SSF III's expense ratio. The Applicants estimate, making the 
Transaction Participation Assumptions and assuming the transactions 
were consummated on December 31, 2003, that the fees and expenses of 
SSF III (excluding any incentive allocation to the Adviser but 
including all other fees) for the calendar year ended December 31, 2004 
would have been 1.57% of average net assets, rather than 0.84% of 
average net assets. Although this relative increase in SSF III's 
expense ratio of 0.73% may be material, the Applicants state that the 
Board believes that the benefits of the Transaction to all Partners 
(including the continued service of the Adviser) outweigh the burden of 
any such increase in SSF III's expense ratio.

Applicants' Legal Analysis

    1. Section 17(a) of the Act prohibits any affiliated person of a 
registered investment company, or any affiliated person of that person 
(``second tier affiliate''), acting as principal, from selling to or 
purchasing from the registered investment company any security or other 
property. Section 2(a)(3) of the Act defines an ``affiliated person'' 
as, among other things, any person directly or indirectly owning, 
controlling or holding with power to vote 5% or more of the outstanding 
voting securities of the other person; any person controlling, 
controlled by or under common control with the other person; any 
officer, director, partner, copartner or employee of the other person; 
and, if the other person is an investment company, its investment 
adviser. Section 2(a)(9) of the Act defines control to mean the power 
to exercise a controlling influence over the management or policies of 
a company. Applicants state that the Adviser and Principals may each be 
deemed to be an affiliated person of SSF III and SSF QP, and that SSF 
III and SSF QP may be deemed to be affiliated persons of each other as 
both are under common control of the Adviser and the Principals. 
Applicants also state that to the extent that an Exchanging Holder owns 
5% or more of the outstanding Units of SSF III, the Exchanging Holder 
could be deemed to be an affiliated person of SSF III (such Exchanging 
Holder, a ``5% Affiliate''), and a second tier affiliate of SSF QP. 
Thus, applicants state, section 17(a) of the Act may prohibit the 
Adviser, Principals and 5% Affiliates from purchasing Units of SSF QP 
from SSF III, and prohibit SSF QP from purchasing portfolio securities 
of SSF III in exchange for SSF QP Units.

[[Page 67765]]

    2. Section 17(b) of the Act authorizes the Commission to exempt a 
transaction from the provisions of section 17(a) if the terms of the 
transaction, including the consideration to be paid or received, are 
reasonable and fair and do not involve overreaching on the part of any 
person concerned and the proposed transaction is consistent with the 
policies of each registered investment company concerned and with the 
general purposes of the Act. Applicants submit that the Transaction has 
been approved by the Board, including a majority of the Independent 
General Partners, is reasonable and fair to SSF III and its Unit 
holders and meets the requirements of section 17(b) of the Act. 
Applicants state that the Transaction will not result in dilution to 
Unit holders of SSF III because (a) it will be effected at the NAV of 
SSF III's Units, which NAV will be calculated in accordance with SSF 
III's policies and procedures, as set forth in its registration 
statement, and computed using the same methodologies that SSF III has 
used to calculate its NAV in connection with each routine repurchase 
offer since its inception,\11\ and (b) it will involve a pro rata 
transfer of SSF III's portfolio securities to SSF QP. Applicants 
further state that, prior to the Transaction, any Limited Partner not 
wishing to remain invested in SSF III or become invested in SSF QP will 
be able to have his or her Units repurchased for cash at the NAV of the 
Units, and all expenses of the Transaction will be paid by the Adviser 
or SSF QP, including the cost of separating SSF III's portfolio between 
SSF III and SSF QP in the Transaction.
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    \11\ SSF QP has the same policies and procedures, and will 
employ the same methodologies to compute its NAV, as SSF III.
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Applicants' Conditions

    Applicants agree that any order granting the requested relief will 
be subject to the following conditions:
    1. The Exchange Tender Offer will be effected at the NAV of SSF 
III's Units determined in accordance with its registration statement 
under the Act.
    2. The sale of portfolio securities by SSF III to SSF QP in the 
Transaction will comply with the terms of rule 17a-7(c), (d) and (f) 
under the Act.
    3. At its next regular meeting following the Transaction, the Board 
of SSF III, including a majority of the Independent General Partners, 
will determine whether the Units were valued in accordance with 
condition 1 above.
    4. SSF III will maintain and preserve for a period of not less than 
six years from the end of the fiscal year in which the Transaction 
occurs, the first two years in an easily accessible place, a written 
record of the Transaction setting forth a description of each security 
transferred, the terms of the Transaction, and the information or 
materials upon which the determination required by condition 3 was 
made.
    5. In the Transaction, the portfolio securities will be distributed 
by SSF III to SSF QP on a pro rata basis, except that cash may be 
distributed in lieu of fractional shares.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 05-22163 Filed 11-7-05; 8:45 am]

BILLING CODE 8010-01-P
