
[Federal Register: October 6, 2008 (Volume 73, Number 194)]
[Notices]               
[Page 58274-58276]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06oc08-120]                         

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 28427; 812-13428]

 
MCG Capital Corporation, et al.; Notice of Application

September 30, 2008.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application for an order under section 6(c) of the 
Investment Company Act of 1940 (the ``Act'') for an exemption from 
sections 18(a), 55(a), and 61(a) of the Act.

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Summary of the Application:  Applicants request an order to permit: (1) 
A business development company to look to the assets of its wholly-
owned subsidiaries, rather than the business development company's 
interest in the subsidiaries themselves, in determining whether the 
business development company meets certain requirements for business 
development companies under the Act, and (2) the business development 
company to adhere to a modified asset coverage requirement.

Applicants:  MCG Capital Corporation (``MCG''), Solutions Capital G.P., 
LLC, Solutions Capital I, L.P., MCG Capital Advisory Services, Inc., 
MCG Equity Funding I, LLC, MCG Finance I, LLC, MCG Finance V, LLC, MCG 
Commercial Loan Funding Trust, MCG Finance VII, LLC, MCG Commercial 
Loan Trust 2006-1, MCG Finance VIII, LLC, MCG Commercial Loan Trust 
2006-2, MCG Finance IX, LLC, MCG Commercial Loan Trust 2008-1, MCG IH 
Holdings, Inc., IH Helicon, Inc., IH NPS Holdings, LLC, MCG Opportunity 
Investment Fund I, LLC, Sleep Investors, LLC, TNR Investors, LLC, 
Crystal Media Network, Inc., IH Chesapeake Tower, Inc., IH Dayton 
Parts, Inc., IH GSD, Inc., IH Intran Inc., IH MTP, Inc., IH NDS, Inc., 
IH NEPG, Inc., IH NYL, Inc., IH Orbitel Holdings, Inc., IH OTM, Inc., 
IH PBI, Inc., IH Premier, Inc. and IH Quantum, Inc.

Filing Dates:  The application was filed on September 25, 2007, and 
amended on June 17, 2008, and September 17, 2008. Applicants have 
agreed to file an amendment during the notice period, the substance of 
which is contained in this notice.

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 October 27, 2008, and should be accompanied by proof of service 
on the Applicant, in the form of an affidavit or, for lawyers, a 
certificate of service. Hearing requests should state the nature of the 
writer's interest, the reason for the request, and the issues 
contested. Persons who wish to be notified of a hearing may request 
notification by writing to the Commission's Secretary.

ADDRESSES: Secretary, U.S. Securities and Exchange Commission, 100 F 
Street, NE., Washington, DC 20549-1090. Applicant, c/o Steven F. 
Tunney, President and Chief Executive Officer, MCG Capital Corporation, 
1100 Wilson Boulevard, Suite 3000, Arlington, VA 22209.

FOR FURTHER INFORMATION CONTACT: Christine Y. Greenlees, Senior 
Counsel, at (202) 551-6879, or Marilyn Mann, Branch Chief, at (202) 
551-6821 (Division of Investment Management, Office of Investment 
Company Regulation).

SUPPLEMENTARY INFORMATION: The following is a summary of the

[[Page 58275]]

application. The complete application may be obtained for a fee at the 
Commission's Public Reference Room, 100 F Street, NE., Washington, DC 
20549-1520 (tel. 202-551-5850).

Applicants' Representations

    1. MCG, a Delaware corporation, is an internally managed, non-
diversified, closed-end investment company that has elected to be 
regulated as a business development company (``BDC'') under the Act. 
MCG is a commercial finance company that provides capital and advisory 
services to middle-market companies throughout the United States.
    2. MCG conducts, and expects to continue to conduct, a portion of 
its business through its current and future subsidiaries, all of whose 
equity securities are owned or will be owned directly or indirectly by 
MCG (each, a ``Subsidiary''). There are three types of Subsidiaries 
that currently are active or are currently being contemplated: (1) 
Operating Subsidiaries, (2) financing subsidiaries, and (3) blocker 
subsidiaries.
    3. MCG's current operating subsidiaries are Solutions Capital I, 
L.P. (the ``SBIC Subsidiary'') and Solutions Capital G.P., LLC (the 
``SBIC GP''). The SBIC Subsidiary, a Delaware limited partnership, is a 
small business investment company (``SBIC'') licensed under the Small 
Business Administration (``SBA'') to operate under the Small Business 
Investment Act of 1958 (``SBIA''). The SBIC Subsidiary relies on 
section 3(c)(7) of the Act. The SBIC GP, a Delaware limited liability 
company, is the sole general partner of the SBIC Subsidiary. MCG is the 
SBIC GP's sole member and owner. The SBIC GP is the sole general 
partner of the SBIC Subsidiary, and MCG is the sole limited partner of 
the SBIC Subsidiary.
    4. MCG intends to operate the SBIC Subsidiary through the SBIC GP 
for the same investment purposes as MCG, and the SBIC Subsidiary will 
invest in the same kinds of securities as MCG. The operations of both 
the SBIC Subsidiary and the SBIC GP will be consolidated with those of 
MCG for financial reporting purposes. The assets of the SBIC Subsidiary 
and the SBIC GP are recorded on MCG's balance sheet, and thus are 
considered assets of MCG for U.S. generally accepted accounting 
principles purposes.
    5. From time to time, MCG transfers pools of loans and/or other 
investments to special purpose entities (the ``Financing 
Subsidiaries'') for use in connection with on-balance sheet financing 
transactions. The current Financing Subsidiaries are structured as 
Delaware limited liability companies. Each such current Financing 
Subsidiary, in turn, transfers such loans and/or other investments to a 
wholly owned trust (each, a ``Financing Trust'') that finances the 
acquisition of such assets through the issuance of debt securities. The 
current Financing Subsidiaries are excluded from the definition of 
investment company under section 3(c)(7) of the Act, and the current 
Financing Trusts are excluded from the definition of investment company 
under rule 3a-7 under the Act.
    6. The purpose of the Financing Subsidiaries is to provide a 
legally separate entity to hold investments and/or to hold the 
Financing Trust, which, in turn, hold the investments supporting MCG's 
financings. MCG solely controls the operations of each Financing Trust, 
including the acquisition and disposition of assets by each Financing 
Trust.
    7. MCG utilizes wholly owned subsidiaries to hold MCG's interests 
in certain of MCG's portfolio companies (the ``Blocker Subsidiaries''). 
The Blocker Subsidiaries are excluded from the definition of investment 
company under section 3(c)(7) of the Act. Certain of the Blocker 
Subsidiaries are structured as Delaware corporations and hold certain 
investment assets that are structured as pass-through tax entities in 
order to allow MCG to continue to qualify as a regulated investment 
company for tax purposes.\1\ Other Blocker Subsidiaries, organized as 
Delaware limited liability companies, hold MCG's interests in MCG's 
portfolio companies in order to block potential investor-related 
liability to MCG.
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    \1\ Applicants represent that these Blocker Subsidiaries are a 
lawful method of tax planning under the Internal Revenue Code and 
are frequently used by companies seeking to elect to be treated as 
regulated investment companies. MCG has obtained an opinion from tax 
counsel from the firm of Sutherland Asbill & Brennan LLP confirming 
the appropriateness of this structure.
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    8. The Blocker Subsidiaries are not operating companies and do not 
have any employees. The Blocker Subsidiaries exist solely for the 
benefit of MCG in order to hold MCG's interests in its portfolio 
companies and do not provide any services to any other company. MCG 
does and will continue to make available significant managerial 
assistance to the issuers of securities held by the Subsidiaries to the 
extent required by section 2(a)(48)(B).\2\
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    \2\ For the purposes of Section 2(a)(48)(B), MCG will treat 
securities held by the Subsidiaries as if they were held directly by 
MCG.
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Applicants' Legal Analysis

A. Relief for MCG To Deem Assets Held by its Subsidiaries To Be Owned 
by MCG for Purposes of Determining Its Compliance With Section 55(a) of 
the Act

    1. Section 2(a)(48) of the Act generally 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 (3) of 
the Act and makes available significant managerial assistance with 
respect to the issuers of these securities. Section 55(a) of the Act 
requires a BDC to have at least 70 percent of its assets invested in 
assets described in sections 55(a)(1) through (7) (``Qualifying 
Assets''). Qualifying Assets generally include securities issued by 
eligible portfolio companies as defined in section 2(a)(46) of the Act. 
Section 2(a)(46)(B) generally excludes from the definition of an 
eligible portfolio company an investment company, as defined under 
section 3 of the Act, and a company that would be an investment company 
but for the exclusion from the definition of investment company in 
section 3(c) of the Act.
    2. Section 6(c) of the Act, in relevant part, permits the 
Commission to exempt any transaction or class of transactions from any 
provision of the Act if, and to the extent that, such exemption is 
necessary or appropriate in the public interest and consistent with the 
protection of investors and the purposes fairly intended by the policy 
and provisions of the Act. Applicants request an order pursuant to 
section 6(c) to allow MCG to deem the assets of its current and future 
Subsidiaries as its own assets for purposes of determining its 
compliance with section 55(a).
    3. Applicants state that each Subsidiary will be formed as a 
limited liability company (``LLC''), a corporation (``Corporation ``) 
or a partnership (``Partnership''). MCG and/or one or more other 
Subsidiaries at all times will be the only members of each Subsidiary 
that is an LLC and will collectively hold all of the ownership 
interests in the LLC Subsidiary. No LLC Subsidiary will admit any 
person other than MCG or another Subsidiary as a member, and no LLC 
Subsidiary will issue interests other than to MCG or another 
Subsidiary. MCG and/or one or more other Subsidiaries at all times will 
own and hold all of the outstanding equity interests in each Subsidiary 
that is formed as a Corporation. MCG and/or one or more other 
Subsidiaries will at all times be the sole limited partner of any 
Subsidiary that is formed as a

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Partnership and the sole owner of such Subsidiary's general partner. 
Applicants also state that since MCG, directly or indirectly through 
another Subsidiary, owns or would own the entire equity interest in any 
current and future Subsidiaries, any activity carried on by them will, 
in all material respects, have the same economic effect on MCG's 
stockholders as if carried on directly by MCG.

B. Relief for the Company To Adhere to a Modified Asset Coverage 
Requirement

    1. Applicants request an exemption pursuant to section 6(c)of the 
Act from the provisions of sections 18(a) and 61(a) of the Act to 
permit MCG to adhere to a modified asset coverage requirement.
    2. Section 18(a) of the Act prohibits a registered closed-end 
investment company from issuing any class of senior security or selling 
any such security of which it is the issuer unless the company complies 
with the asset coverage requirements set forth in that section. Section 
61(a) of the Act makes section 18 applicable to BDCs, with certain 
modifications. Section 18(k) exempts an investment company operating as 
an SBIC from the asset coverage requirements for senior securities 
representing indebtedness that are contained in section 18(a)(1)(A) and 
(B).
    3. Applicants state that a question exists as to whether MCG must 
comply with the asset coverage requirements of section 18(a) (as 
modified by section 61(a)) solely on an individual basis or whether MCG 
must also comply with the asset coverage requirements on a consolidated 
basis because MCG may be deemed to be an indirect issuer of any class 
of senior security issued by the SBIC Subsidiary. Applicants state that 
they wish to treat the SBIC Subsidiary as if it were a BDC subject to 
sections 18 and 61 of the Act. Applicants state that companies 
operating under the SBIA, such as the SBIC Subsidiary, will be subject 
to the SBA's substantial regulation of permissible leverage in its 
capital structure.
    4. Section 6(c) of the Act, in relevant part, permits the 
Commission to exempt any transaction or class of transactions from any 
provision of the Act if and to the extent that such exemption is 
necessary or appropriate in the public interest and consistent with the 
protection of investors and the purposes fairly intended by the policy 
and provisions of the Act. Applicants state that the requested relief 
satisfies the section 6(c) standard. Applicants contend that, since the 
SBIC Subsidiary would be entitled to rely on section 18(k) if it was a 
BDC itself, there is no policy reason to deny the benefit of that 
exemption to MCG.

Applicants' Conditions

    Applicants agree that the order granting the requested relief will 
be subject to the following conditions:

Relief From Section 55(a)

    1. Each Subsidiary will be formed as a limited liability company 
(``LLC''), a corporation (``Corporation ``) or a partnership 
(``Partnership''). MCG and/or one or more other Subsidiaries at all 
times will be the only members of each Subsidiary that is an LLC and 
will collectively hold all of the ownership interests in the LLC 
Subsidiary. No LLC Subsidiary will admit any person other than MCG or 
another Subsidiary as a member, and no LLC Subsidiary will issue 
interests other than to MCG or another Subsidiary. MCG and/or one or 
more other Subsidiaries at all times will own and hold all of the 
outstanding equity interests in each Subsidiary that is formed as a 
Corporation. MCG and/or one or more other Subsidiaries will at all 
times be the sole limited partner of any Subsidiary that is formed as a 
Partnership and the sole owner of such Subsidiary's general partner.
    2. The Subsidiaries, and any future Subsidiaries, may not acquire 
any asset if the acquisition would cause MCG to violate section 55(a).
    3. No person shall serve or act as investment adviser to a 
Subsidiary unless the Board and stockholders of MCG shall have taken 
the action with respect thereto also required to be taken by the board 
of directors of the Subsidiary and stockholders of the Subsidiary as if 
the Subsidiary were a BDC.

Relief From Section 18(a)

    4. MCG will not issue or sell any senior security and MCG will not 
cause or permit the SBIC Subsidiary to issue or sell any senior 
security of which MCG or the SBIC Subsidiary is the issuer except to 
the extent permitted by section 18 (as modified for BDCs by section 
61); provided that immediately after issuance or sale by any of MCG or 
the SBIC Subsidiary of any such senior security, MCG individually and 
on a consolidated basis, shall have the asset coverage required by 
section 18(a) (as modified by section 61(a)), except that, in 
determining whether MCG on a consolidated basis has the asset coverage 
required by section 18(a) (as modified by section 61(a)), any senior 
securities representing indebtedness of the SBIC Subsidiary shall not 
be considered senior securities and, for purposes of the definition of 
``asset coverage'' in section 18(h), will be treated as indebtedness 
not represented by senior securities.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Florence E. Harmon,
Acting Secretary.
 [FR Doc. E8-23492 Filed 10-3-08; 8:45 am]

BILLING CODE 8011-01-P
