
[Federal Register Volume 80, Number 103 (Friday, May 29, 2015)]
[Notices]
[Pages 30746-30747]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-12970]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 31645; File No. 812-14363]


KCAP Financial, Inc.; Notice of Application

May 21, 2015.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application for an order under section 23(c)(3) of 
the Investment Company Act of 1940 (the ``Act'') for an exemption from 
section 23(c) of the Act.

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Summary of the Application: KCAP Financial, Inc. (``Company'') requests 
an order to amend a prior order \1\ that permits the Company to issue 
Restricted Stock \2\ to the Company's Employees \3\ under the terms of 
its Amended and Restated 2006 Equity Incentive Plan, as further amended 
and restate effective June 20, 2014 (the ``Incentive Plan''). The 
Company seeks to amend the Prior Order to permit it to engage in 
certain transactions in connection with the Incentive Plan that may 
constitute purchases by the Company of its own securities within the 
meaning of section 23(c) of the Act.
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    \1\ Investment Company Act Release Nos. 28168 (Feb. 25, 2008) 
(notice) and 28199 (Mar. 24, 2008) (order) (the ``Prior Order'').
    \2\ As defined in the Prior Order.
    \3\ As defined in the Prior Order.

Filing Dates: The application was filed on September 22, 2014, and 
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amended on January 28, 2015, May 15, 2015, and May 21, 2015.

Hearing or Notification of Hearing:  An order granting the requested 
relief will be issued unless the Commission orders a hearing. 
Interested persons may request a hearing by writing to the Commission's 
Secretary and serving applicant with a copy of the request, personally 
or by mail. Hearing requests should be received by the Commission by 
5:30 p.m. on June 15, 2015, and should be accompanied by proof of 
service on applicant, in the form of an affidavit, or for lawyers, a 
certificate of service. Pursuant to rule 0-5 under the Act, hearing 
requests should state the nature of the writer's interest, any facts 
bearing upon the desirability of a hearing on the matter, 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, Securities and Exchange Commission, 100 F Street 
NE., Washington, DC 20549-1090. Applicant: c/o Dayl W. Pearson, 
President and Chief Executive Officer, KCAP Financial, Inc., 295 
Madison Avenue, 6th Floor, New York, NY 10017.

FOR FURTHER INFORMATION CONTACT:  Steven I. Amchan, Senior Counsel, at 
(202) 551-6826, or David P. Bartels, Branch Chief, at (202) 551-6821, 
(Division of Investment Management, Chief Counsel's Office).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained via the 
Commission's Web site by searching for the file number, or for the 
applicant using the Company name box, at http://www.sec.gov/search/search.htm or by calling (202) 551-8090.
    Applicant's Representations:
    1. The Company 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. The Incentive Plan 
authorizes the Company, among other things, to grant to its Employees 
in accordance with the terms and conditions of the Prior Order (i) 
Restricted Stock and (ii) options to acquire shares of the Company's 
common stock, par value $0.01 per share (``Common Stock'') in 
accordance with section 61(a)(3)(B) of the Act. The Company seeks to 
amend the Prior Order to permit it to withhold shares of the Company's 
Common Stock or purchase shares of Common Stock from the Participants 
\4\ to satisfy tax withholding obligations related to the vesting of 
Restricted Stock or the exercise of options to purchase shares of 
Common Stock granted pursuant to the Incentive Plan. In addition, the 
Company seeks to permit Participants to pay the exercise price of 
options to purchase shares of Common Stock granted pursuant to the 
Incentive Plan with shares of Common Stock already held by them or 
pursuant to a net share settlement feature.\5\ The Company will 
continue to comply with all of the terms and conditions of the Prior 
Order.
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    \4\ As defined in the Prior Order.
    \5\ Net share settlement allows the Company to deliver only gain 
shares (i.e., shares of its Common Stock with a Fair Market Value 
(as defined below) equal to the option spread upon exercise) 
directly to the optionee without the need for the optionee to sell 
shares of Common Stock on the open market or borrow cash from third 
parties in order to exercise his or her options. The Company states 
that the Board has determined to use the closing sales price of the 
Common Stock on the NASDAQ Global Select Market (or any other such 
exchange on which the Common Stock may be traded in the future) on 
the date of the applicable transaction or other event as the fair 
market value (``Fair Market Value'') with respect to the Common 
Stock for all purposes under the Incentive Plan.
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    2. On the date that any Restricted Stock vests, such vested shares 
of the Restricted Stock are released to the Participant and are 
available for sale or transfer.\6\ The Company states that value of the 
vested shares is deemed to be wage compensation for the Employee. As 
discussed more fully in the application, upon the exercise of certain 
options the amount by which the Fair Market Value of the shares of the 
Company's Common Stock, determined as of the date of exercise, exceeds 
the exercise price will be treated as ordinary income to the recipient 
of the option in the year of exercise. The Company states that any 
compensation income recognized by an employee generally is subject to 
federal withholding for

[[Page 30747]]

income and employment tax purposes. The Incentive Plan provides that 
the delivery of any shares, or the lifting or lapse of restrictions on 
any Award, shall be subject to the Participant's satisfaction of all 
applicable federal, state and local income and employment tax 
withholding obligations.
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    \6\ During the restriction period (i.e., prior to the lapse of 
the forfeiture restrictions), the Restricted Stock may not be sold, 
transferred, pledged, hypothecated, margined, or otherwise 
encumbered by a Participant.
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    3. The Incentive Plan, as amended and restated effective June 20, 
2014, was approved by the Company's board of directors (``Board''), 
including the required majority of the Company's directors with the 
meaning of section 57(o) of the Act. The Company states that the Board 
is permitted to allow the Company to withhold shares of Common Stock or 
purchase shares of Common stock from the Company's Employees to satisfy 
tax withholding obligations related to the vesting of Restricted Stock, 
or the exercise of options to acquire Common Stock or Restricted Stock 
granted pursuant to the Incentive Plan. The Company states that the 
Incentive Plan further provides the Board with discretion to permit the 
Company's Employees to pay the exercise price of options to purchase 
shares of Common Stock or Restricted Stock with shares of Common Stock 
already held by them or pursuant to net share settlement.
    Applicant's Legal Analysis:
    1. Section 23(c) of the Act, which is made applicable to BDCs by 
section 63 of the Act, generally prohibits a BDC from purchasing any 
securities of which it is the issuer except in the open market, 
pursuant to tender offers or under other circumstances as the 
Commission may permit to ensure that the purchase is made on a basis 
that does not unfairly discriminate against any holders of the class or 
classes of securities to be purchased. The Company states that the 
withholding or purchase of shares of Restricted Stock and Common Stock 
in payment of applicable withholding tax obligations or of Common Stock 
in payment for the exercise price of a stock option might be deemed to 
be purchases by the Company of its own securities within the meaning of 
section 23(c) and therefore prohibited by the Act.
    2. Section 23(c)(3) provides that the Commission may issue an order 
that would permit a BDC to purchase its shares in circumstances in 
which the purchase is made in a manner or on a basis that does not 
unfairly discriminate against any holders of the class or classes of 
securities to be purchased. The Company states that it believes that 
the requested relief meets the standards of section 23(c)(3).
    3. The Company states that these purchases will be made on a basis 
which does not unfairly discriminate against the stockholders of the 
Company because all purchases of Common Stock will be at the closing 
sales price of the Common Stock on the NASDAQ Global Select Market on 
the relevant date (i.e., the public market price on the date of vesting 
of the Restricted Shares, the date of exercise of Non-Statutory Stock 
Options, and the date of a disqualifying disposition with respect to 
Incentive Stock Options). The Company further states that no 
transactions will be conducted pursuant to the requested order on days 
where there are no reported market transactions involving the Common 
Stock. The Company submits that because all transactions would take 
place at the public market price for the Company's common stock, the 
transactions would not be significantly different than could be 
achieved by any stockholder selling in a market transaction.
    4. The Company submits that the proposed purchases do not raise 
concerns about preferential treatment of the Company's insiders because 
the Incentive Plan is a bona fide compensation plan of the type that is 
common among corporations generally. Further, the Company argues that 
the vesting schedule is determined at the time of the initial grant of 
the Restricted Stock and the option exercise price is determined at the 
time of the initial grant of the options. The Company represents that 
that all purchases may be made only as permitted by the Incentive Plan 
and in the discretion of the Board, which is composed of at least a 
majority of ``non-interested'' persons within the meaning of section 
2(a)(19) of the Act. The Company argues that granting the requested 
relief would be consistent with policies underlying the provisions of 
the Act permitting the use of equity compensation as well as prior 
exemptive relief granted by the Commission for relief under section 
23(c) of the Act.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-12970 Filed 5-28-15; 8:45 am]
BILLING CODE 8011-01-P


