[Federal Register Volume 85, Number 101 (Tuesday, May 26, 2020)]
[Notices]
[Pages 31575-31578]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-11139]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 33868; File No. 812-15076]


Sutter Rock Capital Corp.

May 19, 2020.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice.

-----------------------------------------------------------------------

    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 23(a), 23(b) and 63 of the Act; under sections 57(a)(4) and 
57(i) of the Act and rule 17d-1 under the Act permitting certain joint 
transactions otherwise prohibited by section 57(a)(4) of the Act; and 
under section 23(c)(3) of the Act for an exemption from section 23(c) 
of the Act.
    Summary of the Application: Sutter Rock Capital Corp. 
(``Applicant'' or ``Company'') requests an order that would permit 
Applicant to (i) issue restricted shares of its common stock 
(``Restricted Shares'') as part of the compensation package for certain 
of its employees, officers and all directors, including non-employee 
directors (the ``Non-Employee Directors'',\1\) through its Amended and 
Restated 2019 Equity Incentive Plan (the ``Amended Equity Incentive 
Plan'' or the ``Amended Plan''), (ii) withhold shares of the 
Applicant's common stock or purchase shares of Applicant's common stock 
from Participants to satisfy tax withholding obligations relating to 
the vesting of Restricted Shares or the exercise of options to purchase 
shares of Applicant's common stock (``Options'') that were granted 
pursuant to the Initial Equity Incentive Plan (defined below) or will 
be granted pursuant to the Amended Equity Incentive Plan,\2\ and (iii) 
permit Participants to pay the exercise price of Options that were 
granted pursuant to the Initial Equity Incentive Plan or will be 
granted to them pursuant to the Amended Equity Incentive Plan with 
shares of Applicant's common stock.
---------------------------------------------------------------------------

    \1\ Employees, officers, and all directors, including Non-
Employee Directors, are collectively the ``Participants.''
    \2\ Options will not be granted to Non-Employee Directors, and 
therefore, no relief is sought in the application for the grant of 
Options.
---------------------------------------------------------------------------

    Applicant: Sutter Rock Capital Corp.
    Filing Dates: The application was filed on October 25, 2019, and 
amended on February 27, 2020, May 1, 2020, and May 18, 2020.
    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 emailing the Commission's 
Secretary at Secretarys-Office@sec.gov 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, 2020, 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 emailing the Commission's Secretary at Secretarys-Office@sec.gov.

ADDRESSES: The Commission: Secretarys-Office@sec.gov. Applicant: One 
Sansome Street, Suite 730, San Francisco, CA 94104.

FOR FURTHER INFORMATION CONTACT: Jill Ehrlich, Senior Counsel, at (202) 
551-6819, or Daniele Marchesani, Assistant Chief Counsel, 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 website 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 closed-end investment 
company that has elected to be regulated as a business development 
company (``BDC'') under the Act. The Company's investment objective is 
to maximize its portfolio's total return, principally by seeking 
capital gains on its equity and equity-related investments. It invests 
primarily in the equity securities of what it believes to be rapidly 
growing venture-capital-backed emerging companies, and may on an 
opportunistic basis also invest in the debt securities of such 
companies. Applicant was organized under Maryland General Corporation 
Law in March 2011. Applicant's common stock is listed on the Nasdaq 
Capital Market under the symbol ``SSSS.'' The Company has 16,577,587 
shares of common stock outstanding as of April 15, 2020. As of April 
15, 2020, the Company had 6 employees.
    2. Applicant currently has a five-member board of directors (the 
``Board'') of whom four are not ``interested persons'' of Applicant 
within the meaning of section 2(a)(19) (``Non-Interested Directors'').
    3. Applicant believes that, because the market for superior 
investment professionals is highly competitive, Applicant's successful 
performance depends on its ability to offer fair compensation packages 
to its professionals that are competitive with those offered by other 
investment management businesses. Applicant states that the ability to 
offer equity-based compensation to its employees, officers, and 
directors, which both aligns employee, officer, and Board behavior with 
stockholder interests and provides a retention tool, is vital to 
Applicant's future growth and success.
    4. The Applicant's initial equity incentive plan, which became 
effective in 2019, is limited only to the types of equity-based 
compensation that BDCs are permitted to grant under the Act without the 
receipt of exemptive relief (the ``Initial Equity Incentive Plan''). On 
July 31, 2019, the Board, including a majority of the Non-Interested 
Directors, approved the Amended Equity Incentive Plan. The Amended 
Equity Incentive Plan will be submitted for approval to the Company's 
stockholders, and will become effective upon such approval, subject to 
and following receipt of the order. The Amended Equity Incentive Plan 
is intended to expand the Company's ability to issue equity-based 
compensation to employees, officers, and directors, including Non-
Employee Directors, and provides for grants of incentive stock options 
(as defined in Section 422 of the Internal Revenue Code of 1986), 
nonqualified stock options, and Restricted Shares.\3\ Each issuance of 
Plan Awards under the Amended Equity Incentive Plan will be approved by 
the required majority, as defined in Section 57(o) of the Act,\4\ of

[[Page 31576]]

the Company's directors (``Required Majority''). Applicant believes 
that the issuance of Restricted Shares as a form of equity-based 
compensation is in the best interest of the Company's stockholders, 
employees, and business. The Board has delegated its authority to 
administer the Amended Equity Incentive Plan to the compensation 
committee of the Board.
---------------------------------------------------------------------------

    \3\ Incentive stock options, nonqualified stock options, and 
Restricted Shares granted under the Amended Plan are collectively 
referred to as ``Plan Awards.''
    \4\ Section 57(o) of the Act provides that the term ``required 
majority,'' when used with respect to the approval of a proposed 
transaction, plan, or arrangement, means both a majority of a BDC's 
directors or general partners who have no financial interest in such 
transaction, plan, or arrangement and a majority of such directors 
or general partners who are not interested persons of such company.
---------------------------------------------------------------------------

    5. Applicant states that Non-Employee Directors will be granted 
$50,000 of Restricted Shares at each annual meeting of the Company's 
stockholders, with the first grant to be issued immediately upon the 
approval of the Company's stockholders after receipt of the requested 
order by the Commission. Such Restricted Shares will vest if the Non-
Employee Director is in continuous service through the anniversary of 
such grant (or, if earlier, the annual meeting of the Company's 
stockholders that is closest to the anniversary of such grant). The 
awards of Restricted Shares to the Non-Employee Directors will be made 
on an annual basis for so long as such Non-Employee Director remains on 
the Board; provided, however, that no Non-Employee Director will be 
granted Restricted Shares to the extent that such grant would cause he 
or she to receive more than 2.5% of the total outstanding shares of 
common stock in any calendar year, or if such grant would cause the 
Company to exceed the maximum number of shares authorized for issuance 
under the Amended Equity Incentive Plan. No additional awards of 
Restricted Shares or Options will be made, and the amounts proposed to 
be issued to Non-Employee Directors as set forth in the application 
cannot be changed without Commission approval. All awards of Restricted 
Shares that have not vested at the time a Non-Employee Director ceases 
to be a member of the Board will be forfeited. Notwithstanding the 
limitations set forth in the Amended Plan, the Board has determined 
that the maximum number of shares of common stock for which any Non-
Employee Director may be granted Plan Awards in any calendar year is 
25,000 shares.
    6. The Board has determined that the total number of Plan Awards to 
be available under the Amended Plan will be 10 percent of the 
outstanding shares of common stock as of the effective date of the 
Amended Plan. Additionally, notwithstanding the limitations set forth 
in the Amended Plan, the Board has determined that the maximum number 
of shares of common stock for which any employee, officer or employee-
director may be granted Plan Awards in any calendar year is 400,000 
shares.
    7. Unless the Board expressly provides otherwise, immediately upon 
the cessation of a Participant's continuous service, that portion, if 
any, (i) of any Plan Award (other than an Option) held by the 
Participant or the Participant's permitted transferee that is not then 
vested will terminate, and, in the case of Restricted Shares, the 
unvested shares will be returned to the Company and will be available 
to be issued as Plan Awards and (ii) of any Option held by a 
Participant or such Participant's permitted transferee that is not yet 
exercisable will terminate and the balance will remain exercisable for 
the lesser of (x) a period of three months or (y) the period ending on 
the latest date on which such Option could have been exercised, and 
will thereupon terminate subject to certain provisions. Plan Awards 
will not be transferable except for disposition by will or the laws of 
descent and distribution or by gift to a permitted transferee.

Applicant's Legal Analysis

Sections 23(a) and (b), Section 63

    1. Under section 63 of the Act, the provisions of section 23(a) of 
the Act generally prohibiting a registered closed-end investment 
company from issuing securities for services or for property other than 
cash or securities are made applicable to BDCs. This provision would 
prohibit the issuance of Restricted Shares as a part of the Amended 
Plan.
    2. Section 23(b) of the Act generally prohibits a registered 
closed-end investment company from selling any common stock of which it 
is the issuer at a price below its current net asset value. Section 
63(2) of the Act makes section 23(b) applicable to BDCs unless certain 
conditions are met. Because Restricted Shares that would be granted 
under the Amended Plan would not meet the terms of section 63(2), 
sections 23(b) and 63 would prevent the issuance of Restricted Shares.
    3. Section 6(c) provides, in part, that the Commission may, by 
order upon application, conditionally or unconditionally exempt any 
person, security, or transaction, or any class or classes thereof, from 
any provision of the Act, if and to the extent that the 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.
    4. Applicant requests an order pursuant to section 6(c) of the Act 
granting an exemption from the provisions of sections 23(a), 23(b), and 
63 of the Act. Applicant states that the Amended Plan would not raise 
the concerns underlying these sections, which include: (a) Preferential 
treatment of investment company insiders and the use of options and 
other rights by insiders to obtain control of the investment company; 
(b) complication of the investment company's structure that made it 
difficult to determine the value of the company's shares; and (c) 
dilution of shareholders' equity in the investment company. Applicant 
asserts that the Restricted Shares element of the Amended Plan does not 
raise concerns about preferential treatment of Applicant's insiders 
because this element is a bona fide compensation plan of the type that 
is common among corporations generally. In addition, section 
61(a)(4)(B) of the Act permits a BDC to issue to its directors, 
officers, employees, and general partners warrants, options, and rights 
to purchase the BDC's voting securities pursuant to an executive 
compensation plan, subject to certain conditions. Applicant states that 
section 61 and its legislative history do not address the issuance by a 
BDC of restricted stock as incentive compensation. Applicant believes, 
however, that the issuance of Restricted Shares is substantially 
similar, for purposes of investor protection under the Act, to the 
issuance of warrants, options, and rights as contemplated by section 
61. Applicant also asserts that the issuance of Restricted Shares would 
not become a means for insiders to obtain control of Applicant because 
the maximum amount of Restricted Shares that may be issued under the 
Amended Plan at any one time will be ten percent of the outstanding 
shares of common stock of Applicant.
    5. Applicant further states that the Restricted Shares feature will 
not unduly complicate Applicant's capital structure because equity-
based incentive compensation arrangements are widely used among 
corporations and commonly known to investors. Applicant notes that the 
Amended Plan will be submitted for approval to the Applicant's 
stockholders. Applicant represents that the proxy materials submitted 
to Applicant's stockholders will contain a concise ``plain English'' 
description of the Amended Plan and its potential dilutive effect. 
Applicant also states that it will comply with the proxy disclosure 
requirements in Item 10 of Schedule 14A under the Securities

[[Page 31577]]

Exchange Act of 1934. Applicant further notes that the Amended Plan 
will be disclosed to investors in accordance with the requirements of 
the Form N-2 registration statement for closed-end investment companies 
and pursuant to the standards and guidelines adopted by the Financial 
Accounting Standards Board for operating companies. Applicant also will 
comply with the disclosure requirements for executive compensation 
plans applicable to BDCs.\5\ Applicant thus concludes that the Amended 
Plan will be adequately disclosed to investors and appropriately 
reflected in the market value of Applicant's shares.
---------------------------------------------------------------------------

    \5\ See Executive Compensation and Related Party Disclosure, 
Securities Act Release No. 8655 (Jan. 27, 2006) (proposed rule); 
Executive Compensation and Related Party Disclosure, Securities Act 
Release No. 8732A (Aug. 29, 2006) (final rule and proposed rule), as 
amended by Executive Compensation Disclosure, Securities Act Release 
No. 8756 (Dec. 22, 2006) (adopted as interim final rules with 
request for comments).
---------------------------------------------------------------------------

    6. Applicant acknowledges that awards granted under the Amended 
Plan may have a dilutive effect on the stockholders' equity per share 
in Applicant, but believes that effect would be outweighed by the 
anticipated benefits of the Amended Equity Incentive Plan to Applicant 
and its stockholders. Moreover, based on the manner in which the 
issuance of Restricted Shares pursuant to the Amended Plan will be 
administered, the Restricted Shares will be no more dilutive than if 
Applicant were to issue only Options to Participants who are employees, 
as is permitted by Section 61(a)(4) of the Act. Applicant asserts that 
it needs the flexibility to provide the requested equity-based 
compensation in order to be able to compete effectively with commercial 
banks, investment banks, and other publicly traded companies that also 
are not investment companies registered under the Act for talented 
professionals. These professionals, Applicant suggests, in turn are 
likely to increase Applicant's performance and stockholder value. 
Applicant also asserts that equity-based compensation would more 
closely align the interests of Applicant's employees and Non-Employee 
Directors with those of its stockholders. In addition, Applicant states 
that its stockholders will be further protected by the conditions to 
the requested order that assure continuing oversight of the operation 
of the Amended Plan by the Board.

Section 57(a)(4), Rule 17d-1

    7. Section 57(a) proscribes certain transactions between a BDC and 
persons related to the BDC in the manner described in section 57(b) 
(``57(b) persons''), absent a Commission order. Section 57(a)(4) 
generally prohibits a 57(b) person from effecting a transaction in 
which the BDC is a joint participant absent such an order. Rule l7d-1, 
made applicable to BDCs by section 57(i), proscribes participation in a 
``joint enterprise or other joint arrangement or profit-sharing plan,'' 
which includes a stock option or purchase plan. Employees and directors 
of a BDC are 57(b) persons. Thus, the issuance of Restricted Shares 
could be deemed to involve a joint transaction involving a BDC and a 
57(b) person in contravention of section 57(a)(4). Rule 17d-1(b) 
provides that, in considering relief pursuant to the rule, the 
Commission will consider (a) whether the participation of the BDC in a 
joint enterprise is consistent with the policies and purposes of the 
Act and (b) the extent to which such participation is on a basis 
different from or less advantageous than that of other participants.
    8. Applicant requests an order pursuant to sections 57(a)(4) and 
57(i) of the Act and rule 17d-1 under the Act to permit Applicant to 
issue Restricted Shares under the Amended Plan. Applicant acknowledges 
that its role is necessarily different from the other participants 
because the other participants are its directors, officers, and 
employees. It notes, however, that the Amended Plan is in the interest 
of the Applicant's stockholders, because the Amended Plan will help 
align the interests of Applicant's employees with those of its 
stockholders, which will encourage conduct on the part of those 
employees designed to produce a better return for Applicant's 
stockholders. Additionally, section 57(j)(1) of the Act expressly 
permits any director, officer or employee of a BDC to acquire warrants, 
options and rights to purchase voting securities of such BDC, and the 
securities issued upon the exercise or conversion thereof, pursuant to 
an executive compensation plan which meets the requirements of section 
61(a)(4)(B) of the Act. Applicant submits that the issuance of 
Restricted Shares pursuant to the Amended Plan poses no greater risk to 
stockholders than the issuances permitted by section 57(j)(1) of the 
Act.

Section 23(c)

    9. 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 tenders, or under other circumstances as the Commission may permit 
to ensure that the purchases are 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. Applicant states that the 
withholding or purchase of Restricted Shares 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.
    10. Section 23(c)(3) of the Act permits a BDC to purchase 
securities of which it is the issuer in circumstances in which the 
repurchase 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. Applicant believes that the requested relief meets the 
standards of section 23(c)(3).
    11. Applicant submits that these purchases will be made in a manner 
that does not unfairly discriminate against Applicant's stockholders 
because all purchases of Applicant's stock will be at the closing price 
of the common stock on the Nasdaq Capital Market (or any primary 
exchange on which its shares of common stock may be traded in the 
future) on the relevant date. Applicant submits that because all 
transactions with respect the Amended Plan will take place at the 
public market price for the Applicant's common stock, these 
transactions will not be significantly different than could be achieved 
by any stockholder selling in a market transaction. Applicant 
represents that no transactions will be conducted pursuant to the 
requested order on days where there are no reported market transactions 
involving Applicant's shares.
    12. Applicant represents that the withholding provisions in the 
Amended Plan do not raise concerns about preferential treatment of 
Applicant's insiders because the Amended Plan is a bona fide 
compensation plan of the type that is common among corporations 
generally. Furthermore, the vesting schedule is determined at the time 
of the initial grant of the Restricted Shares and the option exercise 
price is determined at the time of the initial grant of the Options. 
Applicant represents that all purchases may be made only as permitted 
by the Amended Plan, which will be approved by the Applicant's 
stockholders prior to any application of the relief. Applicant believes 
that granting the requested relief would be consistent with the 
policies underlying the provisions of the

[[Page 31578]]

Act permitting the use of equity compensation as well as prior 
exemptive relief granted by the Commission under section 23(c) of the 
Act.

Applicant's Conditions

    Applicant agrees that the order granting the requested relief will 
be subject to the following conditions:
    1. The Amended Plan will be authorized by Applicant's stockholders.
    2. Each issuance of Restricted Shares to a Participant will be 
approved by the Required Majority of Applicant's directors on the basis 
that such grant is in the best interest of Applicant and its 
stockholders.
    3. The amount of voting securities that would result from the 
exercise of all of Applicant's outstanding warrants, options and 
rights, together with any Restricted Shares issued under the Amended 
Plan, at the time of issuance shall not exceed 25 percent of the 
outstanding voting securities of Applicant, except that if the amount 
of voting securities that would result from the exercise of all of 
Applicant's outstanding warrants, options and rights issued to 
Applicant's directors, officers and employees, together with any 
Restricted Shares issued pursuant to the Amended Plan, would exceed 15 
percent of the outstanding voting securities of Applicant, then the 
total amount of voting securities that would result from the exercise 
of all outstanding warrants, options and rights, together with any 
Restricted Shares issued pursuant to the Amended Plan, at the time of 
issuance shall not exceed 20 percent of the outstanding voting 
securities of Applicant.
    4. The amount of Restricted Shares issued and outstanding will not 
at the time of issuance of any Restricted Shares exceed ten percent of 
Applicant's outstanding voting securities.
    5. The Board will review the Amended Plan at least annually. In 
addition, the Board will review periodically the potential impact that 
the issuance of Restricted Shares under the Amended Plan could have on 
Applicant's earnings and net asset value per share, such review to take 
place prior to any decisions to grant Restricted Shares under the 
Amended Plan, but in no event less frequently than annually. Adequate 
procedures and records will be maintained to permit such review. The 
Board will be authorized to take appropriate steps to ensure that the 
issuance of Restricted Shares under the Amended Plan will be in the 
best interests of Applicant's stockholders. This authority will include 
the authority to prevent or limit the granting of additional Restricted 
Shares under the Amended Plan. All records maintained pursuant to this 
condition will be subject to examination by the Commission and its 
staff.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-11139 Filed 5-22-20; 8:45 am]
BILLING CODE 8011-01-P


