Who may be interested: Registered Investment Companies; Directors of Registered Investment Companies; Investment Advisers
Quick Take: On April 16, 2026, the staff of the SEC Division of Investment Management (Staff) granted no-action relief to allow a Fund to issue and repurchase certain preferred “Seed Shares” designed to provide initial capital for a newly launched non-traded business development company (BDC) without triggering the senior security restrictions imposed by Sections 18 and 61 of the 1940 Act. The relief provides a potential framework for BDCs and registered closed-end funds to obtain seed funding and build an initial portfolio before raising significant third-party capital.
The Fund, a closed-end fund intending to elect BDC status, requested assurance that the Staff would not recommend enforcement action under Sections 18(a)(2)(A), (B), and (E) (as modified by Section 61(a), which contains special provisions relating to BDC capital structures) if the Fund issued preferred Seed Shares to affiliates of the Fund’s investment adviser and subsequently repurchased those shares pursuant to their terms. The request focused on the treatment of these Seed Shares under the senior security provisions of the 1940 Act in connection with the launch of a non-traded BDC.
The Seed Shares are intended to provide initial capital to allow the Fund to build an investment portfolio before significant third-party subscriptions are received. The Seed Shares would be issued at the same fixed price as the Fund’s common shares and would be purchased solely for cash.
The Seed Shares would carry the same voting rights as the common shares, except that holders would have the right to elect two trustees while the Seed Shares remain outstanding, as required under the 1940 Act for preferred shareholders. The Seed Shares would also receive a quarterly dividend equal to the greater of a fixed floor rate or the distribution paid on the common shares.
The Seed Shares would not have a traditional liquidation preference over the common shares. Upon liquidation, holders would receive, per share, the lesser of the original purchase price and the amount distributed in liquidation of a common share. The Fund also structured a repurchase mechanism, where at least 50% of net proceeds from common share sales after the initial closing would be used to repurchase outstanding Seed Shares.
The Fund’s no-action request included several additional representations and conditions, including that the Fund would not seek exchange listing while Seed Shares remain outstanding, would not acquire assets from affiliated persons until the Seed Shares are fully repurchased (subject to certain exceptions), and would cease offering new common shares and wind down the portfolio if any Seed Shares remain outstanding after 36 months.
The Staff stated it would not recommend enforcement action under Sections 18(a)(2)(A), (B), and (E) based on the facts and representations described in the letter. It further noted that the assurance would apply equally to registered closed-end funds subject to Section 18(a).
The no-action letter is available here.