Securities and Exchange Commission (“Commission”).
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.
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.
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.Start Further Info
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).End Further Info End Preamble Start Supplemental 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).
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 Start Printed Page 67763Act”). 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).
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. 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. 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).
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, 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. 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. 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.
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”). 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, and (d) SSF III would distribute the SSF QP Units to Exchanging Holders on a pro rata basis.
6. Simultaneous with the Exchange Tender Offer, SSF III would conduct a Start Printed Page 67764cash 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. 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.
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. Start Printed 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, 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.
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.Start Signature
For the Commission, by the Division of Investment Management, under delegated authority.
Jonathan G. Katz,
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.Back to Citation
2. SSF QP has been formed in compliance with, and will be bound by the terms and conditions of, the application.Back to Citation
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.Back to Citation
5. A publicly traded partnership is generally taxed as a corporation, i.e. subject to a double level of taxation.Back to Citation
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.Back to Citation
7. The Transaction is subject to the approval of a majority of the outstanding Units held by Limited Partners.Back to Citation
8. SSF III is a Qualified Purchaser.Back to Citation
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.Back to Citation
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.Back to Citation
11. SSF QP has the same policies and procedures, and will employ the same methodologies to compute its NAV, as SSF III.Back to Citation
[FR Doc. 05-22163 Filed 11-7-05; 8:45 am]
BILLING CODE 8010-01-P