A Business Development Company (“BDC”) is a form of unregistered closed-end investment company which is based in the United States; they are companies that invest in small and mid-sized businesses. The designation of this type of company was passed by Congress in 1980 and is included as an amendment to the Investment Company Act of 1940.
BDCs are similar to venture capital funds in that they must raise cash from investors to engage in their business activities. In order for a company to be classified as a BDC, it must be registered and be in compliance with Section 54 of the Investment Company Act of 1940. However, unlike venture capital funds, which usually require accredited investors, BDCs permit non-accredited investors to invest in the company while participating in the sale of the investments.
BDCs are usually taxed as regulated investment companies under the Internal Revenue Code. Similar to REITs, as long as the BDC meets certain income, diversification and distribution requirements, the BDC usually pays little to no income tax. As such, the BDC is set up as a pass-through tax structure whereby the company must distribute at least 90% of its taxable income as dividends to investors. A BDC can achieve additional tax advantages if it distributes at least 98% of its ordinary income and 98% of its capital gains to its investors.
BDCs are usually listed on a national exchange but many have declined to do so. Regardless of their intentions, if a BDC does not wish to list on a national exchange, it is must maintain a similar legal and regulatory structure as those BDCs which are listed on a national exchange.