SCP Private Equity Partners II, L.P. (Jun. 6, 2006) (Qualified Purchaser Definition)

Tuesday, 06 June 2006 08:00

Investment Company Act of 1940 – Section 2(a)(51)(A)(iii) SCP Private Equity Partners II, L.P.

June 6, 2006

In your letter dated June 6, 2006,¹ you request that we concur with your view that, for purposes of section 2(a)(51)(A)(iii) of the Investment Company Act of 1940 (“Company Act”), the Trust (as defined below) will not be deemed to have been formed or operated for the specific purpose of acquiring securities offered by an entity that is excepted from the definition of investment company by section 3(c)(7) of the Company Act (a “3(c)(7) Fund”).

FACTS

You state that SCP Private Equity Partners II, L.P. (“SCP”) is a limited partnership that is organized under the laws of the State of Delaware, and is excepted from the definition of investment company pursuant to section 3(c)(1) of the Company Act. You state that pursuant to SCP’s limited partnership agreement, SCP’s term of existence will expire in June 2010, unless it is extended or terminated earlier pursuant to the limited partnership agreement (“SCP’s liquidation date”). You represent that SCP is a qualified purchaser pursuant to section 2(a)(51)(A)(iv) of the Company Act in that SCP acts for its own account and in the aggregate owns and invests on a discretionary basis not less than $25,000,000 in investments.² You indicate that one or more of SCP’s limited partners are not qualified purchasers, as defined in section 2(a)(51)(A) of the Company Act. You state that SCP has made investments, and is considering making additional investments, in securities issued by one or more 3(c)(7) Funds (the “3(c)(7) Interests”). You state that prior to, or at the time of, SCP’s liquidation date, SCP intends to sell its remaining assets, and distribute the proceeds to its partners. You note that it may be difficult for SCP to dispose of its 3(c)(7) Interests prior to, or at the time of, SCP’s liquidation date. You state that transfer restrictions on the 3(c)(7) Interests may limit the ability of SCP to sell them, and would permit SCP to distribute them pursuant to an in-kind distribution to SCP’s partners only if each of the partners was a qualified person.³ In addition, you state that other factors, such as economic or market considerations, may cause SCP to determine that it is not in the best financial interest of its partners to sell the 3(c)(7) Interests prior to, or at the time of, SCP’s liquidation date. You state that, in order to permit SCP’s orderly liquidation and dissolution, SCP intends to form a trust to hold one or more of the 3(c)(7) Interests (the “Trust”) for liquidation some time after SCP’s liquidation date. You state that the Trust will hold each 3(c)(7) Interest until the issuer of that 3(c)(7) Interest itself disolves, or the 3(c)(7) Interest can be prudently sold. You represent that the sole beneficial owners of the Trust will be persons who were SCP’s partners at the time of SCP’s liquidation date, and each beneficial owner will have an interest in the Trust equal to his or her proportionate interest in SCP at the time of SCP’s liquidation date. You state that SCP’s limited partners will not participate in the decision to organize the Trust. You state that the Trust will be formed contemporaneously with the liquidation and dissolution of SCP. You state that the activities of the Trust will be limited to liquidating, in an orderly fashion, the 3(c)(7) Interests transferred to it by SCP, and distributing the proceeds of the liquidation to the Trust’s beneficial owners (as well as activities designed to assure that liquidation and distribution). You state that the beneficial interests in the Trust will not be transferable, except by operation of law or upon the death of the beneficial owner. You also state that the Trust will terminate upon the complete liquidation of the 3(c)(7) Interests. Finally, you state that the Trust will meet the exception from the definition of investment company contained in section 3(c)(1) of the Company Act. During the June Telephone Call, you expressed concern that, although the Trust will generally meet the definition of qualified purchaser contained in section 2(a)(51)(A)(iii) of the Company Act, it might be deemed to be “formed for the specific purpose of acquiring the securities offered,” and would consequently be unable to meet the definition of qualified purchaser contained in that section.⁴ You also expressed concern that, if the Trust were deemed not to be a qualified purchaser, the 3(c)(7) Funds might, among other things, invoke the 3(c)(7) Interest’s transfer restrictions to prevent SCP from transferring the 3(c)(7) Interests to the Trust in order to protect their excepted status under section 3(c)(7) of the Company Act.

ANALYSIS

Section 3(c)(7) of the Company Act excludes an issuer from the definition of investment company provided, in pertinent part, that the outstanding securities of the issuer are owned exclusively by persons who, at the time of acquisition of such securities, were “qualified purchasers.” As relevant here, the definition of qualified purchaser excludes trusts that were formed or operated for the specific purpose of acquiring the securities offered.⁵ The section excludes those trusts to address the possibility that a person would organize a ‘qualified purchaser entity’ for the purpose of investing in a particular section 3(c)(7) Fund when the investors in the entity did not meet the definition of qualified purchaser.⁶ The determination of whether a trust is formed or operated for the purpose of acquiring securities of a particular 3(c)(7) Fund depends on an analysis of all of the surrounding facts and circumstances.⁷ You contended during the June Telephone Call that the Trust will be formed and operated for the specific purpose of liquidating the 3(c)(7) Interests held by SCP for its partners, and not for the specific purpose of acquiring securities of a particular 3(c)(7) Fund. In support of your views you note that: (A) the activities of the Trust will be limited to liquidating, in an orderly fashion, the 3(c)(7) Interests that are transferred to it by SCP, and distributing the proceeds of the liquidation to the Trust’s beneficial owners (as well as activities designed to assure that liquidation and distribution); (B) the Trust will terminate upon the complete liquidation of the 3(c)(7) Interests; and (C) the sole beneficial owners of the Trust will be persons who were SCP’s partners at the time of SCP’s liquidation date (except as described herein), and each beneficial owner will have an interest in the Trust equal to his or her proportionate interest in SCP at the time of SCP’s liquidation date. You also contended in the June Telephone Call that the Trust will not allow SCP’s partners (who may not meet the definition of qualified purchaser) to acquire any additional 3(c)(7) Interests, but rather, will allow them to continue their indirect investments in the 3(c)(7) Interests (pending liquidation of those interests) that were acquired in accordance with section 2(a)(51)(A) of the Company Act.⁸ We agree. Based upon the facts and representations contained in your letter, we concur with your view that, for purposes of section 2(a)(51)(A)(iii) of the Company Act, the Trust will not be deemed to have been formed or operated for the specific purpose of acquiring securities of a 3(c)(7) Fund.⁹ Please note that our views are based upon the facts and representations contained in your letter dated June 6, 2006, and that any different facts or representations may require a different conclusion. Eric S. Purple Senior Counsel  

Endnotes

¹ As supplemented by the telephone conversation between Eric S. Purple of the staff and Lawrence D. Rovin of Klehr, Harrison, Harvey, Branzburg & Ellers LLP, counsel to SCP Private Equity Partners II, L.P., on June 6, 2006 (the “June Telephone Call”). ² You also represent that SCP is not disqualified by rule 2a51-3(a) under the Company Act from meeting the definition of qualified person contained in section 2(a)(51)(A)(iv). ³ You note that the issuers of the 3(c)(7) Interests would generally permit such transfers only if they would not cause the 3(c)(7) Fund to be required to register as an investment company under the Company Act. You note that absent such a limitation on transfers, a distribution of 3(c)(7) Interests by SCP to a person who is not a qualified purchaser at the time that the person acquires the interests could cause the 3(c)(7) Issuer to lose its ability to rely upon the exception from the definition of investment company contained in section 3(c)(7) of the Company Act. ⁴ Section 2(a)(51)(A)(iii) states that a trust generally will be a qualified purchaser if each settlor of the trust, and each trustee or other person authorized to make the decisions with respect to the trust, is a qualified purchaser as defined in sections 2(a)(51)(A)(i),(ii), or (iv), and provided that the trust was not formed for the purpose of acquiring the securities offered by a 3(c)(7) Fund. You represent that SCP (the settlor of the Trust) will be a qualified purchaser within the meaning of section 2(a)(51)(A)(iv), and that the trustee of the trust will be a qualified purchaser as defined in section 2(a)(51)(A)(i),(ii), or (iv) of the Company Act. ⁵ As relevant here, section 2(a)(51)(A)(iii) excludes a trust from the definition of qualified purchaser if it was “formed for the specific purpose of acquiring the securities” of a 3(c)(7) Fund. In American Bar Association Section of Business Law (pub. avail. April 22, 1999) (“1999 ABA Letter”), we indicated that a trust that is formed or operated for the specific purpose of acquiring the securities offered would not be viewed as a qualified purchaser. In taking that position, we interpreted section 2(a)(51)(A)(iii) in light of, and together with, section 48(a) of the Company Act, which generally prohibits a person from doing indirectly what that person is prohibited by the Company Act from doing directly. ⁶ See Privately Offered Investment Companies, SEC Rel. No. IC-22597 (April 3, 1997) (Adopting rule 2a51-3(a) under the Company Act which imposes “formed for the purpose requirements” parallel to those of section 2(a)(51)(A)(iii)). ⁷ See 1999 ABA Letter (stating that while the percentage of an entity’s assets invested in a 3(c)(7) Fund is “relevant, exceeding a specified percentage level, by itself, is not determinative.”) ⁸ You also contended during the June Telephone Call that the percentage of the Trust’s assets that may be invested in a particular 3(c)(7) Fund is not relevant to an analysis of whether the Trust is a qualified purchaser because, as explained above, the Trust is designed merely to facilitate the orderly liquidation of the assets that are held by SCP at the time of its termination. See supra note 7. ⁹ We take no position regarding whether the formation and operation of the Trust is consistent with, or appropriate under, the terms of SCP’s limited partnership agreement, which calls for the termination of SCP in June 2010.