81 FR 23068 - Newtek Business Services Corp.; Notice of Application

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 75 (April 19, 2016)

[Federal Register Volume 81, Number 75 (Tuesday, April 19, 2016)]
[Notices]
[Pages 23068-23071]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-08934]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 32070; 812-14450]


Newtek Business Services Corp.; Notice of Application

April 13, 2016.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: 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.

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Summary of the Application: Newtek Business Services Corp. 
(``Applicant'' or ``Company'') requests an order that would permit 
Applicant to (a) issue restricted shares of its common stock 
(``Restricted Stock'') as part of the compensation package for certain 
participants in its 2015 Stock Incentive Plan (the ``Plan''), (b) 
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 Stock or the exercise 
of options to purchase shares of Applicant's common stock 
(``Options''), and (c) permit participants to pay the exercise price of 
Options with shares of Applicant's common stock.

Filing Dates: The application was filed on April 28, 2015, and amended 
on October 28, 2015 and February 9, 2016.

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 writing to the Commission's 
Secretary 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 May 9, 2016, 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 writing to the 
Commission's Secretary.

ADDRESSES: Secretary, U.S. Securities and Exchange Commission, 100 F 
Street NE., Washington, DC 20549-1090. Applicant, 212 West 35th Street, 
2nd Floor, New York, New York 10001.

FOR FURTHER INFORMATION CONTACT: Jill Ehrlich, Senior Counsel, at (202) 
551-6819, or Mary Kay Frech, Branch Chief, at (202) 551-6821 (Chief 
Counsel's Office, Division of Investment Management).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained via the 
Commission's Web site by searching for the file number, or for an 
applicant using the Company name box, at http://www.sec.gov/search/search.htm or by calling (202) 551-8090.

Applicant's Representations: 1. Applicant is an internally managed 
closed-end investment company that has elected to be regulated as a 
business development company (``BDC'') under the Act.\1\ Applicant 
represents that it is

[[Page 23069]]

a leading capital provider to small- and medium-sized businesses 
(``SMBs''). Applicant originates loans through a variety of sourcing 
channels and, through a rigorous underwriting process, seeks to achieve 
attractive risk-weighted returns. In addition, Applicant and its 
controlled portfolio companies provide comprehensive lending, payment 
processing, managed technology, personal and commercial insurance and 
payroll solutions to over 100,000 SMB accounts, across all industries. 
Shares of Applicant's common stock are traded on the Nasdaq Global 
Market under the symbol ``NEWT.'' As of December 31, 2015, there were 
14,503,927 shares of Applicant's common stock outstanding. As of that 
date, Applicant had 146 employees.
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    \1\ Applicant was incorporated under the laws of the state of 
New York in June 1999 as Whitestone Holdings, Inc., completed an 
initial public offering in September 2000, and changed its name to 
Newtek Business Services, Inc. in November 2002. In November 2014, 
Newtek Business Services, Inc. merged with and into Newtek Business 
Services Corp. (the ``Reincorporation Transaction'') for the purpose 
of reincorporating in the state of Maryland. Upon completion of the 
Reincorporation Transaction, Applicant elected to be regulated as a 
BDC. Section 2(a)(48) of the Act defines a BDC to be any closed-end 
investment company that operates for the purpose of making 
investments in securities described in sections 55(a)(1) through 
55(a)(3) of the Act and makes available significant managerial 
assistance with respect to the issuers of such securities.
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    2. Applicant currently has a five-member board of directors (the 
``Board'') of whom three are not ``interested persons'' of Applicant 
within the meaning of section 2(a)(19) of the Act, and two are 
considered ``interested persons'' of Applicant.
    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 and non-employee 
directors (``Non-Employee Directors''), which both aligns employee and 
Board behavior with stockholder interests and provides a retention 
tool, is vital to Applicant's future growth and success.
    4. Effective October 22, 2014, Applicant adopted the Newtek 
Business Services Corp. 2014 Stock Incentive Plan (the ``2014 Plan''), 
which provides for the grant of Options. As of February 8, 2016, there 
were no Options outstanding. Applicant proposes to amend and restate 
the 2014 Plan by adopting the Plan, which will supersede the 2014 Plan, 
subject to the issuance of the requested order and stockholder 
approval. The Plan authorizes the issuance of Options and Restricted 
Stock to the Company's directors, including Non-Employee Directors, 
officers and other employees (``Participants'').\2\
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    \2\ Options will not be granted to Non-Employee Directors.
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    5. The Plan will authorize the issuance of Options and Restricted 
Stock subject to certain forfeiture restrictions. The restrictions may 
relate to continued employment or service on the Board, the performance 
of the Applicant pursuant to performance goals as set forth in the 
Plan, or other restrictions deemed by the Required Majority,\3\ the 
Compensation, Corporate Governance, and Nominating Committee \4\ or the 
Board from time to time to be appropriate and in the best interests of 
Applicant and its stockholders. Unless otherwise determined by the 
Board, a Participant granted Restricted Stock will have all of the 
rights of a stockholder including, without limitation, the right to 
vote Restricted Stock and the right to receive dividends, including 
deemed dividends, thereon, although such rights may be deferred during 
the restricted period applicable to these awards. Restricted Stock may 
not be transferred, pledged, hypothecated, margined, or otherwise 
encumbered by the Participant during the restricted period, except for 
disposition by will or intestacy. Except as otherwise determined by the 
Board under the Plan, upon termination of a Participant's employment or 
director relationship with the Company during the applicable 
restriction period, the Participant's Restricted Stock and any accrued 
and unpaid dividends that are then subject to restrictions shall 
generally be forfeited.\5\
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    \3\ 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.
    \4\ The ``Compensation, Corporate Governance, and Nominating 
Committee'' is composed of ``non-employee directors'' within the 
meaning of rule 16b-3, and ``outside directors'' within the meaning 
of section 162(m) of the Internal Revenue Code of 1986, as amended.
    \5\ If any shares subject to an award granted under the Plan are 
forfeited, cancelled, exchanged or surrendered or if an award 
terminates or expires without an issuance of shares, those shares 
will again be available for awards under the Plan.
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    6. A maximum of twenty percent (20%) of Applicant's total shares of 
common stock issued and outstanding (as of the Effective Date) \6\ will 
be available for awards under the Plan. Under the Plan, no more than 
fifty percent (50%) of the shares of stock reserved for the grant of 
awards under the Plan may be Restricted Stock awards at any time during 
the term of the Plan. The maximum amount of Restricted Stock that may 
be outstanding at any particular time will be ten percent of the 
Applicant's voting securities.\7\ Under the Plan, the aggregate number 
of shares of common stock deliverable pursuant to awards will not 
exceed 3,000,000.\8\
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    \6\ Effective Date is defined in section 2(p) of the Plan as the 
date on which the Plan is approved by Applicant's stockholders.
    \7\ For purposes of calculating compliance with this limit, the 
Company will count as Restricted Stock all shares of its common 
stock that are issued under the Plan less any shares that are 
forfeited back to the Company and cancelled as a result of 
forfeiture restrictions not lapsing.
    \8\ If the Company does not receive the order to issue 
Restricted Stock, all shares granted under the Plan may be subject 
to Options. All Option awards will be issued to employees in 
accordance with the statutory provisions set forth in section 61 and 
will not be granted to Non-Employee Directors.
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    7. The Plan will be administered by the Compensation, Corporate 
Governance, and Nominating Committee with respect to Participants 
employed by Applicant and by the Board with respect to Non-Employee 
Directors, and the Board will have the responsibility to ensure that 
the Plan is operated in a manner that best serves the interests of 
Applicant and its stockholders. Restricted Stock will be awarded to 
certain employees, officers and directors, including Non-Employee 
Directors, from time to time as part of the employees', officers' or 
directors' compensation based on their actual or expected performance 
and value to the Company. All awards of Restricted Stock to employees 
and Non-Employee Directors will be approved by the Required Majority. 
Awards of Restricted Stock to Non-Employee Directors will be made on 
the schedule described below.
    8. Under the Plan, Non-Employee Directors will each receive a grant 
of up to 2,000 shares of Restricted Stock at the beginning of each one-
year term of service on the Board, for which forfeiture restrictions 
will lapse as to one-third of such shares each year for three years. 
Each grant of Restricted Stock to Non-Employee Directors will be made 
pursuant to this schedule and will not be changed without Commission 
approval.
    9. The Plan provides that the Company is authorized to withhold 
stock (in whole or in part) from any award of Restricted Stock granted 
in satisfaction of a Participant's tax obligations. In addition, as 
discussed more fully in the application, the exercise of Options will 
result in the recipient being deemed to have received compensation in 
the amount by which the fair market value of the shares of the 
Company's common stock, determined as of the date of exercise, exceeds 
the

[[Page 23070]]

exercise price. Accordingly, Applicant requests relief to withhold 
shares of its common stock or purchase shares of its common stock from 
Participants to satisfy tax withholding obligations related to the 
exercise of Options granted under the 2014 Plan or the vesting of 
Restricted Stock or exercise of Options that will be granted pursuant 
to the Plan. Applicant also requests an exemption to permit 
Participants to pay the exercise price of Options that were granted 
under the 2014 Plan or will be granted to them pursuant to the Plan 
with shares of the Company's common stock.
    10. The Plan was approved on April 27, 2015 by the Compensation, 
Corporate Governance and Nominating Committee and the Board, including 
the Required Majority. The 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 requested order.

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 Stock as a part of the 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 Stock that would be granted 
under the Plan would not meet the terms of section 63(2), sections 
23(b) and 63 would prevent the issuance of Restricted Stock.
    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 Plan would not violate 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 Plan does not raise concerns about preferential 
treatment of Applicant's insiders because the Plan is a bona fide 
compensation plan of the type that is common among corporations 
generally. In addition, section 61(a)(3)(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, for reasons that are unclear, 
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 Stock 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 Stock would 
not become a means for insiders to obtain control of Applicant because 
the maximum amount of Restricted Stock that may be issued under the 
Plan at any one time will be ten percent of the outstanding shares of 
common stock of Applicant. Moreover, no single Participant will be 
granted more than 25% of the shares of stock reserved for issuance 
under the Plan.
    5. Applicant further states that the Plan 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 Plan will be 
submitted for approval to the Company's stockholders. Applicant 
represents that the proxy materials submitted to Applicant's 
stockholders will contain a concise ``plain English'' description of 
the 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 Exchange Act of 1934. Applicant 
further notes that the 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.\9\ 
Applicant thus concludes that the Plan will be adequately disclosed to 
investors and appropriately reflected in the market value of 
Applicant's shares.
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    \9\ 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).
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    6. Applicant acknowledges that awards granted under the 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 Plan to Applicant and its stockholders. 
Moreover, based on the manner in which the issuance of Restricted Stock 
pursuant to the Plan will be administered, the Restricted Stock 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)(3) 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 other venture capital firms 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 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 17d-1, 
made applicable to BDCs by section 57(i), proscribes participation in a 
``joint enterprise or other joint arrangement or

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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 shares of Restricted Stock 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 Stock under the Plan. Applicant acknowledges that its 
role is necessarily different from the other participants because the 
other participants are its directors and employees. It notes, however, 
that the Plan is in the interest of the Company's stockholders, because 
the 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)(3)(B) of the Act. Applicant submits that the issuance of 
Restricted Stock pursuant to the 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 shares of Restricted Stock 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 Global Market (or any primary 
exchange on which its shares of common stock may be traded in the 
future) on the relevant date (i.e., the public market price on the date 
of grant of Restricted Stock and the date of grant of Options). 
Applicant submits that because all transactions with respect to the 
Plan will take place at the public market price for the Company'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 
Plan do not raise concerns about preferential treatment of Applicant's 
insiders because the 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 Stock 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 Plan, which will be 
approved by the Company'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 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 Plan will be authorized by Applicant's stockholders.
    2. Each issuance of Restricted Stock to an officer, employee, or 
Non-Employee Director 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 Stock issued and outstanding 
pursuant to the Plan, will not at the time of issuance of any warrant, 
option, right or share of Restricted Stock under the Plan, exceed 20 
percent of Applicant's outstanding voting securities.
    4. The amount of Restricted Stock issued and outstanding will not 
at the time of issuance of any shares of Restricted Stock exceed ten 
percent of Applicant's outstanding voting securities.
    5. The Board will review the Plan at least annually. In addition, 
the Board will review periodically the potential impact that the 
issuance of Restricted Stock under the 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 Stock under the 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 
Stock under the Plan will be in the best interest of Applicant and its 
stockholders. This authority will include the authority to prevent or 
limit the granting of additional Restricted Stock under the 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, 
under delegated authority.
Brent J. Fields,
Secretary.
[FR Doc. 2016-08934 Filed 4-18-16; 8:45 am]
BILLING CODE 8011-01-P