81 FR 26279 - Terra Capital Partners, LLC, et al.; Notice of Application

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 84 (May 2, 2016)

[Federal Register Volume 81, Number 84 (Monday, May 2, 2016)]
[Notices]
[Pages 26279-26281]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-10109]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 32097; 812-14645]


Terra Capital Partners, LLC, et al.; Notice of Application

April 26, 2016.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application for an order under sections 57(a)(4) 
and 57(i) of the Investment Company Act of 1940 (the ``Act'') and rule 
17d-1 under the Act permitting certain joint transactions otherwise 
prohibited by section 57(a)(4) of the Act and rule 17d-1 under the Act.

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Summary of the Application: Terra Capital Partners, LLC (the 
``Sponsor''), Terra Income Fund 6, Inc. (the ``Company''), Terra Income 
Advisors, LLC (the ``Advisor''), on behalf of itself and its 
successors,\1\ and Terra Capital Markets, LLC (the ``Dealer Manager'' 
and collectively with the Sponsor, the Company, and the Advisor, the 
``Applicants''), on behalf of itself and its successors, request an 
order to permit the Applicants to complete certain transactions in 
connection with an amendment to the dealer-manager agreement entered 
into by and among the Company, the Advisor, and the Dealer Manager.
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    \1\ The term ``successor,'' as applied to each entity, means an 
entity that results from a reorganization into another jurisdiction 
or change in the type of business organization.

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Filing Date: The application was filed on April 25, 2016.

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 May 17, 2016, and should be accompanied by proof of service on 
the applicants, 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. Applicants, Bruce D. Batkin, 
Terra Income Fund 6, Inc., c/o Terra Capital Partners, LLC, 805 Third 
Avenue, 8th Floor, New York, New York 10022.

FOR FURTHER INFORMATION CONTACT: Kieran G. Brown, Senior Counsel, at 
(202) 551-6773, or James M. Curtis, Branch Chief, at (202) 551-6712 
(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.

Applicants' Representations

    1. The Sponsor is a Delaware limited liability company and served 
as the organizer and sponsor of the Company. The Sponsor is also the 
parent company of the Advisor and the Dealer Manager. Since its 
formation in February 2001, the Sponsor has organized or acted as 
investment manager for multiple private real estate investment funds 
(``REITs'').
    2. The Company, a Maryland corporation, is an externally managed, 
non-diversified, closed-end management investment company that has 
elected to be regulated as a business development company (``BDC'') 
under the Act.\2\ The Company's investment Objectives and Strategies 
\3\ are to pay attractive and stable cash distributions and to 
preserve, protect and return capital contributions to the holders 
(``Common Shareholders'') of the Company's common stock (``Common 
Shares''). On March 2, 2015, the Company filed a public registration 
statement on Form N-2 (the ``Registration Statement'') with the 
Commission to offer its Common Shares in a continuous public offering 
(the ``Offering''). The Registration Statement was declared effective 
on April 20, 2015. Since commencing the Offering and through April 14, 
2016, the Company has sold 2,444,185.856 Common Shares, including 
Common Shares purchased by the Sponsor in both an initial private 
placement and from the Offering. The Company currently has a five-
member board of directors (the ``Board'') of whom three are not 
``interested persons'' of the Company within the meaning of section 
2(a)(19) of the Act (the ``Non-interested Directors'').
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    \2\ The Company was incorporated in Maryland in 2013 and 
commenced operations on June 24, 2015, upon raising gross proceeds 
in excess of $2.0 million in its initial public offering. Section 
2(a)(48) 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.
    \3\ The ``Objectives and Strategies'' means the investment 
objectives and strategies, as described in the Registration 
Statement, other filings the Company has made with the Commission 
under the Securities Act of 1933, as amended or under the Securities 
Exchange Act of 1934, as amended (the ``1934 Act''), and the 
Company's reports to Common Shareholders.
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    3. The Advisor is a Delaware limited liability company that is 
registered as an investment adviser under the Investment Advisers Act 
of 1940. The Advisor serves as the investment adviser to the Company.
    4. The Dealer Manager is a Delaware limited liability company that 
serves as the dealer manager of the Company pursuant to a dealer 
manager agreement dated April 20, 2015 by and among the Company, the 
Advisor and the Dealer Manager (the ``Dealer Manager Agreement''). The 
Dealer Manager is duly registered as a broker-dealer pursuant to the 
provisions of the 1934 Act, a member in good standing with the 
Financial Industry Regulatory Authority, Inc. (``FINRA''), and a broker 
dealer duly registered as such in those states where the Dealer Manager 
is required to be registered in order to carry out the Offering.
    5. Currently, the Common Shares are sold at a public offering price 
of $12.50

[[Page 26280]]

per Common Share. This public offering price includes $1.25 in 
underwriting compensation (the ``Underwriting Compensation'') payable 
to the Dealer Manager. The Underwriting Compensation as set forth in 
the current prospectus contained in the Registration Statement (the 
``Prospectus'') consists of three components: A 6% selling commission, 
a 3% dealer manager fee, and a 1% broker-dealer fee (collectively, the 
``Upfront Sales Load''), all of which are paid to the Dealer Manager 
and a portion of which is re-allowed to the selling broker-dealers as 
set forth in the Prospectus. The Underwriting Compensation terms are 
currently governed by the Dealer Manager Agreement.
    6. The Board, including the Non-Interested Directors, has 
determined that it is in the best interests of the Common Shareholders 
to amend the Dealer Manager Agreement (the ``Dealer Manager Agreement 
Amendment'') solely to change the Underwriting Compensation terms to 
reduce the Upfront Sales Load and implement an asset-based, ongoing 
distribution fee (a ``Distribution Fee''). The proposed change would 
reduce the selling commissions and dealer manager fees from 6.0% and 
3.0% to 3.0% and 1.5%, respectively, of gross offering proceeds or an 
aggregate reduction in Upfront Sales Load of 4.5%. The proposed change 
also implements the Distribution Fee of 1.125% of gross offering 
proceeds, payable annually for four years, or 4.5%. The maximum 
Distribution Fee of 4.5% is therefore equal to the reduction in the 
Upfront Sales Load. All Common Shares will continue to have an offering 
price of $12.50 per Common Share after the proposed change.
    7. To ensure that, following the change in Underwriting 
Compensation, the net proceeds to the Company from the sale of all 
Common Shares will be equivalent, the Dealer Manager proposes to 
reimburse to the Company an amount equal to the Distribution Fee to be 
paid with respect to the Common Shares outstanding, or 4.5% of the 
gross proceeds from the Offering, before the implementation of the 
proposed Dealer Manager Agreement Amendment (the ``Distribution Fee 
Reimbursement''). Once this amount is returned to the Company, (1) all 
Common Shares will become subject to the same 5.5% Upfront Sales Load; 
(2) all holders of Common Shares will become subject to the same 
aggregate Distribution Fee of 4.5%; (3) the net proceeds to the Company 
from the sale of all Common Shares (whether issued before or after the 
implementation of the Dealer Manager Agreement Amendment) will be the 
same, $11.25 per Common Share; and (4) all Common Shares will be 
subject to the same 10% in Underwriting Compensation, consistent with 
the limitations imposed by Conduct Rule 2310 of FINRA (``Conduct Rule 
2310'').
    8. Applicants believe that, if the Dealer Manager Agreement 
Amendment is entered into, a greater amount of the existing and future 
Common Shareholders' capital will be available for investment at an 
earlier stage in the Company's investment cycle. This would permit the 
Company and all Common Shareholders to benefit from the income 
generated from such investments while the Distribution Fee Payment is 
deferred, enable the Company to achieve its investment objectives and 
acquire a diversified portfolio, and lead to greater demand for the 
Company's Common Shares, which would further benefit the Common 
Shareholders because of the lower operating expense ratio and Company 
portfolio diversification resulting from such increased sales of Common 
Shares.
    9. The Company believes that the Dealer Manager Agreement Amendment 
will enable the Common Shares to remain competitive with similar 
investments sold by broker-dealers. Because the per share estimated 
value of Common Shares that appears on customer account statements for 
Common Shares with a low Upfront Sales Load combined with a 
Distribution Fee is greater than the per share estimated value of 
Common Shares with a high Upfront Sales Load and no Distribution Fee, 
the Company believes that broker-dealers generally would prefer selling 
Common Shares with a with a low Upfront Sales Load and a Distribution 
Fee.\4\ To accommodate the needs of these broker-dealers, other 
investment products (e.g., non-traded REITs) offer common shares with a 
low Upfront Sales Load and a Distribution Fee, and the inability of the 
Company to offer Common Shares with a similar fee structure places the 
Company at a competitive disadvantage.
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    \4\ NASD Rule 2340 requires, among other things, broker-dealers 
to include on customer account statements a ``per share estimated 
value'' for shares of non-traded, continuously offered BDCs and 
certain similar investments. Amendments to NASD Rule 2340 effective 
April 11, 2016 require, among other things, broker-dealers to 
include on the customer account statements a ``per share estimated 
value,'' generally the current public offering price of the Common 
Shares minus sales charges and estimated organization and offering 
expenses. Prior to the amendment of Rule 2340, the general industry 
practice was to use the public offering price as the per share 
estimated value on customer account statements.
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    10. The Board, including the Non-Interested Directors, after 
reviewing and evaluating the proposed transactions and the Dealer 
Manager Agreement Amendment, determined that: (i) The Dealer Manager 
Agreement Amendment is in the best interests of the Company and its 
Common Shareholders; (ii) the services to be rendered by the Dealer 
Manager are required for the operation of the Company; (iii) the Dealer 
Manager can provide the services such that the nature and quality of 
the services are at least equal to those provided by others; and (iv) 
the fees charged are fair and reasonable in light of the usual and 
customary charges made by others for services of the same nature and 
quality.
    11. The Company has filed a Post-Effective Amendment to its 
registration statement disclosing the changes to the Underwriting 
Compensation terms and will seek a declaration of effectiveness of such 
Post-Effective Amendment by the Commission prior to commencing sales of 
the Common Shares subject to the revised Underwriting Compensation as 
implemented by the Dealer Manager Agreement Amendment. All current 
Common Shares outstanding immediately prior to the implementation of 
the Dealer Manager Agreement Amendment and Common Shares to be issued 
upon effectiveness of the Post-Effective Amendment (exclusive of Common 
Shares to be issued pursuant to the Company's distribution reinvestment 
plan, as further described in the Prospectus) will be subject to the 
same Distribution Fee.

Applicants' Legal Analysis

    1. Section 57(a) of the Act prohibits certain transactions between 
a BDC and persons related to the BDC absent an order from the 
Commission. Specifically, section 57(a)(4) makes it unlawful for any 
person who is related to a BDC in a manner described in section 57(b), 
acting as principal, knowingly to effect any transaction in which the 
BDC or a company controlled by such BDC is a joint or a joint and 
several participant with that person in contravention of rules and 
regulations as the Commission may prescribe for the purpose of limiting 
or preventing participation by the BDC or controlled company on a basis 
less advantageous than that of the other participant. Section 57(b) 
specifies the persons to whom the prohibitions of section 57(a)(4) 
apply. Under section 57(b)(2), these persons include any investment 
adviser or promoter of, general partner in, principal underwriter for, 
or person directly or indirectly either controlling, controlled by, or 
under common control with a BDC (except the BDC itself and

[[Page 26281]]

any person who, if it were not directly or indirectly controlled by the 
BDC, would not be directly or indirectly under the control of a person 
who controls the BDC), or any person who is, within the meaning of 
section 2(a)(3)(C) of the Act, an affiliated person of such person. 
Sections 2(a)(3)(C) defines an ``affiliated person'' of another person 
as any person directly or indirectly controlling, controlled by, or 
under common control with, such other person.
    2. Rule 17d-1 under the Act generally prohibits participation by a 
registered investment company and an affiliated person (as defined in 
section 2(a)(3) of the Act) or principal underwriter for that 
investment company, or an affiliated person of such affiliated person 
or principal underwriter, in any ``joint enterprise or other joint 
arrangement or profit-sharing plan,'' as defined in the rule, without 
prior approval by the Commission by order upon application. Although 
the Commission has not adopted any rules expressly under section 
57(a)(4), section 57(i) provides that the rules (but not section 17(d) 
itself) under section 17(d) applicable to registered closed-end 
investment companies (e.g., rule 17d-1) are, in the interim, deemed to 
apply to transactions subject to section 57(a).
    3. As the investment adviser and principal underwriter to the 
Company, the Advisor and the Dealer Manager, respectively, are subject 
to the prohibitions of section 57(a)(4) as a result of section 57(b)(2) 
of the Act. Moreover, the Sponsor may be deemed to control both the 
Advisor and the Dealer Manager and the Advisor may be deemed to control 
the Company within the meaning of section 2(a)(9) of the Act.\1\ 
Accordingly, the Company, the Advisor, the Dealer Manager and the 
Sponsor may be deemed to be affiliated persons of each other under 
section 2(a)(3)(C) of the Act because they are under common control of 
the Sponsor, and thus the Advisor, the Dealer Manager and the Sponsor 
would be persons described in section 57(b)(2) subject to the 
prohibitions of section 57(a)(4). The Distribution Fee Reimbursement 
and the Dealer-Manager Agreement Amendment (the ``Proposed 
Transactions'') might be deemed a ``joint enterprise or other joint 
arrangement,'' within the meaning of section 57(a)(4) of the Act and 
rule 17d-1 thereunder. Therefore, the Sponsor, the Advisor, the Dealer 
Manager, and the Company may be prohibited from engaging in the 
Proposed Transactions as a result of the prohibitions of section 
57(a)(4) and rule 17d-1, without a grant of the Order of the 
Commission.
    4. In passing upon applications under rule 17d-1, the Commission 
considers whether the company's participation in the joint transaction 
is consistent with the provisions, policies, and purposes of the Act 
and the extent to which such participation is on a basis different from 
or less advantageous than that of other participants.
    5. Applicants believe that the representations and conditions set 
forth in the application will ensure that the Proposed Transactions are 
consistent with the protection of the Company's Shareholders, including 
the Current Common Shareholders (as herein defined), and with the 
purposes intended by the policies and provisions of the Act. Applicants 
state that the Company's participation in the Proposed Transactions 
will be consistent with the provisions, policies, and purposes of the 
Act and on a basis that is not different from or less advantageous than 
that of other participants.

Applicants' Conditions

    Applicants agree that any order granting the requested relief will 
be subject to the following conditions:
    1. The Company will ensure that total Underwriting Compensation 
payable in the Offering will not exceed 10% of the gross proceeds of 
the Offering, consistent with Conduct Rule 2310.
    2. For the period of time in which the Distribution Fee is payable, 
the Dealer Manager will waive any annual Distribution Fee payment to 
which it is otherwise entitled in an amount sufficient to ensure that 
the total return experienced by the holders of the Company's Common 
Shares immediately prior to the implementation of the Dealer Manager 
Agreement Amendment (the ``Current Common Shareholders'') is not less 
than the total return the Current Common Shareholders would have 
experienced if the Proposed Transactions had not occurred and the 
Dealer Manager Agreement had not been amended.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-10109 Filed 4-29-16; 8:45 am]
 BILLING CODE 8011-01-P