PROPOSAL 2
TO AUTHORIZE US, WITH THE SUBSEQUENT APPROVAL OF OUR BOARD OF DIRECTORS, TO ISSUE AND
SELL SHARES OF OUR COMMON STOCK (DURING THE 12 MONTHS FOLLOWING SUCH AUTHORIZATION)
AT A PRICE BELOW ITS THEN CURRENT NET ASSET VALUE PER SHARE, PROVIDED THAT THE
NUMBER OF SHARES ISSUED AND SOLD PURSUANT TO SUCH AUTHORITY DOES NOT
EXCEED 25% OF OUR THEN OUTSTANDING COMMON STOCK
IMMEDIATELY PRIOR TO EACH SUCH SALE
Stockholder Authorization
The 1940 Act
generally prohibits us, as a BDC, from issuing and selling shares of our common stock at a price below the then current NAV per share, with certain exceptions. One such exception would permit us to issue and sell shares of our common stock at a
price below NAV per share at the time of sale if our stockholders approve a sale below NAV per share within the one year period immediately prior to any such sale, provided that our Board makes certain determinations prior to any such sale.
Accordingly, we are seeking the approval of our stockholders so that we may, in one or more public or private offerings, issue and sell shares
of our common stock at a price below our then current NAV per share. The maximum number of shares that we could issue and sell at a per share price below NAV per share pursuant to this authority would be limited to 25% of our then outstanding common
stock immediately prior to each such sale. If approved, the authorization would be effective for a period expiring on the first anniversary of the date of the stockholders approval of this proposal and would permit us to engage in such
transactions at various times within that period, subject to further approval from our Board.
Generally, common stock offerings are
priced based on the market prices of the outstanding shares of common stock. Because over the last three years our common stock has frequently, and at times significantly, traded at a market price below NAV per share, stockholder approval would
permit us to issue and sell shares of our common stock in accordance with pricing standards that market conditions generally require, and would also assure stockholders that the number of shares issued and sold pursuant to such authority does not
exceed 25% of our then outstanding common stock immediately prior to each such sale. If stockholders approve this proposal, we should have greater flexibility in taking advantage of changing market and financial conditions in connection with an
equity offering. Since we became publicly traded in 2005, we have conducted three underwritten public offerings at a price below the then current NAV per common share, one in each of October 2012, March 2015 and May 2017. The net dilutive effect
(after discounts, commissions, and offering costs borne by us) of our issuance of common stock in October 2012 was $0.39 (or 4.3%) per share. The net dilutive effect (after discounts, commissions, and offering costs borne by us) of our issuance
of common stock in March 2015 was $0.29 (or 3.4%) per share. The net dilutive effect (after discounts, commissions, and offering costs borne by us) of our issuance of common stock in May 2017 was $0.07 (or 0.7%) per share.
Furthermore, we sold shares of our common stock under our
at-the-market (ATM) program in March and April of 2018 below our then current estimated NAV per share. The net dilutive effect (after discounts,
commissions, and offering costs borne by us) of our issuance of common stock under the ATM program was $0.00 (or 0.0%) per share as a result of the small number of shares sold at a slight discount to NAV per share and resulting rounding.
Reasons to Offer Common Stock Below Net Asset Value
We believe that current market conditions will provide opportunities to invest new capital at potentially attractive returns. U.S. credit
markets, including many lending institutions, experienced significant difficulties resulting from the fiscal crisis and lingering economic conditions from periods of contraction or recession and such difficulties returned in connection with the COVID-19 pandemic. These conditions contribute to significant stock price volatility for capital providers such as us and make access to capital more challenging for many smaller businesses. However, these changes
in the credit market conditions also have beneficial effects for capital providers like us because small business are selling for lower prices, are generally willing to pay higher interest rates (particularly in times of sparse liquidity) and to
accept more contractual terms that are more favorable to us in their investment agreements. Accordingly, for firms that continue to have access to capital, we believe that the current environment should provide investment opportunities on favorable
terms. Our ability to take advantage of these opportunities is dependent upon our access to equity capital.
As a BDC and a regulated
investment company (RIC) for tax purposes, we are dependent on our ability to raise capital through the issuance of common stock. RICs generally must distribute substantially all of their earnings to stockholders as dividends in order to
achieve pass-through tax treatment, which prevents us from using those earnings to support new investments. We maintain
19