Man in business suit walking

The History of BDCs: Part 1

Business development companies (BDCs) are publicly registered investment companies that finance small and mid-sized businesses. The purpose of the BDC, like any investment company, is to invest its shareholders’ money in order to turn generate income and turn a profit. But while venture capital and private equity funds are open to only a few wealthy investors, BDCs allow anyone to purchase a share on the open market. The result is a structure where many individuals are able to pool their money together in order to invest in private American companies.

Where did investment companies come from?

By the 1930s, the United States Congress needed to pass some bills in order to respond to the stock market crash of 1929. It passed the Securities Act of 1933 and the Security Exchange Act of 1934 to regulate the securities industry and then passed the Investment Company Act of 1940 to provide some much needed regulation to investment companies.

Investment companies were still fairly new by the time the 1940 act was passed. The act required these companies to disclose financial information, thereby protecting the public interest from these new investment opportunities while instilling confidence in investors. The 1940 act was critical to the massive burst in popularity and growth that followed.

The dawn of the BDC
As part of its regulatory structure, the 1940 act limited the number of people that could mutually own funds in private equity and venture capital firms. By the 1970s, these companies convinced Congress that this limitation was drying up the amount of money going to small, growing businesses.

As a result, Congress passed the Small Business Investment Incentive Act of 1980, an act which amended the Investment Company Act of 1940. The idea was to increase the amount of public money that would be invested in small, growing businesses. The 1980 act did just that — it lessened some of the restrictions of the 1940 act by adding a new category of investment company called the BDC. These BDCs, unlike private equity and venture capital firms, would allow anyone to purchase a share on the open market.

Stay tuned to learn about the recent growth spurt in BDCs and how they have changed the investing industry.