Financial Poise
The 90-second lesson series investigates key financial terms

90 Second Lesson: What are BDCs? A Look at the Business Development Company Model

[Editor’s note: This article was originally written in March 2014. It was last updated in November 2017]

A Business Development Company, also known as a BDC, is an investment vehicle that invests in small- and medium-sized businesses. BDCs are similar to venture capital and private equity because they provide investors with a way to invest in small companies. Unlike VC and PE funds, however, a investments in a Business Development Company are open to non-accredited investors; shares are bought and sold on the open market (many are NASDAQ-traded).

BDCs were created in 1980 by an act of Congress to help small businesses raise capital. Capital formation for small businesses, however, is still an issue. In fact, according to a 2014 Pepperdine University survey, small businesses still raise external financing with significant help, even though BDCs have provided over $70 billion to small businesses since their inception. (This is one of the reasons the JOBS Act was signed into law).

You may also like, “The JOBS Act of 2012

Investment capital raised by a Business Development Company remains under heavy scrutiny by the SEC although there have been some recent attempts to reform regulations and laws pertaining to BDCs.

A Business Development Company is Often Popular with the Populace

Nonetheless, investors like the BDC vehicle because:

  1. They have the liquidity of other publicly traded investments.
  2. Investors are not obligated to meet any income, net worth or other criteria that private equity investments require.
  3. The use of leverage and other types of transactions make BDC funds more flexible with investments.
  4. They feature a diversity of investment types (as required by law).
  5. BDCs pay their managers in performance-based fees, cash or through a profit-sharing plan, rather than with a percentage of returns.
  6. Governance and oversight includes a strictly held code of ethics.

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By law, 70% of the investments a Business Development Company makes must be in:

  • Privately issued securities
  • Securities of other BDC companies
  • Distressed debt
  • Government securities
  • Cash or cash items
  • Rapidly maturing debt securities
  • Interests in real estate or business assets

BDC’s also have favorable tax advantages which add to their appeal. In short, BDCs are an important vehicle to fund small and medium-sized businesses while also allowing the non-accredited investor to participate in the investment.

To read more about BDC’s, Financial Poise recommends this excellent piece by By Ze’-ev D. Eiger and Anna T. Pinedo, of Morrison & Foerster LLP.

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About Jonathan Friedland

Jonathan Friedland is a senior partner in Sugar Felsenthal Grais & Helsinger LLP’s Chicago office. He is ranked AV® Preeminent™ by, has been repeatedly recognized as a “SuperLawyer”, by Leading Lawyers Magazine, is rated 10/10 by AVVO, and has received numerous other accolades. He has been profiled, interviewed, and/or quoted in publications such as Buyouts…

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