What changed in this filing

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Item 1. Business

2021-05-26 compared with 2020-06-02 · 127 added, 61 removed, 479 unchanged (28% of the section changed)

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On that date, we elected to be treated as a BDC under the 1940 Act.

On September 30, 2015, we completed the spin-off, which we refer to as the Share Distribution, of CSW Industrials, Inc., or CSWI.

CSWI is now an independent publicly traded company.

The Share Distribution was effected through a tax-free, pro-rata distribution of 100% of CSWI’s common stock to our shareholders.

Each of our shareholders received one share of CSWI common stock for every one share of our common stock on the record date, September 18, 2015.

Cash was paid in lieu of any fractional shares of CSWI common stock.

Following the Share Distribution, we have maintained operations as an internally managed BDC and pursued a credit-focused investing strategy akin to similarly structured organizations.

We intend to continue to provide capital to middle-market companies.

We invest primarily in debt securities, including senior debt, second lien and subordinated debt, and also invest in preferred stock and common stock alongside our debt investments or through warrants.

As a BDC, we are required to comply with certain regulatory requirements.

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In addition, effective April 25, 2019, we are allowed to borrow money such that our asset coverage, as defined in the 1940 Act, equals at least 150% after such borrowing.

Additionally, the Board of Directors approved a resolution which limits the Company's issuance of senior securities such that the asset coverage ratio, taking into account any such issuance, would not be less than 166%, at any time after the effective date.

Additionally, the Board of Directors approved a resolution that limits the Company's issuance of senior securities such that the asset coverage ratio, taking into account any such issuance, would not be less than 166%, at any time after the effective date.

We have elected, and intend to qualify annually, to be treated for U.S.

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As such, we generally will not have to pay corporate-level U.S.

federal income tax on any ordinary income or capital gains that we distribute to our shareholders as dividends.

federal income tax on any ordinary income or capital gains that we timely distribute to our shareholders as dividends.

To continue to maintain our RIC tax treatment, we must meet specified source-of-income and asset diversification requirements and distribute annually at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any.

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Any such carryover taxable income must be distributed through a dividend declared prior to filing the final tax return related to the year that generated such taxable income.

Capital Southwest Management Corporation, or CSMC, our wholly-owned subsidiary, is our management company.

CSMC generally incurs all normal operating and administrative expenses, including, but not limited to, salaries and related benefits, rent, equipment and other administrative costs required for day-to-day operations.

Capital Southwest Management Corporation (“CSMC”), a wholly-owned subsidiary of CSWC, was the management company for CSWC.

Effective December 31, 2020, CSMC merged with and into CSWC, with CSWC continuing as the surviving entity in the merger.

Prior to December 31, 2020, CSMC generally incurred all normal operating and administrative expenses, including, but not limited to, salaries and related benefits, rent, equipment and other administrative costs required for its day-to-day operations (the “Administrative Expenses”).

After December 31, 2020, the Administrative Expenses will be directly incurred by CSWC.

The Company continues to be internally managed and the merger has no material impact on the day-to-day operations of the business.

We also have a direct wholly-owned subsidiary that has elected to be a taxable entity (the “Taxable Subsidiary”).

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The Taxable Subsidiary is taxed at normal corporate tax rates based on its taxable income.

On September 30, 2015, we completed the spin-off, which we refer to as the Share Distribution, of CSW Industrials, Inc., or CSWI.

CSWI is now an independent publicly traded company.

The Share Distribution was effected through a tax-free, pro-rata distribution of 100% of CSWI’s common stock to our shareholders.

Each of our shareholders received one share of CSWI common stock for every one share of our common stock on the record date, September 18, 2015.

Cash was paid in lieu of any fractional shares of CSWI common stock.

Following the Share Distribution, we have maintained operations as an internally managed BDC and pursued a credit-focused investing strategy akin to similarly structured organizations.

We intend to continue to provide capital to middle-market companies.

The following diagram depicts our organizational structure:

As of March 31, 2020 , we had twenty-two employees, each of whom was employed by our management company, CSMC.

These employees include our corporate officers, investment and portfolio management professionals and administrative staff.

All of our employees are located in our principal executive offices in Dallas, Texas.

On April 20, 2021, our wholly owned subsidiary, Capital Southwest SBIC I, LP (“SBIC I”) received a license from the U.S.

Small Business Administration (the “SBA”) to operate as an SBIC under Section 301(c) of the Small Business Investment Act of 1958, as amended.

SBIC I will have an investment strategy substantially similar to ours and make similar types of investments in accordance with SBA regulations.

SBIC I and its general partner will be consolidated for U.S.

GAAP reporting purposes, and the portfolio investments held by it will be included in the consolidated financial statements.

See “Regulation as a Small Business Investment Company” below for more information about the regulations applicable to SBIC I.

Corporate Information

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We focus on investing in companies with histories of generating revenues and positive cash flow, established market positions and proven management teams with strong operating discipline.

We primarily target senior debt and equity investments in LMM companies, as well as first and second lien syndicated loans in UMM companies.

Our target LMM companies typically have annual earnings before interest, taxes, depreciation and amortization, or EBITDA, between $3.0 million and $15.0 million, and our LMM investments generally range in size from $5.0 million to $25.0 million.

Our UMM investments generally include syndicated first and second lien loans in companies with EBITDA generally greater than $50.0 million, and our UMM investments typically range in size from $5.0 million to $15.0 million.

We primarily target senior debt and equity investments in LMM companies, as well as first and second lien loans in UMM companies.

Our target LMM companies typically have annual earnings before interest, taxes, depreciation and amortization, or EBITDA, generally between $3.0 million and $20.0 million, and our LMM investments generally range in size from $5.0 million to $25.0 million.

Our UMM investments generally include first and second lien loans in companies with EBITDA generally greater than $20.0 million, and our UMM investments typically range in size from $5.0 million to $15.0 million.

We seek to fill the financing gap for LMM companies, which historically have had more limited access to financing from commercial banks and other traditional sources.

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We offer managerial assistance to our portfolio companies and provide them access to our investment experience, direct industry expertise and contacts.

Our obligation to offer to make available significant managerial assistance to our portfolio companies is consistent with our belief that providing managerial assistance to a portfolio company is important to its business development activities.

Our obligation to offer to make available significant managerial assistance to our

portfolio companies is consistent with our belief that providing managerial assistance to a portfolio company is important to its business development activities.

Because we are internally managed, we do not pay any external investment advisory fees, but instead directly incur the operating costs associated with employing investment and portfolio management professionals.

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The payment date for the dividend is June 30, 2021.

On May 28, 2020, the Board of Directors declared a total dividend of $0.51 per share, comprised of a regular dividend of $0.41 and a supplemental dividend of $0.10, for the quarter ended September 30, 2020 .

The record date for the dividend is September 15, 2020 .

The payment date for the dividend is September 30, 2020 .

Our Business Strategy

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After investing in a company, we monitor the investment closely, typically receiving monthly, quarterly and annual financial statements.

Senior management, together with the deal team and accounting and finance departments, meets at least monthly to analyze and discuss in detail the company’s financial performance and industry trends.

Senior management, together with the deal team and accounting and finance departments, generally meets at least monthly to analyze and discuss in detail the company’s financial performance and industry trends.

We believe that our initial and ongoing portfolio review process allows us to monitor effectively the performance and prospects of our portfolio companies.

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We have an investment committee that is responsible for all aspects of our investment process relating to investments made by us.

The current members of the investment committee are Bowen Diehl, Chief Executive Officer, Michael Sarner, Chief

Financial Officer, Douglas Kelley, Managing Director, Josh Weinstein, Managing Director, and William Thomas, member of the Board of Directors.

The current members of the investment committee are Bowen Diehl, Chief Executive Officer, Michael Sarner, Chief Financial Officer, Josh Weinstein, Senior Managing Director, and William Thomas, member of the Board of Directors.

Investment Process

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Deal generation and origination is maximized through long-standing and extensive relationships with private equity firms, leveraged loan syndication desks, brokers, commercial and investment bankers, entrepreneurs, service providers such as lawyers and accountants, and current and former portfolio companies and investors.

• Screening :

Once it is determined that a potential investment has met our investment criteria, we will screen the investment by performing preliminary due diligence, which could include discussions with the private equity firm, management team, loan syndication desk, etc.

Upon successful screening of the proposed investment, the investment team makes a recommendation to move forward and prepares an initial screening memo for our investment committee.

Upon successful screening of the proposed investment, the investment team makes a recommendation to move forward and prepares an initial screening memo for our investment

We then issue either a non-binding term sheet (in the case of a directly originated transaction), or submit an order to the loan syndication desk (in the case of a large-market syndicated loan transaction).

• Term Sheet :

In a directly originated transaction, the non-binding term sheet will typically include the key economic terms of our investment proposal, along with exclusivity, confidentiality, and expense reimbursement provisions, among other terms relevant to the particular investment.

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As part of the monitoring process, members of our investment team will analyze monthly, quarterly and annual financial statements against previous periods, review financial projections, meet with the financial sponsor and management (when necessary), attend board meetings (when appropriate) and review all compliance certificates and covenants.

Our investment team meets once each month with senior management to review the performance of each of our portfolio companies.

Our investment team generally meets once each month with senior management to review the performance of our portfolio companies.

We utilize an internally developed investment rating system to rate the performance and monitor the expected level of returns for each debt investment in our portfolio.

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The investment is performing materially above underwriting expectations and the trends and risk factors are generally favorable.

The investment generally has a higher probability of being prepaid in part or in full.

• Investment Rating 2 indicates the investment is performing as expected at the time of underwriting and the trends and risk factors are generally favorable to neutral.

• Investment Rating 3 involves an investment performing below underwriting expectations and the trends and risk factors are generally neutral to negative.

The portfolio company or investment may be out of compliance with financial covenants and interest payments may be impaired, however principal payments are generally not past due.

The investment may be out of compliance with financial covenants and interest payments may be impaired, however principal payments are generally not past due.

• Investment Rating 4 indicates that the investment is performing materially below underwriting expectations, the trends and risk factors are generally negative and the risk of the investment has increased substantially.

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Determinations in Connection with our Offerings

The 1940 Act prohibits us from selling shares of our common stock at a price below the current NAV per share of such stock, with certain exceptions.

One such exception is prior shareholder approval of issuances below current NAV per share provided that our Board of Directors determines that such sale is in the best interests of the Company and its shareholders.

We do not intend to seek shareholder authorization to sell shares of our common stock below the then current NAV per share of our common stock at our 2021 annual meeting of shareholders.

However, in the event we change our position, we will seek requisite approval of our shareholders.

In connection with each offering of shares of our common stock, our Board of Directors or an authorized committee thereof is required by the 1940 Act to make the determination of whether we are selling shares of our common stock at a price below our then current NAV at the time at which the sale is made.

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• our management’s assessment of whether any material change in the NAV has occurred (including through the realization of net gains on the sale of our investments) from the period beginning on the date of the most recently disclosed NAV per share of our common stock and ending as of a time within 48 hours (excluding Sundays and holidays) of the sale of our common stock;

the magnitude of the difference between (i) a value that our Board of Directors or an authorized committee thereof has determined reflects the current (as of a time within 48 hours, excluding Sundays and holidays) NAV of our common stock, which is based upon the NAV disclosed in the most recent periodic report we filed with the SEC, as adjusted to

reflect our management’s assessment of any material change in the NAV since the date of the most recently disclosed NAV, and (ii) the offering price of the shares of our common stock in the proposed offering.

Moreover, to the extent that there is even a remote possibility that we may (i) issue shares of our common stock at a price below the then current NAV of our common stock at the time at which the sale is made or (ii) trigger the undertaking (which we provided to the SEC) to suspend the offering of shares of our common stock if the NAV fluctuates by certain amounts in certain circumstances, our Board of Directors or an authorized committee thereof will elect, in the case of clause (i) above, either to postpone the offering until such time that there is no longer the possibility of the occurrence of such event or to undertake to determine NAV within two days prior to any such sale to ensure that such sale will not be below our then current NAV, and, in the case of clause (ii) above, to comply with such undertaking or to undertake to determine NAV to ensure that such undertaking has not been triggered.

• the magnitude of the difference between (i) a value that our Board of Directors or an authorized committee thereof has determined reflects the current (as of a time within 48 hours, excluding Sundays and holidays) NAV of our common stock, which is based upon the NAV disclosed in the most recent periodic report we filed with the SEC, as adjusted to reflect our management’s assessment of any material change in the NAV since the date of the most recently disclosed NAV, and (ii) the offering price of the shares of our common stock in the proposed offering.

current NAV, and, in the case of clause (ii) above, to comply with such undertaking or to undertake to determine NAV to ensure that such undertaking has not been triggered.

These processes and procedures are part of our compliance policies and procedures.

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In addition, because of this competition, we may be unable to take advantage of attractive investment opportunities and may be unable to identify and make investments that satisfy our investment objectives or meet our investment goals.

HUMAN CAPITAL

As of March 31, 2021, we had twenty-one employees.

These employees include our corporate officers, investment and portfolio management professionals and administrative staff.

All of our employees are located in our principal executive offices in Dallas, Texas.

Our employees are vital to our success as an internally managed BDC.

The long-term success of our business and the success of our investment strategy depends on our people.

We strive to attract, develop and retain our employees by offering advancement and promotion opportunities, attractive compensation and benefit packages and a close-knit culture.

The departure of our key investment and operations personnel could cause our operating results to suffer.

We strive to recruit talented and driven individuals who share our values.

Our recruiting efforts utilize strong relationships with a variety of sources from which we recruit.

We routinely promote from within, promoting current employees who have shown the technical ability, attitude, interest and the initiative to take on greater responsibility.

In addition to our normal prioritization of the health and safety of our employees, since March 2020, to address the specific safety and health matters of our workforce in response to the COVID-19 pandemic, we implemented the following, among other steps:

• Temporarily closing our offices and establishing new safety protocols and procedures;

• Maintaining regular communication with our employees regarding the impacts of the COVID-19 pandemic on our team members and operations;

• Developing and distributing return-to-office guidelines to ensure the safe return of employees to our office;

• Enhanced cleaning protocols;

• Creating and refining protocols to address actual and suspected COVID-19 cases and potential exposure of our employees.

We borrow funds to make investments, a practice known as “leverage,” in an attempt to increase returns to our shareholders.

Effective April 25, 2019, we are allowed to borrow amounts such that our asset coverage, as calculated in accordance with the 1940 Act, equals at least 150% after such borrowing.

The amount of leverage that we employ at any particular time will depend on management’s and our Board of Directors’ assessments of portfolio mix, prevailing market advance rates and other market factors at the time of any proposed borrowing.

We intend to continue borrowing under the Credit Facility in the future and we may increase the size of the Credit Facility, add additional credit facilities or otherwise issue additional debt securities or other evidences of indebtedness in the future, although there can be no assurance that we will be able to do so.

See "Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Liquidity and Capital Resources" as well as Note 5 to our consolidated financial statements for the year ended March 31, 2020 for information regarding the Credit Facility, the issuance of the December 2022 Notes and the issuance of the October 2024 Notes.

The amount of leverage that we employ at any

particular time will depend on management’s and our Board of Directors’ assessments of portfolio mix, prevailing market advance rates and other market factors at the time of any proposed borrowing.

See “Risk Factors – Risks Related to Our Business and Structure – Because we borrow money to make investments, the potential for gain or loss on amounts invested in us is magnified and may increase the risk of investing in us.” On April 30, 2021, we filed an exemptive application with the SEC to permit us to modify the asset coverage requirement to exclude SBA-guaranteed debentures from the calculation.

There can be no assurance if and when the Company will receive the exemptive relief.

We intend to continue borrowing under our senior secured credit facility with ING Capital LLC (as amended, restated, supplemented or otherwise modified from time to time, the "Credit Facility") in the future and we may increase the size of the Credit Facility, add additional credit facilities or otherwise issue additional debt securities or other evidences of indebtedness in the future, although there can be no assurance that we will be able to do so.

See "Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Liquidity and Capital Resources" as well as Note 5 to our consolidated financial statements for the year ended March 31, 2021 for information regarding the Credit Facility, and the issuance of the 5.375% Notes due 2024 (the "October 2024 Notes") and the 4.50% Notes due 2026 (the "January 2026 Notes").

BROKERAGE ALLOCATION AND OTHER PRACTICES

Since we generally acquire and dispose of our investments in privately negotiated transactions, we infrequently use brokers in the normal course of our business.

Because we generally acquire and dispose of our investments in privately negotiated transactions, we infrequently use brokers in the normal course of our business.

Our investment team is primarily responsible for the execution of the publicly traded securities portion of our portfolio transactions and the allocation of brokerage commissions.

We do not expect to execute transactions

through any particular broker or dealer, but will seek to obtain the best net results for us, taking into account such factors as price (including the applicable brokerage commission or dealer spread), size of order, difficulty of execution, and operational facilities of the firm and the firm’s risk and skill in positioning blocks of securities.

We do not expect to execute transactions through any particular broker or dealer, but will seek to obtain the best net results for us, taking into account such factors as price (including the applicable brokerage commission or dealer spread), size of order, difficulty of execution, and operational facilities of the firm and the firm’s risk and skill in positioning blocks of securities.

While we will generally seek reasonably competitive trade execution costs, we will not necessarily pay the lowest spread or commission available.

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In return for such services, we may pay a higher commission than other brokers would charge if we determine in good faith that such commission is reasonable in relation to the services provided.

We did not pay any brokerage commissions during the three years ended March 31, 2020 .

We did not pay any brokerage commissions during the fiscal years ended March 31, 2021, 2020 and 2019.

DIVIDEND REINVESTMENT PLAN

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federal income tax purposes must consist of qualifying investment income.

Absent the Taxable Subsidiary, a proportionate amount of any gross income of a partnership or

LLC (or other pass-through entity) portfolio investment would flow through directly to us.

Absent the Taxable Subsidiary, a proportionate amount of any gross income of a partnership or LLC (or other pass-through entity) portfolio investment would flow through directly to us.

To the extent that such income did not consist of investment income, it could jeopardize our ability to qualify as a RIC and therefore cause us to incur significant amounts of corporate-level U.S.

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As a BDC, we are required to meet a coverage ratio of total assets to total senior securities of at least 150%, which became effective April 25, 2019.

Additionally, the Board of Directors approved a resolution which limits the Company's issuance of senior securities such that that asset coverage ratio, taking into account any such issuance, would not be less than 166%, at any time after the effective date.

Additionally, the Board of Directors approved a resolution that limits the Company's issuance of senior securities such that that asset coverage ratio, taking into account any such issuance, would not be less than 166%, at any time after the effective date.

For this purpose, senior securities include all borrowings and any preferred stock we may issue in the future.

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(2) has a class of securities listed on a national securities exchange with an equity market capitalization of less than $250 million;

or (3) is controlled by the BDC itself or together with others and, as a result of such control, the BDC has an affiliated person on the board of directors of the company.

or (3) is controlled by the BDC itself or together with others and, as a result of such control, the BDC has an affiliated person on the board of directors of the

The 1940 Act presumes that a person has “control” of a portfolio company if that person owns at least 25% of its outstanding voting securities.

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On April 25, 2018, the Board of Directors unanimously approved the application of the recently modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act.

As a result, the minimum asset coverage ratio applicable to the Company was decreased from 200% to 150%, which became effective April 25, 2019.

Additionally, the Board of Directors also approved a resolution which limits the Company’s issuance of senior securities such that the asset coverage ratio, taking into account any such issuance, would not be less than 166%, at any time after the effective date.

As a result, the minimum asset coverage ratio applicable to the

Company was decreased from 200% to 150%, which became effective April 25, 2019.

Additionally, the Board of Directors also approved a resolution that limits the Company’s issuance of senior securities such that the asset coverage ratio, taking into account any such issuance, would not be less than 166%, at any time after the effective date.

We are required to make certain disclosures on our website and in SEC filings regarding, among other things, the receipt of approval to reduce its asset coverage requirement to 150%, its leverage capacity and usage, and risks related to leverage.

As of March 31, 2020 , we had $154.0 million , $77.1 million and 75.0 million in total aggregate principal amount of debt outstanding under our Credit Facility, December 2022 Notes and October 2024 Notes, respectively.

As of March 31, 2021, we had $120.0 million, $125.0 million and $140.0 million in total aggregate principal amount of debt outstanding under our Credit Facility, the October 2024 Notes and the January 2026 Notes, respectively.

As of March 31, 2021, our asset coverage was 187%.

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On August 22, 2017, we received an exemptive order that supersedes the Original Order, or the Exemptive Order, and in addition to the relief granted under the Original Order, allows us to withhold shares to satisfy tax withholding obligations related to the vesting of restricted stock granted pursuant to the 2010 Restricted Stock Award Plan, or the 2010 Plan, and to pay the exercise price of options to purchase shares of our common stock granted pursuant to the 2009 Stock Incentive Plan, or the 2009 Plan.

The right to grant restricted stock awards under the 2010 Plan will terminate ten years after the date that the 2010 Plan was approved by the Company’s shareholders, which is July 18, 2021.

In connection with the termination of the 2010 Plan, the Company’s Board of Directors of Company approved the Capital Southwest Corporation 2021 Employee Restricted Stock Award Plan (the "2021 Employee Plan") as part of the compensation packages for its employees, the terms of which are, in all material respects, identical to the 2010 Plan.

In connection therewith, on March 29, 2021, we filed an exemptive application with the SEC that would supersede the Exemptive Order (the “Superseding Exemptive Order”) to permit the Company to (i) issue restricted stock as part of the compensation package for its employees in the 2021 Employee Plan, and (ii) withhold shares of the Company’s common stock or purchase shares of the Company’s common stock from the participants to satisfy tax withholding obligations relating to the vesting of restricted stock pursuant to the 2021 Employee Plan.

In addition, on March 29, 2021, we filed an exemptive application with the SEC (the “Non-Employee Director Plan Exemptive Order”) to permit the Company to (i) issue restricted stock as part of the compensation package for non-employee directors of the Board of Directors (the “Non-Employee Directors”) under the Capital Southwest Corporation 2021 Non-Employee Director Restricted Stock Award Plan (the “Non-Employee Director Plan”), and (ii) withhold shares of the Company’s common stock or purchase shares of the Company’s common stock from the Non-Employee Directors to satisfy tax withholding obligations relating to the vesting of restricted stock pursuant to the Non-Employee Director Plan.

There can be no assurance if and when the Company will receive the Superseding Exemptive Order or the Non-Employee Director Plan Exemptive Order.

The terms of the Superseding Exemptive Order and the Non-Employee Director Plan Exemptive Order, if received, is expected to be substantially similar to the Exemptive Order.

Each of the 2021 Employee Plan and the Non-Employee Director Plan will also be subject to shareholder approval upon receipt of the Superseding Exemptive Order and the Non-Employee Director Plan Exemptive Order, respectively.

We may also be prohibited under the 1940 Act from knowingly participating in certain transactions with our affiliates without the prior approval of our Board of Directors who are not interested persons and, in some cases, prior approval by the SEC.

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federal excise tax on such income.

Any such carryover taxable income must be

distributed through a dividend declared prior to filing the final tax return related to the year that generated such taxable income.

Any such carryover taxable income must be distributed through a dividend declared prior to filing the final tax return related to the year that generated such taxable income.

Even if we qualify as a RIC, we generally will be subject to corporate-level U.S.

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We will be subject to a 4% nondeductible U.S.

federal excise tax on certain undistributed income unless we distribute in a timely manner an amount at least equal to the sum of (1) 98% of our ordinary income for each calendar year, (2) 98.2% of our capital gain net income for the one year period ended October 31 and (3) any income and gains recognized, but not distributed, in preceding years and on which we paid no U.S.

federal excise tax on certain undistributed income unless we distribute in a timely manner an amount at least equal to the sum of (1) 98% of our ordinary income for each calendar year, (2) 98.2% of our capital gain net income for the calendar year ended December 31 and (3) any income and gains recognized, but not distributed, in preceding years and on which we paid no U.S.

federal income tax.

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• Qualify to be treated as a BDC or be registered as a management investment company under the 1940 Act at all times during each taxable year;

Derive in each taxable year at least 90% of our gross income from dividends, interest, payments with respect to certain securities loans, gains from the sale or other disposition of stock or other securities or foreign currencies or other income derived with respect to our business of investing in such stock, securities or currencies and net income derived from an interest in a “qualified publicly traded partnership” (as defined in the Code), or the 90% Income Test;

• Derive in each taxable year at least 90% of our gross income from dividends, interest, payments with respect to certain securities loans, gains from the sale or other disposition of stock or other securities or foreign currencies or other income derived with respect to our business of investing in such stock, securities or currencies and net

income derived from an interest in a “qualified publicly traded partnership” (as defined in the Code), or the 90% Income Test;

• Diversify our holdings so that at the end of each quarter of the taxable year:

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Because any original issue discount or other amounts accrued will be included in our investment company taxable income for the year of the accrual, we may be required to make a distribution to our shareholders in order to satisfy the Annual Distribution Requirement, even though we will not have received any corresponding cash amount.

As a result, we may have difficulty meeting

the annual distribution requirement necessary to obtain and maintain RIC tax treatment under the Code.

As a result, we may have difficulty meeting the annual distribution requirement necessary to obtain and maintain RIC tax treatment under the Code.

We may have to sell some of our investments at times and/or at prices we would not consider advantageous, raise additional debt or equity capital or forgo new investment opportunities for this purpose.

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We are authorized to borrow funds and to sell assets in order to satisfy distribution requirements.

Under the 1940 Act, we are not permitted to make distributions to our shareholders while our debt obligations and other senior securities are outstanding unless certain “asset coverage” tests are met.

Under the 1940 Act, we are not permitted to make distributions to our shareholders while our debt obligations and other senior securities are

outstanding unless certain “asset coverage” tests are met.

See “Regulation as a Business Development Company” above.

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tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in stock.

If a significant number of our shareholders determine to sell shares of our stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our stock.

If a significant number of our shareholders

determine to sell shares of our stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our stock.

Failure to Obtain RIC Tax Treatment

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The CARES Act lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act of 2017 (2017 Tax Act).

The enactment of the CARES Act did not result in any material adjustments to our income tax provision for the year ended March 31, 2020, or to our net deferred tax assets as of March 31, 2020.

The enactment of the CARES Act did not result in any material adjustments to our income tax provision for the years ended March 31, 2021 or 2020, or to our net deferred tax assets as of March 31, 2021 or 2020.

Possible Legislative or Other Actions Affecting Tax Considerations

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federal tax laws and interpretations thereof could affect the tax consequences of an investment in our stock.

See "Risk Factors – Legislative or other actions relating to taxes could have a negative effect on us."

REGULATION AS A SMALL BUSINESS INVESTMENT COMPANY

SBIC I’s SBIC license will allow it to incur leverage by issuing SBA-guaranteed debentures, subject to the issuance of a leverage commitment by the SBA and other customary procedures.

SBA regulations currently permit SBIC I to borrow up to $175 million in SBA-guaranteed debentures with at least $87.5 million in regulatory capital (as defined in the SBA regulations), subject to SBA approval.

SBA-guaranteed debentures are non-recourse, interest only debentures with interest payable semi-annually and have a ten-year maturity.

The principal amount of SBA-guaranteed debentures is not required to be paid prior to maturity but may be prepaid at any time without penalty.

The interest rate of SBA-guaranteed debentures is fixed at the time of issuance at a market-driven spread over U.S.

Treasury Notes with ten-year maturities.

Receipt of an SBIC license does not assure that SBIC I will receive SBA guaranteed debenture funding, which is dependent upon SBIC I continuing to be in compliance with SBA regulations and policies.

The SBA, as a creditor, will have a superior claim to SBIC I’s assets over our shareholders in the event we liquidate SBIC I or the SBA exercises its remedies under the SBA-guaranteed debentures issued by SBIC I upon an event of default.

On April 21, 2021, we filed an application requesting exemptive relief from the SEC to permit us to exclude the debt of SBIC I guaranteed by the SBA from the definition of senior securities in the asset coverage requirement applicable to us under the 1940 Act.

The SEC previously has granted exemptive relief to permit similar operations, but there can be no assurance that such exemptive relief will be granted and the timing thereof.

SBICs are designed to stimulate the flow of private investor capital to eligible “small businesses” as defined by the SBA.

Under SBA regulations, SBICs may make loans to eligible small businesses, invest in the equity securities of such businesses and provide them with consulting and advisory services.

Under current SBA regulations, eligible small businesses generally include businesses that (together with their affiliates) have a tangible net worth not exceeding $19.5 million and have average annual net income after U.S.

federal income taxes not exceeding $6.5 million (average net income to be computed without benefit of any carryover loss) for the two most recent fiscal years.

In addition, an SBIC must invest 25.0% of its investment capital to “smaller enterprises” as defined by the SBA.

The definition of a smaller enterprise generally includes a business that (together with its affiliates) has a tangible net worth not exceeding $6.0 million for the most recent fiscal year and have average net income after U.S.

federal income taxes not exceeding $2.0 million (average net income to be computed without benefit of any carryover loss) for the two most recent fiscal years.

SBA regulations also provide alternative industry size standard criteria to determine eligibility for designation as an eligible small business or a smaller enterprise, which criteria depend on the primary industry in which the business is engaged and is based on the number of employees or gross revenue of the business and its affiliates.

However, once an SBIC has invested in an eligible small business, it may continue to make follow-on investments in the company, regardless of the size of the company at the time of the follow-on investment, up to the time of the company's initial public offering, if any.

The SBA generally prohibits an SBIC from providing financing to small businesses with certain characteristics, such as relending or businesses with the majority of their employees located outside the United States, and business engaged in certain prohibited industries, such as project finance, real estate, farmland, financial intermediaries or “passive” (i.e.

non-operating) businesses.

Without prior SBA approval, an SBIC may not provide financing or a commitment to a small business in an amount equal to more than approximately 30.0% of the SBIC’s regulatory capital in any one company and its affiliates.

The SBA places certain limitations on the financing terms of investments by SBICs in portfolio companies (such as limiting the permissible interest rate on debt securities held by an SBIC in a portfolio company).

An SBIC may exercise control over a small business for a period of up to seven years from the date on which the SBIC initially acquires its control position.

This control period may be extended for an additional period of time with the SBA's prior written approval.

The SBA restricts the ability of an SBIC to provide financing to an “associate” as defined in the SBA regulations, without prior written approval from the SBA.

SBA regulations also prohibit, without prior SBA approval, a “change of control” or “change in ownership” of transfer of an SBIC (as such terms are defined in the SBA regulations) and require that SBICs invest idle funds in accordance with SBA regulations.

In addition, SBIC I may also be limited in its ability to make distributions to us if they do not have sufficient capital, in accordance with SBA regulations.

SBIC I is subject to regulation and oversight by the SBA, including, among other things, requirements with respect to maintaining certain minimum financial ratios and other covenants, a periodic examination by an SBA examiner, and the performance of a financial audit by an independent auditor.

THE NASDAQ GLOBAL SELECT MARKET CORPORATE GOVERNANCE REGULATIONS

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We are subject to the reporting and disclosure requirements of the Exchange Act, including the filing of quarterly, annual and current reports, proxy statements and other required items.

In addition, we are subject to the Sarbanes-Oxley Act of 2002 and regulations promulgated thereunder, which imposes a wide variety of regulatory requirements on publicly-held companies and their insiders.

Pursuant to Rule 13a-14 of the Exchange Act, our Chief Executive Officer and Chief Financial Officer are required to certify the accuracy of the financial statements contained in our periodic reports;

In addition, we are subject to the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act") and regulations promulgated thereunder, which imposes a wide variety of regulatory requirements on publicly-held companies and their insiders.

• Pursuant to Rule 13a-14 under the Exchange Act, our Chief Executive Officer and Chief Financial Officer are required to certify the accuracy of the financial statements contained in our periodic reports;

• Pursuant to Item 307 of Regulation S-K, our periodic reports are required to disclose our conclusions about the effectiveness of our disclosure controls and procedures;

Pursuant to Rule 13a-15 of the Exchange Act, our management is required to prepare a report on its assessment of our internal control over financial reporting, and we engage an independent registered public accounting firm to separately audit our internal control over financial reporting;

Pursuant to Item 308 of Regulation S-K and Rule 13a-15 of the Exchange Act, our periodic reports must disclose whether there were significant changes in our internal control over financial reporting or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

• Pursuant to Rule 13a-15 under the Exchange Act, our management is required to prepare a report on its assessment of our internal control over financial reporting;

• Pursuant to Item 308 of Regulation S-K and Rule 13a-15 under the Exchange Act, our periodic reports must disclose whether there were significant changes in our internal control over financial reporting or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business