In the 1970’s, a perceived crisis in the capital markets led Congress to enact the Small Business Investment Incentive Act of 1980 (the “1980 Amendments”). As a statutory framework, the 1980 Amendments were designed to put in place a workable approach to the regulation of a public vehicle investing in private equity. By focusing on those provisions of the 1940 Act that created unnecessary obstacles to the formation of a publicly-held, private-equity fund, Congress believed that small businesses would benefit from capital sources previously unavailable.

This legislation attempted to eliminate provisions of the 1940 Act that created unnecessary disincentives to private equity investment extant in the regulatory framework of the time. Open-end investment companies mutual funds could not by definition invest to a meaningful extent in small businesses in light of their fundamental need for liquidity; registered closed-end investment companies, for their part, were considered unappealing as venture capital funds in light of their limitations on borrowing and inability to compensate management with equity, a venture capital sine qua non. The centerpiece of the 1980 Amendments was the advent of a new category of closed-end investment company subject to the 1940 Act, but operated as a venture capital enterprise – the business development company, or BDC.