SEC Division of Investment Management staff letter: The South America Fund N.V.

.. .
-
S£p.." 2 1993'

Our Ref. No. 93-233-CC

The South America

RESPONSE OF THE OFFICE OF CHIEF COUNSEL Fund N. V .

DIVISION OF INVESTMENT MAAGEMENT File No. 132-3

Y~ur letters dated July 16, and April 28, 1993 and

October 26, 1992, request our assurance that we would not

recommend that the Commission take any enforcement action under

Sections 18 (d) and 23 (b) of the Investment Company Act of 1940

(the 111940 Act") if, after registering with the Commission under

the 1940 Act, the South America Fund N.V. (the "Fund") maintains

a capital structure that includes long-term warrants (the

"Warrants") and, for a brief period, sells its common stock at a

price below net asset value without first obtaining shareholder

approval.
The Fund was formed on July 16, 1991 as a closed-end

investment company, organized under the laws of the Netherlands

Antilles. In August 1991, the Fund issued 6,400,000 units, each

of which consisted of five shares of common stock and one

Warrant. Each Warrant entitles the holder to purchase one share

of common stock at a price of $2.00 per share at any time through" August 11, 1996. At the time the Fund issued the Warrants, it was neither registered nor required to be registered with the. Commission under the 1940 Act. 1/ You state that, at the time

~he Fund issued the Warrants, it did not contemplate reorganizing

in the U. S. The Fund now proposes to reorganize as a Delaware

corporation and to register under the 1940 Act as a closed-end,

management investment company. iJ The Fund proposes to 1 ist its

1/ The Fund did not register its securities under the

Securities Act of 1933 (the IISecurities Act"). The Fund

offered some of its units in the United States in

transactions exempt from registration under the Securities

Act by section 4 (2) of the Securities Act and Rule 144A thereunder. The Fund also offered units outside the United States in transactions not subject to registration under the

Securi ties Act, in accordance with Regulation S. The Fund

has taken steps to assure that no more than 100 U. S.

investors own its securities. These steps included placing

a restrictive legend on each stock and warrant certificate,

requiring that shareholders document their nationality, and,

if necessary, requiring ineligible U. S. investors to redeem

their shares.

1/ The Fund currently uses two Sub-advisers that are not

registered with the Commission under the Investment Advisers

Act of 1940 ("Advisers Act") . You state that, prior to

registering under the 1940 Act, either the Fund's sub-

advisers will register under the Advisers Act, or the Fund

will terminate the subadvisers and replace them with

registered advisers. Telephone conversation between Paula

M. Gaccione and Amy R. Doberman, dated November 13, 1992.

common stock but not the Warrants on aU. S. exchange. The common

stock and the Warrants currently are, and will continue to be,

listed on the London stock Exchange.

Section 18 Cd) of the 1940 Act prohibits a registered closed-

end investment company from issuing warrants unless they expire

within 120 days of issuance. You believe that, although Section

18 Cd) prohibits a registered investment company from issuing

certain warrants, it does not require a company to modify its

preregistration capital structure to comply with this statutory

provision. Because you believe that the Fund's reorganization

will not result in a new issuance of securities, 1/ you contend

that the Fund should not be required to redeem the Warrants when

it registers under the 1940 Act. !/

The express terms of Section 18, and its legislative

history, support your interpretation. Section 18 (a) generally

prohibits a registered, closed-end investment company from

issuing senior securities, and Section 18 Cd) specifically

prohibi ts a fund from issuing long-term warrants. Al though

Section 18 clearly reflects Congressional concern with the

dilutive effect on a fund i s common stock of senior securities in

general, and long-term warrants in particular, the statute

appears only to prohibit an investment company from issuing

certain securities concurrent with or subsequent. to its

1/ You state that the Fund proposes to reorganize as a Delaware corporation in accordance with the procedures set forth in

Section 388 of the Delaware General Corporation Law. You

represent that a foreign corporation relying on Section 388

is assumed to have been organized at the time of its

original formation under foreign law and therefore its

reorganization as a Delaware corporation does not result in

an issuance of securities. Accordingly, you bel ieve that

the Fund is not required to register its securities under

the Securities Act. Telephone conversation between Amy R.

Doberman and Paula M. Gaccione, dated July 1, 1993. You do

not request, and we do not offer, any opinion with respect

to whether the Fund i s reorganization as a Delaware

corporation will result in anew issuance of securities or

require registration of the Fund iS securities under the

Securi ties Act.

!/ You state that it is impractical for the Fund to redeem the Warrants because, according to the Warrant Agreement, they

are redeemable only by unanimous consent of the

warrantholders.

• 2

registration. 2/ While the original Senate bill that became the

1940 Act included a provision that would have given the

commission authority to require an investment company to conform

its capital structure with section 18 upon registration, this

provision was not enacted. ~ A company whose capital structure

does not comply with Section 18 may thus register with the

Commission as an investment company without changing its capital

structure. 11

We note, however, that the Warrants create the potential

for substantial dilution of common stockholder interests.

Al though you represent that the Fund will disclose the existence

and terms of the Warrants in all shareholder reports and all

public announcements regarding the commencement of common stock

trading in the U. S., ii if, as you propose, the Warrants are not

listed in the U. S., their existence may not be readily apparent

to investors. Because this result would be especially unfair to

uninformed investors, we believe that the Warrants should be

1 i s ted on the same U. S . exchange as the Fund i s common stock. Moreover, to prevent any further dilution of common stockholder

interests, we believe that the Fund should not conduct any rights

offering in which common stock is offered at a price less than

net asset value as long as there are any. outstanding Warrants.

! f the outstanding Warrants are exercised after the Fund

registers, the Fund may violate Section 23 (b). At the time the

~ See Surfcastle Cpub. avail. Mar. 14, 1988) Cacknowledging

this interpretation of Section 18 by way of contrast to

Section 61 (b) of the 1940 Act, which requires a business
development company C"BDC") to conform its capital structure

before .electing to be treated as a BDC).

§J S. 3580, 76th Cong., 3d Sess., §18 (1940).

11 We note, however, that the capital structure requirements of Section 18 apply to all investment companies that are either

registered or required to register with the commission.

In xg Townsend Corp. of America, Investment Company Act ReI.

No. 4045 CSeptember 2, 1964) Conce company in question

decided to become an investment company , it could no longer

issue warrants that did not comply with Section 18 Cd)). We

also note that a fund that issued long-term warrants prior

to registering with the Commission for the purpose of

evading the 1940 Act i s capital structure requirements would violate Section 48 Ca) of .the 1940 Act.

ii Telephone conversation between Amy R. Doberman and Paula M.

Gaccione, dated July 28, 1993. In addition, the Fund is

required to fully describe its capital structure in all

shareholder reports and proxy statements.

• 3

Fund registers under the 1940 Act, the exercise price of the

Warrants may be 18&& than the Fund i s net asset value per share.

section 23 Cb) prohibits a registered closed-end fund from selling

its common stock at a price below net asset value, except under

certain conditions. While section 23 Cb) (2) permits this practice

if the Fund. obtains the consent of a majority of its common

stockholders, - the Fund may have to issue stock to exercising

warrantholders immediately following registration but before a

shareholder vote. You represent that, after registering under

the 1940 Act, the Fund will obtain the requisite shareholder

approval under Section 23 Cb) (2) as soon as reasonably practicable. V On the basis of the facts and representations in your

letters and the telephone conversations, we would not recommend

that the Commission take any enforcement action under Sections

18 (d) and 23 Cb) if, after registering under the 1940 Act, the

Fund does not redeem the Warrants and, for a brief period, sells

stock to exercising Warrantholders at a price below net asset

value without first obtaining shareholder approval. Our conclusion is based particularly on your representations that (1) the Fund was not required to register under the 194D Act at the

time it issued the Warrants ¡ C 2) the Fund will disclose the

existence of the Warrants and describe their terms in all public

announcements regarding the commencement of its listing on aU. S.

exchange, as well as in all shareholder reports¡ and (3) the Fund

will obtain shareholder approval to issue common stock at less

than net asset value as soon as reasonably practicable after

registering under the 1940 Act. Our position is conditioned on

the Fund C 1) 1 i sting the Warrants. on the same U. S . exchange on

which the Fund's shares will trade¡ and (2) abstaining from

conducting any rights offering at less than net asset value while

the Warrants .are outstanding. Moreover, with respect to the question' presented under Section 23 Cb), this response expresses the Division i s position on enforcement action only and does not express any legal conclusions on the question presented.

(1- .
.,/ t'", , : f I-i,'. .'
Amy ,.R" Dobe~a~'-:' '-.
Senior Counsel

if You represent that the Fund also will seek shareholder

approval to issue common stock at less than net asset value

when it solicits shareholder approval for the Fund's

reorganization as a Delaware corporation. This approval

would not satisfy the requirements of Section 23 Cb), which

requires that the Fund obtain shareholder consent while it

is a registered investment company.

• 4

c .C.
...,. . . iX . ~ lt~ "" \ .. ~ ~ l.c: \ ~ c\

\Yi LLl\l E t:\HH & GALLACiHEH e;Øo~ ~" '..rl .~ q~~q~n~'1I'n,1.1

~!~~~~ P;im
Q' ~ lond'Jn

l. ~ l.
1940 Act/§ 18 (d) & 23 (b) (2)
July 16, 1993

Office of the Chief Counsel REeD S,E,C.
Division of Investment Management Securi ties and Exchange Commission 450 Fifth Street, N. W. JUL J 9 1993 Washington, D.C. 20549 I FE:e 01û I Re: The South America Fund N. V. Laàies and Gentlemen:

This letter supplements our letter to you dated October 26,

1992 (the "Original Letter") and our letter to you dated

Ap~il 28, 1993, in which, on behalf of The South America Fund

N. V. (the "Fund") t a closed-end investment company organized

laws of the Netherlands Antilles, we requested

assurance that the Division of Investment Management (the

"Division") would refrain from recommending enforcement

action to the Securities and Exchange Commission (the

"Commission") upon the reorganization of the Fund into an

investment company incorporated in Delaware and registered

unàer the Investment Company Act of 1940, as amended (the

"1940 Act"). Unless otherwise defined herein, capitalized

terms have the definition attributed to them in the Original

unàe~ the'

Letter.
The purpose of this supplemental letter is to provide you

wi th 'information regarding the mechanisms that the Fund has in place for monitoring the number of its U.S. shareholders.

As you are aware, none of the Fund's Units were registered

under the Securities Act of 1933, as amended (the "Securities

Act"), at the time of their initial offering, nor is the Fund

registered under the 1940 Act. At the time of the offering

and thereafter, care has been taken to seek to assure that

the Common Stock and the Warrants will not be owned 1 beneficially by more than 100 Ineligible U. S. Persons.

The Fud t s offering circular defined "Ineligible O. S. Person" as

(1) a "O.S. Person"(as defined below), (2) any corporation tha~

is not a O. S. Person in which O. S. Persons hold 10\ or more of

either voting power or value, (3) any par~nership that is no~ a

O. S. Person in which a O. S. Person is a partner, or (4) a trus:

OM' CllIrorp Ûnir, T..I.., R( \ .: \':H" 153 WI 53rd ~I~i Rl.\ ::.ULLL'" ,.... Yori, "lflO':':.-l1. VOL I:: ,:"-,,

.!I:: 1/35 81uJ ~..\ ::1:: ,:'..: ;:'NI

"
~. \
91460100
Securities and Exchange Commission

July 16, 1993

~
The measures employed are the following:

1. The underwriters of the offering represented and

warranted to the Fund that Units would be placed with no

more than 40 Ineliaible U.S. Persons and that no such

investor would acq;ire in excess of 10% of the Units

issued by the Fund.

2. The offering to Ineligible U. S. Persons was made in

compliance with Regulation D under the Securities Act or

Regulation S unàer the Securities Act.

3. On an ongoing basis, every shareholder or warrantholder

of the Fund must, at the request of the managing

director of the Fund, furnish the Fund, with

documentation demonstrating whether the investor is an

Ineligible U. S. Person. If the àocumentation is not

supplied by a shareholder or warrantholòer, as the case

ffay be, or if it comes to the attention of the Fund at

any time that any of the shares of Common Stock or

Warrants are owned directly or çeneficially by an

Ineligible U. S. Person whose ownership would cause the

Fund to be required to register under the 1940 Act or to

register any of its Common Stock or Warrants unòer the

Securi ties Act, then the Fund may require the

shareholder or warrantholder to transfer his Common

Stock or Warrants or may compel a redemption of the

Common Stock or Warrants.

4 . Common Stock and Warrants are issued only in registered

form. The Common Stock and Warrant certificates are

endorsed with a prominent legenà providing that (1) they

have not been registered under the Securities Act,

(2) the Fund has not been registered under the 1940 Act,

(3) the securities evidenced by the certificate cannot

be transferred or sold to an Ineligible U. S. Person

except as permitted by the Fund's managing director and

that is not aU. S. Person whose grantor or any of whose

beneficiaries is a U.S. Person. The term "U.S. Person" means (1)

any citizen or resident of the United States, (2) a corporation or

partnership created or organized in the United States or under the

laws of the United States, or (3) a trust or estate which is

subject to U.S. tax on its worldwide income from all sources.

. ,
!1460100
Securities and Exchange Commission

July 16, 1993

(4) if the securities are beneficially owned by an

Ineligible U. S. Person in circumstances where the Fund

determines that such person's ownership would be

prejudicial to the Fund, the securities may be required

to be transferred or, al ternati vely, compulsorily

redeemed by the Fund.

5. Each purchaser of Common Stock or Warrants is required

to represent, among other things, that he understands

and agrees to the restrictions set forth in No. 4 and

that (a) he will not transfer any of his Common Stock or

Warrants to an Ineligible U. S. Persont (b) he did not

acquire nor will he transfer any of his Common Stock or

Warrants wi thin the United States without the prior

approval of the Fund and (c) he will notify the Fund

imrrediately if he becomes, an Inel igible U. S. Person.

6. Ar Rgreement with both Euro- Clear and CEDEL~ on the one

handt and the Fund, on the other hand, provides that a

di vidend payment or other distribution with respect to

any shares of the Fund t s Common Stock will be withheld

if the shareholder has not provided to Euro-Clear or

tEDEL written certification that it is not an Inelioib¡e

U.S. Person and, in .turn, if Euro-Clear orCEDEL haš not t therefore, provided to the Fund's transfer or other paying agent a written certification that it has

received such shareholder certifications. The Euro-

Clear or CEDEL participant must promptly advise the

Fund's transfer agent or other paying agent of any

change in the status of a beneficial owner to that of a~

Ineligible u.s. Person.

'* '* '*
We trust that the above discussion is responsive to your

request for additional information. Should you require

additional assistance, please do not hesitate to contact me

at (212) 935-8000.

. .,
.
91460100
Securities and Exchange Commission

July 16, 1993

In accordance with Securities Act Release No_ 6269 (Dec. 5,

1980), seven additional copies of this letter have been

enclosed.
Very truly yours,

I
" , "-' _ '. ',I
¡ )', '. ".,, ;.. . ' -.,/. ('-~ /" i.' l. c.

Paula M _ Gaccione

PMG/rr
Enclosures cc: Amy Doberman t Esq.

Mr _ Piers Flayfair

Rose F. DiMartinot Esq,

:-" '1ork
\YILLKIE FARR & GALLAGHER
'h5hin~ton. De london
Paris
1940 Act/§ 18 (d) & § 23 (b) (2)

Office of the Chief Counsel

Division of Investment Management

Securities and Exchange Commission

450 Fifth Street, N. W.

Washington, D.C. 20549

Re: The South America Fund N. V .
Ladies and Gentlemen:

This letter supplements our letter to you dated October

26, 1992 (the "Original Letter"), in which, on behalf of The

South ,America Fund N. V. (the "Fund"), a closed-end investment

company organized under the laws of the Netherlands Antilles, we

requested that the Division of Investment Management (the

"Division") of the Securities and Exchange Commission (the

"Commission") concur in our view that upon the reorganization of

'~he Fund into an investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act"), the Fund's outstanding warrants (the "Warrants") would not be deemed to violate Section 18 (d) of the 1940 Act. Unless otherwise defined herein, capitalized terms have the definition attributed to them in the Original Letter. The purpose of this supplemental letter is two-fold.

First, this supplemental letter broadens the relief requested in

the Original Letter to encompass Section 23 (b) (2) of the 1940 Act

in order to permit, during the Interim Period (as such term is

defined below), the Fund's Çommon Stock to be issued at a price

below the Common Stock's current net asset value upon exercise of the Warrants. Second, this supplemental letter provides supporting information on the question of whether the

reorganization of the Fund from a Netherlands Antilles limited

liability company into a Delaware corporation and a closed-end,

non-diversified management investment company registered under

the 1940 Act and incorporated in Delaware (the "Transaction") resul ts in a new issuance of the Fund's outstanding Warrants. As

stated in the ~riginal Letter, the chief purposes of the

Transaction are to enhance the value of shareholders' investment

in the Fund by permitting the development of a more liquid

trading market for the Common Stock and to eliminate adverse tax

consequences to U.S. investors associated with the Fund's being a

PFIC.
OD!! Citic:or Ceter T!!lu: ReA 233780 153 wt 53rd Sut ReA :!05 ~ York. ~ Y 10022.46 'IT 12 767Q 212 935 8000 Fax: 212 752 ~l

91460025
Securities and Exchange Commission

,.
Discussion
I. Issuance of the Fund's Common Stock Below Net Asset Value

A. Backqround

The Original Letter explains that the Transaction

involves: (1) the transfer of the Fund's corporate seat from the

Netherlands Antilles to Delaware and (2) the registration of the

Fund under the 1940 Act. The Original Letter stated that prior

to the seat transfer, holders of the Fund's Common Stock would be

asked to approve amendments to the Fund's Articles of

Incorporation to change the Fund's name and to make such other

changes as may be necessary to replace the Fund's existing

Articles of Incorporation with a Delaware certificate of

incorporation containing provisions more typical of aU. S.

registered closed-end investment company. At the same time,

holders of the Common Stock would be asked to approve the

-issuance of the Common Stock at a price below the Common Stock's

current net asset value upon exercise of the Warrants, pursuant

to Section 23(b) (2) of the 1940 Act.

The Warrants entitle the holders thereof, until August

26, 1996, to purchase one share of Common Stock at a price of

u. S. $2.00. ,Although such purchase price may be below the net asset value of the Fund's Common Stock on the exercise date of

the Warrants, the Fund cannot unilaterally abrogate the rights of

the warrantholders and, as set forth in the Original Letter, any

amendment to the Warrant Agreement would require the unanimous

consent of the warrantholders, a result that is impracticable, if

not impossible, to achieve.

B. Statutory Languaqe

Section 23 (b) (2) of the 1940 Act prohibits the issuance
of common stock by a registered closed-end investment company at a price below current net asset value unless such issuance is (1) in connection with an offering to the holders of one or more

classes of tha company's capital stock; (2) with the consent of a

majority of the company's common stockholders; (3) upon

conversion of a convertible security in accordance with its

terms; (4) upon the exercise of any warrant outstanding on the

date of enactment of the 1940 Act or issued in accordance with

the provisions of Section 18 (d); or (5) under such other

circumstances as the Commission may permit by rules, regulations

or orders for the protection of investors.

91460025
Securities and Exchange Commission

The Staff has indicated that obtaining approval from

holders of the Fund's Common Stock before the Fund becomes

registered under the 1940 Act does not satisfy the requirements

of Section 23 (b) (2), which can be read to require that approval be obtained while the company is a regulated investment company.

Thus, the Fund undertakes to call a special shareholders' meeting

as soon as practicable after becoming registered under the 1940

Act to solicit shareholder approval of the issuance during the

Interim Period (defined below) of the Common Stock below net

asset value upon exercise of the Warrants. The Fund requests

that the Staff refrain from recommending any action to the

Commission if, during the period between the registration of the

Fund as an investment company under the 1940 Act and the approval

by the holders of its Common Stock of the issuance of the Common Stock at a price below net asset value, (the "Interim Period") , the Fund issues shares at a discount from net asset value upon

exercise of Warrants. Assuming this approval is obtained, the

Fund! s shareholders will have approved the issuance of the Common

• Stock at less than 'net asset value both immediately prior to the

Transaction and again soon after the Transaction. The Fund will

seek to minimize the length of the Interim Period by

expeditiously filing proxy materials for review by the Staff

following registration of the Fund as an investment company.

In view of the fact that the Warrants were validly

Fund was a Netherlands Antilles limited liability

company and at a time when a domestication in the United States

was not contemplated, and in light of the short duration of the

Interim Period, we believe the relief requested hereby is

issued when the

appropriate. The relief sought is necessry to facilitate the domestication of the Fund under U. S. law while preserving, as the

Fund must, the contractual rights of the warrantholders.

II. The Transaction Does Not Result in a New Issuance of

Warrants
A. Background

As discussed in our Original Letter, Section 18

prohibits the issuance of specified securities and the sale of

those securities unless the issuer complies with the capital

structure requirements of that section. Section 18 (d)

specifically prohibits the issuance of warrants expiring later

than 120 days from their issuance. Nevertheless, precedent

exists which indicates that a company subject to Section 18 does

not have to change its capital structure as in effect before it

91460025

Securities and Exchange Commission

becomes registered; however, any further sale or issuance of

shares after the company is registered triggers the application

of Section 18. i
With the exception of possible adjustments in the

amount of Warrants outstanding pursuant to certain anti-dilution

provisions, no additional Warrants are expected to be issued

after the Fund becomes registered under the 1940 Act.

Accordingly, the only basis upon which Section 18 would apply is

if the Transaction itself resulted in an issuance (or reissuance)

of the Warrants.

B. Discussion

Section 388 of the Delaware General Corporation Law

provides, in pertinent part, that "upon filing with the Secretary

of State a certificate of domestication ... the corporation shall

be domesticated in this State and ... the existence of the

. -corporation shall be deemed to have commenced on the date the corporation commenced its existence in the jurisdiction in which

the corporation was first formed ..." Delaware counsel has

informed us that there does not appear to be any judicial or

administrative decision addressing the question of whether a

security is deemed to be "reissued" upon the domestication of a

corporation pursuant to Section 338. However, counsel's view is

that the language and substance of Section 388 indicate that

following its domestication in Delaware, the Fund is to be

treated as a continuation of a foreign corporation and not as a

new entity. Section 388 further provides that "the domestication

of any corporation in this state shall not be deemed to affect

any obligations or liabilities of the corporation incurred prior

to its domestication." If Section 388 contemplated that a

domestication in Delaware created a separate new entity, the

foregoing 'provision would be unnecessary since there could be no

previously existing obligations of a newly created entity. Thus,

Delaware counsel believes that the Transaction should not be

viewed as affecting the Warrants or in any way constituting an

issuance or reissuance of the Warrants under Delaware law. . In re Surfcastle Inc., SEC No-Action Letter, (1988-1989

Transfer Binder) Fed. Sec. L. Rep (CCH) 1 78,847 at p. 3

(March 14, 1988) (emphasis added) (citations omitted) .

91460025
Securities and Exchange Commission

The Staff has granted no-action requests in connection

with transactions involving various changes in the form of

organization, investment policies and operating practices of a

registrant.2 In those cases, the relief is premised on the fact

that the change in state of incorporation, for example, does not

materially change the nature of the security held by the

investor. While not directly applicable, some guidance as to

federal policy on the issue of domestication can be obtained from

studying Staff interpretations of Rule 145 under the Securities

Act of 1933 ("Rule 145"), which indicate that the critical

determinant of the applicability of the Rule 145 exemption is the

effect which the change of domicile has upon the rights of shareholders. The Staff has granted no-action relief from registration for investment company reorganizations based on Rule

145 (a) (2), which exempts from registration, securities issued in

connection with a statutory merger or similar plan of acquisition

where the sole purpose of the transaction is to change the

issuér's domicile. 3 In general, a modification in the terms of

a security that makes a fundamental change in the nature of the ,

investment the security represents is a disposition of the

modified security for value and a resultant sale of that

security. In the situation at hand, there will be no significant

change in the warrantholder's economic interests (that is, there

will be no change in the terms of the Warrants or in the

dividend, preference or liquidation rights of the underlying

Common Stock). As indicated above, under Delaware law, the Fund

continues as an entity with its outstanding obligations unimpaired. The Fund will have the same investment objectives 2 See Scudder Common Stock Fund. Inc. (avail. Oct 10, 1984) (a Massachusetts corporation reorganized as a

Massachusetts business trust with a change in investment

obj ecti veand fundamental investment restrictions); and Comstock Fund. Inc. (avail. Aug. 28, 1978) (a Delaware

open-end investment company reincorporated in Maryland) . Research has not disclosed any no-action positions taken

by ..he Staff in connection with a domestication by a

foreign corporation, as is contemplated here.

3 See Lutheran Brotherhood Monev Market Fund. Inc., CCH

(1983 -1984 Transfer Binder) Fed. Sec. L. Rep. 77,501.

~ also the Division of Corporation Finance's

Interpretation of Rule 145, as expressed in Release No.

34 -10,661 (Feb. 28, 1974).

9i460025
Securi ties and Exchange Commission

and policies after the Transaction as before the Transaction.

Thus, no new issuance of Warrants should be deemed to result.

Conclusion
For the reasons set forth herein and in the Original

Letter, we respectfully request that the Division advise us that

it would not recommend any enforcement action to the Commission

if (a) the Fund were to register as an investment company and

maintain its capital structure as described in the Original

Letter and as supplemented hereby and (b) the Fund were to issue

shares of Common Stock at a discount to net asset value during

the Interim Period upon exercise of the Warrants. The Fund hopes

to effect the Transaction as soon as possible and, accordingly,

solicits your prompt consideration of this matter.

We trust that the above discussion is responsive to

your request for additional information. Should you require

'-addi tional assistance, please do not hesitate to contact me at (:212) 935-8000. If you determine preliminarily that you are unable to concur in our view of the matters described herein and in the

Original Letter, we specifically ask that you contact the

undersigned or Rose F. DiMartino of. this firm at (212) 935-8000

prior to transmittal of your response so that we may have an

opportuni ty to address your concerns prior to the issuance of a

negative response.

In accordance with Securities Act Release No. 6269

(Dec. 5, 1980), seven additional copies of this letter have been enclosed. ~ruiy yours,

((\ ûl 7l aula M. Gaccione
. cc: Lawrence B. Stoller, Esq.
Piers Playfair
Rose F. DiMartino, Esq.

. .
\YILLKIE E.\RR & GALLAGHER
1940 Act/S 18 (d)
'October 26, 1992

! hßtJD B.E.C.

Office of the Chief Counsel

r .~ 1 ~.~-~
~ OCT 2 7 terl2 Division of Investment Management

Securi ties and Exchange Commission

450 Fifth Street, N. W. t~
--.:...~Y-- .... i~ 142 i

Washington, D.C. 20549

Re: The South America Fund N.V.

Ladies and Gentlemen:

On behalf of The South America Fund N. V. (the "Fund"), a

closed-end investment company organiz,ed under the laws of the

Netherlands Antilles, we respectfully request that the Division

of Investment Management (the "Division") of the Securities and

Exchange Commission (the "Commission") concur in our view that

upon the reorganization of the Fund into an investment company

registered under the Investment Company Act of 1940, as amended

(the "1940 Act"), as described below, the Fund's outstanding

warrants would not violate Section 1B(d) of the 1940 Act.

The relief requested is supported by the specific language of

Section ,lB(d) itself, which prohibits the issuance by a

reqistered investment company of warrants expiring in more than

120 days. Since the Fund was not registered under the 1940 Act

at the time it issued its warrants, nor was it required to

register, Section 18 (d) by its terms would not be viol ated if

the Fund maintains its warrants outstanding after it registers

as an investment company under the 1940 Act.

Backqround
The Fund is a closed-end investment company, which was formed

on July 16, 1991 under the laws of the Netherlands Antilles.

was designed for investors desiring to participate in

a diversified portfolio of South American securities.

The Fund

On August 8, 1991, the Fund issued 6,400,000 units ("Units") at

$10 per Unit, each Unit consisting of five shares of the Fund's

common stock, par value $.01 per share (the "Common Stock"),

and one warrant to subscribe for one share of Common Stock to

be issued by the Fund (a "Warrant"). Each Warrant entitles the

One Ciiicorp Cenier Telex: RCA 233780 153 Easl S3rd 5irHI ReA ::8805 !lew "iorlc.:-Y l002:.-4669 loT i:. 7679 21:. 935 8000 Fax: 21:. 752 2991

0262B
Securities and Exchange Commission

holder to subscribe fo~ one share of Common Stock at a price of

$2.00 at any time until August 11, 1996, subject to certain

adjustments. The Co~mon Stock and the Warrants are listed

separately on The International Stock Exchange of the United

Kingdom and the Republic of Ireland, Ltd. (the "London Stock

Exchange" ) .
The issuance of the Common Stock and the Warrants was not

registered under the Securities Act of 1933, as amended Cthe

"1933 Act"), in reliance on the exemptions noted below, and the

Fund is not registered under the 1940 Act in reliance on the

exclusion in Section 3(c)(1) thereof and the terms of Section

7(d) thereof. A portion of the Units were offered in the

Uni ted States in transactions exempt from the registration

requirements of the 1933 Act pursuant to Rule 144A under the

1933 Act and Section 4 (2) of that Act. A portion of the Units

were also offered outside the United States in transactions not

subject to the registration requirements of the 1933 Act in

accordance with Regulation S thereunder. The Common Stock and

Warrants are subject to certain restrictions on transfer in

order to ensure compliance with U.S. securities and tax law and

regulations, in particular, to seek to assure that the Fund can-

continue to avoid any requirement to register as an investment

company under the 1940 Act.

The Fund is a "passive foreign investment company" ("PFIC") for

U. S. federal income tax purposes, which results in certain

a¿verse tax consequences to U. S. investors.1 1 Unless a shareholder subj ect to U. S. taxation makes the election, provided in Section 1295 of the Internal

Revenue Code of 1986, as amended (the "Code"), the tax on

the gain from the sale of shares of Common Stock will be

determined by the excess distributions rule as follows:

(1) the amount of the gain will be allocated ratably to , each day of the holding period; (2) the tax will be computed at the highest effective rate for ordinary

income for each year of the holding period on the amount

of the gain allocated to such year; and (3) interest, at

the prescribed Code rate, will be added to the amount of

the tax, with interest commencing on the due date for the

tax return for each year of the holding period prior to

the year of sale. Thus, the entire gain will be treated

as ordinary income whether such gain is attributable to

undistributed income of the Fund or to unrealized

appreciation in Fund investments.

If a shareholder makes the election described above, the

shareholder wi 11 be required to include its pro rata

share of the Fund's ordinary income (including short-term (Footnote Continued)

0262B

Securities and Exchange Commission

The Fund i s investment objective is long-term capital

appreciation by investing primQ~ily in South American equity

securities (excluding Mexican equity securities). The Fund is

managed by a managing director as required under Netherlands

Antilles law, which also provides administrative and transfer

agency services to the Fund. A supervisory board (the "Board")

supervises the policies of the managing director and oversees

business of the Fund. Currently, the Board

consists of four persons, one of whom would be an "interested

person" of the Fund if Section 2Ca)(19) of the 1940 Act were

applied. BEA Associates, an investment adviser registered

under the Investment Advisers Act of 1940, as amended, is the

investment adviser to the Fund. The Fund also has retained a

sub-investment adviser in each of Argentina, Brazil, Chile and

the general

Venezuela.
The Warrants '
Each Warrant entitles the holder thereof at any time during the

period ending August 19, 1996 to purchase one share of Common

Stock at a price (the "Exercise Price") of U.S. $2.00, subject

to adjustment in certain events. 2 The agreement governing the

rights of warrantholders (the "Warrant Agreement") provides

that, in lieu of adjusting the Exercise Price, the numer of

shares of Common Stock covered by each Warrant or the numer of

Warrants outstanding may be adjusted upon the occurrence of

events . The Warrants cannot, under the terms of the

Wê.=rant 'Agreement, be redeemed at the option of the Fund.

Because any amendment to the Warrant Agreement to provide for

those
1 (Footnote Continued)

gains in excess of long-term losses) and long-term gains

(i. e., the excess of net long-term gains over short-term

losses) in the return of the shareholder for each taxable

year. Actual distributions out of amounts so included

will not be taxable to the shareholder.

2 The Exercise Price is subject to adjustment in certain

events, including C i) the declaration of a dividend on

the Common Stock payable in Common Stock; (ii) a stock

split or consolidation of Common Stock; (iii) the

issuance by reclassification of Common Stock; (iv) the

issuance to all holders of Common Stock of rights or

warrants entitling them to subscribe for or purchase

Common Stock at less than the then market price; and (v)

the distribution to all holders of Common Stock of

evidences of indebtedness or assets of the Fund (other

than cash dividends) or subscription rights (other than

those referred to in clause (iv) above).

0262B
Securi ties and Exchange Commission

such redemption would require the unanimous consent of the

warrantholders, redemption of the Warrar;s is not practicable.

Proposed Transaction

The Fund proposes to reorganize itself from The South America

Fund N.V., a Netherlands Antilles limited liability company,

into The South America Fund, Inc., a Delaware corporation and a

closed-end non-diversified management investment company

registered under the 1940 Act (the "Transaction"). The chief

purposes of the Transaction are to enhance the value of

shareholders' investment in the Fund by permitting the

development of a more liquid trading market for the Common

Stock and to el iminate adverse tax consequences to U. S . investors associated with the Fund i s being a PFIC.

The Transaction will involve the following steps:

1. Transfer of Corporate Seat

The Board has approved the transfer of the Fund's

corporate seat from the Netherlands &~tilles to Delaware,

receipt of a positive response to this letter and

the satisfaction of certain other conditions. Under

subject to

Netherlands Antilles law and pursuant to the Fund i s Articles of Incorporation, the Fund is authorized to transfer its corporate

seat by resolution of the Fund i s managing director subject to

t~a priòr approval of the Board. Section 388 of the Delaware

General Corporation Law provides that a foreign entity like the

Delaware corporation by filing a certificate

of domestication and a certificate of incorporation in '

Delaware. Upon the filing of these documents and upon the

Fund can become a

filing' by the Fund i s managing director of certain documents with the Commercial Register in Curacao, Netherlands Anti lIes, the Fund will be "domesticated" in Delaware, which means that

the Fund would become a Delaware corporation subject to all the

provisions and entitled to all the benefits of Delaware laws

governing corporations.
Prior to the seat transfer, the holders of the Common Stock

will be asked to approve amendments to the Fund i s Articles of

Incorporation (a) to change the Fund i s name and (b) to make

such other changes as may be necessary to replace the Fund 's

existing Articles of Incorporation with a Delaware certificate

of incorporation containing provisions more typical of aU. S.

registered closed-end investment company. At the same time,

holders of Common Stock will be asked to approve the issuance

of Common Stock at a price below the Common Stock' s current net

asset value upon exercise of the Warrants, pursuant to Section

23(b)(2) of the 1940 Act.

-.
0262B
Securities and Exchange Co~mission

2. Recistration of the Fund under the 1940 Act

Upon transfer of the Fund's corporate seat to

Delaware, the Fund will file a notification of registration on

Form N-8A and a registration statement on Form N-2 ~~der the

1940 Act.

3. Listina Matters

The Fund would apply to list the Cor.~on Stock o~

the New York Stock Exchance, the Amer:can Stock Exchance or t~;

National Association of Sécuri ties Dealers Automated Quotation

Sys~em. The listing of the Co~mon Stock and the Warrants on

the London Stock Exc~ange is cu=rently ex?ected ~o be

maintaineå.
4. Shelf Reqist=ation

The Funè believes that certain Dersons t~at

purchased Co~roon Stock in ~he :nitial offering of Units

pur 3~ant to R~le 144A under the 1933 Act may be interested in

ii:ing a, "shelf" registra:ion statement pursuant to Rt.le 415

under the 1933 Act that wou~d enable them to sell all or a

por:ion of their shares from time to time during t~e two yea=

period following the effectiveness of the registration

::a:e~ent. The Fund does not intend to issue any shares of

'~~~n Stock or Warrants at or about the time of the

~~:~action individually or together with selling shareholders,

èXC ~?t in connection with the exercise of Warrants in

accordance with their terms.

Question Presented

Section 18 of the 1940 Act forbids the issuance of specified

securities unless certain conditions are satisfied regarding the type, numer, terms and asset coverage of the securities.
Section 18 (d) provides, in relevant part, that " it shall be

unlawful for any registered management investment company to issue any warrant or right to subscribe to purchase a sect.rity of which such company is the issuer, except in the form of

warrants or rights to subscribe expiring not later than one

hundred and twenty days after their issuance ..."

As noted above, the F~~d has outstanding Warrants that expire

in approximately four years. At the time the Fund becomes

registered as an investment company, the Warrants would not

expire wi thin 120 days. The question, therefore, arises as to whether the Fund 's capital structure would violate Section

18(d) of the 1940 Act. For the reasons set forth below, we

believe that it would not.

., . 0262B
Securities and Exchange Commission

Discussion
A. Statutory Lanauaqe and Leqislative History

The language of Section 18(d) itself is clear. It prohibits

only the issuance by a reqistered investment company of

warrants expiring in more than 120 days. The Fund, at the time

it issued the Warrants, was not registered under the 1940 Act,

nor was it required to register, having taken advantage of the

exclusion from the definition of investment company provided by

Section 3(c)(1) of the 1940 Act. Except for possible

adjustments in the amount of Warrants outstanding pursuant to

the anti-dilution provisions described above, no additional

Warrants are expected to be issued after the Fund becomes

registered under the 1940 Act.

Section 18(d) does not require an entity to conform its capital

structure to the recrirements of the Sect ion once it becomes

registered. This is fully supported by le~islative history as

well as the plain language of the Section. Prior to enactmer.t

of Section 18 (d), consideration was given to vesting the

Co~mission with the power to cause an investment company to

conform its capital structure to the requirements of that

Section, but no such language was ever included in the enacted
version.4
3 If Congress meant for the statute to have a broader

reach, it would have included language similar to the

language included in Section 61(b) of the 1940 Act, which expl ici tly requires an issuer 's. capital structure to meet the requirements of the 1940 Act when it files an

election to be treated as a business development company II as if it were issuing a security of each class which it has outstanding at such time. II 4 See Comm. on Banking and Currency, Hearings before a

subcomm. on S. 3580, 76th Cong., 3d Sess. 384-385 (1940).

See also Alfred Jaretzki, Jr., The Investment Company Act

of 1940, 26 Wash. L.Q. 303, 332 (1941) (certain persons

demanded a time limit during which existing companies

would have to conform to their capital structures to

Section 18). See also Tamar Frankel, 3 The Reaulation of

Money Manaqers 125 (1980) C II (i) f a company sold or issued

securities before it became an investment company without

complying with section 18, and then became an investment

company, there is no violation of the section. ")

, "

0262B
Securities and Exchange Commission

B. Precedents

The relief sought hereby is supported by language in an

exemptive order and in a Division no-action letter -- In re

Townsend Cor oration of America and Townsend Mana ement Com anv

("Townsend") and In re Surfcastle Inc. ("Surfcastle").

In Townsend, ,an unregistered, closed-end investment company had

issued perpetual warrants. The company subsequently became

registered. The company 's capital structure was determined to

have violated Section 18(d) of the 1940 Act because the

company i s warrants were found to have been issued at a time

when the company, although not registered under the 1940 Act,

was an investment company within the meaning of Section 3 (a) of the 1940 Act and was required to be registered as such. 7 In

reaching this result the Commission stated flatly that Section

18(d) is applicable 'only to registered investment companies or

to companies required to be registered. Since the F~~d has

availed itself, and, until registered, will continue to avail

itself, of the Section 3(c)(1) exclusion from the definition of

învestment company, Townsend supports the view that the Fund need not conform its capital structure to Section 18 (d) after it registers.

Surfcastle involved the registration of a company as a business

development company ("BDC") under the 1940 Act that prior to

registration had issued warrants exercisable for a period longer than, one year. The staff concluded that the warrants did not violate Section 18(d) of the 1940 Act becauset measured

from the date the company i s registration as a BDC became

, effective, the warrants expired wi thin 120 days, as required by

Section 18(d). In a footnote, the staff of the Division took

the opportunity to explain the difference.between Section 61(b)

of the 1940 Act, which governs BDCs, and Section 18(d) as

appl ied to other regi stered investment companies:

... (S)ection 61(b) treats the capital structure of a company that becomes a BDC

differently than a company that becomes a

registered management investment company

subject to the provisions of section 18.

5 Townsend, Investment Company Act Release No. 4045,

(1964-1966 Transfer Binder) Fed. Sec. L. Rep. (CCH)

, 77, 120, at 82, 063 C Sept. 2, 19 64) .

6 Surfcastle, SEC No-Action Letter, (1988-1989 Transfer

Binder) Fed. Sec. L. Rep. (CCH) , 78,847, at 78,287

(March 14, 1988).

7 Townsend at pp. 71-73.

, '.

0262B
Securities and Exchange Commission

Section 18, contrary to section 61(b),

prohibits the issuance of specified securities

and the sale of those securities unless the

company complies with the capital structure

requirements of that section. Thus, a company

subject to section 18 does not have to change

its capi tal 5 tructure before it becomes regi s t ered. . .. However, any further sale or issuance of shares after the company is

registered triggers the application of section
18....8
Both Townsend and Surfcastle confirm the plain language of

Section 18(d) of the 1940 Act that the registration of a f~~d

as an investment company does not require previously

outs~anding warrants to be modified to conform to Section 1B(d)

except where the fund was required to register, at the time the

warrants were issued. Since the Fund was not required to

register at the time it issued the Warrants, its subsequent

registration does not result in a violation of Section 1B(d) or

re~~ire the terms of the Warrants to be modified to shorten the

Exercise Period.
C. Benefits to the Fund and its Shareholders

The Fund was designed primarily as an investment vehicle for

institutional investors. Shares were not publicly

offered in the United States or listed on an u.S. exchange.

The Warrants themselves were offered because investors in

offshore funds listed on the London Stock Exchange have come to

expect this structure. This contrasts sharply with the

offering of country funds designed for U. S. retail markets. In

addition, the investment policies reflect the institutional,

non-U.S. r ather than retail, nature of the Fund. In contrast to the three U. S. registered equity funds investing in the same

geographic area as the Fund -- The Latin America Investment

Fund, Inc., The Latin America Equity Fund, Inc. and The Latin

America Discovery Fund, Inc. -- the Fund does not invest in

Mexican equi ty securities. The reason for this is that

insti tutional investors of the type to which the Fund was

marketed have the sophistication to invest directly in Mexico

without using a pooled vehicle, such as the Fund.

Since the offering of the Units, the premises on which the Fund

was organized have been reevaluated in light of the greater-than-anticipated numer of U. S. investors in the Fund and the less-than-anticipated liquidity of the Common Stock on

8 Surfcastle at p. 3 (emphasis added) (citations omitted).

0262B
Securities and Exchange Commission

the London Stock Exchange. The Board believes that the

Transaction would provide several important benefits to the

Fund and its shareholders.

First, the Transaction would result in the Common Stock being

traded on a u.s. securities market that may reasonably be

expected to provide increased 1 iquidi ty for the Fund's shareholders. The proliferation of the numer and variety of

securi ties and trading strategies and the increase in market

past few years have made liquidity highly

important to investors. While the London Stock Exchange

provides a liquid market for the trading of many securities, it

has not proven to be s.uch for the Common Stock and Warrants.

Set forth below is a table showing the average daily trading of

the Common Stock and Warrants on the London Stock Exchange in

comparison with the trading of three NYSE-listed U.S.

investment companies investing in the same geographic area:

volatility over the

Shares Net Asset Market Aver,age Daily Outstanding Val ue Per Price Per Trading Volume of Sha res in on Dc t . 20. S':are on Share on 1992 Oct. 20, 1992 Oct. 20. 1992 Seotember 19929 _ Name of Fun d/Sha res

(millions)

The South America Fund N,V.

15.000 COnlon Stock .................. 32,0 $2.11 $1.45

.45 2.000
Warrants ...................... 6.4

The Lat in America Investment

4.0 23.54 23.125 18.200 Fund. Inc. .... .,... . . .... . . .. .. .
The Lat in America Equity
6.0 14.56 13,25 19.300 Fund. Inc. ....................

The Lat in America Discovery

5.9 12.72 11.375 8.200 fund. Inc. ....................

Second, the Fund is considered a PFIC for U. S. federal income

tax purposes. In order to comply with certain London Stock

Exchange listing requirements, the Fund does not distribute net

realized capital gains to its shareholders; instead, it

reinvests them. Accordingly, Fund shareholders that are U. S.

taxpayers are subject to the Code provisions described above,

which may require them to pay U. S. taxes without having received a distribution to cover the payment due. As a U.S.

registered fund, the Fund contemplates distributing

9 The inception dates of the funds other thån the Fund are

as follows: The Latin America Investment Fund, Inc.

July 25. 1990; The Latin America Equity Fund, Inc.

October 22, 1991; and The Latin America Discovery Fund,

Inc. -- June 16, 1992.

0262B
Securi ties and Exchange Commission

substantially all of its net realized capital gains as well as net investment income annually. Although the consequences of the Fund i s being a PFIC were recognized and disclosed to investors at the time the Units were offered, the numer of U. S. investors and the amount of real ized capital gains could

not have been anticipated at that time. For the fiscal year

ended December 31, 1991, the Fund had net realized capital

gains of $3,913,913, and for the semiannual period ended

June 30, 1992, the Fund had net realized capital gains of

$8,248,497.
Lastly, once the Fund is registered, it becomes subject to the

full spectrum of regulation afforded by the 1940 Act. This

enhanced level of regulatory protection is beneficial to

existing shareholders of the Fund as well as potential

investors, for its provides them with specific safeguards

against self-dealing, conflicts of interest, misappropriation

of funds and overreaching in many areas.

Conclusion
In light of the statutory language, the legislative history and

the above-referenced precedents and in view of the substantial

benefi ts to shareholders that can be expected to result from the Transaction, it is our view that Section 18(d) of the 1940 Act does not prohibit the Fund, once regi stered as aU. S . investment company i from maintaining a capital structure that

consists, in part, of outstanding Warrants with a maturity

greater than 120 days.

For the reasons set forth herein, we respectfully request that

the Division advise us that it would not recommend any

enforcement action to the Commission if the Fund were to

regi ster as an investment company and maintain its capital

structure as herein described. The Fund hopes to effect the

Transaction as soon as possible and, accordingly, solicits your

prompt consideration of this matter.

If you determine preliminarily that you are unable to concur in

our view of these matters, we specifically ask that you contact

the undersigned or Paula Gaccione of this firm at (212)

935-8000 prior to transmittal of your response so that we may

have an opportunity to address your concerns prior to the

issuance of a negative response.

eo . .
0262B
Securities and Exchange Commission

In accordance wi th Securities Act Release No. 6269 (Dec. 5,

1980), seven additional copies of this letter have been

enclosed.
Very truly yours,
~ ~IJ' ,- /7/ // .. ,
I Rose F. DiMarti¿o
¡/'\fJ I. .?' ~ cc: Piers Playfair

Paula M. Gaccione, Esq.