---
kind: "section"
citation: "15 U.S.C. § 80a–18"
title: "15"
title_heading: "Commerce and Trade"
number: "80a–18"
heading: "Capital structure of investment companies"
release: "119-102"
url: "https://uscodex.org/usc/15/80a-18"
units:
  - "Chapter 2D — Investment Companies and Advisers"
  - "Subchapter I — Investment Companies"
---

# §80a–18. Capital structure of investment companies

- (a) **Qualifications on issuance of senior securities—** It shall be unlawful for any registered [closed-end company](/usc/15/80a–5.md?p=a-2) to issue any class of [senior security](#g), or to sell any such [security](/usc/15/80a–2.md?p=a-36) of which it is the [issuer](/usc/15/80a–2.md?p=a-22), unless—
  - (1) if such class of [senior security](#g) represents an indebtedness—
    - (A) immediately after such issuance or sale, it will have an asset coverage of at least 300 per centum;
    - (B) provision is made to prohibit the declaration of any dividend (except a dividend payable in stock of the [issuer](/usc/15/80a–2.md?p=a-22)), or the declaration of any other distribution, upon any class of the capital stock of such [investment company](/usc/15/77z–2.md?p=i-2), or the [purchase](/usc/15/78c–5.md?p=g) of any such capital stock, unless, in every such case, such class of [senior securities](#g) has at the time of the declaration of any such dividend or distribution or at the time of any such [purchase](/usc/15/78c–5.md?p=g) an asset coverage of at least 300 per centum after deducting the amount of such dividend, distribution, or [purchase](/usc/15/78c–5.md?p=g) price, as the case may be, except that dividends may be declared upon any preferred stock if such [senior security](#g) representing indebtedness has an asset coverage of at least 200 per centum at the time of declaration thereof after deducting the amount of such dividend; and
    - (C) provision is made either—
      - (i) that, if on the last business day of each of twelve consecutive calendar months such class of [senior securities](#g) shall have an asset coverage of less than 100 per centum, the holders of such [securities](/usc/15/80a–2.md?p=a-36) voting as a class shall be entitled to elect at least a majority of the members of the [board](/usc/15/205c.md?p=1) of [directors](/usc/15/80a–2.md?p=a-12) of such registered [company](/usc/15/80a–2.md?p=a-8), such voting right to continue until such class of [senior security](#g) shall have an asset coverage of 110 per centum or more on the last business day of each of three consecutive calendar months, or
      - (ii) that, if on the last business day of each of twenty-four consecutive calendar months such class of [senior securities](#g) shall have an asset coverage of less than 100 per centum, an event of default shall be deemed to have occurred;
  - (2) if such class of [senior security](#g) is a stock—
    - (A) immediately after such issuance or sale it will have an asset coverage of at least 200 per centum;
    - (B) provision is made to prohibit the declaration of any dividend (except a dividend payable in common stock of the [issuer](/usc/15/80a–2.md?p=a-22)), or the declaration of any other distribution, upon the common stock of such [investment company](/usc/15/77z–2.md?p=i-2), or the [purchase](/usc/15/78c–5.md?p=g) of any such common stock, unless in every such case such class of [senior security](#g) has at the time of the declaration of any such dividend or distribution or at the time of any such [purchase](/usc/15/78c–5.md?p=g) an asset coverage of at least 200 per centum after deducting the amount of such dividend, distribution or [purchase](/usc/15/78c–5.md?p=g) price, as the case may be;
    - (C) provision is made to entitle the holders of such [senior securities](#g), voting as a class, to elect at least two [directors](/usc/15/80a–2.md?p=a-12) at all times, and, subject to the prior rights, if any, of the holders of any other class of [senior securities](#g) outstanding, to elect a majority of the [directors](/usc/15/80a–2.md?p=a-12) if at any time dividends on such class of [securities](/usc/15/80a–2.md?p=a-36) shall be unpaid in an amount equal to two full years’ dividends on such [securities](/usc/15/80a–2.md?p=a-36), and to continue to be so represented until all dividends in arrears shall have been paid or otherwise provided for;
    - (D) provision is made requiring approval by the vote of a majority of such [securities](/usc/15/80a–2.md?p=a-36), voting as a class, of any plan of [reorganization](/usc/15/80a–2.md?p=a-33) adversely affecting such [securities](/usc/15/80a–2.md?p=a-36) or of any action requiring a vote of [security](/usc/15/80a–2.md?p=a-36) holders as in [section 80a–13(a) of this title](/usc/15/80a–13.md?p=a) provided; and
    - (E) such class of stock shall have complete priority over any other class as to distribution of assets and payment of dividends, which dividends shall be cumulative.
- (b) **Asset coverage in respect of senior securities—** The asset coverage in respect of a [senior security](#g) provided for in [subsection (a)](#a) may be determined on the basis of values calculated as of a time within forty-eight hours (not including Sundays or holidays) next preceding the time of such determination. The time of issue or sale shall, in the case of an offering of such [securities](/usc/15/80a–2.md?p=a-36) to existing stockholders of the [issuer](/usc/15/80a–2.md?p=a-22), be deemed to be the first date on which such offering is made, and in all other cases shall be deemed to be the time as of which a firm commitment to issue or sell and to take or [purchase](/usc/15/78c–5.md?p=g) such [securities](/usc/15/80a–2.md?p=a-36) shall be made.
- (c) **Prohibitions relating to issuance of senior securities—** Notwithstanding the provisions of [subsection (a)](#a) it shall be unlawful for any registered closed-end [investment company](/usc/15/77z–2.md?p=i-2) to issue or sell any [senior security](#g) representing indebtedness if immediately thereafter such [company](/usc/15/80a–2.md?p=a-8) will have outstanding more than one class of [senior security](#g) representing indebtedness, or to issue or sell any [senior security](#g) which is a stock if immediately thereafter such [company](/usc/15/80a–2.md?p=a-8) will have outstanding more than one class of [senior security](#g) which is a stock, except that (1) any such class of indebtedness or stock may be issued in one or more series: Provided, That no such series shall have a preference or priority over any other series upon the distribution of the assets of such registered [closed-end company](/usc/15/80a–5.md?p=a-2) or in respect of the payment of interest or dividends, and (2) promissory notes or other evidences of indebtedness issued in consideration of any loan, extension, or renewal thereof, made by a bank or other [person](/usc/15/80a–2.md?p=a-28) and privately arranged, and not intended to be publicly distributed, shall not be deemed to be a separate class of [senior securities](#g) representing indebtedness within the meaning of this subsection.
- (d) **Warrants and rights to subscription—** It shall be unlawful for any registered [management company](/usc/15/80a–4.md?p=3) to issue any warrant or right to subscribe to or [purchase](/usc/15/78c–5.md?p=g) a [security](/usc/15/80a–2.md?p=a-36) of which such [company](/usc/15/80a–2.md?p=a-8) is the [issuer](/usc/15/80a–2.md?p=a-22), except in the form of warrants or rights to subscribe expiring not later than one hundred and twenty days after their issuance and issued exclusively and ratably to a class or classes of such [company](/usc/15/80a–2.md?p=a-8)’s [security](/usc/15/80a–2.md?p=a-36) holders; except that any warrant may be issued in [exchange](/usc/15/80a–2.md?p=a-14) for outstanding warrants in connection with a plan of [reorganization](/usc/15/80a–2.md?p=a-33).
- (e) **Application of section to specific senior securities—** The provisions of this section shall not apply to any [senior securities](#g) issued or sold by any registered [closed-end company](/usc/15/80a–5.md?p=a-2)—
  - (1) for the purpose of refunding through payment, [purchase](/usc/15/78c–5.md?p=g), redemption, retirement, or [exchange](/usc/15/80a–2.md?p=a-14), any [senior security](#g) of such registered [investment company](/usc/15/77z–2.md?p=i-2) except that no [senior security](#g) representing indebtedness shall be so issued or sold for the purpose of refunding any [senior security](#g) which is a stock; or
  - (2) pursuant to any plan of [reorganization](/usc/15/80a–2.md?p=a-33) (other than for refunding as referred to in paragraph (1) of this subsection), provided—
    - (A) that such [senior securities](#g) are issued or sold for the purpose of substituting or exchanging such [senior securities](#g) for outstanding [senior securities](#g), and if such [senior securities](#g) represent indebtedness they are issued or sold for the purpose of substituting or exchanging such [senior securities](#g) for outstanding [senior securities](#g) representing indebtedness, of any registered [investment company](/usc/15/77z–2.md?p=i-2) which is a party to such plan of [reorganization](/usc/15/80a–2.md?p=a-33); or
    - (B) that the total amount of such [senior securities](#g) so issued or sold pursuant to such plan does not exceed the total amount of [senior securities](#g) of all the [companies](/usc/15/80a–2.md?p=a-8) which are parties to such plan, and the total amount of [senior securities](#g) representing indebtedness so issued or sold pursuant to such plan does not exceed the total amount of [senior securities](#g) representing indebtedness of all such [companies](/usc/15/80a–2.md?p=a-8), or, alternatively, the total amount of such [senior securities](#g) so issued or sold pursuant to such plan does not have the effect of increasing the ratio of [senior securities](#g) representing indebtedness to the [securities](/usc/15/80a–2.md?p=a-36) representing stock or the ratio of [senior securities](#g) representing stock to [securities](/usc/15/80a–2.md?p=a-36) junior thereto when compared with such ratios as they existed before such [reorganization](/usc/15/80a–2.md?p=a-33).
- (f) **Senior securities securing loans from bank; securities not included in “senior security”—**
  - (1) It shall be unlawful for any registered [open-end company](/usc/15/80a–5.md?p=a-1) to issue any class of [senior security](#g) or to sell any [senior security](#g) of which it is the [issuer](/usc/15/80a–2.md?p=a-22), except that any such registered [company](/usc/15/80a–2.md?p=a-8) shall be permitted to borrow from any bank: Provided, That immediately after any such borrowing there is an asset coverage of at least 300 per centum for all borrowings of such registered [company](/usc/15/80a–2.md?p=a-8): And provided further, That in the event that such asset coverage shall at any time fall below 300 per centum such registered [company](/usc/15/80a–2.md?p=a-8) shall, within three days thereafter (not including Sundays and holidays) or such longer period as the [Commission](/usc/15/80a–2.md?p=a-7) may prescribe by rules and regulations, reduce the amount of its borrowings to an extent that the asset coverage of such borrowings shall be at least 300 per centum.
  - (2) “[Senior security](#g)” shall not, in the case of a registered [open-end company](/usc/15/80a–5.md?p=a-1), include a class or classes or a number of series of preferred or special stock each of which is preferred over all other classes or series in respect of assets specifically allocated to that class or series: Provided, That (A) such [company](/usc/15/80a–2.md?p=a-8) has outstanding no class or series of stock which is not so preferred over all other classes or series, or (B) the only other outstanding class of the [issuer](/usc/15/80a–2.md?p=a-22)’s stock consists of a common stock upon which no dividend (other than a liquidating dividend) is permitted to be paid and which in the aggregate represents not more than one-half of 1 per centum of the [issuer](/usc/15/80a–2.md?p=a-22)’s outstanding [voting securities](/usc/15/80a–2.md?p=a-42). For the purpose of insuring fair and equitable treatment of the holders of the outstanding [voting securities](/usc/15/80a–2.md?p=a-42) of each class or series of stock of such [company](/usc/15/80a–2.md?p=a-8), the [Commission](/usc/15/80a–2.md?p=a-7) may by rule, regulation, or [order](/usc/15/8702.md?p=14) direct that any matter required to be submitted to the holders of the outstanding [voting securities](/usc/15/80a–2.md?p=a-42) of such [company](/usc/15/80a–2.md?p=a-8) shall not be deemed to have been effectively acted upon unless approved by the holders of such percentage (not exceeding a majority) of the outstanding [voting securities](/usc/15/80a–2.md?p=a-42) of each class or series of stock affected by such matter as shall be prescribed in such rule, regulation, or [order](/usc/15/8702.md?p=14).
- (g) **“Senior security” defined—** Unless otherwise provided: “Senior security” means any bond, debenture, note, or similar obligation or instrument constituting a [security](/usc/15/80a–2.md?p=a-36) and evidencing indebtedness, and any stock of a class having priority over any other class as to distribution of assets or payment of dividends; and “senior security representing indebtedness” means any senior security other than stock.

  The term “senior security”, when used in subparagraphs (B) and (C) of paragraph (1) of [subsection (a)](#a), shall not include any promissory note or other evidence of indebtedness issued in consideration of any loan, extension, or renewal thereof, made by a bank or other [person](/usc/15/80a–2.md?p=a-28) and privately arranged, and not intended to be publicly distributed; nor shall such term, when used in this section, include any such promissory note or other evidence of indebtedness in any case where such a loan is for temporary purposes only and in an amount not exceeding 5 per centum of the value of the total assets of the [issuer](/usc/15/80a–2.md?p=a-22) at the time when the loan is made. A loan shall be presumed to be for temporary purposes if it is repaid within sixty days and is not extended or renewed; otherwise it shall be presumed not to be for temporary purposes. Any such presumption may be rebutted by evidence.

- (h) **“Asset coverage” defined—** “Asset coverage” of a class of [senior security](#g) representing an indebtedness of an [issuer](/usc/15/80a–2.md?p=a-22) means the ratio which the value of the total assets of such [issuer](/usc/15/80a–2.md?p=a-22), less all liabilities and indebtedness not represented by [senior securities](#g), bears to the aggregate amount of [senior securities](#g) representing indebtedness of such [issuer](/usc/15/80a–2.md?p=a-22). “Asset coverage” of a class of [senior security](#g) of an [issuer](/usc/15/80a–2.md?p=a-22) which is a stock means the ratio which the value of the total assets of such [issuer](/usc/15/80a–2.md?p=a-22), less all liabilities and indebtedness not represented by [senior securities](#g), bears to the aggregate amount of [senior securities](#g) representing indebtedness of such [issuer](/usc/15/80a–2.md?p=a-22) plus the aggregate of the involuntary liquidation preference of such class of [senior security](#g) which is a stock. The involuntary liquidation preference of a class of [senior security](#g) which is a stock shall be deemed to mean the amount to which such class of [senior security](#g) would be entitled on involuntary liquidation of the [issuer](/usc/15/80a–2.md?p=a-22) in preference to a [security](/usc/15/80a–2.md?p=a-36) junior to it.
- (i) **Future issuance of stock as voting stock; exceptions—** Except as provided in [subsection (a)](#a) of this section, or as otherwise required by law, every share of stock hereafter issued by a registered [management company](/usc/15/80a–4.md?p=3) (except a common-law trust of the character described in [section 80a–16(c) of this title](/usc/15/80a–16.md)) shall be a voting stock and have equal voting rights with every other outstanding voting stock: Provided, That this subsection shall not apply to shares issued pursuant to the terms of any warrant or subscription right outstanding on March 15, 1940, or any firm contract entered into before March 15, 1940, to [purchase](/usc/15/78c–5.md?p=g) such [securities](/usc/15/80a–2.md?p=a-36) from such [company](/usc/15/80a–2.md?p=a-8) nor to shares issued in accordance with any rules, regulations, or [orders](/usc/15/8702.md?p=14) which the [Commission](/usc/15/80a–2.md?p=a-7) may make permitting such issue.
- (j) **Securities issued by registered face-amount certificate company—** Notwithstanding any provision of this subchapter, it shall be unlawful, after August 22, 1940, for any registered [face-amount certificate company](/usc/15/80a–4.md?p=1)—
  - (1) to issue, except in accordance with such rules, regulations, or [orders](/usc/15/8702.md?p=14) as the [Commission](/usc/15/80a–2.md?p=a-7) may prescribe in the public interest or as necessary or appropriate for the protection of investors, any [security](/usc/15/80a–2.md?p=a-36) other than (A) a [face-amount certificate](/usc/15/80a–2.md?p=a-15); (B) a common stock having a par value and being without preference as to dividends or distributions and having at least equal voting rights with any outstanding [security](/usc/15/80a–2.md?p=a-36) of such [company](/usc/15/80a–2.md?p=a-8); or (C) short-term payment or promissory notes or other indebtedness issued in consideration of any loan, extension, or renewal thereof, made by a bank or other [person](/usc/15/80a–2.md?p=a-28) and privately arranged and not intended to be publicly offered;
  - (2) if such [company](/usc/15/80a–2.md?p=a-8) has outstanding any [security](/usc/15/80a–2.md?p=a-36), other than such [face-amount certificates](/usc/15/80a–2.md?p=a-15), common stock, promissory notes, or other evidence of indebtedness, to make any distribution or declare or pay any dividend on any capital [security](/usc/15/80a–2.md?p=a-36) in contravention of such rules and regulations or [orders](/usc/15/8702.md?p=14) as the [Commission](/usc/15/80a–2.md?p=a-7) may prescribe in the public interest or as necessary or appropriate for the protection of investors or to insure the financial integrity of such [company](/usc/15/80a–2.md?p=a-8), to prevent the impairment of the [company](/usc/15/80a–2.md?p=a-8)’s ability to meet its obligations upon its [face-amount certificates](/usc/15/80a–2.md?p=a-15); or
  - (3) to issue any of its [securities](/usc/15/80a–2.md?p=a-36) except for cash or [securities](/usc/15/80a–2.md?p=a-36) including [securities](/usc/15/80a–2.md?p=a-36) of which such [company](/usc/15/80a–2.md?p=a-8) is the [issuer](/usc/15/80a–2.md?p=a-22).
- (k) **Application of section to companies operating under Small Business Investment Act provisions—** The provisions of subparagraphs (A) and (B) of paragraph (1) of [subsection (a)](#a) of this section shall not apply to [investment companies](/usc/15/77z–2.md?p=i-2) operating under the [Small Business](/usc/15/1691c–2.md?p=h-2) Investment Act of 1958 [[15 U.S.C. 661](/usc/15/661.md) et seq.], and the provisions of [paragraph (2)](#a-2) of said subsection shall not apply to such [companies](/usc/15/80a–2.md?p=a-8) so long as such class of [senior security](#g) shall be held or guaranteed by the [Small Business](/usc/15/1691c–2.md?p=h-2) [Administration](/usc/15/2203.md?p=2).

## Source credit

(Aug. 22, 1940, ch. 686, title I, § 18, 54 Stat. 817; Pub. L. 85–699, title III, § 307(c), Aug. 21, 1958, 72 Stat. 694; Pub. L. 91–547, § 10, Dec. 14, 1970, 84 Stat. 1421; Pub. L. 85–699, title III, § 317, formerly § 319, Aug. 21, 1958, as added Pub. L. 92–595, § 2(g), Oct. 27, 1972, 86 Stat. 1316, renumbered § 317, Pub. L. 104–208, div. D, title II, § 208(h)(1)(E), Sept. 30, 1996, 110 Stat. 3009–747; Pub. L. 94–29, § 28(4), June 4, 1975, 89 Stat. 165; Pub. L. 100–181, title VI, § 613, Dec. 4, 1987, 101 Stat. 1261; Pub. L. 105–353, title III, § 301(c)(4), Nov. 3, 1998, 112 Stat. 3236.)

## Notes

### Editorial Notes

### References in Text

The Small Business Investment Act of 1958, referred to in subsec. (k), is Pub. L. 85–699, Aug. 21, 1958, 72 Stat. 689, which is classified principally to chapter 14B (§ 661 et seq.) of this title. For complete classification of this Act to the Code, see Short Title note set out under section 661 of this title and Tables.

### Amendments

1998—Subsec. (e)(2). Pub. L. 105–353 substituted “paragraph (1) of this subsection” for “subsection (e)(2) of this section” in introductory provisions.

1987—Subsec. (e). Pub. L. 100–181 redesignated pars. (2) and (3) as (1) and (2), respectively, and struck out former par. (1) which read as follows: “pursuant to any firm contract to purchase or sell entered into prior to March 15, 1940;”.

1975—Subsec. (i). Pub. L. 94–29 substituted “section 80a–16(c) of this title” for “section 80a–16(b) of this title”.

1972—Subsec. (k). Section 319 of Pub. L. 85–699, as added by Pub. L. 92–595, inserted provision that subsec. (a)(2) shall not apply to companies operating under the Small Business Investment Act of 1958, so long as such class of senior security shall be held or guaranteed by the Small Business Administration.

1970—Subsec. (f)(2). Pub. L. 91–547 substituted “That (A)” and “or (B) the” for “(A) That” and “or (B) that the” and inserted provision for purpose of insuring fair and equitable treatment of the holders of the outstanding voting securities of each class or series of stock of such company, that the Commission may by rule, regulation, or order direct that any matter required to be submitted to the holders of the outstanding voting securities of such company shall not be deemed to have been effectively acted upon unless approved by the holders of such percentage (not exceeding a majority) of the outstanding voting securities of each class or series of stock affected by such matter as shall be prescribed in such rule, regulation, or order.

1958—Subsec. (k). Pub. L. 85–699 added subsec. (k).

### Statutory Notes and Related Subsidiaries

### Effective Date of 1975 Amendment

Amendment by Pub. L. 94–29 effective June 4, 1975, see section 31(a) of Pub. L. 94–29, set out as a note under section 78b of this title.

### Effective Date of 1970 Amendment

Amendment by Pub. L. 91–547 effective Dec. 14, 1970, see section 30 of Pub. L. 91–547, set out as a note under section 80a–52 of this title.

### Executive Documents

### Transfer of Functions

For transfer of functions of Securities and Exchange Commission, with certain exceptions, to Chairman of such Commission, see Reorg. Plan No. 10 of 1950, §§ 1, 2, eff. May 24, 1950, 15 F.R. 3175, 64 Stat. 1265, set out under section 78d of this title.