A brief note:
Consolidation: The Past
Prospect (NASDAQ:PSEC) owns in excess of 50% of the voting equity of a number of entities on its balance sheet, including First Tower. Such equity ownership would nominally require consolidation.
Prospect's accounting treatment has been, in my view, strange. It does not consolidate its wholly owned entities, and further asserts to be able to count as interest income loans owed effectively to itself. Prospect Capital Management then collects incentive fees based on interest paid on such loans.
Prospect also elects not to consolidate debt owed to others by these entities which stands senior in precedence to Prospect's claims.
Such debt is material.
For example, Prospect discloses $272mm of debt senior to its own interests in the First Tower position. If consolidated, this and other senior instruments would likely count against the BDC statutory leverage limit.
Consolidation: The Present
Prospect represents the SEC has required reclassification or restatement to consolidate such holdings and reclassify interest income. Prospect intends to appeal. 
As a consequence of the SEC's actions, Prospect no longer expects the Nicholas Financial (NASDAQ:NICK) transaction to close before the present agreement terminates on its own terms on June 12, 2014. Prospect represents discussions are ongoing seeking amendment of the current agreement. 
NICK is subject to a NASDAQ delisting notice for failure to hold its 2013 AGM.  Indeed, NICK has failed to hold any general meeting in the last 21 months.
As in all dealings with Prospect, disclosure is scarce and I urge readers to thoroughly review both page 64 and 100 of the current SEC Form 10-Q, filed on May 6, 2014.
 Prospect SEC Form 10-Q (March 2014), p. 86 ("As of March 31, 2014, First Tower's total debt outstanding to parties senior to us was $271,759")
 Prospect SEC Form 10-Q (March 2014) p. 100.( "the staff of the SEC has asserted that some of our wholly owned companies are investment companies for accounting purposes and are required to be consolidated by us. Based on our assessment of generally accepted accounting principles ("GAAP"), we disagree with the staff's assertion and intend to appeal to the SEC's Chief Accountant and, if necessary, the Commission itself. We do not yet know the timing of such appeal process.")
 Prospect SEC Form 10-Q (March 2014) p. 64. ("As disclosed elsewhere in this document, the staff of the SEC has asserted that certain unconsolidated holding company subsidiaries through which we hold our investment in operating subsidiaries should be consolidated and consequently is delaying the effectiveness of our registration statement on Form N-14 related to this transaction. The purchase agreement provides for this transaction to close by June 12, 2014, subject to certain terms, or on such other date as the parties to the arrangement may agree in writing. We are currently in discussions to extend the closing deadline to allow us time to appeal the staff's position. Based on the foregoing, we do not currently anticipate that the transaction will close by June 12, 2014.")
 Nicholas Financial 8-K, dated 8 April 2014, Item 3.01 Notice of Delisting or Failure to Satisfy a Continued Listing Rule or Standard.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.