Small Business Innovation Act of 2016

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Small Business Innovation Act of 
2016''.

SEC. 2. PROGRAM AUTHORIZATION.

    Section 303(b) of the Small Business Investment Act of 1958 (15 
U.S.C. 683(b)) is amended, in the matter preceding paragraph (1), in 
the first sentence, by inserting after ``issued by such companies'' the 
following: ``, in a total amount that does not exceed $4,000,000,000 
each fiscal year (adjusted annually to reflect increases in the Chained 
Consumer Price Index for All Urban Consumers (C-CPI-U), as published by 
the Bureau of Labor Statistics of the Department of Labor)''.

SEC. 3. SMALL BUSINESS EARLY-STAGE INVESTMENT PROGRAM.

    Title III of the Small Business Investment Act of 1958 (15 U.S.C. 
681 et seq.) is amended by adding at the end the following:

        ``PART D--SMALL BUSINESS EARLY-STAGE INVESTMENT PROGRAM

``SEC. 399A. DEFINITIONS.

    ``In this part:
            ``(1) Early-stage small business.--The term `early-stage 
        small business' means a small business concern that--
                    ``(A) is domiciled in a State or Indian country (as 
                defined in section 1151 of title 18, United States 
                Code); and
                    ``(B) has not generated positive cash flow from 
                operations in any fiscal year before the date on which 
                a participating investment company makes an initial 
                investment in the small business concern.
            ``(2) Eligible applicant.--The term `eligible applicant' 
        means a limited liability company or a limited partnership 
        organized and chartered or otherwise existing under Federal or 
        State law for the purpose of performing the functions and 
        conducting the activities contemplated under the program, 
        including those managed by a manager of a small business 
        investment company.
            ``(3) Participating investment company.--The term 
        `participating investment company' means an applicant approved 
        under section 399E to participate in the program.
            ``(4) Program.--The term `program' means the early-stage 
        investment program established under section 399B.
            ``(5) Small business concern.--The term `small business 
        concern' has the same meaning given that term in section 3(a) 
        of the Small Business Act (15 U.S.C. 632(a)).
            ``(6) Small business concern in a targeted industry.--The 
        term `small business concern in a targeted industry' means a 
        small business concern that is engaged primarily in 
        researching, developing, manufacturing, producing, or bringing 
        to market goods, products, or services in a targeted industry.
            ``(7) Targeted industry.--The term `targeted industry' 
        means any of the following business sectors:
                    ``(A) Advanced manufacturing.
                    ``(B) Agricultural technology.
                    ``(C) Biotechnology.
                    ``(D) Clean energy technology.
                    ``(E) Digital media.
                    ``(F) Environmental technology.
                    ``(G) Information technology.
                    ``(H) Life sciences.
                    ``(I) Water technology.
            ``(8) Temporary debt.--The term `temporary debt' means 
        borrowings of a participating investment company--
                    ``(A) with a term not to exceed 90 days from a 
                regulated financial institution for the purpose of 
                maintaining operating liquidity of the participating 
                investment company or providing funds for a particular 
                financing of a small business concern; and
                    ``(B) that do not exceed 50 percent of the 
                leveraged capital of the participating investment 
                company.

``SEC. 399B. ESTABLISHMENT OF PROGRAM.

    ``The Administrator shall establish and carry out an early-stage 
investment program to provide equity financing to support early-stage 
small businesses in accordance with this part.

``SEC. 399C. ADMINISTRATION OF PROGRAM.

    ``The Administrator, acting through the Associate Administrator 
described in section 201, shall administer the program.

``SEC. 399D. APPLICATIONS.

    ``An eligible applicant that desires to participate in the program 
shall submit to the Administrator an application that includes--
            ``(1) a business plan describing how the eligible applicant 
        intends to make successful venture capital investments in 
        early-stage small businesses and direct capital to small 
        business concerns in targeted industries or other business 
        sectors;
            ``(2) information regarding the relevant venture capital 
        investment qualifications and backgrounds of the individuals 
        responsible for the management of the eligible applicant; and
            ``(3) a description of the extent to which the eligible 
        applicant meets the selection criteria and other requirements 
        to participate in the program under section 399E.

``SEC. 399E. SELECTION OF PARTICIPATING INVESTMENT COMPANIES.

    ``(a) In General.--Not later than 120 days after the date on which 
the Administrator receives an application from an eligible applicant 
under section 399D, the Administrator shall make a determination to 
conditionally approve or disapprove the eligible applicant to 
participate in the program and shall transmit the determination to the 
eligible applicant electronically and in writing. A determination to 
conditionally approve an eligible applicant shall identify all 
conditions the eligible applicant is required to satisfy for the 
Administrator to provide final approval to the eligible applicant to 
participate in the program, and shall provide a period of not less than 
1 year for the eligible applicant to satisfy the conditions.
    ``(b) Selection Criteria.--In making a determination under 
subsection (a), the Administrator shall consider--
            ``(1) the likelihood that the eligible applicant will meet 
        the goals specified in the business plan of the eligible 
        applicant;
            ``(2) the likelihood that the investments of the eligible 
        applicant will create or preserve jobs in the United States, 
        both directly and indirectly;
            ``(3) the character and fitness of the management of the 
        eligible applicant;
            ``(4) the experience and background of the management of 
        the eligible applicant;
            ``(5) the extent to which the eligible applicant will 
        concentrate investment activities on early-stage small 
        businesses;
            ``(6) the likelihood that the eligible applicant will 
        achieve profitability;
            ``(7) the experience of the management of the eligible 
        applicant with respect to establishing a profitable investment 
        track record;
            ``(8) the extent to which the eligible applicant will 
        concentrate investment activities on small business concerns in 
        targeted industries; and
            ``(9) the extent to which the eligible applicant will 
        concentrate investment activities on small business concerns in 
        targeted industries that have received funds from a Federal 
        agency, including--
                    ``(A) the National Institutes of Health;
                    ``(B) the National Science Foundation; and
                    ``(C) funds received from a Federal agency under 
                the Small Business Innovation Research Program or the 
                Small Business Technology Transfer Program, as such 
                terms are defined under section 9 of the Small Business 
                Act (15 U.S.C. 638).
    ``(c) Regulatory Capital Requirements.--To participate in the 
program, an eligible applicant shall have regulatory capital--
            ``(1) in an amount that is not less than $20,000,000, 
        unless the Administrator determines that the eligible applicant 
        can have long-term financial viability with a lower amount of 
        regulatory capital; and
            ``(2) of which not more than 33 percent is from State or 
        local government entities.
    ``(d) Non-Affiliation Requirement.--To participate in the program, 
not less than 30 percent of the regulatory and leverageable capital of 
an eligible applicant shall come from 3 persons unaffiliated with the 
management of the fund and unaffiliated with each other.
    ``(e) Third-Party Debt.--To participate in the program, an eligible 
applicant may not incur debt, other than leverage, unless the debt is 
temporary debt.

``SEC. 399F. EQUITY FINANCINGS.

    ``(a) In General.--The Administrator may make one or more equity 
financings to a participating investment company.
    ``(b) Equity Financing Amounts.--
            ``(1) Non-federal capital.--An equity financing made to a 
        participating investment company under the program may not be 
        in an amount that exceeds the amount of the capital of the 
        participating investment company that is not from a Federal 
        source and that is available for investment on or before the 
        date on which an equity financing is drawn upon by the 
        participating investment company. The capital of the 
        participating investment company may include legally binding 
        commitments with respect to capital for investment.
            ``(2) Limitation on aggregate amount.--The aggregate amount 
        of all equity financings made to a participating investment 
        company under the program may not exceed $100,000,000.
    ``(c) Equity Financing Process.--In making an equity financing 
under the program, the Administrator shall commit an equity financing 
amount to a participating investment company, and the amount of each 
commitment shall remain available to be drawn upon by a participating 
investment company--
            ``(1) for new-named investments, during the 5-year period 
        beginning on the date on which the commitment is first drawn 
        upon by the participating investment company; and
            ``(2) for follow-on investments and management fees, during 
        the 10-year period beginning on the date on which the 
        commitment is first drawn upon by the participating investment 
        company, with additional 1-year periods available at the 
        discretion of the Administrator.
    ``(d) Commitment of Funds.--Not later than 2 years after the date 
on which funds are appropriated for the program, the Administrator 
shall make commitments for equity financings.

``SEC. 399G. INVESTMENTS IN EARLY-STAGE SMALL BUSINESSES.

    ``(a) In General.--As a condition of receiving an equity financing 
under the program, a participating investment company shall make all of 
the investments of the participating investment company made with 
amounts received under the program, including securities, promissory 
notes, or other obligations, in small business concerns, of which at 
least 50 percent of the total amount of such investments shall be in 
early-stage small businesses in targeted industries.
    ``(b) Evaluation of Compliance.--After a participating investment 
company has expended not less than 50 percent of the amount of an 
equity financing commitment made under section 399F, the Administrator 
shall evaluate the compliance of the participating investment company 
with the requirements under subsection (a).
    ``(c) Waiver.--The Administrator may waive the requirements for a 
participating investment company under subsection (a) if the 
Administrator determines that it is in the best interest of the long 
term solvency of the fund established in section 399J.

``SEC. 399H. PRO RATA INVESTMENT SHARES.

    ``Each investment made by a participating investment company under 
the program shall be treated as comprised of capital from equity 
financings under the program according to the ratio that capital from 
equity financings under the program bears to all capital available to 
the participating investment company for investment.

``SEC. 399I. EQUITY FINANCING INTEREST.

    ``(a) Equity Financing Interest.--
            ``(1) In general.--As a condition of receiving an equity 
        financing under the program, a participating investment company 
        shall convey an equity financing interest to the Administrator 
        in accordance with paragraph (2).
            ``(2) Effect of conveyance.--The equity financing interest 
        conveyed under paragraph (1)--
                    ``(A) shall have all the rights and attributes of 
                other investors attributable to their interests in the 
                participating investment company;
                    ``(B) shall not denote control or voting rights to 
                the Administrator; and
                    ``(C) shall entitle the Administrator to a pro rata 
                portion of any distributions made by the participating 
                investment company equal to the percentage of capital 
                in the participating investment company that the equity 
                financing comprises, which shall be made at the same 
                times and in the same amounts as any other investor in 
                the participating investment company with a similar 
                interest.
            ``(3) Allocations.--A participating investment company 
        shall make allocations of income, gain, loss, deduction, and 
        credit to the Administrator with respect to the equity 
        financing interest as if the Administrator were an investor.
    ``(b) Manager Profits.--As a condition of receiving an equity 
financing under the program, the manager profits interest payable to 
the managers of a participating investment company under the program 
shall not exceed 20 percent of profits, exclusive of any profits that 
may accrue as a result of the capital contributions of any such 
managers with respect to the participating investment company. Any 
excess of manager profits interest, less taxes payable thereon, shall 
be returned by the managers and paid to the investors and the 
Administrator in proportion to the capital contributions and equity 
financings paid in. No manager profits interest (other than a tax 
distribution) shall be paid before the repayment to the investors and 
the Administrator of all contributed capital and equity financings 
made.
    ``(c) Distribution Requirements.--As a condition of receiving an 
equity financing under the program, a participating investment company 
shall make all distributions to all investors in cash and shall make 
distributions within a reasonable time after exiting investments, 
including following a public offering or market sale of underlying 
investments.
    ``(d) Reserve Requirements.--
            ``(1) In general.--A participating investment company with 
        an outstanding equity financing under the program shall, during 
        the first 5 years of the term of each debenture which requires 
        periodic interest payments to Administration, maintain a 
        reserve sufficient to pay the interest and charges on the 
        debenture for the first 21 payments due after the date of 
        issuance.
            ``(2) Form.--The reserve required under this subsection may 
        consist of any combination of--
                    ``(A) binding unfunded commitments from 
                institutional investors of the participating investment 
                company that may only be called for the purpose of--
                            ``(i) the payment of interest and charges 
                        to the Administration; or
                            ``(ii) the payment of any other amounts due 
                        to the Administration; and
                    ``(B) cash maintained in a separate bank account or 
                separate investment account permitted by the 
                Administration by regulation and separately identified 
                in the financial statements of the participating 
                investment company as `restricted cash' available only 
                for the purpose of--
                            ``(i) paying interest and charges to the 
                        Administration; or
                            ``(ii) the payment of any other amounts due 
                        to the Administration.
            ``(3) Reduction of required amount.--
                    ``(A) In general.--The required reserve associated 
                with a debenture shall be reduced on each payment date 
                upon payment of the required interest and charges to 
                the Administration.
                    ``(B) Elimination.--If a participating investment 
                company prepays a debenture before the due date for the 
                twenty-first payment after the date on which the 
                debenture is issued, the reserve requirement with 
                respect to the debenture shall be eliminated.
            ``(4) Inclusion in formation documents.--The formation 
        documents for a participating investment company shall 
        incorporate the reserve requirements under this subsection.

``SEC. 399J. FUND.

    ``(a) In General.--There is established in the Treasury a separate 
account (in this section referred to as `the fund') for equity 
financings which shall be available to the Administrator, subject to 
annual appropriations, as a revolving fund to be used for the purposes 
of the program. All amounts received by the Administrator under the 
program, including any moneys, property, or assets derived by the 
Administrator from operations in connection with the program, shall be 
deposited in the fund.
    ``(b) Funds Administration.--Not more than 1 percent of the total 
amount made available for the fund in a fiscal year may be used for 
funds administration.

``SEC. 399K. APPLICATION OF OTHER SECTIONS.

    ``To the extent not inconsistent with requirements under this part, 
the Administrator may apply sections 309, 311, 312, 313, and 314 to 
activities under this part, and an officer, director, employee, agent, 
or other participant in a participating investment company shall be 
subject to the requirements under such sections.

``SEC. 399L. ANNUAL REPORTING.

    ``The Administrator shall include information on the performance of 
the program in the annual performance report of the Administration 
required to be submitted under section 10(a) of the Small Business Act 
(15 U.S.C. 639(a)).''.

Summary: Small Business Innovation Act of 2016 This bill amends the Small Business Investment Act of 1958 to authorize the Small Business Administration (SBA) to guarantee the payment of up to $4 billion per fiscal year for debentures or participating securities issued by small business investment companies (SBICs) to encourage the formation and growth of small businesses. The SBA must establish and carry out an early-stage investment program to provide, through participating investment companies, equity financing to support early-stage businesses that have not generated positive cash flow at any time prior to an initial investment by a participating investment company. The bill outlines participating investment company application requirements and selection and approval procedures. It allows the SBA to make one or more equity financings to a participating investment company, with a limit of $100 million to any one company. A participating investment company shall make all of its investments in small businesses, of which at least 50 shall be early-stage small businesses in specified targeted industries. A separate account is established for equity financings under the program.