79–010

Calendar No. 759

106TH CONGRESS REPORT

2d Session " ! SENATE 106–383

COMMUNITY DEVELOPMENT AND VENTURE CAPITAL ACT

OF 1999

AUGUST 25, 2000.—Ordered to be printed

Filed under authority of the order of the Senate of July 26, 2000

Mr. BOND, from the Committee on Small Business,

submitted the following

REPORT

[To accompany S. 1594]

On July 26, 2000, the Committee on Small Business considered

S. 1594, the Community Development and Venture Capital Act of

1999. The Committee adopted by unanimous voice votes a substitute amendment offered by the Ranking Democrat, Senator John

F. Kerry, the sponsor of the bill, and two amendments offered by

the Chairman, Senator Christopher S. Bond, with respect to investments in low-income urban areas and the percentage of investments to be made in HUBZone areas. As amended, S. 1594 would

authorize the establishment of a comprehensive economic development program that seeks to stimulate venture capital investment

and intensive management assistance in small businesses located

in the country’s most distressed and under-invested communities.

Having considered S. 1594, as amended, the Committee reports favorably thereon and recommends that the bill do pass.

I. INTRODUCTION

Community development venture capital is a growing practice

that ties venture capital investment to economic development and

community revitalization. Unlike traditional venture capital funds

that are solely profit-driven, community development venture capital funds (CDVCs) are both mission-driven and profit-driven. The

industry refers to this as a ‘‘double bottomline’’—investments that

show promise not only of a financial return, but also of a social return. Social returns range from creating sustainable local jobs with

2

1Kerwin Tesdell is the president of the Community Development Venture Capital Alliance

and an adjunct professor at New York University School of Law. He holds an economics degree

from Harvard College, law and business degrees from New York University, and a certificate

from the Venture Capital Institute.

liveable wages to providing a much-needed service to the community.

CDVC investments are much smaller than traditional venture

capital funds, typically ranging between $50,000 and $500,000, and

go to small businesses located in distressed urban and rural areas.

However, while many of the existing active CDVCs seek out and

make investments based on location, some CDVCs, such as Coastal

Enterprises in Maine, make the majority of their investments

based on job creation potential. Another important distinction between traditional funds and mission-driven funds is that CDVCs

provide on-going, intensive business counseling and assistance.

It is generally accepted among economists and business experts

that venture capital has significantly contributed to the success of

the U.S. economy over the last 20 to 30 years. Accordingly, CDVC

funds have set out to demonstrate that the same model of business

development that has driven economic expansion in California’s

Silicon Valley and Route 128 in Massachusetts can also make a

powerful difference in areas like the inner-city areas of Boston’s

Roxbury and New York’s East Harlem, or the rural desolation of

Kentucky’s Appalachia and Mississippi’s Delta region.

The Committee has reviewed S. 1594 and the field of community

development venture capital on three occasions: On March 16, 1999

as part of the SBA’s FY2000 Budget Hearing; on May 12, 1999 as

part of the roundtable entitled ‘‘SBA’s SBIC and Microloan Programs’’; and on February 24, 2000 as part the SBA’s FY2001 Budget Hearing. The testimony and statements from those hearings and

roundtables demonstrate a real need for this legislation. For example, while there is a growing industry of community development

venture capital companies, there are virtually no institutional

sources of equity capital in distressed communities. Specifically,

there are currently 26 active CDVCs. They manage approximately

$157 million combined, and only 14 of those funds are capitalized

at $5 million or more, which is the absolute minimum for economic

viability of a fund.

Mr. Kerwin Tesdell,1 one of the roundtable participants and

president of the Community Development Venture Capital Alliance

in New York, explained why Congress should implement a community development venture capital program: ‘‘Why is Federal support

needed for this program? * * * right now we depend on social capital, from foundations and others with a social interest as well as

an economic interest in investment. That is a very small pool of

capital. Therefore, our funds are often undercapitalized, operate at

an inefficient level, and are unable to meet the needs of their communities.’’

This legislation creates a community development venture capital program that is modeled on the Small Business Administration’s existing venture capital program, called the Small Business

Investment Company (SBIC) program. Congress created the SBIC

program in 1958 to fill the gap between the scarcity of venture capital available to small businesses and the needs of start-up and

growing small businesses.

3

2Quote from the statement of Julia S. Rubin, a community development venture capital expert described in footnote no. 3, submitted for the record as part of the SBA’s FY2000 Budget

Hearing on March 16, 1999. 3Price Waterhouse Venture Capital Survey 1999/2000.

4 Julia S. Rubin is a doctoral candidate at Harvard University examining the field of community development venture capital (CDVC). She advises the Small Business Administration on

the President’s New Markets Venture Capital Initiatives, which is modeled after the CDVC industry. She also advises community development venture capital funds on how to attract more

Continued

The SBIC program has proven to be an extremely successful public-private sector partnership with the government. Since the program was started, it has provided more than $22 billion of investments in more than 86,000 small U.S. companies. In the last five

years, it has returned $238 million in profit participation to the

U.S. Department of Treasury. As successful as the SBIC program

is, it does not sufficiently reach areas of our country that need economic development the most. According to Don Christensen, the

Associate Administrator of the SBA’s Investment Division, who

participated in the Committee’s roundtable in 1999: ‘‘* * * Although the SBIC Program is extremely effective in addressing the

needs of small business in general, it comes up short in terms of

the needs of small businesses located in distressed urban and rural

areas * * * In the HUBZones, for example. A number of investments are being made by SBICs in those areas, but they are the

larger ones. What we need is a new program to address the specific

needs * * *’’

For example, in 1999, SBICs invested $771 million in low-and

moderate-income areas. However, ‘‘the vast majority of those investments were very large and not at all comparable to the type

of investments [NMVC] funds would make.’’ 2 Based on SBA data,

in 1998, only 1.8 percent, or $59 million, went to investments of $1

million or less in low- and moderate-income areas. In 1999, the percentage shrunk. Out of the total $4.2 billion that SBICs invested

in 1999, only 1.6 percent, or $66 million, went to such investments.

It is estimated that $60 million will be invested in low-income

areas through the NMVC program in FY2001, with the remaining

$140 million to be invested over the subsequent four-year period.

In approving this legislation, it is not the Committee’s intention

to criticize the SBIC program or the investment pattern of currently licensed SBICs. On the contrary, the Committee encourages

the SBICs to continue making investments in low- and moderateincome (LMI) areas and provides an incentive through a recently

implemented debenture, called an LMI debenture, which has favorable terms. The Committee recognizes the vital role that SBIC investments play in the economy and the financing gap they fill by

making investments of $300,000 to $5 million in small businesses,

which traditional venture capitalists do not typically make. Traditional venture capitalists make average investments of $9 million.3

The Committee is approving S. 1594 to expand the number of

smaller investments being made to small businesses in the poorest

areas, low-income geographic areas, and to fill another gap in access to capital that small businesses face. Investments for NMVC

funds typically will range from $50,000 to $300,000 versus the

$300,000 to $5 million range found in the Agency’s SBIC program.

According to Julia Sass Rubin,4 a community development venture capital expert at Harvard University who participated in the

4

venture capital. Formerly a consultant for McKinsey & Co., she received her M.B.A., M.A. and

B.A. degrees from Harvard University. 5Michael E. Porter is the C. Roland Christensen Professor of Business Administration at Harvard Business School. He is the author of many best-selling books on strategy, including ‘‘The

Competitive Advantage of Nations, Competitive Advantage: Creating and Sustaining Superior

Performance,’’ and ‘‘Competitive Strategy: Techniques for Analyzing Industries and Competitors.’’ The quote is taken from ‘‘The Competitive Advantage of the Inner City’’ of the Harvard

Business Review.

1999 roundtable and submitted a statement for the hearing record

on SBA’s FY2001 budget, the situation is compounded by the fact

that ‘‘these [SBIC] investments were narrowly distributed. Only

five states received 59 percent of these dollars in 1999, and only

four states accounted for 55 percent of these dollars in 1998. In

1999, California alone accounted for 30 percent of all SBIC LMI investments of $1 million or less. [Similarly], in 1998, California accounted for 28 percent of all investments. Meanwhile, 21 states in

1999, and 20 states in 1998, received no [SBIC] capital at all. [Finally], in 1998, only two SBIC investments went to rural LMI

areas.’’

The need for targeted venture capital investment is not only

clear from these statistics, but from investment experts and economists who recognize the vital role of venture capital in our economy. At the Federal Reserve System Research Conference on Business Access to Capital and Credit held in March of 1999, Federal

Reserve Board Chairman Alan Greenspan said: ‘‘* * * Credit alone

is not the answer. Businesses must have equity capital before they

are considered viable candidates for debt financing. * * * Continued efforts to develop markets for private equity investments will

be rewarded by an innovative and productive business community.

This is especially true in lower-income communities, where the

weight of expansive debt obligations on small firms can severely

impede growth prospects, or more readily lead to business failures.’’

We can make a difference in the country’s poor, under-invested

and under-served areas by investing in a new industry of community development venture capital funds that target investment capital and business expertise into low- and moderate-income areas to

develop and expand local businesses that create jobs and alleviate

economic distress.

II. DESCRIPTION OF THE BILL

The ‘‘Community Development Venture Capital Act of 2000’’ addresses the venture capital financing needs of small businesses located in low-income urban areas and low- and moderate-income

rural areas, referred to by the Administration as ‘‘new markets.’’

The SBA defines new markets as rural and inner city communities,

including HUBZones and Rural and Urban Empowerment Zones.

New markets are areas of the country where entrepreneurs have

experienced barriers to the marketplace and there is little to attract investors. At the same time, these areas need so much, there

are significant opportunities. According to Michael Porter,5 a respected professor at Harvard University and business analyst who

has written extensively on competitiveness, ‘‘* * * inner cities are

the largest underserved market in America, with many tens of billions of dollars of unmet consumer and business demand.’’ The

Committee believes comparable opportunities exist in poor rural

areas.

5

6Ms. Elyse Cherry, transcript of the May 12, 1999, Roundtable, ‘‘SBA’s SBIC and Microloan

Programs.’’ Page 18, line 6.

This legislation has three parts: the New Markets Venture Capital Program, a venture capital program to funnel investment

money into distressed communities; the Community Development

Venture Capital Assistance Program, a capacity building program

to expand the number of venture capital firms and professionals

who are devoted to investing in such communities; and

BusinessLINC, a mentoring program to link established, successful

businesses with small business owners in stagnant or deteriorating

communities in order to facilitate the learning curve to develop and

grow their small businesses.

Title I—New Markets Venture Capital Program

The center piece of S. 1594 is the New Markets Venture Capital

Program. Its purpose is to stimulate economic development through

public-private partnerships called New Markets Venture Capital

Companies (NMVCs) that invest venture capital in and provide

technical assistance to smaller businesses located in distressed

rural and urban areas, including HUBZones and Urban and Rural

Empowerment Zones.

Through this legislation, the SBA will create a separate venture

capital program that will fund up to 20 venture capital companies

dedicated to new markets. Unlike the SBIC program which focuses

on small businesses with high-growth potential and claims successes such as Staples and Calaway Golf, the NMVC program will

focus on smaller businesses that show promise of a double

bottomline. While these smaller businesses can be higher risk, need

patient capital and technical assistance, and have modest growth

prospects, they can also provide quality jobs and create productive

wealth in and among our neediest communities.

During the Committee’s roundtable, Ms. Elyse Cherry, president

of the Boston Community Venture Fund in Massachusetts, one of

the country’s premier community development venture capital

funds, gave an example of an investment with a double bottomline:

City Fresh Foods. Run by two young African-American brothers,

the company provides African-American, Hispanic and Caribbean

food to the Meals-on-Wheels program in the Roxbury/Dorchester

area of Boston, a low- and moderate-income area in the inner-city

‘‘that had no investment in the last 20 years.’’ 6 The ethnic meals

were in demand and needed because the typical menus were too

bland, and the elderly and disabled who relied on Meals-on-Wheels

were not eating their food. In spite of the market demand, the company had lost money in every one of its three years of existence.

It was faced with shutting down or getting more financing. After

Boston Community Venture Fund invested in City Fresh and started providing the owners with management assistance, the company

developed a positive cash flow in about six months and was a year

ahead of schedule at the time of the Committee’s Roundtable. In

addition to providing a needed service, City Fresh Foods has created more than 20 jobs. It also hires from the community, pays its

employees from $8 to $16 per hour, and offers training and opportunity for employees to move from entry-level jobs to supervisory

positions.

6

S. 1594 as reported authorizes the SBA to make matching grants

to new markets venture capital companies (NMVCs) and specialized small business investment companies (SSBICs), licensed under

Section 301(d) of the Small Business Investment Act, so that they

can provide technical assistance to prospective and financed portfolio companies. Though the legislation does allow SSBICs to use

these funds to provide technical assistance to small businesses at

the pre- and post-investment stages, priority should be given for

LMI investments that are already financed (post-investment). The

Committee wants to stress that SSBICs cannot use these matching

TA grants for any investments they have made prior to implementation of this legislation.

S. 1594 also authorizes the SBA to guarantee debentures issued

by the NMVCs. The debentures leverage the private capital that

NMVCs raise and enable NMVCs to make venture capital investments in small businesses located in low-income urban areas and

low- and moderate-income rural areas.

In order to participate in the program, a New Markets Venture

Capital Company must be a newly formed, for-profit entity. It must

have demonstrated management expertise in community development venture capital. It must have raised a minimum of $5 million

in private capital. Generally, it must have obtained matching fund

commitments for each dollar of technical assistance (TA) to be used

over a five- to ten-year period. TA matching grants will be provided

to an NMVC in an amount equal to 30 percent ($1.5 million) of the

$5 million it raised in private funds. If an NMVC cannot raise the

TA matching contribution up front, the legislation permits the SBA

to issue a TA grant if an NMVC has a plan for (1) how it will

match the TA grant money, and (2) the NMVC has already raised

20 percent of the required match. Lastly, an NMVC applicant must

have developed a plan and operational structure that focuses investments in low-income areas, illustrating that it is mission-driven. This last provision is important because it is a safeguard

against NMVC companies that might take advantage of the program.

This bill authorizes the SBA to match up to 11⁄2 times an NMVC

company’s private capital through guarantees of debentures, called

Low-Income Debentures (LIDs). An NMVC company will not be required to make interest payments on an LID for five years. This

deferred interest feature, similar to the LMI debenture available

under the SBIC program, is designed to encourage the NMVC companies to make patient investments in smaller enterprises located

in low-income geographic areas. This type of patient funding, sometimes referred to as an ‘‘equity-type’’ investment, will allow an

NMVC company to nurture the development of a smaller enterprise

for long-term success and help the NMVC company to obtain a reasonable return on its investment.

While an NMVC will not be required to make interest payments

on an LID for five years, it will be charged interest. The accumulating interest is built into the LID, which discounts (reduces) the

face value of the LID from a 11⁄2 match ($7.5 million) to a net cash

value of a one-to-one match ($5 million). For example, under S.

1594, an NMVC company is required to raise a minimum of $5 million in private capital. The SBA will match that private capital

through the guarantee of a LID, up to 11⁄2 times, or $7.5 million.

7

However, assuming an 8 percent interest rate on that $7.5 million

for five years, the net proceeds (cash value) of that LID then would

be approximately $5 million, same as the amount of private capital

raised by the NMVC company. That one-to-one match gives the

NMVC a total portfolio of $10 million to invest.

While the Administrator is authorized to issue and guarantee

trust certificates of these LID debentures, Federal securities laws

still apply. The Committee wants to make clear that nothing in

this legislation is intended to undermine the authority of the Securities and Exchange Commission.

The reported legislation provides many protections to maximize

the chances of NMVC funds succeeding financially and having a

significant impact on their communities. The structure of NMVC

companies comes from the experience of existing CDVCs and current research. It also draws upon the lessons learned by the SBA

from administering the SBIC and SSBIC programs. Accordingly,

this bill sets a minimum fund size of $5 million in order for an organization to qualify for SBA leverage. It requires NMVC companies to have qualified and experienced management. It reduces the

potential leverage that NMVC funds can draw upon, to a 1 to 11⁄2

ratio. And, like the SBIC program, NMVC funds lose all of their

capital before any government guaranteed funds are placed at risk.

As reported, S. 1594 also prevents an NMVC company from filing

for bankruptcy to guarantee that NMVC companies repay any federal financial assistance it receives under the new markets venture

capital program.

Restricting investments in urban communities to low-income

areas

At the markup, the Committee Chairman Bond expressed concern that the program benefit only businesses located in low-income (LI) areas, rather than low- and moderate-income (LMI)

areas. By unanimous consent, the Committee adopted the Chairman’s amendment to change the geographic investment areas for

urban areas from low- and moderate-income areas to only low-income areas. The amendment did not change the criteria for defining rural areas in which NMVC companies may invest.

Targeting twenty-five percent of the debentures to HUBZone

areas

The Chairman offered an amendment at the markup requiring

new markets venture capital companies to invest 25 percent of the

money raised through SBA-backed debentures in small companies

that are located in Historically Underutilized Business Zones

(HUBZones). The Committee created the HUBZone program as

part of the SBA Reauthorization of 1997 (PL 105–135). The Committee unanimously adopted the amendment.

Title II—The Community Development Venture Capital Assistance

Program

S. 1594 authorizes the SBA to establish the Community Development Venture Capital Assistance Program. The purpose is to promote the growth of the field of community development venture

capital through training, technical assistance, knowledge sharing

and the expansion of best practices among venture funds. Existing

8

community development venture capital companies have emphasized to the Committee that capacity-building is especially important in areas not currently served by the active CDVCs. There are

many states and communities where there is an urgent need for

equity investments that will result in the creation of jobs, wealth

and opportunities for low-income people, but where there may not

yet be a venture fund with the capacity to become a New Markets

Venture Capital company. Initially, this title has the potential to

help the venture capital program for low-income areas.

The need is clear. The Community Development Venture Capital

funds across the country have a proven track record in making

smart, responsible investments in small businesses in their communities, but the capital needs of firms in economically distressed

areas far outweigh the existing capacity of these organizations.

Compared to the more than 1,143 traditional and SBIC venture

capital firms in the U.S., only 26 funds nationwide currently concentrate on investing in companies that show promise of financial

and social returns. The industry needs more community development venture capital funds to reach more of these underserved

communities. The bill authorizes $20 million total in program level

over four years (FY2000–2003).

First, the Community Development Venture Capital Assistance

program would authorize at least $15 million for SBA grants to private, nonprofit organizations with expertise in making venture capital investments in poor communities. These organizations would

use these grants to provide hands-on technical assistance to spawn

and develop new and emerging CDVC or NMVC companies. The

intermediary organizations would match the grants dollar for dollar with non-Federal sources.

Second, this program would provide up to $5 million in SBA

grants to colleges, universities, and other firms or organizations—

public or private—to create and operate training and intern programs, organize a national conference, and fund academic research

and studies dealing with community development venture capital.

Senator Wellstone originally introduced this legislation during

the 105th Congress as an amendment to H.R. 3412, the Small

Business Investment Company Technical Corrections Act of 1998.

It passed both the Senate Committee on Small Business and the

full Senate, but the House did not get to act on the bill before the

Congress adjourned so it was not enacted. Senator Wellstone reintroduced this legislation this Congress as S. 619 on March 15,

1999. His bill has been incorporated as Title II of S. 1594.

Title III—BusinessLINC

This legislation amends the Small Business Act to authorize

matching grants for BusinessLINC, a program which links large

businesses with small business owners. The Administrator of the

Small Business Administration is authorized to make grants to and

enter into participation agreements with coalitions of public and

private-sector participants to promote, expand and facilitate mentor-protege relationships in low-income areas and provide the additional money needed to identify existing and potential small businesses for linkage to appropriate larger businesses.

BusinessLINC builds upon an already successful public-private

partnership that began June 5, 1998 between the U.S. Small BusiVerDate 11-MAY-2000 18:00 Aug 30, 2000 Jkt 079010 PO 00000 Frm 00008 Fmt 6659 Sfmt 6602 E:\HR\OC\B383SR.003 pfrm08 PsN: B383SR
9

ness Administration (SBA), the U.S. Department of the Treasury,

and the private business sector. The Business Learning, Investment, Networking, and Collaboration (LINC) initiative was formed

to encourage the linkage of large businesses to small businesses,

enhancing the economic vitality and competitive capacity of small

businesses located in economically distressed urban and rural

areas.

The Committee authorizes $6.6 million per year for

BusinessLINC grants for six years, from FY2000–2005.

Authorization levels

For the New Markets Venture Capital Program, this amended

legislation authorizes a total of program level of $150 million for

debentures and a total of $30 million for technical assistance

matching grants for fiscal years 2000 though 2005. For the Community Development Venture Capital Assistance Program, this bill

authorizes a total of $20 million for fiscal years 2000 though 2003.

For BusinessLINC, this bill authorizes $6.6 million annually for

fiscal years 2000 though 2005. The amounts for all three programs

shall remain available until expended.

III. COMMITTEE VOTE

In compliance with rule XXVI(7)(b) of the Standing Rules of the

Senate, the following votes were recorded on July 26, 2000. A motion by Senator Kerry to adopt the substitute amendment by Senator Kerry passed by unanimous voice vote. A motion by Senator

Kerry to adopt two amendments by Senator Bond concerning investments in low-income urban areas and the percentage of investments to be made in HUBZone areas passed by unanimous voice

vote. A motion by Senator Bond to adopt the ‘‘Community Development Venture Capital Act of 1999,’’ as amended, was approved by

a 16–1 recorded vote, with the following Senators voting in the affirmative: Bond, Kerry, Burns, Bennett, Snowe, Enzi, Fitzgerald,

Crapo, Abraham, Levin, Harkin, Lieberman, Wellstone, Cleland,

Landrieu and Edwards. Voting in the negative: Senator Voinovich.

IV. EVALUATION OF REGULATORY IMPACT

In compliance with rule XXVI(11)(b) of the Standing Rules of the

Senate, it is the opinion of the Committee that no significant additional regulatory impact will be incurred in carrying out the provisions of this legislation. There will be no additional impact on the

personal privacy of companies or individuals who utilize the services provided.

V. COST ESTIMATE

In compliance with rule XXVI(11)(a)(1) of the Standing Rules of

the Senate, the Committee estimates the cost of the legislation will

be less than the amounts indicated by the Congressional Budget

Office (CBO) in the following letter. CBO estimates a subsidy rate

of 20 percent for the New Markets Venture Capital program. However, as part of its responsibilities under the Credit Reform Act of

1990, the Office of Management and Budget (OMB) estimates a

subsidy rate of 14.44 percent for the program for FY2001.

10

CONGRESSIONAL BUDGET OFFICE COST ESTIMATE

S. 1594—Community Development and Venture Capital Act of 2000

Summary: S. 1594 would authorize appropriations for fiscal

years 2000 through 2005 for the New Markets Venture Capital

(NMVC) program within the Small Business Administration (SBA).

This program would provide federal loan guarantees to venture

capital corporations that invest in small businesses located in lowincome communities. The bill also would establish a program—the

community Development Venture Capital program—to provide

training and assistance to venture capital companies that promote

community development. Finally, S. 1594 would authorize appropriations for the BusinessLINC program, also within SBA. This

program would promote relationships between large and small

businesses.

CBO estimates that implementing S. 1594 would cost a total of

$104 million over the 2001–2005 period, assuming appropriation of

the necessary amounts. Because S. 1594 would not affect direct

spending or receipts, pay-as-you-go procedures would not apply.

S. 1594 contains an intergovernmental mandate as defined in the

Unfunded Mandates Reform Act (UMRA), but CBO estimates that

the cost of the mandate would not be significant. The bill contains

no new private-sector mandates.

Estimated cost to the Federal Government: For this estimate,

CBO assumes that S. 1594 will be enacted near the start of fiscal

year 2001 and that funds will be provided for its implementation

each year. The estimated budgetary impact of S. 1594 is shown in

the following table. The costs of this legislation fall within budget

function 370 (commerce and housing credit).

By fiscal year, in millions of dollars

2000 2001 2002 2003 2004 2005

SPENDING SUBJECT TO APPROPRIATION

Spending for NMVC and business LINC:

Under current law:

Budget authority 1 ......................................... 11 0 0 0 0 0

Estimated outlays ......................................... 4 5 2 2 0 0

Proposed Changes:

Estimated authorization level ....................... 0 35 34 18 12 12

Estimated outlays ......................................... 0 20 31 24 16 13

Spending under S. 1594:

Estimated authorization level 1 ..................... 11 35 34 18 12 12

Estimated outlays ......................................... 4 25 33 24 16 13

1 The 2000 level is the amount appropriated for that year. It includes $9 million for NMVC technical assistance and $2 million for Business

LINC assistance. In addition, Public Law 106–113 had earmarked $6 million for the subsidy cost of NMVC loan guarantees; but Public Law

106–259 (enacted August 9, 2000) repealed that earmark. 2 Less than $500,000.

Basis of estimate

S. 1594 would authorize appropriations for three programs within SBA. Based on historical spending patterns of similar programs,

CBO estimates implementing the New Markets Venture Capital

program would cost $54 million, the Community Development Venture Capital program would cost $20 million, and the

BusinessLINC program would cost $30 million.

11

New markets venture capital

S. 1594 would authorize the NMVC programs for six years (fiscal years 2000 through 2005), with appropriations limited to $30 million for technical assistance grants and such sums as necessary to

subsidize and administer up to $150 million in NMVC loan guarantees. For this estimate, CBO assumes SBA would guarantee 100

percent of any loans under this program.

CBO estimates that S. 1594 would authorize the appropriation of an additional $56 million over the 2001–2005 period for the NMVC

program. This cost reflects the difference between the total

amounts authorized in the bill and the $9 million appropriated for

the current year.

Specifically, S. 1594 would authorize the appropriation of up to $30 million over the 2000–2005 period for technical assistance,

which is $21 million more than has been appropriated for fiscal

year 2000. In addition, CBO estimates that it would cost about $30

million to subsidize $150 million in NMVC loan guarantees. Finally, experience with other SBA programs suggests that it would

cost an average of about $1 million a year to administer the program, net of any examination fees paid by borrowers.

CBO estimates that the subsidy cost of the NMVC program

would be about 20 percent of the amount guaranteed. This estimate is based on trends in defaults and recoveries for similar SBA

programs and on information regarding the likely terms and conditions of the guarantees. Experience with other programs suggests

that NMVC borrowers would default on about 45 percent of guaranteed loans. In the event of a default, CBO expects that the agency would liquidate the NMVC investments and that recoveries

would average about 50 percent of the loan balance three years

after default. Based on information from the Office of Management

and Budget, we assume that SBA would allow borrowers a grace

period of five years during which they would not pay interest; instead, such interest would be added to the outstanding debt. Because S. 1594 would authorize SBA to guarantee up to $150 million

of loans, we estimate that this program would require the appropriation of about $30 million for credit subsidies.

Community development venture capital

S. 1594 would authorize the Community Development Venture

Capital program for four years (fiscal years 2000 through 2003),

with appropriations limited to $20 million for grants and contracts

to provide technical assistance. Based on the spending patterns of

similar programs, CBO estimates that outlays for this program

would total about $20 million over the 2001–2005 period.

BusinessLINC

S. 1594 would authorize appropriations of $6.6 million each year

over the 2001–2005 period to promote relationships between large

and small businesses. Based on the spending patterns of SBA’s

other grant and assistance programs. CBO estimates that outlays

for this program would be $30 million over the 2001–2005.

Pay-as-you-go considerations: None.

Impact on state, local, and tribal governments: Title I would preempt state laws by prohibiting them from limiting the Administration’s ability to exercise its ownership rights in certain debentures

12

issue by a new markets venture capital company. Such a preemption of state law is an intergovernmental mandate as defined by

UMRA, but CBO estimates that the mandate would impose no significant costs on state, local, or tribal governments.

Impact on the private sector: S. 1594 contains no new privatesector mandates as defined by UMRA.

Previous CBO estimates: This estimate differs from previous estimates of related legislation because of a change in the amounts

being spent under current law. CBO’s previous estimates included

$6 million that was appropriated in 2000 for the subsidy cost of

NMVC loans. The Department of Defense Appropriations Act, 2001

(Public Law 106–259, enacted on August 9, 2000) allows SBA to

spend such funds on other loan programs. CBO transmitted three

related estimates prior to this change in law.

On August 4, 2000, CBO transmitted a cost estimate for S. 1594,

the Community Development and Venture Capital Act of 2000, as

ordered reported by the Senate Committee on Small Business on

July 26, 2000. That version of the bill would authorize the

BusinessLINC program only through fiscal year 2003. CBO estimated that implementing S. 1594, as ordered reported, would cost

total of $87 million over the 2001–2005 period.

On June 26, 2000, CBO transmitted a cost estimate for H.R.

2848, the New Markets Initiative Act of 1999, as ordered reported

by the House Committee on Banking and Financial Services on

April 13, 2000. H.R. 2848 would authorize loan guarantees under

the NMVC program of up to $100 million and technical assistance

to borrowers. CBO estimated those provisions would cost $40 million over the 2001–2005 period.

On July 16, 2000, CBO transmitted a cost estimate for H.R.

4530, the New Markets Venture Capital Program Act of 2000, as

ordered reported by the House Committee on Small Business on

May 25, 2000. S. 1594 would authorize loan guarantees under the

NMVC program of up to $150 million and technical assistance to

borrowers. CBO estimated that implementing H.R. 4530 would cost

$47 million over the 2001–2005 period.

Estimated prepared by: Federal Costs: Mark Hadley; Impact on

State, Local, and Tribal Governments: Victoria Heid Hall; and Impact on the Private Sector: Lauren Marks.

Estimate approved by: Peter H. Fontaine, Deputy Assistant Director for Budget Analysis.

VI. SECTION-BY-SECTION

Section 1. Short title

The title of the bill is ‘‘The Community Development and Venture Capital Act of 2000.’’

Title I—New Markets Venture Capital Program

Sec. 101. New Markets Venture Capital Program

This section amends Title III of the Small Business Investment

Act of 1958 to establish the New Markets Venture Capital Program, a mission-driven venture capital program designed to attract

investment capital and business expertise to smaller businesses in

new markets. New markets are low-income urban and rural areas

of the country where entrepreneurs have experienced barriers to

13

the marketplace and there is little to attract investors. At the same

time, these areas need so much, there are significant opportunities.

Subsection 351. Definitions

This subsection sets forth the definitions for the terms used in

the legislation.

Subsection 352. Purposes

The purpose of the New Markets Venture Capital program is to

encourage venture capital investment in smaller businesses located

in urban and rural areas; to promote the creation of wealth, economic development, and job opportunities in low-income areas; and

to establish a venture capital program at the Small Business Administration, separate from its Small Business Investment Company (SBIC) venture capital program, that focuses on economic development.

Subsection 353. Establishment

This subsection establishes the new markets venture capital program, which authorizes the SBA to (1) make grants to new markets

venture capital (NMVC) companies and Specialized Small Business

Investment Companies (SSBICs) so that they can provide technical

assistance to prospective and financed portfolio companies, and (2)

to guarantee the debentures issued by NMVCs to enable such companies to make venture capital investments in low-income areas.

Subsection 354. Selection of NMVC companies

This subsection sets forth the criteria the SBA must follow in selecting NMVC companies. The criteria is designed to ensure that

selected NMVC companies are fiscally sound, well-managed, and

experienced to identify and make responsible, successful community development venture capital investments that will benefit lowincome communities and the investors. The Committee expects the

SBA to select NMVC companies that have a primary objective of

economic development of low-income geographic areas, particularly

in regard to quality job creation for the people who live in the area.

In order to participate in the program, NMVC companies must

satisfy the following requirements:

(1) Each NMVC company must be a newly formed, for-profit entity.

(2) Each NMVC company’s management team must have demonstrated experience in making venture capital investments in

smaller companies that result in creating jobs and promoting economic development in the community.

(3) Each NMVC company must provide a plan that concentrates

its activities on serving the eligible investment areas, and submit

a proposal that will expand economic opportunities and address the

unmet capital needs within the eligible areas.

(4) Each applicant must submit a proposal describing how it will

provide marketing, management and technical assistance to smaller companies expected to be financed by the NMVC.

(5) Each NMVC company must raise at least $5 million of contributed capital or binding capital commitments from non-Federal

investors, which SBA will match with guarantees.

14

(6) Each NMVC company must obtain matching fund commitments, cash or in-kind, from non-SBA sources, for marketing, management and technical assistance equal to 30 percent of the $5 million ($1.5 million) in funds it raises. SBA matches the money dollar-for-dollar.

There is an exception for the technical assistance matching requirements. The Committee understands that it may be difficult for

some NMVC companies to raise their entire 30–percent match during the application stage. In those circumstances, the Administrator may approve an NMVC company if it has a viable plan to

raise the $1.5 million in cash or in-kind and has binding commitments for at least 20 percent of that $1.5 million on hand.

(7) Each NMVC must make at least 80 percent of its investments

in low-income geographic areas. In order for an investment to be

counted toward the 80% goal under this legislation, the investment

must be made in a small business concern located in a low-income

area. This ensures that the New Markets Venture Capital Company Program will focus investment capital where it is most needed, rather than duplicating SBA’s existing venture capital program,

the Small Business Investment Company program.

It is also the Committee’s view that by investing the majority of

funds in low-income communities, we will not only provide the benefit of increased job opportunities for people who live in the area,

but also provide the benefit of improving the physical community.

This double benefit ensures that the resources spent under S. 1594

will provide the maximum economic impact on the low-income communities to which this bill is targeted.

In addition to the criteria outlined above, this legislation requires

the SBA to consider geographic distribution of applicants when selecting NMVC companies. The Committee expects the SBA to select

qualified NMVC companies that are located in different areas

around the country, to the extent possible, so that the program is

not concentrated in one or two regions.

Subsection 355. Technical assistance grants

Under the New Markets Venture Capital Program, the SBA is

authorized to make technical assistance (TA) grants to NMVC companies established under this legislation and to certain Specialized

Small Business Investment Companies (SSBICs). However, the

conditions are different.

NMVC companies are eligible for one or more grants equal up to

30 percent of the $5 million in capital and commitments that they

must raise for investment capital. They must match their grant

funds dollar for dollar, and they can use the funds to provide marketing, management and technical assistance to small businesses

pre- and post-investment, meaning small businesses that have already been financed or are expected to be financed through this

program. The grant funds will be made available to NMVCs over

a multi-year period not to exceed 10 years.

SSBICs are also eligible for TA grant funds. They are eligible

without entering into a participation agreement with SBA to act as

an NMVC company, but they must submit a plan to SBA explaining how the funds will be used. The participation of the SSBICs is

limited only to investments they make in low-income areas after

the date of enactment, and the grant amount is limited to 30 perVerDate 11-MAY-2000 18:00 Aug 30, 2000 Jkt 079010 PO 00000 Frm 00014 Fmt 6659 Sfmt 6602 E:\HR\OC\B383SR.007 pfrm08 PsN: B383SR
15

cent of those investments. Like NMVC companies, SSBICs must

match the grant funds dollar for dollar, the grant funds will be

made available over a multi-year period not to exceed 10 years, and

they can use the funds to provide marketing, management and

technical assistance to small businesses pre- and post-investment.

Though the legislation does allow SSBICs to use these funds to

provide technical assistance to small businesses pre- and post-investment, priority will be given for low-income investments that

are ultimately financed. The Committee wants to emphasize that

SSBICs cannot use matching TA grant funds for any investments

they have made prior to implementation of this legislation.

This legislation also authorizes SBA to make supplemental

grants. They are for NMVC companies and SSBICs to provide extra

technical assistance to the smaller enterprises that they finance.

These grants must also be matched one for one. The purpose of

supplemental grants is to provide an extra incentive for NMVC

companies and SSBICs to invest in small companies that have potential but are more time-consuming and thus more expensive to

manage.

The Program limits the use of grant funds to marketing, management and technical assistance to smaller enterprises financed

by NMVC companies and SSBICs. The purpose of this limitation

is to ensure that NMVC companies and SSBICs do not use the

funds to support other business costs and projects.

Subsection 356. Debentures

S. 1594 authorizes the SBA to guarantee debentures that

NMVCs issue to raise capital for equity and equity-type investments. The term cannot exceed 15 years, and the debentures are

subject to the interest rate and terms approved by the Administrator. Interest payments will be deferred on these debentures for

the first five years of their term. To protect taxpayer investment

in NMVCs, the total face value of debentures cannot exceed 150

percent of the NMVC’s private capital.

This legislation also requires that 25 percent of the proceeds

from debentures be invested in smaller enterprises located in

HUBZones (Historically Underutilized Business Zones). The Committee created the HUBZone program as part of the SBA Reauthorization of 1997 (PL 105–135). The Committee notes that the

HUBZone definition for eligible inner city census tracts and nonmetropolitan counties is a comprehensive definition that includes

more than 7,000 metropolitan census tracts, more than 900 nonmetropolitan counties, 527 Native American reservations and Native Alaskan villages.

Subsection 357. Issuance and guarantee of trust certificates

This subsection authorizes the SBA to issue and guarantee trust

certificates representing ownership of all or part of the debentures

issued by an NMVC company and guaranteed by the Administration. Each guarantee issued under this section is limited to the

amount of the principal and interest on the guaranteed debentures

that compose the trust or pool of certificates. This section grants

SBA subrogation and ownership rights over the trust certificates

guaranteed under this section, but the SBA is prohibited from collecting a fee for any guarantee of a trust certificate issued under

16

this section. Finally, this section allows SBA to contract with an

agent to carry out the pooling and central registration functions for

the trust certificates issued.

While the Administrator is authorized to issue and guarantee

trust certificates of these debentures, Federal securities laws still

apply. The Committee wants to make clear that nothing in this legislation is intended to undermine the authority of the Securities

and Exchange Commission.

Subsection 358. Fees

This subsection authorizes SBA to charge such fees as it deems

appropriate with respect to any guarantee or grant issued to an

NMVC company. This authorization is subject to the prohibition

contained in Subsection 357 that prohibits SBA from collecting a

fee for any guarantee of a trust certificate issued under that section.

Subsection 359. Bank participation

This subsection allows any national bank, and any member bank

of the Federal Reserve System, to invest in an NMVC company

formed under this legislation so long as the investment does not exceed 5 percent of the capital and surplus of the bank.

Banks that are not members of the federal Reserve system are

allowed to invest in an NMVC company formed under this legislation so long as such investment is allowed under applicable State

law, and so long as the investment would not exceed 5 percent of

the capital and surplus of the bank.

Subsection 360. Federal financing bank

This subsection establishes that Section 318 of the Small Business Investment Act does not apply to any NMVC company created

under this legislation.

Subsection 361. Reporting requirements

Under this legislation, NMVC companies are required to provide

to SBA such information as the Administration requires, including:

information related to the measurement criteria that the NMVC

company proposed in its program application; and, for each case in

which an NMVC company makes an investment or a grant to a

business located outside of a low-income area, a report on the number and percentage of employees of the business who reside in an

low-income area.

Subsection 362. Examinations

This subsection requires that each NMVC company shall be subject to examinations made at the direction of the Investment Division of SBA. This section allows for examinations to be conducted

with the assistance of a private sector entity that has both the necessary qualifications and expertise. It is the intent of the Committee that the oversight of the NMVC program be modeled after

that developed for the SBIC program and administered by the

SBA’s Investment Division. Oversight should include a close working relationship between the SBA analysts and NMVC management teams, detailed reporting requirements, frequent on-site exVerDate 11-MAY-2000 18:00 Aug 30, 2000 Jkt 079010 PO 00000 Frm 00016 Fmt 6659 Sfmt 6602 E:\HR\OC\B383SR.008 pfrm08 PsN: B383SR
17

aminations to evaluate performance and conformance with the operating plan, and careful analysis of the firm’s economic impact.

Subsection 363. Injunctions and Other Orders

This subsection grants SBA the power of injunction over NMVC

companies and the authority to act as a trustee or receiver of a

company if appointed by a court. This section of the legislation

closely tracks the existing injunction provision (Section 311) of the

Small Business Investment Act of 1958. It is the Committee’s intent that oversight of the NMVC program be modeled after that developed for the SBIC program and administered by SBA’s Investment Division.

Subsection 364. Unlawful Acts and Omissions; Breach of Fiduciary Duty

This subsection defines what is to be considered as a violation of

this legislation, who is considered to have a fiduciary duty, and

who is ineligible to serve as an officer, director, or employee of any

NMVC company because of unlawful acts. It closely tracks the unlawful acts provision (Section 314) of the Small Business Investment Act of 1958. It is the Committee’s intent to grant SBA the

same authority over NMVC companies that it has over Small Business Investment Companies with respect to unlawful acts and the

breach of fiduciary responsibility. This subsection also grants the

SBA the authority to use the procedures set forth in Section 313

of the Small Business Investment Act of 1958 to remove or suspend

any director or officer of an NMVC. company.

Subsection 365. Regulations

This subsection authorizes the SBA to issue such regulations as

it deems necessary to carry out the provisions of this legislation.

Subsection 366. Authorizations

This subsection authorizes a program level of $150 million for

SBA-guaranteed debentures and $30 million for matching technical

assistance grants.

Sec. 102. Bankruptcy exemption for NMVC companies

This section prohibits NMVC companies from filing for protection

under bankruptcy laws. The purpose of this section is to guarantee

that NMVC companies repay any federal financial assistance it receives under the new markets venture capital program.

Sec. 103. Federal savings associations

This section amends the Home Owners’ Loan Act to allow a federal savings association to invest directly in new markets venture

capital companies instead of forming a service subsidiary to make

the investments. It also limits investment to five percent of a

thrift’s capital and surplus. The purpose of this section is to put

thrifts on even footing with national banks in making these types

of investments.

18

Title II—Community Development Venture Capital Assistance

Sec. 201. Findings

This section sets forth Congressional findings on the value of

community development venture capital and the need to expand

the number of professionals and organizations experienced to do

this type of specialized investing.

Sec. 202. Community development venture capital activites

This section amends the Small Business Act to establish a oneto-one matching grant program to increase the number and expertise of community development venture capital funds (CDVCs)

around the country, such as new markets venture capital companies. It also provides grant money to colleges, universities, and

other firms or organizations—public or private—to increase training and research.

Subsection (a) sets forth the definitions of a Community Development Venture Capital Organization, a Developmental Organization, and an Intermediary Organization.

Subsection (b) sets forth the authority given to the Administrator

of the Small Business Administration to carry out this program. (1)

It gives the Administrator the authority to enter into contracts

with one or more organizations that either research community development venture capital or develop specialized venture capital

professionals and organizations. (2) It gives the Administrator the

authority to make grants to developmental organizations to carry

out training and research activities related to community development venture capital, and grants to intermediary organizations to

provide marketing, management and technical assistance to community develoment venture capital organizations.

Subsection (c) sets forth the four training and research activities

for which a developmental organization can use a grant. (1) It can

be used to strengthen the professional skills of individuals in or operating a CDVC by creating training programs. (2) It can be used

to increase interest in community development venture capital by

creating a program to place students and graduates as interns in

CDVCs or internmediary organizations for one year with a stipend.

(3) It can be used to promote best practices by organizing and funding a national conference for CDVCs to share information regarding starting and operating CDVCs. And (4), it can be used for mobilizing academic resources by encouraging graduate schools to form

centers that study community development venture capital; providing funding for the development of related materials for courses;

and providing funding for research on community development venture capital.

Subsection (c) limits to 25 percent the amount of grant money

that can be used for the aforementioned training and research activities.

Subsection (d) clarifies that an intermediary organization that receives a grant under this section must use that money to provide

intensive marketing, management and technical assistance and

training to promote the development of community development

venture capital organizations. It further clarifies that the grant

money can be used for the start-up and operating costs of new

CDVCs.

19

Subsection (e) sets forth the conditions of receiving a grant. An

intermediary organization must provide a one-to-one match of nonfederal money in order to receive a grant.

Subsection (f) authorizes a total of $20 million for fiscal years

2000 through 2003 to carry out the provisions of the Community

Development Venture Capital Capacity Building and Professional

Development Act.

Title III—BusinessLINC

Sec. 301. Grants authorized

This section amends the Small Business Act to authorize matching grants for BusinessLINC, a program which links large businesses with small business owners. The Administrator of the Small

Business Administration is authorized to make grants to and enter

into participation agreements with a coalition of public and privatesector participants that will expand business-to-business relationships between large and small businesses and provide businesses

with information about companies that are interested in mentorprotege programs. Grants require a one-to-one match in cash or inkind, unless the Administrator waives the requirement.

This section authorizes $6.6 million per year for BusinessLINC

grants for six years, from FY2000–2005.

Sec. 302. Regulations

This section requires the Administrator to issue program regulations.

VII. CHANGES IN EXISTING LAW

In the opinion of the Committee, it is necessary to dispense with

the requirement of rule XXVI(12) of the Standing Rules of the Senate in order to expedite the business of the Senate.

Æ