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38–202 PDF 2007

FULL COMMITTEE HEARING ON

LEGISLATION UPDATING AND

IMPROVING THE SBA’S INVESTMENT

AND SURETY BOND PROGRAMS

COMMITTEE ON SMALL BUSINESS 

UNITED STATES HOUSE OF 

REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

SEPTEMBER 6, 2007

Serial Number 110-44

Printed for the use of the Committee on Small Business

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/house 

HOUSE COMMITTEE ON SMALL BUSINESS 

NYDIA M. VELA ́ ZQUEZ, New York, Chairwoman 

HEATH SHULER, North Carolina 

CHARLIE GONZA ́ LEZ, Texas 

RICK LARSEN, Washington 

RAUL GRIJALVA, Arizona 

MICHAEL MICHAUD, Maine 

MELISSA BEAN, Illinois 

HENRY CUELLAR, Texas 

DAN LIPINSKI, Illinois 

GWEN MOORE, Wisconsin 

JASON ALTMIRE, Pennsylvania 

BRUCE BRALEY, Iowa 

YVETTE CLARKE, New York 

BRAD ELLSWORTH, Indiana 

HANK JOHNSON, Georgia 

JOE SESTAK, Pennsylvania 

STEVE CHABOT, Ohio, Ranking Member 

ROSCOE BARTLETT, Maryland 

SAM GRAVES, Missouri 

TODD AKIN, Missouri 

BILL SHUSTER, Pennsylvania 

MARILYN MUSGRAVE, Colorado 

STEVE KING, Iowa 

JEFF FORTENBERRY, Nebraska 

LYNN WESTMORELAND, Georgia 

LOUIE GOHMERT, Texas 

DEAN HELLER, Nevada 

DAVID DAVIS, Tennessee 

MARY FALLIN, Oklahoma 

VERN BUCHANAN, Florida 

JIM JORDAN, Ohio

MICHAEL DAY, Majority Staff Director 

ADAM MINEHARDT, Deputy Staff Director 

TIM SLATTERY, Chief Counsel 

KEVIN FITZPATRICK, Minority Staff Director

STANDING SUBCOMMITTEES 

Subcommittee on Finance and Tax

MELISSA BEAN, Illinois, Chairwoman 

RAUL GRIJALVA, Arizona 

MICHAEL MICHAUD, Maine 

BRAD ELLSWORTH, Indiana 

HANK JOHNSON, Georgia 

JOE SESTAK, Pennsylvania 

DEAN HELLER, Nevada, Ranking 

BILL SHUSTER, Pennsylvania 

STEVE KING, Iowa 

VERN BUCHANAN, Florida 

JIM JORDAN, Ohio

Subcommittee on Contracting and Technology

BRUCE BRALEY, IOWA, Chairman 

HENRY CUELLAR, Texas 

GWEN MOORE, Wisconsin 

YVETTE CLARKE, New York 

JOE SESTAK, Pennsylvania 

DAVID DAVIS, Tennessee, Ranking 

ROSCOE BARTLETT, Maryland 

SAM GRAVES, Missouri 

TODD AKIN, Missouri 

MARY FALLIN, Oklahoma

(II) 

Subcommittee on Regulations, Health Care and Trade

CHARLES GONZA ́ LEZ, Texas, Chairman 

RICK LARSEN, Washington 

DAN LIPINSKI, Illinois 

MELISSA BEAN, Illinois 

GWEN MOORE, Wisconsin 

JASON ALTMIRE, Pennsylvania 

JOE SESTAK, Pennsylvania 

LYNN WESTMORELAND, Georgia, Ranking 

BILL SHUSTER, Pennsylvania 

STEVE KING, Iowa 

MARILYN MUSGRAVE, Colorado 

MARY FALLIN, Oklahoma 

VERN BUCHANAN, Florida 

JIM JORDAN, Ohio

Subcommittee on Urban and Rural Entrepreneurship

HEATH SHULER, North Carolina, Chairman 

RICK LARSEN, Washington 

MICHAEL MICHAUD, Maine 

GWEN MOORE, Wisconsin 

YVETTE CLARKE, New York 

BRAD ELLSWORTH, Indiana 

HANK JOHNSON, Georgia 

JEFF FORTENBERRY, Nebraska, Ranking 

ROSCOE BARTLETT, Maryland 

MARILYN MUSGRAVE, Colorado 

DEAN HELLER, Nevada 

DAVID DAVIS, Tennessee

Subcommittee on Investigations and Oversight

JASON ALTMIRE, PENNSYLVANIA, Chairman 

CHARLIE GONZA ́ LEZ, Texas 

RAUL GRIJALVA, Arizona 

LOUIE GOHMERT, Texas, Ranking 

LYNN WESTMORELAND, Georgia

(III) 

C O N T E N T S 

OPENING STATEMENTS 

Page

Vela ́zquez, Hon. Nydia M. ....................................................................................... 1

Chabot, Hon. Steve .................................................................................................. 2

Altmire, Hon. Jason ................................................................................................. 4

Jordan, Hon. Jim ..................................................................................................... 5

WITNESSES

PANEL I 

Preston, Hon. Steven C., United States Small Business Administration ........... 6

PANEL II 

Peterson, Hon. William G., American Insurance Association and the Surety 

and Fidelity Association of America ................................................................... 16

More, Robert J., National Venture Capital Association ....................................... 18

Koenig, Dr. Scott, Biotechnology Industry Organization (BIO) ........................... 20

Atkinson, Dr. Robert, Information Technology and Innovation Foundation ...... 22

Mercer, Lee, National Association of Small Business Investment Companies ... 25

Phillips, Ron, Community Development Venture Capital Alliance ..................... 26

APPENDIX 

Prepared Statements: 

Vela ́zquez, Hon. Nydia M. ....................................................................................... 38

Chabot, Hon. Steve .................................................................................................. 40

Altmire, Hon. Jason ................................................................................................. 42

Preston, Hon. Steven C., United States Small Business Administration ........... 44

Peterson, Hon. William G., American Insurance Association and the Surety 

and Fidelity Association of America ................................................................... 58

More, Robert J., National Venture Capital Association ....................................... 66

Koenig, Dr. Scott, Biotechnology Industry Organization (BIO) ........................... 75

Atkinson, Dr. Robert, Information Technology and Innovation Foundation ...... 80

Mercer, Lee, National Association of Small Business Investment Companies ... 85

Phillips, Ron, Community Development Venture Capital Alliance ..................... 92

(V) 

(1)

FULL COMMITTEE HEARING ON LEGISLATION 

UPDATING AND IMPROVING THE SBA’S 

INVESTMENT AND AND SURETY BOND 

PROGRAMS 

Thursday, September 6, 2007

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON SMALL BUSINESS, 

Washington, DC. 

The Committee met, pursuant to call, at 10:00 a.m., inRoom 

2360, Rayburn House Office Building, Hon. Nydia M. Vela ́zquez 

[chair of the Committee] Presiding. 

Present: Representatives Vela ́zquez, Shuler, Michaud, Cuellar, 

Moore, Altmire, Clarke, Chabot, Graves, Akin, Musgrave, Davis, 

Fallin, and Jordan 

OPENING STATEMENT OF CHAIRWOMAN VELA ́ ZQUEZ 

ChairwomanVELA ́ ZQUEZ. Good morning, I am pleased to call this 

hearing to order. In today’s hearing, the committee will examine a 

proposal to improve the Small Business Administration’s existing 

investment programs and establish a new Angel investment program. This enhancement, which expands access to venture capital, 

will help modernize the SBA so that its service offering meet the 

needs of America’s entrepreneurs. In June, this committee received 

testimony from key members of the investment community who describes the challenges facing our Nation’s small businesses. 

Small business relied on venture capital investment to form the 

pursuit of new ideas, indeed many well-known companies began a 

small business that grew to prominence with the help of venture 

capital. Several companies like Google, IBM and Microsoft would 

not be the industry leaders they are today if it were not for venture 

capital investment, yet despite this importance, it remains extremely difficult for small businesses to attract investments. This 

is particularly true for two key segments of the business community, early stage businesses and those located in low income communities. 

Over the last 5 years, there has been a steady movement of venture capital away from small business startups and to work later 

stage businesses, this has not only limited the ability of small businesses to expand and grow, but also hindered their ability to generate innovative, new ideas and new products. Venture capital represents the life blood for these businesses, without it these startup companies will never reach their full potential, perhaps no FedVerDate 0ct 09 2002 09:29 Dec 20, 2007 Jkt 033615 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 G:\CLERK SB\HEARINGS\TRANSCRIPTS\38202.TXT LEANN
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eral agency is better positioned to address this problem than the 

SBA. 

Unfortunately, the administration has failed to press these advantages for the benefit of the small business community, it continues to withhold the support necessary for the new markets program to achieve its full potential. Similarly, the SBA has failed to 

explore new strategies that has proven successful at increasing 

venture capital investments in start ups. And perhaps most notably, the agency continues to follow outdated policies that restrict 

the flow of venture capital and other forms of investment to small 

firms. The committee print being considered will begin to reverse 

these policies, this proposal will renew our commitment to increase 

investments in low income areas by restoring for them NMVC program it also features a renewed focus on small manufacturing companies providing much needed help to communities that have suffered from a loss of their industries. 

A new Angel Investment Program will also be established. This 

will fill the void for stiff capital that has been created by the elimination of the participating securities program. This emerging strategy is already enjoying widespread success in the private sector 

and will be a vital step in ensuring that start up in early stage 

businesses have the capital they need to grow stronger. The proposal will simplify and streamline the treatment of small businesses receiving venture capital investments. This change will ensure that entrepreneur has unimpeded access to this key form of 

financing. Together, these initiatives will strengthens SBA’s commitment to improve investments in small businesses and automatically improve innovation among our Nation’s entrepreneurs. 

Our small businesses have always been the incubators for new 

ideas and investment has been the fuel for this great engine of 

American economic development. As this country continues to rely 

on entrepreneurs to spur economic development and create jobs the 

need for equity capital will only continue to grow. I would like to 

extend our thanks to all of the witness who will be testifying today. 

I am sure that their unique view and comments on the proposed 

legislation will be insightful as the committee moves forward in the 

legislative process on this very important subject. 

[The prepared statement of Ms. Vela ́zquez may be found in the 

Appendix on page 38.]

ChairwomanVELA ́ ZQUEZ. I now yield to the ranking member, Mr. 

Chabot, for his opening statement. 

OPENING STATEMENT OF MR. CHABOT 

Mr.CHABOT. Thank you, Madame Chairwoman, and I want to 

thank you for holding this important hearing to address legislation 

that would update the Small Business Administration programs 

that provide long term capital and surety bonds to small businesses. Recent events in the financial market show that small businesses will continue to face difficulties raising credit in capital 

through normal commercial markets. Those business owners with 

solid credit scores and balance sheets will have to spend more to 

obtain credit. Those without stellar credentials may find credit in 

capital very scarce. Such gaps in the commercial finance markets 

3

are problematic because small businesses are the most significant 

component for creating new jobs in the economy. An economy that 

faces some uncertainty due to problems in the housing market will 

have the situation exacerbated by any limitations on small business growth resulting from restrictions on availability of capital. 

During the past 6 years, this committee has heard from a variety 

of sources that conventional debt and equity markets do not provide adequate resources to small businesses, particularly new small 

businesses, ones that do not have a track record of cash flow and 

solid earnings. The committee also already has passed legislation 

that addresses improvements in the market for debt. Today the 

committee is considering legislation to rectify issues in the equity 

market for small business. Some of changes proposed in this legislation we are considering today are appropriate and necessary technical changes, for example, special small business investment companies called new called new market venture capital companies are 

hampered because the definition of new markets in a Small Business Investment Act is more restrictive than the one in the Tax 

Code. 

It certainly makes sense to modify the Small Business Investment Act to improve the capabilities of new market venture capital 

companies to invest in poor areas. Another appropriate technical 

change involves raising the limits on the amount of leverage available to small business investment companies, rather than using an 

index for inflation. This change will provide these SBICs with 

greater certainty concerning the amount of funds that will be made 

available by the SBA, these and the other technical changes in the 

bill to improve the existing equity program, in my opinion, makes 

sense. 

However I am not yet convinced that we need to create completely new programs to provide equity capital to small businesses, 

rather than continue to reform and improve existing programs. I 

would be very interested in hearing from our witnesses, their views 

on the best approach that the committee can take to ensure that 

small businesses have access to equity capital given the recent tumult in the financial markets. The other program that we are examining today is the SBA’s guarantee of surety bonds, surety 

bonds generally are required to assuage the buyer of services that 

the supplier will finish the contract or some substitute will be 

found to do so. Surety bonds are used in many industries, although 

they are most prevalent in construction contracts. If a contract requires a surety bond small businesses, particularly one without a 

significant track record may not be able to bid because the business 

will be unable to obtain a surety bond at a reasonable cost. 

The SBA surety bond program provides an important tool to increase the competitive capacity of small businesses to bid on various contracts, including those offered by the Federal government. 

The technical changes that we are considering for the surety bond 

program will enhance its availability and utility for small businesses. In turn, an improved surety bond program will enhance the 

competitive capacity of small businesses to win contracts that require the proffer of a surety bond. 

Finally, the bill makes drastic changes to the definition of small 

business by eviscerating the long-held standard that a small busiVerDate 0ct 09 2002 09:29 Dec 20, 2007 Jkt 033615 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 G:\CLERK SB\HEARINGS\TRANSCRIPTS\38202.TXT LEANN
4

ness is one that is independently owned and operated. Title V of 

the bill we are considering will enable venture capital companies 

to own, control and operate numerous small businesses, numerous 

small businesses without any affiliation standard at all. This will 

enable venture funded small government contractors to take advantage of economies of scale and scope that truly independent 

small businesses will not and arguably provide an unfair advantage. 

In the long run, this will reduce competition in the government 

marketplace and increased costs to the taxpayer, that is our concern. I am willing to hear what advice our witnesses will have on 

reducing the potential significant adverse consequences on small 

businesses of this change, and hopefully we will be able to work 

something out between now and the future when this is taken up 

in the legislation, and as I have said in the past, this committee, 

and especially the Chair, I think myself in particular, and our staff 

have had a very good relationship thus far in this Congress. I hope 

we will work it out, although there are some challenges that we 

face. 

I thank the chairwoman for holding this hearing and thank the 

witnesses who will be testifying this morning and look forward to 

the ideas offered by our distinguished panelists and I yield back 

the balance of my time. 

ChairwomanVELA ́ ZQUEZ. Thank you, Mr. Chabot. Let me state 

what we are considering today is the footprint of this legislation 

that has not been introduced. You have valid concerns, I hope at 

the end of this hearing today we could sit down and work out those 

differences because I think that some of the concerns and the 

points that you address will be addressed today during the process 

of this hearing. 

Now I recognize Mr. Altmire for an opening statement. 

OPENING STATEMENT OF MR. ALTMIRE 

Mr.ALTMIRE. Thank you, Chairwoman Vela ́zquez, for today’s 

hearing and for your continued work on behalf of America’s small 

businesses. I appreciate your leadership and the opportunity I have 

had working with you and the committee’s staff in drafting legislation to improve access to equitable capital for America’s small businesses. I also want to thank the ranking member and his staff for 

helping us work through some of these issues and improvement to 

strengthen this bill going forward. 

The previous hearing this committee held on June 21st examined 

many of the challenges that small businesses face in acquiring investment capital. High levels of risk, regulatory and compliance 

costs, the cost of capital assets, limited cash flow just to name a 

new. The primary source of investment assistance through the SBA 

is the small business investment company program, it is a public 

private partnership that has invested $48 billion in more than 

100,000 small businesses since 1958. 

Notable success stories include Intel, Apple Computer, Whole 

Foods, Staples, Quiznos and Costco. The SBA’s other two investment program, the new market venture capital program and surety 

bond program, have, however, demonstrated limited success. 

Onlysix companies currently participate in the NMVC program and 

5

the surety bond program has become an increasingly unattractive 

option for some small businesses. 

All three SBA investment programs are designed to provide our 

Nation’s small business start ups with access to equity capital in 

order to foster innovation and create more jobs in our communities, 

unfortunately these programs have fallen short creating an environment where it is difficult for startups to attract initial investment. 

Today, we have an opportunity to discuss how to address these 

challenges and beginning consideration of a legislative solution 

that I will soon introduce, the Small Business Investment Improvements Act of 2007. This bill will strengthen the SBIC program, expand the NMVC program, and improve the surety bond program 

also establishing a new office of Angel investment, the changes this 

legislation proposes to the current fracture of the SBIC program 

will bring it up to date with today’s practices, it simplifies how the 

maximum live registration caps are calculated and revises the limitation on aggregate investment to increase overall investment in 

small business. 

Further it will provide incentives to target investments to businesses owned by veterans, women and minorities. Changes will 

also be made to the NMVC program by providing incentives for investment in small manufacturing companies in low income areas 

and expanding the program. Doing so will ensure a wider distribution of investment nationwide and create opportunities for more 

small businesses to benefit from the program. 

Finally, this bill will establish the office of Angel Investment that 

will focus on increasing equity investment in small business. Within the new Office of Angel Investment, an Angel Investment program will be developed to matched Angel groups with early stage 

small businesses. A Federal Angel network will be made available 

through SBA’s Web site and grant initiatives will be established to 

increase awareness about the benefits of Angel investing to both 

entrepreneurs and investors. 

The Small Business Investment Improvement Act of 2007 will reduce many of the barriers that small businesses face when seeking 

to obtain equity investment through the SBA and its private partners. Small businesses are the backbone of our economy generating 

57 million jobs a year insuring that they are able to obtain vital 

capital at crucial points in development are of paramount importance to all of us on this committee. I hope my colleagues will join 

me in support of this effort. Again, I want to thank the Chair and 

the ranking member for their assistance with this bill and for holding this hearing today. 

ChairwomanVELA ́ ZQUEZ. Thank you. 

The Chair recognizes Mr. Jordan. 

OPENING STATEMENT OF MR. JORDAN 

Mr.JORDAN. I think we had some terrible flooding in the midwest 

the last couple of weeks, and serious damage was done in our district. Mr. Preston, along with his team, has been in our district has 

been in our district working hard. When we visited you had been 

traveling for a week in Ohio in our district and appreciate the administrator taking time to come talk to local leaders. More imporVerDate 0ct 09 2002 09:29 Dec 20, 2007 Jkt 033615 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 G:\CLERK SB\HEARINGS\TRANSCRIPTS\38202.TXT LEANN
6

tantly, families and individual business owners impacted by the 

floods, so we appreciate that very much. 

Mr.PRESTON. Thank you. 

ChairwomanVELA ́ ZQUEZ. Any other statements? 

We will proceed with our first panel. It is with great pleasure 

that we welcome Administrator Preston. He is the 22nd administrator of the U.S. Business Administration and agency that advocates on behalf of the nation’s small businesses helps advance our 

economy and assists in providing financial assistance following a 

disaster. 

STATEMENT OF HON. STEVEN C. PRESTON, ADMINISTRATOR, 

UNITED STATES SMALL BUSINESS ADMINISTRATION 

Mr.PRESTON. Thank you very much, Chairwoman Vela ́zquez, 

Ranking Member Chabot, and other members of the committee, 

good morning. Since 1958, the SBA’s SBIC program has invested 

over $50 billion in over 100,000 small businesses. Forty years of 

performance supporting the Nation’s economy. The debenture program has formed the backbone of this program and it operated 

without a cost to the taxpayer for the last 7 years. In 2006 alone, 

the SBIC debenture licensees invested $1.2 billion. About 25 percent of those investments went to low and moderate income areas, 

amounting to more than $300 million in LMI investments last 

year. We continue to focus on making more capital available to 

LMIs through outreach and education, we also continue to aid 

under the market venture program, which has made over 47 million in equity investments in 55 portfolio companies over the last 

5 years. New market venture cap companies have also provided 

over $10 million in operational assistance in actual or potential 

portfolio companies. 

To date, none of the new market venture capital groups have repaid the debentures and the licensees have not yet fully invested 

their leverage, that is not to imply anybody’s default, we are not 

at the repayment phase of the program. We continue to support the 

new markets program and will assess the potential of the program 

as investment results become clear. In addition to SBA’s program, 

many of, you mentioned the Angel market. Private sector Angel investing has grown, to be a significant source of capital for start 

ups. It has grown steadily since 2001, it is now over $25 billion 

which is up almost 11 percent from last year and has been aided 

by many of the macro economic policies of the administration. 

While Angel Investment is a source of critical seed capital for entrepreneurs, the administration believes that stable pro investment 

policies are the most effective method of encouraging activity 

among Angels. Over the past 5 years, Angel Investment has grown 

65 percent and created 540,000 jobs in the last three years. 

The administration believes that the best way to strengthen this 

investment is through an economic framework then encouraged investment at all levels through broad based and reasonable tax 

rates and reduced regulatory impediments. The administration 

firmly believes that the economic policy has been a factor in the rebound of the sector. 

I would like to now turn to the draft legislation more specifically 

regarding the debenture program. SBA has no opposition to many 

7

of the proposed changes in Title I, these changes can’t clarify the 

formula which think is very helpful in the current program without 

increasing risk, they also should have low cost impact in the program, the less complicated rules should encourage funds to participate in the program. We do think the current tiered structure 

should remain, or that the maximum leverage should be limited to 

two tiers. We are concerned that a third tier would increase risk 

to the program and many funds receive income in returns of capital 

that mitigate the need for that third tier. 

In Section 102 we believe the language targeting low income 

communities already in a Small Business Investment Act accomplishes the demographic affect desired. Turning to new markets 

venture capital. While the initial investments appear promising, we 

think it is premature to judge the program’s overall effectiveness, 

six of the firms are in the investment stage, none of them are making payments on debentures right now. Until that happens, it is 

difficult for us to judge the individual performance of these groups 

or of the overall program. Also, since there are no fees or returns 

to cover the programs losses, the cost of the program will equal the 

operating support we provide the program in addition to the overall 

debenture losses, there is no offset to that. The goals of the program are important. 

At this time, we think it is difficult to assess the total cost benefit relationship there. We will support the proposal to amend the 

definition of LMI as discussed. Turning to the Angel capital provision, while the administration believes encouraging private investment and small business is important we do not support the subsidy supported in this bill. Angel investing represents pure venture 

capital. We assuming that the bill would allow the government to 

participate in the return on a pari passu basis with the Angel investors, we suggested that we would like to talk about clarifying 

the language to make sure we understand what that looks like. 

If that is the case, once again, we would want to work with you 

on clarification. More fundamentally we do not see how the program would increase the likelihood of wealthy Angel investors to 

invest along side the government in target investments. I think 

once they find attractive investments, we believe they will do so 

with or without government support, especially considering the size 

of this marketplace and the connectedness of it and increasing connectedness of it. 

Also, Angel investors typically do invest side by side as we look 

forward at the SBA investment is limited as described in the bill. 

When portfolio companies require follow on capital, Angel investors 

could create deals beyond that cap level which would allow them 

to increase their returns at SBA’s expense so we would want to 

talk about how to deal with those issues. 

We welcome the suggested improvements in the surety bond program, participation has diminished. While SBA has made a number of regulatory and administrative changes there is a limit to our 

ability to affect changes without statutory authority so I am glad 

our recent regulatory effort is working, we heard favorable feedback from the industry and also acknowledge the need for some 

legislative changes. We recently saw the language concerning ownership interest in venture capital firms while the SBA encourages 

8

venture capital investment in small businesses we are concerned 

about this provision the basic premise of small business size status, 

independent ownership and control could be circumvented by the 

provision, it could allow large venture capitalists to own several 

small businesses without affecting the size statuses. Furthermore 

such concerns could compete for and obtain contract set aside for 

small business concerns as well as grants and other forms of assistance reserved to small businesses. We continue to work hard to 

strengthen our impact through the investment division, but we 

have tempered those efforts with prudence and fiscal oversight 

focus. We have also increased our oversight to address problems 

and worked to improve our relationship and to reach out to industry leadership to work toward common solutions in many of the 

programs we have. Thank you for the opportunity to testify before 

the committee and I look forward to answering any questions you 

might have. 

[The prepared statement of Administrator Preston may be found 

in the Appendix on page 44.]

ChairwomanVELA ́ ZQUEZ. Thanks you, Mr. Preston. 

In June, we conducted a hearing on this topic and we heard from 

one of the witnesses, Mr. John Wade, John May, a widely recognized Angel investor and current chairman of the Angel Capital Association. The committee was told to consider creating a government fund that automatically coinvests with Angel, this is a way 

to spur economic development with low cost. 

The model we have proposed in the bill does just this, but your 

answer to creating a new proposal that will start a greater investment is always no. So you tell us that the administration’s policies 

are sufficient to meet the need for investment in small businesses, 

but this is what we have, Mr. Preston, you have eliminated participating securities, you have done nothing to move the debenture 

program to early stage firms. Last year, only 3.4 percent of all 

SBIC financing went to black owned small businesses, only 1.3 percent went to Hispanic owned businesses, only 2.3 percent went to 

women-owned businesses, and last year SBA licenses only 10, none 

of which were for early stage. Five years ago, the SBA license, 40 

new SBICs, more than half of which were for early stage investment. So my answer is do these numbers, my question really reflect an agency with sufficient tools to meet the investment mission? 

Mr.PRESTON. Madam Chair, you covered a lot of ground in that 

comment. Let me just make a couple of comments. First of all, I 

think we are doing a lot with early stage investors. As you know, 

about a third of our 7a program goes to early stage investors, this 

debt capital but is very significant. Almost $5 billion in 7a went to 

early stage last year. When you look at LMI areas, I think I already noted that 25 percent of the debenture cap program today is 

going to LMI areas. If you look at the lending programs to minorities you will see we have a very significant percentage of lending 

programs going to minorities, you made a number of comments. 

ChairwomanVELA ́ ZQUEZ. With all due respect, Mr. Preston, this 

is about Angel capital, Angel Investment, this is about venture capital, this is not about that, 7a is not venture capital. 

9

Mr.PRESTON. I understand that, but we are talking about getting 

capital to early stage businesses overall and there are a number of 

tiers of capital and we play a significant role in some of those tiers. 

I would say when you look at a $25 billion Angel marketplace and 

you consider launching a $25 million program where the government co invests pari passu, I, having spent much of my career in 

this business, am suspicious whether or not that would energize investment in the areas that you are targeting. If I am a venture 

capitalist or an Angel investor and putting a million dollars into an 

investment, asking the government for a million dollars and going 

through our programs first, asking for one of my partners for a million to invest in what I think is a good business, I know where they 

will go. 

ChairwomanVELA ́ ZQUEZ. You are not answering my question. My 

question is, how do you react to the fact that you are saying this 

is not important, this model is not the answer because we have all 

these other programs, but when we look at the performance they 

fall short when it comes to women-owned businesses, to Hispanicowned businesses, to black and low income areas. 

Mr.PRESTON. As I mentioned, the debenture program has about 

25 percent in LMI, that is over $300 million. What I would also tell 

you is we are working on a number of initiatives, we would be 

happy to have your staff over to go through them. We recently 

hired to head all of our lending and investment operations Grady 

Hedgesbeth. He was Mike Dukakis’s secretary of economic affairs, 

he is working on designing a number of vehicles with us, he has 

a deep economic development background, and he was the founder 

and president of the first bank, owned Urban Investment Bank up 

in Boston, which provided mezzanine and equity financing to minority and inner city businesses. This is the person we have leading the design of our new initiatives in our outreach. We are looking extensively, we are working with Treasury on CDFI. 

ChairwomanVELA ́ ZQUEZ. I guess he has a lot of work to do. With 

these numbers I would suggest that you go back and sit down and 

present this picture to him, because the numbers speak for themselves. 

Lets talk about the reasons that you are citing for not creating 

the Angel program, you are saying the risk to the government. The 

proposed legislation however, Mr. Preston, will require Angels to 

much dollar for dollar the capital received from the SBA, thus giving Angels more risk than due private investors in the SBIC program. Why are you willing to put the government at greater risk 

in the SBIC program and not in this new Angel program? 

Mr.PRESTON. In the SBIC program, in the debenture program, 

we are looking at a current pay instrument and it is a different 

kind of investment. I would say is I have been out there talking 

not only with many inner city companies, but people who work in 

this industry, I know you have held hearings and you know very 

well from your own district the challenges that people have, I believe what we need to do, and this is what we are focusing on, is 

a much greater focus on outreach, on financial education, on helping people understand the opportunities in the inner city. I am not 

sure that a co-investment with Angels is the way to do it, I do not 

10

think it is an outreach vehicle. I think there is a real awareness 

issue. 

And also think and this is what I have heard continually when 

I’ve done the round tables, inner city investing and rural investing 

can be very good business. I am very concerned about the perspective that somehow we have to help people because it is not good 

business. You have great transportation, proximity to customers, 

public transportation, you have work for sets available often real 

estate is cheaper. My view is there is a different way to address 

the issue.

ChairwomanVELA ́ ZQUEZ. The reality here is this is not about the 

perception, it is about improving the investment in early stage 

companies, in Hispanic-owned business, women-owned businesses, 

black-owned businesses, and low income areas. I think this program, the Angel program, put the government at the lower risk 

than those of SBIC. SBA lost nearly $3 billion in the SBIC program 

in the last 6 years. We are putting controls, so we question the 

type of controls that you think you have in place to prevent the 

SBIC from getting the government to lose the money. 

Mr.PRESTON. I agree the participating securities program has 

lost a lot of money. I think it was a poorly structured program and 

I don’t think the government was protected based on its structure, 

so I would concur with you that the particular program has come 

at great cost to the taxpayer. 

ChairwomanVELA ́ ZQUEZ. Mr. Preston, currently your agency considers venture capital companies as affiliates with their business 

investments. As a result, the SBA adds the investment companies 

employees with the employees from companies receiving investment and with every other business in which the investment firm 

is invested. If the total number of employees exceeds 500 then the 

entire organization viewed as a whole by the SBA is not considered 

a small business, does your agency follow this same affiliation policy in the context of companies that receive investment from SBIC 

approved investors? 

Mr.PRESTON. I do not know. 

ChairwomanVELA ́ ZQUEZ. The answer is no. 

Mr.PRESTON. So I figured you knew. You wouldn’t have asked 

the question. 

ChairwomanVELA ́ ZQUEZ. Why does your agency treat investment 

different when it comes from private venture capital as an opposed 

to an SBIC licensed SBIC. 

Mr.PRESTON. My concern on this legislation, is that you have 

large affiliated groups getting small business contracts, we want to 

do everything we can to help those small businesses who truly are 

small businesses get those contracts that may be able to be dealt 

with through greater clarification of the definition in your bill. 

ChairwomanVELA ́ ZQUEZ. In your testimony, you have suggested 

that the way we are treating venture capital has insufficient safeguards. 

Mr.PRESTON. Yes. 

ChairwomanVELA ́ ZQUEZ. I disagree. The bill that we have under 

consideration, or the draft bill, first, it will not require that the 

venture capital firm itself be a small business;two, prohibit a large 

company from controlling the venture capital company;three, reVerDate 0ct 09 2002 09:29 Dec 20, 2007 Jkt 033615 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 G:\CLERK SB\HEARINGS\TRANSCRIPTS\38202.TXT LEANN
11

quire that the venture capital firm have fewer than 500 employees, 

require that the venture capital firm be located in the United 

States. There should certainly forestall concerns that we are allowing a large corporation to set up a venture capital company to invest in small businesses in order to obtain contracts. Under your 

own risk recertification rule from November last year, as long as 

a large corporation acquired a small business by the end of June 

of this year, it gets a free pass for the small firm’s contracts for 

the next 5 years. 

We have certainly not done anything remotely so egregious here. 

To the contrary, we have taken steps to prevent such abuses. How 

can you say that these safeguards are insufficient? 

Mr.PRESTON. Madame Chairwoman, I think a venture capital 

firm with 50 people or even 100 people can be a very, very significant enterprise. If you are looking at the employee base of the firm 

itself, you will get an enormous amount of leverage off of that employee base. Now, if you want we can get into the recertification 

discussion, but specifically with this bill, I am concerned that if you 

are looking at the people who work at the fund itself, you are missing—a 100-person fund can leverage billions and billions of dollars. 

ChairwomanVELA ́ ZQUEZ. What about the SBIC with 50 employees or 500, they are not restricted. 

Mr.PRESTON. The SBICs in practice are relatively small funds. If 

you see an inconsistency in the SBIC piece, I would be happy to 

address that separately, I am addressing what you have in your 

bill right now, and that’s what I’m trying to focus on. 

ChairwomanVELA ́ ZQUEZ. The venture capital firms that we are 

talking about are small firms, these are not large firms. 

Mr.PRESTON. All I am saying is I think as we draft the language 

in this legislation which should make sure that is, in fact, the case, 

a 400-person venture capital firm is enormous. I think the largest 

firms in the country may not even be that big, I think it is very 

important we put the property restrictions in it. 

ChairwomanVELA ́ ZQUEZ. We do, sir, we do, sir. 

Mr.PRESTON. If it is the right firm and we put some safeguards 

in there, it may be fine and many of the small businesses we 

should be working with. 

ChairwomanVELA ́ ZQUEZ. We will be working with you, we will be 

working with a minority. Let me say this, no one in this committee 

has fought nail and tooth regarding big businesses taking away fair 

contracting tended to go to small business, I am not going to jeopardize this here. 

Mr.PRESTON. Ma’am, I have ever never ever doubted your commitment to small business and I do not think you could doubt 

mine, I think we can work on this collaboratively. 

ChairwomanVELA ́ ZQUEZ. I recognize Mr. Chabot. 

Mr.CHABOT. Thank you, Madam Chair. Administrator Preston, 

thank you for your appearance here this morning. I think I understood you to say the investment community—first of all, there is 

about $25 billion that is already being invested by the Angel. 

Mr.PRESTON. Yes. 

Mr.CHABOT. And this is a program, 25 or 100 million, depending 

on the way one looks at it. As a practical matter, the investment 

community may see government involvement as a yellow flag, that 

12

this is an area that is risky, and therefore could potentially have 

the opposite impact. Did you say that in so many words? 

Mr.PRESTON. What I said in so many words is a broad and deep 

market with a fair degree of connectedness among investors, the 

connectedness is growing. I think these Angel networks that are 

merging are very favorable for small business and very favorable 

to enhance investment. And as a result, I am suspicious of the 

value an Angel investor would see in calling up us for money with 

going through a government process in getting qualified and dealing with filings as opposed to going to somebody sells. There is no 

kind of added return to them, we are not enhancing their return, 

and so I guess I view this as limited value. 

Now, I do agree with the chairwoman in saying and I appreciate 

that our return would be pari passu, I think this is important to 

do this. To the chairwoman’s earlier comment that is not what happened in the participating security program, and that is one of the 

reasons the government lost so much money. 

Mr.CHABOT. Thank you. I think you stated it is your belief that 

the best way to strengthen the Angel investment market is not necessarily through the government market, but rather through creating an economic framework that encourages investment at all 

levels, I think you specifically said, I think your terminology was 

the macro economic policies of the administration; could you elaborate a little bit? 

Mr.PRESTON. I think through a favorable tax environment that 

encourages investing and people’s ability to get returns out without 

an onerous tax burden is very favorable, a favorable regulatory environment. Since the beginning of the administration, we have 

sense a growth in the Angel market. I would also mention, Mr. 

Chabot, that we do see an outreach opportunity here and an access 

issue in certain areas of our country. I hear it time and again out 

in the field. We do think it is important for us to play a role there. 

The other thing I would say, I would not disparage the importance of the lending program in this area. In your own State, you 

may not be aware, it is further north than your district, but we are 

actually doing a pilot right now where we are coupling our lending 

programs with equity investment as soft of a 1, 2 punch to give 

people a full capital structure when they are having had a hard 

time getting capital elsewhere. So there is a lot we can do that is 

very incremental here. 

Mr.CHABOT. I think you noted that the proposed structure of the 

Angel Investment program could permit the possibility of a conflict 

of interest. Would you elaborate on that? 

Mr.PRESTON. This is something and this may be able to be dealt 

with through some of the language, but I think we are maxed out, 

if I recall, at $2 million. What may well happen is you look at follow on investments, we may come in on that first or second tier 

with a particular valuation and investment structure relative to 

the other investors, as you do follow-on investments, we may not 

have a seat at the table. Those could be done at a different valuation lower or higher, it could dilute our interest, there are a number of things that could happen that would be potentially detrimental to our interest in the program. 

13

Mr.CHABOT. Thank you. Finally, you expressed some concern 

that the legislation does not provide for repayment of proceeds if 

the Angel investment is not profitable, could you give some examples where that sort of thing could happen? 

Mr.PRESTON. I am trying to recall the exact language, I think it 

described the repayment of as being out of profits and profits typically refer to returns over and above your original investment. My 

comment had to do with if there was a certain amount of capital 

and return that is returned to the investors that we participate in 

the entire pie, not just the profit piece. Based on our discussions 

at a staff level, we understand that is the intention, we just want 

to make sure that the language is as clear as possible. 

Mr.CHABOT. Thank you very much, I have no further questions. 

ChairwomanVELA ́ ZQUEZ. Mr. Altmire. 

Mr.ALTMIRE. Mr. Preston, I want to focus on one of the things 

that you had a discussion with the chairwoman about the new markets venture capital program is the only program that has been 

specifically designed to increase investment in small businesses in 

low income areas specifically. So can you talk about if you feel that 

this is still a worthwhile investment, if so why has it not been requested to be funded over the past 4 years. 

Mr.PRESTON. It is the only program specifically designed and 

structured to go exclusively into those areas. Right now we are still 

in the funding stage of that program, we are not at a point where 

we have seen any returns coming out of it. In addition we do not 

know how it is performing. Secondly in terms of the cost of the program there are two elements to the cost, number 1, any loses in 

the program the government will fund because there are not any 

fees to cover it. Number 2, we provide operating costs, based on our 

estimates, we do not know where we will end up. We can easily see 

a loss of 30 percent on the money invested if you look at the operating costs and the potential losses in the program. If you look at, 

as an alternative, the debenture program where we are putting out 

$300 million and it is a zero subsidy program, we are putting out 

a lot more money out there at a zero cost to the taxpayer other 

than the administrative costs, so we have concerns with how it will 

ultimately turn out. In any case, it will be a fairly significant cost 

to the taxpayer. 

Mr.ALTMIRE. In the interest of time with a vote on, I will condense my questions about Angel Investment. Can you talk about 

what you see as the value of mentorship with regard to Angel Investment with the programming, and does the agency support low 

cost mentorship and management advice through that program? 

Mr.PRESTON. I think, somehow getting mentorship counseling 

technical assistance for small business is very important. And obviously as you know we have a large network of people that we fund 

through SBDCs, women’s business centers as well and our district 

network of 70 locations where we counseled over 300,000 people 

last year, a million 4 overall, so small businesses at every stage can 

use counseling and mentoring. 

Mr.ALTMIRE. Thank you. 

ChairwomanVELA ́ ZQUEZ. Will the gentleman yield? 

Mr.ALTMIRE. Yes. 

14

ChairwomanVELA ́ ZQUEZ. I would like to follow up on your answer 

regarding the new markets venture capital program. Are you saying that you are just waiting to see when the program they repay 

to the government. 

Mr.PRESTON. The program has not begun to repay. We do know, 

based on the way the program is structured, that the cost will be 

the operating costs that we fund plus any losses, because unlike 

the debenture program, there are not fees in plus to cover those 

losses. 

ChairwomanVELA ́ ZQUEZ. Have you taken any steps to strengthen 

existing companies in this program? 

Mr.PRESTON. We provide millions of dollars of operational assistance. 

ChairwomanVELA ́ ZQUEZ. Have you done any evaluations to date? 

Mr.PRESTON. Yes. We looked at those programs to date. 

ChairwomanVELA ́ ZQUEZ. Do you have a report of how those companies are performing? 

Mr.PRESTON. We can share that with you. 

ChairwomanVELA ́ ZQUEZ. Will you be able provide today the committee with such a valuation? 

Mr.PRESTON. I do not know if we can turn that around today but 

we certainly can do that expeditiously. 

ChairwomanVELA ́ ZQUEZ. Now I recognize Ms. Clarke. No, lets 

take a recess here and we will come back and resume as soon as 

we finish voting. 

ChairwomanVELA ́ ZQUEZ. Ms. Clarke. The Committee is called 

back to order. 

Ms.CLARKE. Thank you very much, Madam Chair, and Ranking 

Member Chabot, for holding this very important hearing today. As 

has already been stated by our Chair, Ms. Vela ́zquez, the SBA 

funding and programs such as the SBIC’s participating security 

program has had a negative impact on the SBA’s ability to provide 

capital investment for minority entrepreneurs. Only 3.4 percent of 

all financing in the SBIC program went to small businesses that 

were majority black-owned. About 1.4 percent of all SBIC investments went to small businesses that were Hispanic-owned. And 

2.37 percent of the SBIC investments went to women-owned businesses. 

I was listening to your comments to our Chair, and you sort of 

did an exchange there where you said you have no doubt of our 

Chair’s commitment and there should be no doubt of your commitment. But when you look at results like this—and I am really result-oriented—it would seem to me that there would be an urgency 

and a drive to see these types of results, you know, really change 

dramatically. And I kind of got the impression that there was no 

real urgency or recognition of how poor this performance truly, 

truly is. If your agency were a corporation that produced results 

like this, you would not survive. And I think we need to look at 

business as business, not as, you know, some sort of an entitlement 

or some sort of a social program. We are talking about worthy businesses and companies that are not being impacted by your mandate, by your goals. So I wanted to ask what goals you have set 

for your agency when you have such abysmal statistics. 

15

Mr.PRESTON. I think you are honing in on, very specifically, the 

debenture program and women and minorities. If you look at our 

other programs, all across the board, I think our statistics are very 

good in many of those areas. 

Ms.CLARKE. Let’s just then concentrate on another program, new 

markets venture capital. Despite that to date, despite the fact that 

Congress created this program to address unmet equity needs in 

low-income communities, to date the NMVC program has made a 

total of 149 million, including 62.4 million of non-Federal funding, 

oriented towards low-income areas in some 15 States throughout 

the United States. There are only six, six NMVC companies participating in the program, and the fiscal year 2008 budget allocates no 

resources to bring more companies into the program. The additional funding is crucial to ensure that the NMVC program meets 

its full potential to improve economic development in low-income 

communities. It is just, you know, the rhetoric is on one end, the 

results on the other. The emphasis is really not there. And, you 

know, you can’t paint a picture of roses when the numbers say it 

all. 

Mr.PRESTON. Yeah, but I think it is important to talk about what 

numbers we are talking about. You are mixing LMI with women 

and minority. I think our LMI numbers for these investment programs are actually quite good. And we are working very hard to 

improve them. I think our women and minority numbers for most 

of our programs are very good. I am concerned in the debenture investment program—and that is what we are talking about—that 

these numbers are not very strong. 

Now let me tell you how we have been working to address those 

issues. First of all, we have been doing a tremendous amount of 

outreach to understand what the problem is. We did an entire symposium called Access to Venture Capital for Women and Minorities. 

We brought in a number of people from the Hill, from trade groups 

that are very focused on this issue. 

I mentioned earlier, ma’am, I am not sure if you were in the 

room when I mentioned this, but we hired a new person to run all 

of our investment programs, who headed—who was a secretary for 

economic development for Mike Dukakis in Massachusetts. He 

headed the first ever bank-owned venture firm that focused specifically on minority and inner-city investment. They put over a hundred million dollars out there. He is an expert in this area. He is 

working actively with us right now to look at designs to improve 

our investment in critical areas. 

So this issue with where the debenture program has invested 

over the years, specifically for the categories you mentioned is not 

new, and as such, it is an issue we are trying to understand. 

The other programs have done much more in those areas. We 

have tried to address this historically by finding venture firms. We 

don’t control their investments in the debenture program. But we 

have tried to address historically by finding debenture firms with 

minority representation on their investment committees and in 

senior management. But that does not seem to have moved the 

needle dramatically at this point. 

But I think we have got, you know, a lot under development. We 

are looking at a number of different mechanisms. As I said to the 

16

chairwoman, we would be happy to get over here and go through 

all the different structures we are looking at. We are working with 

a number of people in various industry groups that really care 

about these issues to find structures that will have a lasting impact. So we are working on it. But this is, you know—but I don’t 

disagree with you. I think the women and minority representation 

in that particular program is low. 

Ms.CLARKE. Thank you, Madam Chair. 

ChairwomanVELA ́ ZQUEZ. Mr. Akin? 

Mr.AKIN. I didn’t have any questions. 

ChairwomanVELAZQUEZ. Mr. Chabot? 

Mr.CHABOT. Nothing. 

ChairwomanVELA ́ ZQUEZ. We are good. 

Mr.PRESTON. I would love to come over and see you all and spend 

time with you. 

ChairwomanVELA ́ ZQUEZ. Sure. Thank you. 

Mr.PRESTON. We will schedule that. 

ChairwomanVELA ́ ZQUEZ. Sure, Mr. Preston. Thank you very 

much for your appearance this morning. The gentleman is excused. 

ChairwomanVELA ́ ZQUEZ. I would ask the witnesses of the second 

panel to please come forward. 

ChairwomanVELA ́ ZQUEZ. Mr. Peterson, are you ready? We are 

going to start with you. 

Mr.PETERSON. Thank you, ma’am. 

ChairwomanVELA ́ ZQUEZ. Let me make an introduction. I just 

want to make sure that you know you are going to be the first witness. 

I want to welcome all of you. Our first witness is Mr. William 

Peterson. Mr. Peterson is Vice President and Public Affairs Officer 

for CNA Surety, a nationwide surety and fidelity funding company. 

Prior to his current position, Mr. Peterson served four terms in the 

South Dakota House of Representatives, and was majority leader 

in that body for 4 years. Mr. Peterson appears today on behalf of 

the Surety and Fidelity Association of America and the American 

Insurance Association, which together represent the interests of 

surety and insurance companies nationwide. Mr. Peterson, you will 

have 5 minutes to make your presentation. Welcome. 

STATEMENT OF WILLIAM G. PETERSON, ASSISTANT VICE 

PRESIDENT AND PUBLIC AFFAIRS OFFICER, CNA SURETY 

CORPORATION, SIOUX FALLS, SOUTH DAKOTA; ON BEHALF 

OF AMERICAN INSURANCE ASSOCIATION AND THE SURETY 

AND FIDELITY ASSOCIATION OF AMERICA 

Mr.PETERSON. Thank you, Madam Chair. I am truly honored to 

be here with you and the other members of the Committee today 

and the other ladies and gentlemen present. I am a vice president 

and public affairs officer for CNA Surety Company, which is 

headquartered in Chicago, Illinois, although my office is in Sioux 

Falls, South Dakota. CNA Surety Company is the largest publicly 

traded surety and fidelity bonding company in the United States. 

We write bonds from the smallest commercial to multimillion-dollar contract bonds. We have been a participant in the SBA surety 

bond guarantee program since 1994, and we are honored to be the 

Small Business Administration’s partner of the year in both 2005 

17

and 2006. We have been and continue to be a significant writer of 

these bonds under the bond guarantee program. 

My purpose today, Madam Chair and members of the Committee, 

is to be a strong advocate for our company and for our industry for 

the continuance of the SBA’s bond guarantee program, but also to 

suggest some changes to it which we feel will make it a much 

stronger program both for contractors, small and emerging contractors, for the taxpayers, for the general public, and for the surety 

industry. 

I think we need to start with one simple question. Why is this 

program important? It is important because, ladies and gentlemen, 

our country has many unmet infrastructure needs, as was made 

apparent by the tragic collapse of the bridge in Minneapolis just a 

month ago. Small and emerging contractors in the United States 

can play an extremely important role in the rebuilding of America, 

and yet it is also true that historically small and emerging contractors have had difficulty in getting the bonds required for contract 

projects. 

The role of bonding companies, surety companies and contract 

bonds also will play an important role in the rebuilding of America, 

because bonds have one simple purpose: They are there to protect 

the taxpayer and those who would fall underneath the contract of 

a contract provision. We pay when a contractor either fails to perform their contract or fails to pay their subcontractors and others. 

Fortunately, there is a bridge to cover that between the small 

and emerging contractor and the surety industry. That bridge is 

the Small Business Administration and its bond guarantee program. This program will continue to play an important role as we 

move forward to rebuild the infrastructure of the United States. 

But a well-run program must assure the surety industry of a consistency of participation requirements and also administrative procedures. 

With that in mind, Madam Chair, we have five suggestions for 

improvement to this legislation and to the program which I would 

like to share briefly with the Committee today. First and most importantly, we would ask that this legislation would prevent in the 

future the unraveling of bond guarantees by the SBA. There are 

two parts to the bond guarantee program. There is part A, there 

is part B. I will not go into the details of those at this time. But 

there has been in the past, a past history, the Small Business Administration has rejected the claim even though the bond has been 

prior approved or the bonding company has been prior approved. 

That needs to stop. Once the company is approved, once the bond 

is approved, if there is a claim the Small Business Administration 

must step up and guarantee their payment under that bond. 

Secondly, we recognize as an industry that the SBA cannot be 

self-sufficient. We understand that a study is being proposed to 

look at the funding structure of the SBA. As an industry and as 

a company, we strongly support that study and are willing to participate in it. 

Third, we strongly believe that there needs to be an alternative 

dispute resolution agreement. Currently, if there is a dispute between the SBA and the surety, the only alternative we have is litigation. And as we all are aware, litigation is time-consuming and 

18

it is expensive. There are better ways to resolve disputes between 

our industry and the SBA. 

Fourth, we believe that there should be transparency of the fee 

structures of the SBA, and also a prohibition against price controls 

on surety. For many years we had to operate under the prices as 

established in 1987. That is 20 years ago, and a lot has changed. 

Finally, we also support increased staffing for the SBA across 

this country, and stronger surety education for SBA staff. We feel 

that will work to the benefit of the SBA, small and emerging contractors, and our industry. 

What I really want to do in conclusion, Madam Chair, is to make 

a very firm commitment to you, to the members of the Committee, 

to the SBA, and to small and emerging contractors that we as an 

industry stand by to help, that we are committed to making this 

program work for everyone. We will work with the SBA, we will 

work with small emerging contractors on these issues and others. 

I want to thank you for your time and attention today. It is truly 

appreciated, and I will stand by for your questions. Thank you, 

ma’am. 

ChairwomanVELA ́ ZQUEZ. Thank you. 

[The prepared statement of Mr. Peterson may be found in the 

Appendix on page 58.]

ChairwomanVELA ́ ZQUEZ. Our next witness is Mr. Robert More. 

Mr. More is a partner at Domain Associates, a venture capital firm 

with offices in Princeton, New Jersey, and San Diego, California. 

Mr. More is testifying today on behalf of the National Venture Capital Association, a trade association based in Arlington, Virginia, 

that represents over 460 venture capital firms, which currently 

comprise approximately 90 percent of all the venture capital under 

management in the United States. Welcome. 

STATEMENT OF ROBERT J. MORE, PARTNER, DOMAIN ASSOCIATES, L.L.C., SAN DIEGO, CALIFORNIA; ON BEHALF OF THE 

NATIONAL VENTURE CAPITAL ASSOCIATION 

Mr.MORE. Thank you very much. Good morning. Domain Associates, for your information, we invest exclusively in young life 

sciences-focused businesses, and I am also a member of the NVCA, 

National Venture Capital Association. Thank you for the opportunity to share today the challenges that our small venture-backed 

businesses have faced as it relates to current SBA policies, and 

why we believe the Small Business Investment Expansion Act of 

2007 is a positive step towards fostering the type of private-public 

partnership that will allow the United States to sustain its economic leadership for years to come. 

In 2006, venture-backed companies accounted for 10.1 million 

jobs and 2.3 trillion in U.S. revenues. As the chairwoman mentioned earlier, companies that were once small venture-backed 

businesses include Google, Genentech, Starbucks, Microsoft, and 

Federal Express. 

Today I am here on behalf of the next Google or Genentech that 

is currently being funded by a venture capital firm and is significantly disadvantaged by current SBA policies. Specifically, we are 

troubled by the SBA’s recent interpretation of its affiliation rule in 

19

determining whether a company meets the small business criteria. 

Under the existing affiliation requirements, a business concern can 

have no more than 500 employees, including its affiliates, to qualify 

as a small business. Under this requirement, most venture-backed 

businesses would meet the criteria. However, SBA has recently applied a formula which sweeps in the venture capital firm and the 

employees from every company in which the venture capital firm 

invests when considering a venture-backed company for small business classification. 

Unfortunately, I have been involved in one of those instances in 

the past year. Approximately 9 months ago, one of my firm’s portfolio companies filed a new drug application with the FDA and requested a small business waiver for the FDA’s application fee. The 

fee was approximately $900,000. The FDA requested that the SBA 

conduct a formal size determination with respect to the company’s 

eligibility. The company filed the appropriate paperwork, which 

showed that during the 3-year period prior to the filing of the NDA, 

they averaged 7.25 employees. 

A month later, the SBA notified the company that it had determined that Domain Associates controls the company, and requested 

information with respect to Domain’s ownership in all of the other 

unrelated portfolio companies. If Domain was deemed to control 

any of the other companies, they would be deemed affiliates of this 

company and their employees would be counted in the total. 

We informed the SBA that Domain only has the right to elect 

one out of six directors, and neither Domain nor any of the three 

other venture capital firms invested have the ability to exercise 

control over the company. In response to this explanation, the size 

specialists at the SBA responded by saying, ′′That may be true, but 

the SBA does not deal in the real world.′′

Last week the company was advised by the SBA that after more 

than 7 months they are still working on the matter. It is difficult 

to understand how the SBA justifies their position when it directly 

contradicts language in the Small Business Investment Act, which 

seems to address this very issue. Ownership by a venture capital 

firm should not trigger the affiliation rule for programs that were 

created under the SBIA. It appears that the SBA has a gross 

misperception that small businesses that receive venture backing 

should not be considered a small business. 

But our industry is focused on building companies that will commercialize a product or service. We typically enter an investment 

when the early-stage research has been completed. Therefore, a 

small business must leverage other sources of financing to bring research to the stage where it can be commercialized by having a 

venture capitalist. Without this SBA support, many technologies 

would linger on the shelf because they would not reach the stage 

where they could be brought to a venture capitalist. 

Intuitively, it would seem the SBA would want to fund venturebacked companies because these companies have already been vetted by professionals who think highly enough of the management 

team to invest. Unfortunately, this is not the case. The current interpretation by the SBA could be likened to a situation in which 

the NIH would refrain from funding any project at a well-endowed 

20

academic institution because they have a lot of money behind 

them. 

NVCA supports the Small Business Investment and Expansion 

Act, specifically Title V, which will resolve the SBA’s affiliation 

issue and which will clarify SBA’s affiliation rules by ensuring 

businesses with venture capital investment are not penalized. 

It will also put in place proper safeguards to ensure this cannot 

be exploited by large businesses by specifically defining a venture 

capital operating company. No other asset class supports the 

premise more that small businesses are the lifeblood of the U.S. 

company than venture capital. We are not sure what world the 

SBA operates in, but in our world of the small businesses, all small 

businesses should have access to the same benefits. We are confident that the proposed legislation is a positive step in keeping us 

all in the real world, and assuring that the United States maintains its competitive edge by supporting small businesses of all 

kinds. 

ChairwomanVELA ́ ZQUEZ. Thank you Mr. More. 

[The prepared statement of Mr. More may be found in the Appendix on page 66.]

ChairwomanVELA ́ ZQUEZ. Our next witness is Dr. Scott Koenig. 

Dr. Koenig is the president and chief executive officer at 

MacroGenics, a Maryland-based company focused on research and 

development of products for the fields of oncology, inflammation, allergy, and infectious diseases. Dr. Koenig is also a member of the 

Board of Scientific Counselors at the National Institute of Allergy 

and Infectious Diseases at the National Institutes of Health, and 

is testifying today on behalf of the Biotechnology Industry Organization, a national organization that represents the interests of 

America’s biotechnology industry. You have 5 minutes to make 

your presentation. Welcome. 

Dr.KOENIG. Thank you very much, Chairwoman Vela ́zquez, 

Ranking Member Chabot, and members of the Committee. I appreciate the opportunity to testify before the Committee regarding the 

Small Business Investment and Expansion Act, and the critical role 

venture capital in small biotechnology companies. I am Scott 

Koenig. I am the president and CEO of MacroGenics, a private venture-backed biotechnology company in Rockville, Maryland. Prior to 

this, I was senior vice president of MedImmune, and I have worked 

at the National Institute of Allergy and Infectious Diseases. I am 

also currently chairman of the board of Applied Genetic Therapy 

Corporation, in Alachua, Florida, which is also a venture-backed 

company. 

STATEMENT OF SCOTT KOENIG, M.D., Ph.D., PRESIDENT AND 

CHIEF EXECUTIVE OFFICER, MACROGENICS, ROCKVILLE, 

MARYLAND; ON BEHALF OF THE BIOTECHNOLOGY INDUSTRY ORGANIZATION (BIO) 

Dr.KOENIG. MacroGenics’ mission is to develop immune-based 

therapies to treat patients with cancer, autoimmune disorders, allergy, and infectious diseases. MacroGenics was founded in 2000, 

and has 87 employees. We do not yet have an FDA-approved therapy, and we just started our Phase 3 clinical testing of a 

21

monoclonal antibody to treat new onset juvenile diabetes patients, 

and have several other products in development. 

I am testifying today on behalf of the Biotechnology Industry Organization, BIO, which represents more than 1,100 biotechnology 

companies and other organizations. The vast majority of BIO’s 

members are small, early-stage research and development-oriented 

companies like mine, most with fewer than 50 employees, and do 

not have marketed products. 

The largest obstacle to delivering on the scientific promise of biotechnologies is accessing sufficient capital to perform the research 

and development. Biotechnology research has a long road from preclinical research to FDA approval. It takes between 8 and 12 years 

to bring a biotechnology therapy to market, and costs between $800 

million and $1.2 billion. Without product revenue, biotechnology 

companies are almost entirely reliant on the capital markets to 

fund the research and development. 

Typically, a biotechnology company will begin its fund-raising for 

its lead product in development. In the case of MacroGenics, our 

lead product is this monoclonal antibody to treat patients with new 

onset juvenile diabetes, which we are now beginning the Phase 3 

studies. To get to this point, we undertook three rounds of private 

funding, which has involved about a dozen venture capital companies. Despite the extensive fund-raising that a biotechnology company undertakes for the lead product, these funds are generally not 

interchangeable but are, rather, tied to specific milestones to support the lead product development. 

To develop an early-stage therapy, a company now has to find 

secondary sources of fund-raising. At the very earliest stages of development, this is particularly challenging. And it is in this capacity that other sources of financing, like the small business innovation research grants, have been instrumental. 

Venture capital financing plays a very critical road in the development of small biotechnology companies, especially since emerging 

biotechnology companies do not yet have an FDA-approved product 

on the market, and therefore lack any significant sources of revenue. Unfortunately, small businesses do not have the internal resources to overcome and wait out the market imperfections. This 

is key, because if private capital market is the only financing option available to small biotech companies, then good science will inevitably be delayed. This will impact patients, which I care deeply 

about, and this will also impact the economic development of our 

high-technology industry and this part of our economy. 

This is not a criticism of the venture capital community. Venture 

capitalists are adept at evaluating scientific merit of research and 

the strength of a company’s intellectual property and management. 

The U.S. Is the world leader in biotechnology, and this in large 

part can be attributed to our robust capital markets. However, 

some science is just too high-risk or too early-stage to entice venture capital investment. This particular failure in the private capital markets is often referred to as the ′′valley of death,′′ because 

it is at this point at which good science can wither for lack of funding. At this juncture, a larger company can generally have access 

to capital through existing revenues or bank loans to overcome the 

shortfall. However, this is really not an option for a small bioVerDate 0ct 09 2002 09:29 Dec 20, 2007 Jkt 033615 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 G:\CLERK SB\HEARINGS\TRANSCRIPTS\38202.TXT LEANN
22

technology company. Because of the very long times for development of these biologics, small biotechnology companies may not be 

able to pay a loan for a decade or more, or may want to use the 

loan to pay the interest on the loan, and most banks won’t provide 

that for them. 

The good news is that small investment can bridge this funding 

gap. Funding options available to small biotechnology companies 

include Angel investors, historically the SBIR grants, and more recently a very small, select set of venture capital philanthropists. 

However, funding gaps continue to persist. This is exacerbated 

by the SBA’s use of outdated rules and regulations to define small 

businesses that in large part exclude many of the small biotechnology companies from accessing grants or programs. The 

SBA’s decisions have real impacts on patients awaiting cures, our 

employees, and the economy. 

BIO supports and applauds the Committee’s efforts to recognize 

the importance of private capital financing and the unique financing challenges facing small businesses. The Small Business Investment Expansion Act addresses the unique financing challenges of 

small businesses, and will modernize the SBA’s rules. The Committee’s foresight will help ensure that the SBA programs and grants 

assist both the mom-and-pop operations as well as the small cutting-edge technology companies. 

This legislation will also impact U.S. competitiveness. While the 

SBA holds onto outdated rules, other countries are moving forward 

to support and recruit high-technology companies. We cannot take 

for granted that the U.S. will always lead the world in biotechnology. 

Congress can continue to support small domestic biotechnology 

companies by allowing the government to partner with companies 

that need resources at key stages of development that are not readily available in the private capital markets. 

Again, I appreciate you allowing me to testify today. 

ChairwomanVELA ́ ZQUEZ. Thank you, Dr. Koenig. 

[The prepared statement of Dr. Koenig may be found in the Appendix on page 75.]

ChairwomanVELA ́ ZQUEZ. Our next witness, Dr. Robert Atkinson. 

Dr. Atkinson is president of the Information Technology and Innovation Foundation, a Washington, D.C.-based technology policy 

think tank that is focused on issues of technology, innovation, and 

information policy. Dr. Atkinson has an extensive background in 

technology policy. He has conducted groundbreaking research 

projects on technology and innovation. He is a valued adviser to 

State and national policymakers, and a popular speaker on innovation policy nationally and internationally. 

You are welcome, sir, and the rule is 5 minutes. Thank you. 

STATEMENT OF ROBERT ATKINSON, PRESIDENT, INFORMATION TECHNOLOGY AND INNOVATION FOUNDATION, WASHINGTON, D.C. 

Mr.ATKINSON. Thank you, Madam Chairwoman, and Mr. Chabot, 

and members of the Committee. I appreciate the opportunity to be 

here today to talk about the proposed legislation and the SBA inVerDate 0ct 09 2002 09:29 Dec 20, 2007 Jkt 033615 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 G:\CLERK SB\HEARINGS\TRANSCRIPTS\38202.TXT LEANN
23

vestment programs. I want to talk about it somewhat in the context as the last speaker, in terms of national competitiveness in an 

economy—in a world economy where cost is really the driver of a 

lot of activity in Asia and other countries. The U.S. Competitive advantage has to be innovation, and entrepreneurship plays a critical 

role in that. So I think these issues that you are focusing on are 

central to our economic future. 

I have been involved in these issues for many years, early, early 

on, when I was with the Office of Technology Assessment, which 

was an arm Congress. I was the first director of the Rhode Island 

Economic Policy Council. In fact, when I was there we helped create an SBIC-funded venture fund in the State that was very successful, focused on small and early startup companies. 

I have also written extensively on these issues, most recently a 

Kauffman Foundation-funded report called the 2007 State New 

Economy Index, which looked at a whole number of indicators, including entrepreneurship indicators by State, and found very interesting results of how entrepreneurship is actually active, and venture capital around the country. 

I am going to jump right into I think—kind of the main sort of 

point, I think, of this is there is clearly a debate about what the 

role of the Federal Government should be in this space. And there 

is no question that we have got the best venture capital markets, 

the best capital markets in the world in my view. And to be sure, 

there is no question that the lion’s share of funding for entrepreneurial ventures should come, does come, and will come from the 

private sector. But that doesn’t mean that there is not a role for 

government to fill in gaps and to go to some of the market failures. 

Our last speaker alluded to the ′′valley of death′′ being just one 

of the market failures. Let me suggest there are two big reasons 

why there is a critical role for government. One is in the last decade what we have seen is a significant increase in the amount of 

venture capital invested. It has doubled since 1995-96, but according to NSF data, the share of that investment going to zero and 

first stage deals has dropped by half. So we have seen a big expansion of the industry, but much more focus on later-stage big deals. 

Again I don’t blame the industry for doing that. I understand why 

that happens. But the result is that there is a gap there. 

The second gap relates to geography. Venture industry, 79 percent of venture investments go to the top—go to 10 States. This is 

up from 2000 from 69 percent. So the industry actually at the peak 

in 2000, which was the peak of VC investing, the industry has actually gotten more concentrated. 

A large share of the funds go to two States, California and Massachusetts. Again, there is nothing wrong with that. I don’t blame 

the industry for doing that. But what it means is large portions of 

the Nation simply don’t have access to those kinds of investments. 

One of the responses to that is a number of States, at this count 

44 States have established some sort of programs to fill that gap. 

Sometimes they partner with the private sector, sometimes with 

community organizations. 

For example, Pennsylvania’s Ben Franklin partnership program 

guarantees up to 25 percent of the loss by a qualified investor who 

makes an investment in Pennsylvania venture firms. 

24

Wisconsin recently established an Angel network. 

So the States recognize that this market is not perfect, and they 

are acting. But I would argue that the Federal Government needs 

to work with the States, needs to complement what they are doing, 

if for no other reason than States, even though they are doing some 

of this activity, their inclination—having worked for a Governor I 

understand the inclination—is to go for very big deals, recruit the 

big company to come, do the press release, get a lot of credit. Building an entrepreneurial economy, it is hard to get credit for that. 

You don’t see the results for many, many years. The results can be 

small at the beginning. 

So with regard to specific comments on the bill, again I commend 

the bill. I just make, I guess, a couple of comments. One is on the 

SBIC program, I strongly agree with the Committee on this, that 

the focus of SBIC should be pushed backwards to smaller deals, to 

earlier-stage deals. That is the market failure. I don’t think we 

need to be substituting for the private sector here. 

One suggestion I might make would be you propose that 25 percent go—at least 25 percent go to smaller enterprise, which I fully 

support. You might want to add, in my opinion, something on the 

size of the deal, perhaps saying some portion of the funds have to 

go to deals less than $2 million. 

With regard to the Angel fund, again I think there is a gap there. 

And I think providing an Angel fund is an important step to do 

that. One suggestion I might have would be to require more. Right 

now it is two Angels as part of the group. I would expand that to 

maybe five or even ten. I think having part of the goal of government here is to build networks, not just to provide money, and 

sending a message that we want more Angels to partner together. 

And more of my comments from the testimony—but my time is 

almost up, so my last point is I think we shouldn’t underestimate 

the importance of the grant program that you proposed. Again, a 

lot of the market failure there is about information and coordination. And so I think having a grant program, particularly if States 

were to partner that or local communities, where they could then 

help build these networks and help them manage these networks, 

I think that would be very important. 

My one last suggestion would be perhaps adding a cash match 

requirement if government is going to be a player. I think we could 

help leverage that. I think States would be happy to participate 

and contribute some of their own funds to that. 

So, again, thank you, and I commend you for your efforts. 

ChairwomanVELA ́ ZQUEZ. Thank you, Dr. Atkinson. 

[The prepared statement of Mr. Atkinson may be found in the 

Appendix on page 80.]

ChairwomanVELA ́ ZQUEZ. Our next witness is Mr. Lee Mercer. 

Mr. Mercer is president of the National Association of Small Business Investment Companies, and has served in that capacity since 

1996. Before joining NASBIC, Mr. Mercer held positions in both 

the private and public sectors as a partner in a New Hampshire 

law firm, a government program manager for Digital Equipment 

Corporation, and president of two privately owned companies. Welcome. 

25

STATEMENT OF LEE MERCER, PRESIDENT, NATIONAL 

ASSOCIATION OF SMALL BUSINESS INVESTMENT COMPANIES 

Mr.MERCER. Thank you. Madam Chair, Mr. Chabot, members of 

the Committee, thank you for the opportunity to appear today. 

On behalf NASBIC, I would like to start by saying that we support the SBIC provisions of the draft legislation under consideration. If enacted, they will improve the debenture program, make 

it more—

ChairwomanVELA ́ ZQUEZ. Can you bring the microphone closer to 

you? Thank you. 

Mr.MERCER. Sorry. You would think I would learn after all these 

years. 

We do support the provisions, the SBIC provisions in the bill. If 

enacted, they will improve the debenture program and make it 

more attractive to private sector management teams and investors. 

As Administrator Preston emphasized, since its beginning in 

1958, the SBIC program has provided approximately 50 billion of 

long-term debt and equity capital to more than 100,000 small companies; 2.9 billion of that was invested in a little over 2,100 companies in fiscal year 2006. And the numbers will be down slightly, but 

not too much in fiscal year 2007. 

Many of the most well-known companies in the country have received early financing from the program, including Intel, Apple, 

Callaway Golf, Whole Foods, Palm Computing, Staples, Quizno’s, 

Federal Express, Outback Steakhouse, Costco, Mothers Work, 

Build-a-Bear Workshop, and finally Heelys, if anybody has seen 

those. 

Thirty percent of all SBIC investment dollars in fiscal year 2006 

went to companies that had been in business only 2 years or less 

at the time of investments. SBICs have been a crucial source of 

capital during those early and difficult years. SBIC financing supports jobs and job growth. Small businesses receiving SBIC financing in fiscal year 2006 employed approximately 286,000 individuals, an average of 135 employees per company, and the median 

was 35. SBICs play an important role in financing local businesses 

in States and geographic regions not generally served by non-SBIC 

private equity funds. Of the 2,100 U.S. small businesses that received 2006 financing, 40 percent were located in LMI areas. They 

received 23 percent of the dollars invested that year. 

Now the SBIC program is at a critical crossroad. As detailed in 

my testimony, unleveraged bank SBIC program, long a leader in 

terms of dollars invested in small companies, has become a negligible part of the SBIC program in terms of dollars invested. Likewise, the participating security program is unfortunately, because 

it was an early-stage focus program, ramping out of existence. It 

is a victim of what we feel was an erroneous decision by OMB that 

the participating security is not a debt security for the purposes of 

the Credit Reform Act, and thus not a qualifying security for subsidy scoring purposes. 

That leaves the debenture program as the sole mainstay of the 

SBIC program at present. It has been growing slowly over the 

years, but not nearly fast enough to fill the void that is being left 

by the exit of the bank-owned SBICs and the participating security 

funds. However, the debenture program does have the potential to 

26

grow much larger if the SBIC program changes in the bill are enacted. They will simplify the program, always good for 

anygovernment-industry partnership, and make investment rules 

relative to the maximum that can be invested in any one company 

closer to industry norms. That is a critical provision to attract good 

managers and important to the portfolio companies themselves. 

These changes, together with the regulatory improvements being 

worked on by SBA, are what is needed to send a clear message to 

private management teams and private investors that the government truly does support the debenture SBIC program and wants 

to see it grow in effectiveness and helping to finance America’s 

small businesses. Without them, we fear that the SBIC program 

will be marginalized over time. That is not a happy thought for a 

program that has been so important to the growth of American 

business. 

Thank you for your consideration of our views. We look forward 

to working with the Committee as you finalize this important legislation. 

ChairwomanVELA ́ ZQUEZ. Thank you, Mr. Mercer. 

[The prepared statement of Mr. Mercer may be found in the Appendix on page 85.]

ChairwomanVELA ́ ZQUEZ. And now I recognize Mr. Michaud for 

the purpose of introducing our next witness. 

Mr.MICHAUD. Thank you very much, Madam Chair. 

The next witness is Ron Phillips, who is president and founder 

of Coastal Enterprises, Inc., a nonprofit community development 

corporation and community development financial institute based 

in Wiscasset, Maine. CEI works primarily in rural regions, creating 

jobs, affordable housing, and social services for people and places 

left out of the economic mainstream. CEI has also mobilized over 

$1.1 billion for financing and technical assistance in the development of small, medium and micro-businesses. Under its venture 

capital funds, CEI is making investments outside of Maine as well 

in northern New England, upstate New York, and other regions. 

I want to welcome Ron here today, look forward to your testimony. And you also have 5 minutes. Thank you. 

STATEMENT OF RON PHILLIPS, COASTAL ENTERPRISES INC., 

WISCASSET, MAINE; ON BEHALF OF THE COMMUNITY DEVELOPMENT VENTURE CAPITAL ALLIANCE 

Mr.PHILLIPS. Thank you very much, Congressman, for your support. And that helps me with some of my time. I also want to thank 

Chairwoman Vela ́zquez for inviting me to this hearing, and recognize as well Congressman Chabot, who also represents a new markets venture capital fund, which is one of the six funds that I also 

am representing here today, CEI Community Ventures, Inc. I also 

am a co-founder of the National Community Development Venture 

Capital Alliance, and was on the board. And that is a trade association for community development venture capital funds which are 

socially targeted, getting capital to small businesses, particularly 

small-scale capital in rural as well as urban regions. 

I do want to recognize and acknowledge, too, Congresswoman 

Moore, because I know this manufacturing issue has come up as 

27

to targeting more, because we have lost so many jobs overseas. And 

I have been very proud to say our industry, the community development venture capital industry, can count about 53 percent of its 

investment in manufacturing firms in the markets they are working in. In our own case we count about 77 percent. So we have got 

a vast majority of our investment going into manufacturing. 

I am going to feature one story as I come to that. I have written 

comments. I have presented some of the recommendations in them, 

and I will get to them. 

But I want to get to the heart of this matter. We have worked 

with Angel investors, I would like to say, as well as institutional 

investors. And there is some promising opportunities to get into the 

Angel network. We have raised, in our new markets venture capital fund, for example, we have invested a small, but very powerful 

$5.8 million. Very small. Our average investment is about 

$700,000, much smaller than the average in this country. We want 

to keep this in mind because we are getting to smaller-scale businesses that are just starting, need this capital. But that capital has 

leveraged up 26 million other dollars, most of it institutional dollars from banks and other places. We work very closely with banks, 

by the way, in our network. But interesting, $7 million has come 

from the Angel network that we work with for these companies. 

And I do believe that the relationship between the new markets 

venture capital company and the Angel network could be a very interesting place because we provide some of the formality of underwriting and screening deals, as well as the Angel networks, of 

course, bring their energy and passion to a particular kind of commitment. So I think there is some promise in there. 

Let me give you one story, if I could. I didn’t bring my clam 

chowder with me, but in Whiting, Maine, a population of 2,200, 

there was a company there called Look’s Gourmet that was there 

for 100 years, a kind of a dormant company doing its thing, processing—the canning industry, which has been a prominent industry in that part of the State. Washington County, by the way, is 

the poorest county in Maine, as the Congressman knows, and it 

also is the first county in which the sun rises in America. It has 

those two features to it. So if you are ever there or travel there, 

keep that in mind. 

But Mike Cote, an entrepreneur, he used to work with 

Pepperidge Farms foods, knew a lot about food processing, he is in 

his fifties, looking for an opportunity, a Maine native, an entrepreneur, bought the company and moved up there with his significant person, and they took it—they have begun the process of taking this company forward. We have invested in it. We put operational assistance funds to it to help it in the business planning 

and marketing, and particularly the branding of this company. It 

is called the Bar Harbor brands. You can Google that and buy often 

and buy plenty if you would like. The company now employs 26. 

It has doubled its employment from 11. That is huge in a place like 

Whiting, Maine, with 2,200. And if you read the Ellsworth American, you will see and hear the bylines, entrepreneurial spirit hits 

that town. That is what New Markets Venture Capital company is 

all about. They are setting the stage, they are creating the economic framework to help these companies go forward. 

28

Now let me just end with some of my recommendations, and I 

have got many more ideas to offer if any questions come my way. 

The technical fixes are already incorporated in this. I just want to 

draw your attention to them. First, we recommended that the new 

markets venture capital become compatible with the new markets 

tax credit in terms of geographic regions and targeting. There are 

some details in there that if it does become more coterminous with 

the new markets tax credit, then we have now blended and made 

more efficient this program. That actually is the most important 

feature to this. 

We also have asked for more time to raise capital. It is very hard 

to raise capital. We want 2 years. And we have also asked for actually no matching funds to the operational grant program. The reason why, although I agree that it is important to get States and 

others to match funds, places like Maine, and States, and States’ 

budgets are really pressed, and hard-pressed, and rural areas are 

hard-pressed to come up with anything. So 10 percent of the total 

capital or up to $1 million of grant money will really help smaller 

businesses get off the ground. 

Thank you very much. I would be glad to answer any questions. 

ChairwomanVELA ́ ZQUEZ. Thank you, Mr. Phillips. 

[The prepared statement of Mr. Phillips may be found in the Appendix on page 92.]

ChairwomanVELA ́ ZQUEZ. I would like to address my first question to Dr. Atkinson. Administrator Preston’s testimony suggested 

that the SBA debenture-based programs are adequate to fill the 

need for investment for startup and early-stage small businesses. 

Would you agree with this assessment? 

Mr.ATKINSON. I would not agree with that, because while I think 

they are an important step, I think two things are problematic. 

One is that the deals, as I said, have moved up even in SBIC to 

bigger deals, which I think was not the purpose of the program initially. And so I think your legislation to move it back is filling an 

important gap. If you are a big company—if you are a company 

that wants a $20 million or a $100 million dollar investment and 

you have got the right financials, you can get it. You can get it no 

matter where you are. 

One of the key things about the way a lot of these investments 

work is you have to be within driving distance. So if you are not 

near that—so I think that is why—and I don’t think the current 

programs work as well as they should, and I think the addition of 

an Angel program gets even more directly into that market gap. 

ChairwomanVELA ́ ZQUEZ. And that was my second question. 

So, Dr. Koenig, in his testimony Administrator Preston expressed 

concerns that this bill would have the effect of permitting large 

businesses to receive investment funding intended for small businesses. Is this a legitimate concern? 

Dr.KOENIG. I absolutely disagree that is a concern. All we are 

trying to do is fix this definition. The size of the company, all those 

provisions are all still maintained in the rulings. The fact of the 

matter is that the venture capital business is, while investing in 

the companies, the companies themselves operate the business. So 

they really—individually there may be a number of venture capitalVerDate 0ct 09 2002 09:29 Dec 20, 2007 Jkt 033615 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 G:\CLERK SB\HEARINGS\TRANSCRIPTS\38202.TXT LEANN
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ists who actually invest in a business, but their actual ownership 

position in the company is only a small portion of the total company. So we don’t see that this creates any risk for the businesses. 

ChairwomanVELA ́ ZQUEZ. Mr. More— thank you, Dr. Koenig—in 

your testimony you mentioned safeguards contained in the bill that 

will prevent the venture capital provisions in the bill from being 

exploited by large businesses. Can you comment on what those 

safeguards are and whether you believe they go far enough in protecting the interests of small businesses? 

Mr.MORE. I don’t know that I am knowledgeable enough to comment on that, but certainly when you have a company like Merck 

that sets up a venture capital operating company, Merck is—as a 

company is larger than 500 employees. And you know, we see corporate venture capital going on all the time. I would say that is an 

issue that I would see addressed by that. 

ChairwomanVELA ́ ZQUEZ. And Mr. Phillips, Administrator Preston 

stated that with LMI debentures, the SBIC program can actually 

provide greater investment to businesses in low-income areas and 

at less cost than new markets venture capital companies. If this is 

true, what additional benefit does the new markets venture capital 

program provide that the SBIC program does not? 

Mr.PHILLIPS. I think that is a very good question. I don’t think 

I agree with the Administrator on that, and I have discussed that 

with him. The SBIC, first of all, its average investment is much 

larger. And I have already made the point that we are dealing with 

smaller-scale investment capital for starting, seed, and early-stage 

companies. So that is one difference. 

The second is the SBIC does not get involved on a hands-on technical basis with consistency with their portfolio companies. I am 

going to make that blanket statement. I am sure there are some 

SBICs that do very well that way, because part of the structure of 

a venture firm is to actually engage directly with a portfolio. But 

we get involved much more intensely with that, using the operational grant funds as an assistance to bring in specialized people 

to help with business plans, marketing, Web site, branding, and so 

forth development. Those are some of the things. 

The third reason is that we target to geographic areas. I think 

SBICs, many of them do a great job, are not necessarily in the 

business of targeting, let alone socially targeting. We often target 

to environmental as well as social benefits and job creation. So 

those are some of the distinctions I would point out. 

ChairwomanVELA ́ ZQUEZ. I guess you saw the exchange between 

the Administrator and myself regarding the new markets program. 

Mr.PHILLIPS. Yes, I did. 

ChairwomanVELA ́ ZQUEZ. Even though he says that SBA intends 

to continue supporting the new markets program, it is simply too 

early to provide additional funding for the program. What effect is 

this wait-and-see approach having on small businesses that participate in the program? 

Mr.PHILLIPS. I have an answer to that, actually, and he would 

understand this. And I would love to talk with him directly about 

it. When you are involved in venture capital in setting up funds 

and operating funds, you need to maintain your continuity. And if 

you wait until one fund is completely in, or the jury is in, and you 

30

haven’t started the process to fund or develop your next fund, you 

are probably going to have a gap. And that is not a very good thing 

in the venture market if you have a team in the region and doing 

your work. So you have to start something. You have to put something in motion. You may not want to go into the particular project 

that is coming along, but you should at least get something going. 

And I would answer it at least that way. 

ChairwomanVELA ́ ZQUEZ. Mr. Mercer, Administrator Preston expressed concerns with the provision of the bill that will increase 

the maximum leverage limits for funds that invest in socially and 

economically disadvantaged small businesses. In your opinion, will 

this initiative restrict the investment decisions of SBIC licenses? 

Mr.MERCER. No. I would disagree with the Administrator on 

that, because the way—the important thing for a fund, be it an 

SBIC or any fund, is to have the ability to have a diversified portfolio to spread risk on the portfolio. And I think the way that provision is drafted would allow for a diversified portfolio to spread the 

risk. 

So, you know, the SSBIC program was a completely targeted program, and perhaps to too narrow a niche, where 100 percent of investments had to be in minority-owned enterprises. And SSBICs 

still exist. There are still I think 17 or 18 of them. But the fact is 

they are not—they are not raising additional capital. So it could be 

that even they are finding a too structured market too severe. So 

I think it is worth trying. You never know until you do try. And 

since it is such an important goal of Congress and most administrations, I would support it. 

ChairwomanVELA ́ ZQUEZ. Thank you, Mr. Mercer. Now I recognize Mr. Chabot. 

Mr.CHABOT. Thank you very much, Madam Chair. Mr. Peterson, 

I think I will begin with you if I can. 

Mr.PETERSON. Thank you, sir. 

Mr.CHABOT. Have problems in the credit market affected the financial capacity of sureties to write bonds? 

Mr.PETERSON. Not at this point; no, sir. 

Mr.CHABOT. Do you anticipate that anytime in the future, or 

does that seem to be not something that is on the horizon? 

Mr.PETERSON. You know, it is something that we are certainly 

conscious of. Anytime that the market undergoes some challenges 

it can have an effect on all of American businesses. But we don’t 

really anticipate it having an effect on ours directly. We are an industry that is really tied to the business cycle. As the business climate improves and as economic activity expands, you know, our 

business improves and our activity expands as well. And conversely, when it contracts, the same thing happens to our industry. 

Credit markets obviously have a role to play in that, but they are 

not necessarily a significant determinant effect. 

Mr.CHABOT. Thank you. 

Mr. Atkinson, I will go to you next. Are tax policies such as research and development tax credits and lower capital gains taxes 

just as important, or many would argue probably even more so, to 

the development of a venture capital industry as government contributions of actual capital? And if so, how does that work out of 

the scheme of things? 

31

Mr.ATKINSON. I would agree with you that they are just as important, in fact maybe more important. I absolutely agree. I think 

for example the R&D tax credit, we just issued two reports on that 

which are on our Web site that show fairly conclusively, looking at 

academic research both in this country and around the world, that 

tax incentives for R&D are very effective and do fill a need. 

And by the way, I would add we used to be number one in most 

generous R&D tax credit in the world in 1990, and now we are 

number 16 among OECD nations. So I agree with that. I guess I 

just wouldn’t look at it as an either/or. I certainly agree with you, 

though. 

Mr.CHABOT. Thank you. 

Mr. Mercer, if I could turn to you next. And before I do, just kind 

of an observation. You mentioned some of the companies that have 

benefited in the participating security SBIC. One of them was 

Build-a-Bear. And many of us who are parents have maybe had 

that experience. I know if you are in Gatlinburg or Myrtle Beach, 

you can’t pass one of those places without your kids wanting one, 

even if they have them in the past. They play with them for about 

5 minutes until they see the next Build-a-Bear site, and then want 

another one. Also they have the—you know, once you get the bear 

that is not the end of the story. That is just the beginning, because 

then there is clothing for all these things. And try to convince your 

kid that their existing doll clothes will fit the Build-a-Bear. It has 

to be the new stuff. What a racket. But they have done very well. 

Mr.MERCER. It is just a legal pyramid scheme. 

Mr.CHABOT. One that has worked quite effectively, at least in my 

house. But in any event, the real question, the bill we have somewhat talked about, although I don’t think it has been completely 

pulled together yet but it is still being considered, that offers increased leveraged availability to women-owned and socially disadvantaged small businesses. And are the current incentives for 

making capital available to these small businesses sufficient or insufficient? And how much will this help to increase capital available to those specific type of businesses I mentioned? 

Mr.MERCER. Well, let me start by saying that SBIC funds, indeed 

almost any venture fund or mezzanine fund, start with being gender-blind and ethnicity-blind. Most organizations don’t even track 

the deals that they review, and they review hundreds if not thousands of potential deals each year, by whether the company is 

owned by a woman or a minority. So in the past, obviously with 

the SSBIC program, the government created a program that said, 

okay, if you want the benefits of a particular government program 

you must target 100 percent. And that program was terminated by 

Congress in 1996 because it simply became too expensive. The program was losing money. And so people have wrestled with this 

issue for years and not been able to come up with any good way 

to solve it. 

Clearly, I think the biggest problem is that business plans that 

might merit funding often don’t get to the desk of an SBIC manager or any venture manager. And it has more to do with the networks that are involved and how those business plans get there 

than anything else. The approach that is suggested in the draft legislation says that more money will be available to an SBIC if it deVerDate 0ct 09 2002 09:29 Dec 20, 2007 Jkt 033615 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 G:\CLERK SB\HEARINGS\TRANSCRIPTS\38202.TXT LEANN
32

cides to agree to focus up to 50 percent, at least 50 percent on 

women- and minority-owned businesses. Will it work? I don’t know. 

But by offering an incentive of additional capital it may work. And 

I think that as long as it is not—doesn’t require that the fund 

focus—that the portfolio be so focused that it becomes too risky, I 

think it is perhaps a good experiment to try. 

Mr.CHABOT. Thank you. 

Mr. Phillips, if I could go to you next. You had talked briefly 

about some of the investments made by Coastal Enterprises and 

the success that you had, particularly in more challenging areas, 

some of which are in my district, for example. Could you just discuss a couple of those again to tell us the type of areas that are 

benefited? 

Mr.PHILLIPS. Yes. Thank you for that question. We have a diverse portfolio. In terms of venture capital, we have actually invested in about 40, 45 companies in that portfolio alone, and then 

overall about 1,700 small businesses throughout the State of Maine 

and to some extent rural New England and upstate New York. So 

we have quite a range. Most of our investing is sub-debt capital, 

not venture capital but sub-debt capital, which is near equity in 

many ways. It is a debt instrument. 

Our portfolio of companies are very diverse. We include child 

care centers, for example. But we will get involved with the fishing 

industry and fish processing, the farm sector and the timber industry. So a lot of it is natural resources. And these all have their 

challenges. They are all assets, however, to local and rural development, which is the way we approach these—our area. 

We also are working more closely with new immigrants and refugees that are coming into Maine. Maine has been a very white 

State, but we are also working in that area. And we do a lot of 

micro-enterprise lending. 

Now if we go down our portfolio and look at the character of it, 

I mentioned earlier most of it is manufacturing. A lot of it is in food 

processing, and naturally so, because you are in a rural area. That 

gets you into the concept of what a cluster industry might look like, 

if you invested more and more in the food processing sector. And 

that is going on not just in Maine, but in other parts of the country, as the consumers become more conscious of diet and natural 

and wholesome foods or organic foods. This is some of the character 

of our activity. Throughout that entire process we are looking at 

the job quality that gets created. 

We are very concerned about health benefits and the challenges, 

too, that businesses face in paying into health insurance programs. 

But livable wages and job quality are important. And we are also 

trying to back women in business, and run a very robust Woman 

in Business Development Initiative out of our organization. 

Mr.CHABOT. Thank you very much. 

Madam Chair, in the interest of giving the other members that 

are here a chance to ask questions, I will yield back. 

ChairwomanVELA ́ ZQUEZ. Thank you. Mr. Michaud, you have any 

questions? 

Mr.MICHAUD. Thank you, Madam Chair. I have one question for 

Mr. Phillips. 

33

Dealing with the manufacturing businesses, as you know the 

Committee has set aside a portion of the new markets venture capital appropriations to companies that are primarily engaged in the 

development of and investment in small manufacturing. And I 

would like to know what percentage of CEI’s investments go to 

small manufacturers? And how do you determine what type of 

business to invest in? And do you focus specifically on certain sectors? 

Mr.PHILLIPS. Oh, boy. Thank you. I almost think I answered 

some of that before, but I will try again. 

Most of our portfolio is in manufacturing. So that is a good sign. 

I understand there is some language in the bill around this. And 

I get a little bit conflicted exactly how to do that, because I know 

in venture capital you have got to be flexible and be very careful 

about narrowing one’s options in a fund, because you can get into 

some difficulty with that. 

At the same time, we are very sympathetic with the concept of 

manufacturing. My view is that different regions of the country 

have different assets and potential. So as much flexibility as possible ought to be in there. And already I think a lot of the funds, 

at least that I represent, are investing in manufacturing. 

How do we determine that? You are looking at what the competitive advantage is of your region. In Maine’s case, I just mentioned 

the food processing sector. We also have energy, timber industry. 

As you well know, in different aspects of the timber industry. So 

you are looking to align capital with the competitive opportunities 

that exist within the actual geographic region you might be working with. 

Mr.MICHAUD. Do you think agencies, whether it is EDA, SBA, 

should be looking at—if they are going to invest, put money for economic development opportunities—they ought to look at clusters 

and that a certain portion of funds should be promulgated that the 

fact that they can get actually private sector funding in them? 

Mr.PHILLIPS. I think cluster, some here might know more about 

that as a development strategy than myself, but I think cluster industries concept as a development strategy is not new. It has been 

around. There is a lot of a body of evidence and evaluation to show 

it is a very important way to do economic development in any particular region. There is a lot of networking. 

That Look’s Gourmet, by the way, is in the food processing sector. But also the interesting thing is the mussels, and lobster 

shells, and clam shells that they produce as waste are bought by—

are delivered to a local crafts person in Washington County who 

turns those into flatware, silverware for your dinner table. So you 

have very colorful sorts of things there. There are a lot of spin-offs 

around industry. And that is part of the image of what you are trying to do is create new synergies at that regional level. Thank you. 

Mr.MICHAUD. Thank you very much.RPTS DEANDCMN NORMAN 

Mr.MICHAUD. Thank you very much. 

Mr.CHABOT. Let me ask one question. In your opinion, Mr. Mercer, what is the best way to get equity to small businesses? Is it 

best to create new programs or improve existing programs, if you 

have an opinion? 

34

Mr.MERCER. Thank you very much for that question, to quote the 

former Administrator of SBA. I might want to take a pass, but I 

will wade into the waters. There are two distinct things. You know, 

equity investing in this country is a continuum from family and 

friends and then Angels and then into more institutional and larger fund sizes. You essentially cannot have—if you remove any of 

the pieces of this capital markets continuum that has served our 

country so well, or if gaps form in any of those, then the country 

is ill-served. I am not in expert on Angel investing and so I would 

not want to say that the provisions in the draft legislation are not 

a good way to increase equity financing for small business because 

it presumably would increase equity financing for small business. 

I think the participating security program showed itself, at least 

in the early stages, the first several years, to be a very good vehicle 

for stimulating equity investing as well; although what I would say 

is that the size of those investments would probably be larger than 

the size of the typical Angel investment and would be at the next 

stage of investment. 

So you could go back and improve—you could resurrect the participating security SBIC program, literally by putting a provision 

in the Small Business Investment Act that says for the provisions 

of the Fair Credit Reform Act, for the purposes of the Fair Credit 

Reform Act, a participating security is a debt security for all purposes, and that would solve the problem. 

From an accounting standpoint it is a debt security. SBA requires the participating security funds themselves to carry it on 

their books as a debt security. It is only OMB who said it is not 

a debt security for the purposes of the Credit Reform Act. So you 

might want to improve the program by focusing it towards more 

early stage or—and you would still have a credit subsidy problem 

that might carry a subsidy rate of 24 percent. So there are things 

you would have to do to solve it. 

But I do not think the two programs are mutually exclusive. I 

do not think that is the case. I do not want—I guess that is my 

answer. 

ChairwomanVELA ́ ZQUEZ. If I may, Mr. Mercer, but you know also 

the changes that you will want to see for the program will have to 

be supported by the Budget Committee, and they are not willing 

to do so. 

Mr.MERCER. I understand that CBO— well, the participating security program exists in law right now and new leverage could be 

provided as long as it was on a dollar-for-dollar appropriation. 

Clearly that is not going to happen. The program will not ever exist 

unless it is a credit subsidy program. In order to get to be a credit 

subsidy program, the security has to be considered a debt security. 

Right now it is not. 

Mr.CHABOT. Reclaiming my time. 

ChairwomanVELA ́ ZQUEZ. Sure. 

Mr.CHABOT. Mr. Koenig, if the capital community—assuming it 

is very astute in evaluating the market potential of a firm—and it 

does not make an investment, should that not be an indication perhaps to the government that it should not make an SBI or award? 

Dr.KOENIG. Not at all. As Mr. Atkinson was pointing out, the 

way the venture capital community has funded the biotechnology 

35

industry has evolved over time. In the early nineties there was a 

lot more opportunity for companies at an earlier stage to get to the 

public markets. Companies that had less developed programs could 

put out public offerings to get other access to capital. 

What has happened since the year 2000 is that much of the venture capital money is going to later-stage opportunities. And so because it has taken a lot more money to develop any more programs 

and get to the public markets, they have taken most of their opportunities and focused it on these late-stage opportunities, which is 

now creating a much larger gap. So their rejection of this is not for 

the merits of the science. The science typically in most of those 

cases is too early, not developed, and they would have to invest so 

much more money before they would see a return on their investment the way these companies are set up right now. 

Mr.CHABOT. Thank you. 

Mr. More, what economies of scale and scope are available to 

venture capital firms that are not available to small businesses 

that do not have venture funding? 

Mr.MORE. I am not aware of economies of scale. Do you mean 

two companies using the same manufacturing facilities? 

Mr.CHABOT. Venture capital firms—in other words, having access 

to a better situation than would individual companies, for example. 

Mr.MORE. I think the venture capital industry, venture capitalists themselves, we talk a lot about how we try and help our companies. I think, honestly, some of that is true. Some of that is rhetoric as in any other industry. I don’t think grouping venture capital 

firms together as a class and saying just because something is venture-backed, first of all, does not mean it is a good idea and it is 

going to be successful. 

Second of all, there is a spectrum of venture capital out there. 

You have $10 million funds that are venture capitalists that are 

trying to invest in minority areas. A friend of mine, Tom Darden, 

is doing that in Detroit. There are big funds that are large international institutional funds that are investing hundreds of millions 

of dollars that may have economies of scale that I am unaware of. 

I do not see any of that in the biotech industry. We may say that 

we have used this consultant on occasion and we will use them in 

new companies we are setting up. And if you call that an economy 

of scale it is not like we are getting a better deal. The one validation is we have used them before and we know they are a good person to work with. So I think the networks are important, but I do 

not think there is any economies. 

Mr.CHABOT. I yield back. 

ChairwomanVELA ́ ZQUEZ. Ms. Moore. 

Ms.MOORE. Thank you so much, Madam Chair, for recognizing 

me. I want to thank you for this really important hearing on SBA’s 

investment in surety bonds programs. I am very, very excited to be 

here today because I do think, I do agree with our distinguished 

panelists that this is really the appropriate role for government to 

leverage our few little dollars with the needs of the business community, because you indeed do create opportunities and jobs. 

Just a little commercial to those in the biotech venture capital 

business. Wisconsin has the most important line—or the—of stem 

36

cells. So make sure that the geographic distribution of those funds 

recalls our industry in Wisconsin. So I’m done with the commercial. 

I just want to ask a few questions. I do not know who the appropriate person is. Perhaps Mr. Phillips. I am particularly interested 

in Title II of this bill, the new market venture capital program. As 

the Chairwoman knows, ever since I have been on this Committee 

and been a Member of Congress, I have tried to get the new market venture capital program up and going, and hopefully with—I 

am so happy this is part of this package, as I have introduced this 

bill both sessions that I have been here. 

Mr. Phillips, I wanted you to clarify your comment about getting 

this in sync with the new market tax credit program, because I 

thought we had done that. If you could specifically—this is a technical question. 

Mr.PHILLIPS. It is technical. In my comments I gave the technical 

language to describe the technical ways in which this needs to happen. It has to do with a couple of things. The new market tax credit 

and the new markets venture capital programs came into being in 

the Clinton administration, and they disconnected in the wee hours 

of some morning in terms of their consistency and compatibility. So 

that is all that is being talked about, just for the record, is to make 

the programs consistent in terms of geographic areas that qualify 

in terms of census track eligibility. So it gets down to census track, 

and the new markets venture capital does not quite overlap with 

the new markets tax credit, so we are trying to get it to just qualify, at least on that census track basis. 

The second thing we are trying to do is make some exceptions 

to geographic eligibility by allowing for investment in projects outside the eligible census track so you are now looking at targeted 

population. The CDFI has a ruling on this it has published on how 

that all works. So we are trying to do that. 

Now, why is that? Particularly for rural areas, but also urban 

areas, you can have a project that just is outside the census track, 

as a distressed census track right across the street, and literally 

you cannot do that project. A manufacturing facility could be across 

the street in Madison where it does not qualify. Under targeted 

populations, you could do that. I could go on and on. 

Ms.MOORE. Well, that does lead to my next question. Senator 

Kerry, we were working with him on the reauthorization of this 

bill, and he did raise these points. Our concern then was that the 

language would be tight enough so that it could not be construed 

as some amorphous doing good things for low-income communities, 

like having some indirect impact on low-income communities; i.e., 

you have hired all the greeters for Wal-Mart out of a certain census 

track and you have invested in an entity that was not there. So I 

hope that the chairperson and others will work with you on this, 

because that was my concern is that it would be just too flexible. 

As it relates to the statutory purpose of providing economic development in low-income areas, I would hope that these changes 

would not take this off of this initial mission. 

Mr.PHILLIPS. I do not think they do. I think the targeted population is very difficult to apply in the real world, I give you that. 

I am a practitioner—representing that right now, a national organization. It is hard to apply target populations, actually, due to the 

37

fact that it is not flexible. It is really right on in terms of making 

sure low-income people benefit. It is very hard to do. 

I do have one thing to say about the new markets tax credit, if 

I could offer this. 

Ms.MOORE. Yes, yes. 

Mr.PHILLIPS. This Committee—I put this on the table. You asked 

the question, so what is the best way to deliver equity capital? You 

know the new markets tax credit has been a phenomenal success 

as a model in using the tax code to spur private capital investments and large investments into places it has not traditionally 

gone—in rural communities this has been exceptionally important— tens of millions, and now in the billions of dollars flowing 

into projects, very interesting projects, to revitalize a communities 

that have never seen this kind of capital before as a result of the 

Tax Code and tax credit. 

If we were to find a way to really make the tax credit work for 

the venture capital industry—and there are some technical barriers 

to that, which I could take a week going through with you—then 

you have really opened up a whole new world of getting the experts 

of venture investors, who are really good at analyzing and understanding the future. At least they know how to make bets. 

So I offer this, and there is some good work that needs to be 

done—we have talked to Administrator Preston about this—the 

CDFI fund and the U.S. Treasury need to get involved. There are 

some financial models, but you need the will to make this happen.It is not that easy. 

Mr.ATKINSON. I wonder if I could beg the Committee’s forgiveness and ask to be excused. I have a speech I committed to give. 

ChairwomanVELA ́ ZQUEZ. Sure. I am about to adjourn. I want to 

thank all of you. You have been a very good hearing today on this 

important subject. We will continue to work together to clarify 

some of the concerns that have been raised. And the gentleman has 

a unanimous consent request? 

Mr.CHABOT. I do. I just ask unanimous consent that a statement 

from Mr. Graves be admitted into the record. 

ChairwomanVELA ́ ZQUEZ. Without objection. 

ChairwomanVELA ́ ZQUEZ. I would like to say that I ask unanimous consent that any statements submitted for the record be accepted for 5 legislative days. This hearing is adjourned. 

[Whereupon, at 12:43 p.m., the Committee was adjourned.]

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