I 

109TH CONGRESS 

1ST SESSION H. R. 3429 

To amend the Small Business Investment Act of 1958 to establish a 

participating debenture program. 

IN THE HOUSE OF REPRESENTATIVES 

JULY 26, 2005 

Mr. MANZULLO (for himself and Mr. RAMSTAD) introduced the following bill; 

which was referred to the Committee on Small Business 

A BILL 

To amend the Small Business Investment Act of 1958 to 

establish a participating debenture program. 

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled, 

3 SECTION 1. ESTABLISHMENT OF PARTICIPATING DEBEN4 TURES PROGRAM. 

5 (a) ESTABLISHMENT.—Section 303 of the Small 

6 Business Investment Act of 1958 (15 U.S.C. 683) is 

7 amended by adding at the end the following new sub8 section: 

9 ‘‘(k) PARTICIPATING DEBENTURES.— 
2 

•HR 3429 IH 

1 ‘‘(1) GUARANTEE OF PARTICIPATING DEBEN2 TURES.—The Administrator is authorized to guar3 antee the payment of the redemption price and in4 terest on a participating debenture issued by a small 

5 business investment company under such terms and 

6 conditions as the Administrator shall establish by 

7 regulation. 

8 ‘‘(2) LIMITATION ON GUARANTEE OF PARTICI9 PATING DEBENTURES.—A guarantee under para10 graph (1) shall not— 

11 ‘‘(A) exceed the amount of the payment to 

12 which the guarantee applies; or 

13 ‘‘(B) change the timing of such payment. 

14 ‘‘(3) MAXIMUM LEVERAGE.—The Administrator 

15 may not guarantee a new participating debenture 

16 issued by a small business investment company if 

17 the aggregate unpaid principal balance of the par18 ticipating debentures issued by that small business 

19 investment company would exceed 200 percent of 

20 the leverageable capital of such company on the day 

21 after the company issued or distributed the new par22 ticipating debenture. 

23 ‘‘(4) PURCHASE OF PARTICIPATING DEBEN24 TURES.—The Administrator may authorize a trust 

25 or pool acting on behalf of the Administration to 
3 

•HR 3429 IH 

1 purchase participating debentures issued by a small 

2 business investment company under such terms and 

3 conditions as the Administrator shall establish by 

4 regulation. 

5 ‘‘(5) PARTICIPATING DEBENTURE DEFINED.— 

6 In this subsection, the term ‘participating debenture’ 

7 means a debt security that is— 

8 ‘‘(A) in a form prescribed by the Adminis9 trator that obligates the issuing company to— 

10 ‘‘(i) pay any unpaid accrued interest 

11 on that debt security on the date which is 

12 5 years after the date on which it is issued; 

13 ‘‘(ii) pay interest accrued after the 

14 date that is 5 years after the date on 

15 which the debt security is issued semi-an16 nually; and 

17 ‘‘(iii) pay any other amount as re18 quired by this subsection and 

19 ‘‘(B) subject to the terms and conditions 

20 set forth in this subsection and to any addi21 tional terms and conditions as may be pre22 scribed by the Administrator that are consistent 

23 with this subsection. 

24 ‘‘(6) REDEMPTION.—Not later than the date 

25 which is 10 years after the date on which it is 
4 

•HR 3429 IH 

1 issued, a participating debenture shall be redeemed 

2 for an amount equal to the outstanding principal 

3 balance of such participating debenture plus any ac4 crued but unpaid interest due on such participating 

5 debenture as of the date on which it is redeemed. 

6 ‘‘(7) INTEREST.— 

7 ‘‘(A) IN GENERAL.—Interest on a partici8 pating debenture is preferred and cumulative 

9 and is pre-payable out of any gross receipts 

10 available for distribution and is payable at the 

11 scheduled interest payment dates and at the 

12 scheduled or accelerated maturity of the partici13 pating debenture. 

14 ‘‘(B) INTEREST ON PRINCIPAL BAL15 ANCE.—Interest on the principal balance out16 standing of a participating debenture shall ac17 crue on a daily basis, and unpaid accrued inter18 est shall compound semi-annually from the date 

19 of the issuance of such participating debenture, 

20 at a rate determined by the Secretary of the 

21 Treasury taking into consideration the current 

22 average market yield on outstanding marketable 

23 obligations of the United States with remaining 

24 periods to maturity comparable to the average 

25 maturities on such securities, adjusted to the 
5 

•HR 3429 IH 

1 nearest one-eighth of 1 percent, plus an addi2 tional charge, in an amount established annu3 ally by the Administration, as necessary to re4 duce to zero the cost (as defined in section 502 

5 of the Federal Credit Reform Act of 1990 (2 

6 U.S.C. 661a)) to the Administration of pur7 chasing and guaranteeing participating deben8 tures under this Act, which rate may not exceed 

9 1.5 percent per annum, and which shall be paid 

10 to and retained by the Administration. 

11 ‘‘(8) PAYMENT DEFAULTS.—If a small business 

12 investment company fails to pay any principal or in13 terest on a participating debenture when due (in14 cluding any mandatory prepayment out of gross re15 ceipts)— 

16 ‘‘(A) the Administrator, in addition to any 

17 other remedies available by law, may demand 

18 immediate payment of the principal balance and 

19 accrued interest on any participating debenture 

20 issued by the small business investment com21 pany; and 

22 ‘‘(B) the interest rate on any outstanding 

23 participating debentures issued by the small 

24 business investment company shall increase 

25 until all payment defaults are cured or waived, 
6 

•HR 3429 IH 

1 up to a maximum of 300 basis points, at a rate 

2 of— 

3 ‘‘(i) 50 basis points on the date on 

4 which the small business investment com5 pany defaults; 

6 ‘‘(ii) 50 basis points on the date that 

7 is 6 months after the date on which the 

8 small business investment company de9 faults; and 

10 ‘‘(iii) an additional 50 basis points at 

11 6-month intervals thereafter. 

12 ‘‘(9) GROSS RECEIPTS DEFINED.—In this sub13 section, the term ‘gross receipts’ means any cash re14 ceived by a small business investment company, in15 cluding investment proceeds (return of capital and 

16 profit), interest, dividends, and fees (other than cap17 ital contributed by a partner, proceeds from the 

18 issuance of participating debentures, and any other 

19 money borrowed by the small business investment 

20 company). 

21 ‘‘(10) LIQUIDATION OF SMALL BUSINESS IN22 VESTMENT COMPANY.—In the event of the liquida23 tion of a small business investment company issuing 

24 participating debentures under this subsection, a 

25 participating debenture shall be senior in priority for 
7 

•HR 3429 IH 

1 all purposes to any equity interest in the issuing 

2 company, whenever created. In liquidation, unfunded 

3 commitments by private investors may, at the option 

4 of the Administration, be applied to pay accrued in5 terest and principal of outstanding participating de6 bentures. 

7 ‘‘(11) INVESTMENT OBLIGATION.— 

8 ‘‘(A) IN GENERAL.—Any company issuing 

9 a participating debenture under this Act shall 

10 invest or commit to invest an amount equal to 

11 the outstanding face value of such participating 

12 debenture solely in equity capital. 

13 ‘‘(B) EQUITY CAPITAL.—In this para14 graph, ‘equity capital’ means common or pre15 ferred stock or a similar instrument, including 

16 subordinated debt with equity features which is 

17 not amortized and which provides for interest 

18 payments from appropriate sources, as deter19 mined by the Administration. 

20 ‘‘(12) OTHER DEBT.—A small business invest21 ment company issuing a participating debenture 

22 under this subsection shall have no debt other than 

23 debt obtained through issuing participating deben24 tures and temporary debt (as defined by the Admin25 istrator) in an amount equal to not more than 50 
8 

•HR 3429 IH 

1 percent of the company’s private capital, and subject 

2 to any terms and conditions specified by the Admin3 istrator. 

4 ‘‘(13) USE OF PROCEEDS.—Subject to regula5 tions issued by the Administrator, a small business 

6 investment company may use the proceeds of a par7 ticipating debenture issued by the company to pay 

8 the principal amount and accrued interest due on an 

9 outstanding participating debenture issued by that 

10 company. 

11 ‘‘(14) DISTRIBUTION OF GROSS RECEIPTS.— 

12 Except as otherwise provided in this subsection, a 

13 small business investment company shall utilize 

14 gross receipts, from any source or however cat15 egorized for Generally Accepted Accounting Prin16 ciples or tax accounting purposes, first for the pay17 ment of accrued interest on participating deben18 tures, then for repayment of participating debenture 

19 principal and contributed private capital, and finally 

20 for profit distributions, as follows: 

21 ‘‘(A) PAST DUE INTEREST AND PRIN22 CIPAL.—Gross receipts shall be used within 10 

23 days of receipt— 

24 ‘‘(i) to pay any past due interest 

25 (whether past due by its terms or by accel-
9 

•HR 3429 IH 

1 eration) on a participating debenture 

2 issued by the small business investment 

3 company; and 

4 ‘‘(ii) if no past due interest is out5 standing, to repay any past due principal 

6 (whether past due by its terms or by accel7 eration) on such a debenture. 

8 ‘‘(B) MANDATORY INTEREST PREPAY9 MENT.—If no unpaid accrued interest or past 

10 due principal is outstanding on any partici11 pating debenture issued by the small business 

12 investment company, then, not later than the 

13 last day of the calendar quarter in which any 

14 gross receipts are received (or, in the case of 

15 gross receipts received during the last 15 days 

16 of a calendar quarter, not later than the last 

17 day of the subsequent calendar quarter), the 

18 company shall use such receipts to prepay ac19 crued interest on the participating debentures 

20 issued by the company. Such prepayment shall 

21 be applied to such accrued interest in the order 

22 in which such interest would otherwise become 

23 due and payable. 

24 ‘‘(C) AMORTIZATION DISTRIBUTIONS.—If 

25 no unpaid accrued interest or past due principal 
10 

•HR 3429 IH 

1 is outstanding on any participating debenture 

2 issued by the company, gross receipts shall be 

3 distributed to— 

4 ‘‘(i) the Administrator, to amortize 

5 outstanding participating debenture lever6 age; and 

7 ‘‘(ii) private investors in the small 

8 business investment company, 

9 pro rata according to the ratio of outstanding 

10 participating debenture leverage to outstanding 

11 leverageable capital at the time of distribution. 

12 ‘‘(D) POST-AMORTIZATION DISTRIBU13 TIONS.—If no accrued interest or principal is 

14 outstanding on any participating debenture 

15 issued by the small business investment com16 pany, and the company has no outstanding 

17 leverageable capital, gross receipts shall be dis18 tributed as follows: 

19 ‘‘(i) Unless aggregate distributions to 

20 private investors under this subparagraph 

21 equal or exceed aggregate contributions to 

22 the capital of the company previously made 

23 by private investors, gross receipts shall be 

24 distributed to the Administration in an 

25 amount equal to the initial profit participa-
11 

•HR 3429 IH 

1 tion percentage of the total amount distrib2 uted, with any remaining gross receipts 

3 distributed to private investors. 

4 ‘‘(ii) If aggregate distributions to pri5 vate investors under this subparagraph 

6 equal or exceed aggregate contributions to 

7 the capital of the company previously made 

8 by private investors, there shall be distrib9 uted to the Administration an amount 

10 equal to the final profit participation per11 centage of the total amount distributed, 

12 with any remaining gross receipts distrib13 uted to private investors. 

14 ‘‘(E) MANAGEMENT EXPENSES.—For pur15 poses of calculating the amount to be distrib16 uted to the Administration pursuant to sub17 paragraph (D), except as otherwise prescribed 

18 by the Administration, the management ex19 penses of any company which issues partici20 pating debentures under this subsection shall 

21 not be greater than 2.5 percent of the combined 

22 capital of the company per year, plus, in the 

23 case of a company with combined capital of less 

24 than $20,000,000, an additional $125,000. 

25 ‘‘(F) DEFINITIONS.—In this paragraph: 
12 

•HR 3429 IH 

1 ‘‘(i) The term ‘outstanding 

2 leverageable capital’ means any aggregate 

3 capital contributions received by a small 

4 business investment company from private 

5 investors which exceed aggregate distribu6 tions received by the private investors from 

7 the company. 

8 ‘‘(ii) The term ‘initial profit participa9 tion percentage’ means 25 percent of the 

10 leverage ratio, reduced by the weighted av11 erage interest rate on the participating de12 bentures issued by the company. 

13 ‘‘(iii) The term ‘final profit participa14 tion percentage’ means 50 percent of the 

15 leverage ratio, reduced by the weighted av16 erage interest rate on the participating de17 bentures issued by the company. 

18 ‘‘(iv) The term ‘leverage ratio’ means 

19 the ratio of the aggregate amount of par20 ticipating debenture leverage previously 

21 drawn by the company (including such le22 verage that has been repaid) to the aggre23 gate amount of capital previously contrib24 uted to the company by private investors. 
13 

•HR 3429 IH 

1 ‘‘(v) The term ‘combined capital’ 

2 means the aggregate amount of private 

3 capital and outstanding leverage. 

4 ‘‘(vi) The term ‘management ex5 penses’ includes management fees and any 

6 additional salaries, office expenses, travel, 

7 business development costs, office and 

8 equipment rental, bookkeeping, and the de9 velopment, investigation, and monitoring of 

10 investments paid by the small business in11 vestment company, but does not include 

12 the cost of services provided by specialized 

13 outside consultants, outside lawyers and 

14 outside auditors, who perform services not 

15 generally expected of a venture capital 

16 company nor does such term include the 

17 cost of services provided by any affiliate of 

18 the company which are not part of the nor19 mal process of making and monitoring ven20 ture capital investments. 

21 ‘‘(15) EXCEPTIONS TO THE ORDER OF DIS22 TRIBUTIONS.—Notwithstanding paragraph 15(C), if 

23 no unpaid accrued interest (whether or not past due) 

24 and no past due principal is outstanding on any par25 ticipating debenture issued by a small business in-
14 

•HR 3429 IH 

1 vestment company, the following exceptions shall 

2 apply: 

3 ‘‘(A) TAX DISTRIBUTIONS.— 

4 ‘‘(i) SPECIAL DISTRIBUTION TO PRI5 VATE INVESTORS.—Notwithstanding any 

6 outstanding principal that is not past due 

7 on participating debentures issued by the 

8 small business investment company, the 

9 company may make a special distribution 

10 of gross receipts or other cash to private 

11 investors without a corresponding distribu12 tion to the Administration if— 

13 ‘‘(I) the small business invest14 ment company has an investment in a 

15 business that is organized as a limited 

16 liability company or as a partnership 

17 (referred to in this paragraph as a 

18 ‘portfolio company’); 

19 ‘‘(II) the portfolio company has 

20 income that is taxable to the members 

21 or partners of such portfolio company; 

22 ‘‘(III) the portfolio company 

23 makes a distribution to the members 

24 or partners of such portfolio company 

25 in an amount equal to the tax liability 
15 

•HR 3429 IH 

1 of such members or partners on the 

2 taxable income of the portfolio com3 pany assuming that each is taxed at 

4 the highest combined Federal, State, 

5 and local income tax rate applicable to 

6 individuals anywhere in the United 

7 States; and 

8 ‘‘(IV) the small business invest9 ment company is organized as a lim10 ited liability company or a partnership 

11 such that any income of the portfolio 

12 company allocated to such small busi13 ness investment company is reallo14 cated to private investors, who are lia15 ble for the payment of taxes on such 

16 income as if such income were the in17 come of the private investors, regard18 less of whether such investors receive 

19 any cash with respect to such income. 

20 ‘‘(ii) AMOUNT OF SPECIAL DISTRIBU21 TION.—The amount of the special distribu22 tion of gross receipts under clause (i) shall 

23 not exceed the amount that is the dif24 ference between— 
16 

•HR 3429 IH 

1 ‘‘(I) the estimated aggregate 

2 maximum tax liability of the private 

3 investors in the small business devel4 opment company for the income of 

5 any portfolio company in which the 

6 small business development company 

7 is invested during the calendar year 

8 that precedes the distribution; and 

9 ‘‘(II) the aggregate amount dis10 tributed to such private investors 

11 (other than amounts distributed pur12 suant to this subparagraph) during 

13 the period beginning on April 15 of 

14 the calendar year preceding the dis15 tribution and ending on the date on 

16 which the distribution is made, but in 

17 no circumstances more than the ag18 gregate amount of tax distributions 

19 received by the small business invest20 ment company from investments in 

21 portfolio companies during the same 

22 period. 

23 ‘‘(iii) TIMING OF SPECIAL DISTRIBU24 TION.—Any special distribution of gross 
17 

•HR 3429 IH 

1 receipts under clause (i) shall be made not 

2 later than April 15 of each calendar year. 

3 ‘‘(B) PAYMENT OF EXPENSES.—The small 

4 business investment company may— 

5 ‘‘(i) use gross receipts to pay pre6 viously incurred expenses (including man7 agement fees) and other liabilities; and 

8 ‘‘(ii) retain gross receipts in an ex9 pense reserve account in an amount which, 

10 together with any existing expense reserve 

11 of the company, shall not exceed the rea12 sonably anticipated expenses and other li13 abilities of the company (other than such 

14 expenses and liabilities as are prohibited by 

15 law) for the succeeding 12-month period. 

16 ‘‘(C) PREPAYMENT.—Subject to any appli17 cable requirements under State law, the small 

18 business investment company may use gross re19 ceipts or other cash to prepay outstanding par20 ticipating debenture leverage and interest, in 

21 whole or in part, without penalty, and at any 

22 time. 

23 ‘‘(16) RESTRICTIONS ON DISTRIBUTIONS.— 

24 ‘‘(A) LIQUIDITY AND OTHER ADMINISTRA25 TIVE OR STATE LAW RESTRICTIONS.—No dis-
18 

•HR 3429 IH 

1 tribution shall be made except in accordance 

2 with the liquidity requirements and other appli3 cable restrictions on distributions established by 

4 the Administration or under applicable State 

5 law. 

6 ‘‘(B) CAPITAL IMPAIRMENT OR REGU7 LATORY VIOLATION.—If a small business invest8 ment company is in restricted operations or liq9 uidation by reason of capital impairment or reg10 ulatory violation, the maturity date of the par11 ticipating debentures issued by that company, 

12 including both principal and accrued interest, is 

13 subject to acceleration at the option of the Ad14 ministration, and, whether or not there has 

15 been such acceleration, up to 100 percent of all 

16 gross receipts and unfunded private investor 

17 commitments may, at the option of the Admin18 istration, be required to be distributed to the 

19 Administration until accrued interest and prin20 cipal on the participating debentures issued by 

21 the company have been paid in full, in accord22 ance with any terms and conditions the Admin23 istrator may establish by regulation. 

24 ‘‘(17) DISTRIBUTIONS IN KIND.— 
19 

•HR 3429 IH 

1 ‘‘(A) ELECTION OF IN-KIND DISTRIBUTION

2 OF SECURITIES.— 

3 ‘‘(i) PUBLICLY TRADED AND MARKET4 ABLE SECURITIES.—A small business in5 vestment company that issues participating 

6 debentures may elect to make an in-kind 

7 distribution of securities at any time, sub8 ject to applicable securities laws and regu9 lations, if such securities are publicly trad10 ed and marketable. 

11 ‘‘(ii) TREATMENT AS GROSS RE12 CEIPTS.—For purposes of this subsection, 

13 such securities shall be treated as gross re14 ceipts and shall be subject to the priorities 

15 and restrictions applicable to gross receipts 

16 under this subsection and any regulation 

17 issued by the Administration that is appli18 cable to gross receipts. 

19 ‘‘(B) TREATMENT OF ADMINISTRATION

20 SHARE.—The company shall either deposit the 

21 Administration’s share of such securities with a 

22 trustee designated by the Administration, or re23 tain the Administration’s share, if the Adminis24 trator so directs and with the agreement of the 

25 company. 
20 

•HR 3429 IH 

1 ‘‘(C) RETENTION OF ADMINISTRATION

2 SHARE.—If the company retains the Adminis3 tration’s share, it shall sell such share and 

4 promptly remit the proceeds to the Administra5 tion. 

6 ‘‘(D) VALUE OF ADMINISTRATION

7 SHARE.—For purposes of this paragraph, the 

8 value of the Administration’s share is— 

9 ‘‘(i) the value of the publicly traded 

10 and marketable securities described in sub11 paragraph (A)(i), as of the date of dis12 tribution to the Administration under sub13 paragraph (B) or as of the initial date of 

14 retention under subparagraph (C); and 

15 ‘‘(ii) the controlling value for the pur16 poses of determining the remaining liability 

17 of the company to the Administration; 

18 ‘‘(E) ULTIMATE SALE OF ADMINISTRATION

19 SHARE.—Upon the ultimate sale of the 

20 Adminsitration’s share or upon the small busi21 ness investment company’s ultimate sale of 

22 such share on behalf of the Administration, the 

23 Administration may receive an amount that is 

24 more or less than the value of the 
21 

•HR 3429 IH 

1 Adminsitration’s share under subparagraph 

2 (D). 

3 ‘‘(F) TRUSTEE DEFINED.—In this para4 graph, the term ‘trustee’ means a person who 

5 is knowledgeable about and proficient in the 

6 marketing of thinly traded securities. 

7 ‘‘(18) TIMING OF DISTRIBUTIONS.— 

8 ‘‘(A) IN GENERAL.—Subject to subpara9 graph (B) and paragraph (18), any gross re10 ceipts received by a small business investment 

11 company issuing participating debentures under 

12 this subsection that are not placed in an ex13 pense reserve pursuant to paragraph (16)(B) 

14 shall be distributed by the last day of the fiscal 

15 quarter in which such net receipts were received 

16 by the company, except that gross receipts re17 ceived after the date that is 15 days before the 

18 end of a fiscal quarter shall be distributed by 

19 the last day of the subsequent fiscal quarter. 

20 ‘‘(B) EXCEPTIONS TO TIMING OF DIS21 TRIBUTIONS.—Gross receipts consisting of mar22 ketable securities shall be distributed within six 

23 months of receipt, unless the small business in24 vestment company has obtained the prior con25 sent of the Administrator. 
22 

•HR 3429 IH 

1 ‘‘(19) REINVESTMENT OF GROSS RECEIPTS.— 

2 Subject to such regulations and restrictions as may 

3 be prescribed by the Administrator and the agree4 ment of the private investors in a small business in5 vestment company, any gross receipts that exceed 

6 the amount required to make payments to the Ad7 ministration as required by this subsection may be 

8 reinvested in qualified small businesses by the small 

9 business investment company. 

10 ‘‘(20) POST-DISTRIBUTION COMPUTATION.— 

11 After distributions have been made pursuant to this 

12 subsection, the Administration’s share of such dis13 tributions shall not be reduced or recomputed except 

14 as expressly provided in this subsection. 

15 ‘‘(21) NO OWNERSHIP INTEREST IN ADMINIS16 TRATION.—This subsection shall not be construed as 

17 creating in the Administration any ownership inter18 est in any small business investment company which 

19 issues participating debentures. 

20 ‘‘(22) CONFLICT WITH OTHER SUBSECTIONS.— 

21 ‘‘(A) IN GENERAL.—In the event of a con22 flict between this subsection and any other pro23 vision of this Act, this subsection shall apply. 

24 ‘‘(B) SPECIFIC PROVISIONS.—In par25 ticular, this subsection supersedes subsections 
23 

•HR 3429 IH 

1 (g) and (h) in their entirety with respect to all 

2 matters pertaining to participating deben3 tures.’’. 

4 (b) REGULATIONS.—The Administrator shall issue 

5 regulations to carry out subsection (k) of section 303 of 

6 the Small Business Investment Act of 1958 (15 U.S.C. 

7 683), as added by subsection (a), before the date that is 

8 180 days after the date of the enactment of this Act. 

Æ