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[Congressional Bills 109th Congress]
[From the U.S. Government Publishing Office]
[S. 1923 Introduced in Senate (IS)]

109th CONGRESS
  1st Session
                                S. 1923

   To address small business investment companies licensed to issue 
           participating debentures, and for other purposes.

_______________________________________________________________________

                   IN THE SENATE OF THE UNITED STATES

                            October 26, 2005

   Ms. Snowe (for herself, Mr. Talent, and Mr. Bond) introduced the 
 following bill; which was read twice and referred to the Committee on 
                  Small Business and Entrepreneurship

_______________________________________________________________________

                                 A BILL

 
   To address small business investment companies licensed to issue 
           participating debentures, and for other purposes.

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

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Small Business Investment and Growth 
Act of 2005''.

SEC. 2. PARTICIPATING DEBENTURE COMPANIES.

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

``SEC. 321. PARTICIPATING DEBENTURE COMPANIES.

    ``(a) Definitions.--As used in this section, the following 
definitions shall apply:
            ``(1) General partner.--The term `general partner' means an 
        investor in a small business investment company that 
        participates in the daily management of the small business 
        investment company, and may include a managing partner in a 
        limited liability company.
            ``(2) Gross receipts.--The term `gross receipts' means any 
        cash received by a small business investment company, including 
        investment proceeds (both return of capital and profit), 
        interest, dividends, and fees, other than capital contributed 
        by a partner, the proceeds of the issuance of participating 
        debentures, and other money (if any) borrowed by the small 
        business investment company.
            ``(3) Interim funding provider.--The term `interim funding 
        provider' means any entity that providers funding guaranteed by 
        the Administration to a licensed company in between the 
        periodic pools created by any trustee.
            ``(4) Licensed company.--The term `licensed company' means 
        a small business investment company authorized to issue 
        participating debentures by a license issued under section 301 
        for that purpose.
            ``(5) Limited partner.--The term `limited partner' means an 
        investor in a small business investment company, other than the 
        Administrator, that does not participate in the daily 
        management of the small business investment company.
            ``(6) Participating debenture.--The term `participating 
        debenture' means a debt security that is--
                    ``(A) in a form prescribed by the Administrator 
                that obligates the issuing company to pay--
                            ``(i) on the fifth anniversary of the date 
                        of issuance of the debenture, all accrued 
                        interest on that debenture that has not 
                        previously been paid;
                            ``(ii) semiannually thereafter, interest 
                        accruing after the fifth anniversary of the 
                        date of issuance of the debenture; and
                            ``(iii) any other amount required by this 
                        subsection; and
                    ``(B) is subject to the terms and conditions set 
                forth in this subsection and to any additional terms 
                and conditions as may be prescribed by the 
                Administrator that are consistent with this subsection.
            ``(7) Private collateral.--The term `private collateral' 
        means any money that any private partner has contractually 
        committed to invest in a licensed company during the most 
        recent licensing of the licensed company, but that has not yet 
        been paid to the licensed company.
            ``(8) Trustee.--The term `trustee' means an entity that 
        combines any securities, interests, or obligations from 
        licensed companies in the participating debenture program under 
        subsection (b) into pools and issues trust certificates.
            ``(9) Trust certificate.--The term `trust certificate' 
        means a certificate issued by the trustee that represents an 
        interest in a particular pool of any securities, interests, or 
        obligations from licensed companies in the participating 
        debenture program.
            ``(10) Trust certificate holder.--The term `trust 
        certificate holder' means an investor that purchases a trust 
        certificate.
    ``(b) Participating Debentures Program.--
            ``(1) Guarantee of participating debentures.--
                    ``(A) Redemption price and interest.--The 
                Administrator is authorized to guarantee the payment of 
                the redemption price and interest on a participating 
                debenture issued by a licensed company to the interim 
                funding provider under such terms and conditions as the 
                Administrator shall establish by regulation.
                    ``(B) Repayment in default.--The Administration is 
                authorized to guarantee the repayment to the interim 
                funding provider in the event of a default by a 
                licensed company, of the funds advanced by the interim 
                funding provider to the licensed company pursuant to 
                the agreement between the Administration and the 
                licensed company, under such terms and conditions as 
                the Administrator shall establish by regulation.
                    ``(C) Trust certificates.--The Administrator is 
                authorized to guarantee the payment of the redemption 
                price and interest on a trust certificate issued by the 
                trustee to the trust certificate holders under such 
                terms and conditions as the Administrator shall 
                establish by regulation.
            ``(2) Guarantee fee.--The Administration is authorized to 
        charge a separate fee--
                    ``(A) under paragraph (1)(A), to the interim 
                funding provider;
                    ``(B) under paragraph (1)(B), to the licensed 
                company; and
                    ``(C) under paragraph (1)(C), to the trustee.
            ``(3) Zero-subsidy.--Each of the fees authorized under 
        paragraph (2) shall be sufficient to reduce the cost of each 
        corresponding guarantee in paragraph (1) to zero, as that term 
        is defined under the Federal Credit Reform Act of 1990.
            ``(4) Matching payment streams.--With respect to any 
        participating debenture issued by a licensed company, or with 
        respect to any security issued representing an interest in a 
        pool of such securities, the amount and schedule of--
                    ``(A) the interest payment obligations of the 
                Administration to the trust certificate holders shall 
                be equal to the amount and schedule of the interest 
                obligations of the licensed company to the 
                Administration; and
                    ``(B) the principal redemption obligations of the 
                Administration to the trust certificate holders shall 
                be the same as the amount and schedule of the licensed 
                company's principal redemption obligations to the 
                Administration.
            ``(5) Interest to interim funding provider.--
                    ``(A) Right to receive interest.--For the advancing 
                of monies to a licensed company pursuant to the license 
                of that company, the interim funding provider shall 
                have the right to receive interest from the licensed 
                company.
                    ``(B) Amounts.--The interest authorized under 
                subparagraph (A) shall be calculated based on the time 
                period beginning on the date on which the interim 
                funding provider advances the funding, and ending when 
                the interim funding provider provides the securities of 
                the licensed company to a trustee for the purpose of 
                pooling those securities and selling interests in that 
                pool.
                    ``(C) Collection of interest.--The interim funding 
                provider may collect interest referred to in this 
                paragraph by withholding money from the money advanced 
                to the licensed company by the interim funding 
                provider.
            ``(6) Maximum leverage.--Notwithstanding any other 
        provision of this subsection, the Administrator may not 
        guarantee a new participating debenture to be issued by a small 
        business investment company, and the company shall not make any 
        distribution to its private investors, if immediately after 
        such issuance or distribution the aggregate unpaid principal 
        balance of the participating debentures issued by the company 
        would exceed 200 percent of the leverageable capital of the 
        licensed company.
            ``(7) Purchase of participating debentures.--The 
        Administrator may authorize a trust or pool acting on behalf of 
        the Administration to purchase participating debentures issued 
        by a small business investment company, under such terms and 
        conditions as the Administrator shall establish by regulation.
            ``(8) Redemption.--Not later than 10 years after the date 
        on which it is issued, a participating debenture shall be 
        redeemed for an amount equal to its outstanding principal 
        balance plus any accrued but unpaid interest on such 
        participating debenture as of the date on which it is redeemed.
            ``(9) Interest.--
                    ``(A) In general.--Interest on a participating 
                debenture is preferred and cumulative and is prepayable 
                out of any gross receipts available for distribution 
                and is in any event payable at the scheduled or 
                accelerated maturity of the participating debenture.
                    ``(B) Interest on principal balance.--Interest on 
                the principal balance outstanding of a participating 
                debenture shall accrue on a daily basis, and unpaid 
                accrued interest shall compound semiannually from the 
                date of issuance of the debenture, at a rate determined 
                by the Secretary of the Treasury, taking into 
                consideration the current average market yield on 
                outstanding marketable obligations of the United States 
                with remaining periods to maturity comparable to the 
                average maturities on such securities, adjusted to the 
                nearest \1/8\ of 1 percent, plus an additional charge, 
                in an amount established annually by the Administrator, 
                as necessary to reduce to zero the cost (as defined in 
                section 502 of the Federal Credit Reform Act of 1990 (2 
                U.S.C. 661a)) to the Administration of purchasing and 
                guaranteeing participating debentures under this Act, 
                which rate may not exceed 1.5 percent per annum, and 
                which shall be paid to and retained by the 
                Administration.
            ``(10) Payment defaults.--
                    ``(A) In general.--In the event of a failure of a 
                small business investment company to pay any principal 
                or interest on a participating debenture when due 
                (including any mandatory prepayment out of gross 
                receipts), the licensed company shall be in default, 
                and shall be subject to the provisions of subparagraphs 
                (B) through (D).
                    ``(B) Acceleration.--The Administration, in 
                addition to any other remedies it may have, may demand 
                immediate payment of the principal balance and accrued 
                interest on any or all participating debentures issued 
                by the defaulting company.
                    ``(C) Default rate of interest.--The interest rate 
                on the participating debenture with respect to which 
                the payment default occurred may increase, at the 
                discretion of the Administrator, by not greater than 50 
                basis points from the date of the payment default, and 
                by not greater than an additional 50 basis points on 
                each 6-month anniversary of that date, up to a maximum 
                total increase of 300 basis points, until all of the 
                payment defaults of the defaulting company have been 
                cured or waived.
                    ``(D) Private collateral.--The Administration may 
                apply the private collateral of the licensed company to 
                pay any interest or principal payment that has not been 
                paid on time according to the payment schedule for the 
                licensed company.
            ``(11) Liquidation of licensed company.--In the event of 
        the liquidation of a licensed company issuing participating 
        debentures under this subsection, a participating debenture 
        shall be senior in priority for all purposes to any interest in 
        the issuing company, whenever created. In liquidation, the 
        private collateral of the licensed company may, at the option 
        of the Administrator, be applied to pay accrued interest and 
        principal of outstanding participating debentures.
            ``(12) Default of a licensed company.--In the event of the 
        default of a licensed company issuing participating debentures 
        under this subsection--
                    ``(A) a participating debenture shall be senior in 
                priority for all purposes to any interest in the 
                issuing company, whenever created; and
                    ``(B) at the option of the Administrator, the 
                private collateral of the licensed company may be 
                applied to pay accrued interest and principal on 
                outstanding participating debentures.
            ``(13) Investment obligation.--
                    ``(A) In general.--Any company issuing a 
                participating debenture under this Act shall invest or 
                commit to invest an amount equal to the outstanding 
                face value of such participating debenture solely in 
                equity capital.
                    ``(B) Equity capital.--In this subparagraph, the 
                term `equity capital' means common or preferred stock 
                or a similar instrument, including subordinated debt 
                with equity features which is not amortized and which 
                provides for interest payments from appropriate 
                sources, as determined by the Administrator.
            ``(14) Other debt.--A licensed company issuing a 
        participating debenture under this subsection shall have no 
        debt other than leverage obtained in accordance with this Act, 
        and temporary debt in an amount equal to not more than 50 
        percent of the private capital of the company.
            ``(15) Use of proceeds.--Unless otherwise determined by the 
        Administration, a licensed company may use the proceeds of a 
        participating debenture issued by the company to pay the 
        principal amount and accrued interest due on outstanding 
        participating debentures issued by that company, if the company 
        has outstanding equity capital invested in an amount equal to 
        the amount being refinanced.
            ``(16) Distribution of gross receipts.--
                    ``(A) In general.--Except as otherwise provided in 
                this subsection, gross receipts, from any source or 
                however categorized for generally accepted accounting 
                principles or tax accounting purposes, shall be 
                utilized first for the payment of accrued interest on 
                participating debentures, then for repayment of 
                participating debenture principal and contributed 
                private capital, and finally for profit distributions, 
                as provided in subparagraphs (B) through (G).
                    ``(B) Past due interest and principal.--Gross 
                receipts shall first be used, within 10 days of 
                receipt--
                            ``(i) to pay any past due interest on 
                        participating debentures issued by the licensed 
                        company; and
                            ``(ii) when there is no past due interest 
                        outstanding, to repay any past due principal on 
                        such debentures (whether such interest and 
                        principal are past due by their terms or by 
                        acceleration).
                    ``(C) Mandatory interest prepayment.--If no unpaid 
                accrued interest or past due principal is outstanding 
                on any participating debenture issued by a licensed 
                company, the company shall use its gross receipts, not 
                later than the end of the calendar quarter in which 
                they were received (or the following calendar quarter, 
                if received within 15 days before the end of a calendar 
                quarter) to prepay accrued interest on the 
                participating debentures issued by the company, which 
                prepayments will be applied to such accrued interest in 
                the order in which such interest would otherwise become 
                due and payable.
                    ``(D) Amortization distributions.--If no unpaid 
                accrued interest or past due principal is outstanding 
                on any participating debenture issued by a licensed 
                company, the company shall distribute its gross 
                receipts--
                            ``(i) to the Administration to amortize 
                        outstanding participating debenture leverage; 
                        and
                            ``(ii) to its private investors, pro rata 
                        according to the ratio of outstanding 
                        participating debenture leverage to outstanding 
                        leverageable capital at the time of 
                        distribution.
                    ``(E) Post-amortization distributions.--If no 
                accrued interest or principal is outstanding on any 
                participating debenture issued by a licensed company, 
                and the company has no outstanding leverageable 
                capital, the gross receipts of the company shall--
                            ``(i) until aggregate distributions to 
                        private investors under this subparagraph equal 
                        aggregate contributions to the capital of the 
                        company previously made by private investors, 
                        be distributed to the Administration, an amount 
                        equal to the initial profit participation 
                        percentage of the total amount being 
                        distributed with the remaining gross receipts 
                        distributed to the private investors;
                            ``(ii) if aggregate distributions to 
                        private investors under this subparagraph equal 
                        or exceed aggregate contributions to the 
                        capital of the company previously made by 
                        private investors, be distributed to the 
                        Administration an amount equal to the final 
                        profit participation percentage of the total 
                        amount being distributed, with the remaining 
                        gross receipts distributed to the private 
                        investors; and
                            ``(iii) in the case of any post-
                        amortization distributions to the 
                        Administration pursuant to this subparagraph, 
                        be deemed to constitute `additional' interest 
                        (not `accrued' interest).
                    ``(F) Management expenses.--For purposes of 
                calculating the amount to be distributed to the 
                Administration pursuant to subparagraph (E), except as 
                otherwise prescribed by the Administration, the 
                management expenses of any company which issues 
                participating debentures under this subsection shall 
                not be greater than 2.5 percent of the combined capital 
                of the company per year, plus, in the case of a company 
                with combined capital of less than $20,000,000, an 
                additional $125,000.
                    ``(G) Definitions.--In this paragraph--
                            ``(i) the term `combined capital' means the 
                        aggregate amount of private capital and 
                        outstanding leverage;
                            ``(ii) the term `final profit participation 
                        percentage' means 50 percent of the leverage 
                        ratio, reduced by the weighted average interest 
                        rate on the financing commitments issued by the 
                        company;
                            ``(iii) the term `initial profit 
                        participation percentage' means 25 percent of 
                        the leverage ratio, reduced by the weighted 
                        average interest rate on the financing 
                        commitments issued by the company;
                            ``(iv) the term `leverage ratio' means the 
                        ratio of the aggregate amount of financing 
                        commitment leverage previously drawn by the 
                        company (including leverage that has been 
                        repaid, and not solely the maximum amount at 
                        any one time outstanding, if different) to the 
                        aggregate amount of capital previously 
                        contributed to the company by private investors 
                        (not solely the maximum amount at any one time 
                        outstanding, if different);
                            ``(v) the term `management expenses' 
                        includes management fees and any additional 
                        salaries, office expenses, travel, business 
                        development costs, office and equipment rental, 
                        bookkeeping, and the development, 
                        investigation, and monitoring of investments 
                        paid by the licensed company, but does not 
                        include the cost of services provided by 
                        specialized outside consultants, outside 
                        lawyers and outside auditors, who perform 
                        services not generally expected of a venture 
                        capital company nor does such term include the 
                        cost of services provided by any affiliate of 
                        the company which are not part of the normal 
                        process of making and monitoring venture 
                        capital investments; and
                            ``(vi) the term `outstanding leverageable 
                        capital' means any aggregate capital 
                        contributions received by a licensed company 
                        from private investors which exceed aggregate 
                        distributions received by the private investors 
                        from the company.
            ``(17) Exceptions to order of distributions.--
                    ``(A) In general.--Notwithstanding paragraph 
                (16)(D), if no unpaid accrued interest (whether or not 
                past due) and no past due principal is outstanding on 
                any participating debenture issued by the licensed 
                company subparagraph (B) through (D) of this paragraph 
                shall apply.
                    ``(B) Tax distributions.--
                            ``(i) In general.--The company may make a 
                        special distribution of gross receipts or other 
                        cash to its private investors without a 
                        corresponding distribution to the 
                        Administration while principal is outstanding 
                        on participating debentures issued by the 
                        company, if--
                                    ``(I) the licensed company has an 
                                investment in a business (referred to 
                                in this subparagraph as the `portfolio 
                                company') organized as a limited 
                                liability company (referred to in this 
                                subparagraph as an `LLC') or as a 
                                partnership;
                                    ``(II) the portfolio company has 
                                income which will be taxable to its 
                                members or partners;
                                    ``(III) the portfolio company makes 
                                a distribution to its members or 
                                partners in an amount equal to their 
                                assumed tax liability on the portfolio 
                                company's taxable income (referred to 
                                in this subparagraph as a `tax 
                                distribution'); or
                                    ``(IV) the small business 
                                investment company is itself a 
                                partnership or an LLC, so that any 
                                portfolio company income allocated to 
                                it is reallocated to the private 
                                investors, and it is they who are 
                                liable for payment of tax on that 
                                income as if it was their own income, 
                                whether or not they receive any cash in 
                                respect of that income.
                            ``(ii) Authority to make distribution.--In 
                        circumstances described in clause (i), the 
                        issuing company may, prior to April 15 of each 
                        calendar year, distribute to its private 
                        investors up to an amount equal to the 
                        difference between--
                                    ``(I) the estimated aggregate 
                                maximum tax liability of the private 
                                investors on the income of portfolio 
                                companies organized as LLCs or 
                                partnerships during the preceding 
                                calendar year; and
                                    ``(II) the aggregate amount 
                                distributed to the private investors 
                                (other than pursuant to this 
                                subparagraph) since April 15 of the 
                                preceding calendar year, but in no 
                                event more than the aggregate amount of 
                                tax distributions that the issuing 
                                company received from all of its 
                                portfolio companies during the 
                                preceding calendar year.
                    ``(C) Expenses.--A small business investment 
                company may use its gross receipts to pay previously 
                incurred expenses (including management fees) and other 
                liabilities and it may, in addition, retain additional 
                gross receipts in an expense reserve account in an 
                amount which, added to any existing expense reserve, 
                does not exceed such reasonably anticipated expenses 
                and other liabilities for the following 12-month 
                period, provided such expenses and other liabilities 
                are not prohibited under regulations established by the 
                Administrator or other applicable law.
                    ``(D) Prepayment.--Subject to any applicable State 
                law requirements, a small business investment company 
                may use gross receipts or other cash to prepay 
                outstanding participating debenture leverage and 
                interest in whole or in part without penalty at any 
                time.
            ``(18) Restrictions on distributions.--
                    ``(A) Liquidity and other administrative or state 
                law restrictions.--A distribution under this subsection 
                may not violate liquidity requirements or other 
                applicable restrictions on distributions in regulations 
                issued by the Administrator or under applicable State 
                law.
                    ``(B) Capital impairment or regulatory violation.--
                If a small business investment company is in restricted 
                operations or liquidation by reason of capital 
                impairment or regulatory violation, the maturity date 
                of the participating debentures issued by that company, 
                including both principal and accrued interest, is 
                subject to acceleration at the option of the 
                Administrator, and, whether or not there has been such 
                acceleration, up to 100 percent of all gross receipts 
                and the private collateral of the licensed company may, 
                at the option of the Administrator, be required to be 
                distributed to the Administration until accrued 
                interest and principal on the participating debentures 
                issued by the company have been paid in full, in 
                accordance with any terms and conditions that the 
                Administrator may establish by regulation.
            ``(19) Distributions in kind.--
                    ``(A) Election of in-kind distribution of 
                securities.--A small business investment company that 
                issues participating debentures may elect to make an 
                in-kind distribution of securities at any time, subject 
                to applicable securities laws and regulations, if such 
                securities are publicly traded and marketable (or 
                `marketable securities'). Marketable securities 
                distributed in kind shall be deemed to be gross 
                receipts for purposes of this subsection, and their 
                distribution shall be subject to the priorities and 
                restrictions applicable to gross receipts under this 
                subsection and to applicable regulations issued by the 
                Administrator.
                    ``(B) Treatment of administration share.--The 
                licensed company shall either deposit the 
                Administration share of such securities with a trustee 
                designated by the Administrator, or retain the 
                Administration share, if the Administrator so directs 
                and with the agreement of the company.
                    ``(C) Retention of administration share.--If the 
                company retains the Administration share, it shall sell 
                such share and promptly remit the proceeds to the 
                Administration.
                    ``(D) Value of administration's share.--For 
                purposes of this paragraph, the value of the 
                Administration share is--
                            ``(i) the value of the securities, as of 
                        the date of distribution to the Administration 
                        under subparagraph (B), or as of the initial 
                        date of retention under subparagraph (C); and
                            ``(ii) the controlling value for the 
                        purposes of determining the remaining liability 
                        of the company to the Administration, except 
                        that the Administration may receive a greater 
                        or lesser amount upon its ultimate sale of such 
                        share or upon the ultimate sale by the company 
                        of such share on behalf of the Administration.
            ``(20) Timing of distributions.--
                    ``(A) In general.--Subject to paragraphs (16) and 
                (18), any gross receipts received by a small business 
                investment company issuing participating debentures 
                under this subsection that are not placed in an expense 
                reserve pursuant to paragraph (18)(C) shall be 
                distributed by the last day of the fiscal quarter in 
                which such gross receipts were received by the company, 
                except that gross receipts received within 15 days 
                before the end of a fiscal quarter shall be distributed 
                by the last day of the subsequent fiscal quarter.
                    ``(B) Exceptions to timing of distributions; 
                marketable securities.--Gross receipts consisting of 
                marketable securities shall be distributed within 6 
                months of the date of receipt, unless the small 
                business investment company has obtained the prior 
                consent of the Administrator.
            ``(21) Reinvestment of gross receipts.--Subject to such 
        regulations and restrictions as may be prescribed by the 
        Administrator, and by the agreement of the private investors in 
        a small business investment company, any gross receipts that 
        exceed the amount needed to make payments required to be made 
        to the Administration under this subsection, may at the option 
        of the company be reinvested in qualified small businesses.
    ``(c) Post-Distribution Computation.--After distributions have been 
made pursuant to this section, the Administration share of such 
distributions shall not be reduced or recomputed, except as expressly 
provided in this section.
    ``(d) No Ownership Interest to Administration.--This section shall 
not be construed as creating in the Administration any ownership 
interest in any small business investment company which issues 
participating debentures.
    ``(e) Conflict With Other Provisions.--
            ``(1) In general.--In the event of a conflict between this 
        subsection and any other provision of this part A, this 
        subsection shall apply.
            ``(2) Specific provisions.--In particular, the provisions 
        of this section supersede subsections (g) and (h) of section 
        303 in their entirety with respect to all matters pertaining to 
        participating debentures issued by a licensed company covered 
        by this section.''.
                                 <all>
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