I

104TH CONGRESS

2D SESSION H. R. 3720

To amend the Small Business Investment Act of 1958, and for other

purposes.

IN THE HOUSE OF REPRESENTATIVES

JUNE 26, 1996

Mrs. MEYERS of Kansas introduced the following bill; which was referred to

the Committee on Small Business

A BILL

To amend the Small Business Investment Act of 1958, and

for other purposes.

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

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘Small Business Invest5 ment Company Reform Act of 1996’’.

6 SEC. 2. DEFINITIONS.

7 (a) SMALL BUSINESS CONCERN.—Section 103(5) of

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

9 662(5)) is amended by inserting before the semicolon the

10 following: ‘‘, except that, for purposes of this Act, an in-
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1 vestment by a venture capital firm, investment company

2 (including a small business investment company) employee

3 welfare benefit plan or pension plan, or trust, foundation,

4 or endowment that is exempt from Federal income tax5 ation—

6 ‘‘(A) shall not cause a business concern to be

7 deemed not independently owned and operated;

8 ‘‘(B) shall be disregarded in determining wheth9 er a business concern satisfies size standards estab10 lished pursuant to section 3(a)(2) of the Small Busi11 ness Act; and

12 ‘‘(C) shall be disregarded in determining wheth13 er a small business concern is a smaller enterprise’’.

14 (b) PRIVATE CAPITAL.—Section 103(9) of the Small

15 Business Investment Act of 1958 (15 U.S.C. 662(9)) is

16 amended to read as follows:

17 ‘‘(9) the term ‘private capital’—

18 ‘‘(A) means the sum of—

19 ‘‘(i) the paid-in capital and paid-in

20 surplus of a corporate licensee, the contrib21 uted capital of the partners of a partner22 ship licensee, or the equity investment of

23 the members of a limited liability company

24 licensee; and
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1 ‘‘(ii) unfunded binding commitments,

2 from investors that meet criteria estab3 lished by the Administrator, to contribute

4 capital to the licensee; provided that such

5 unfunded commitments may be counted as

6 private capital for purposes of approval by

7 the Administrator of any request for lever8 age, but leverage shall not be funded based

9 on such commitments; and

10 ‘‘(B) does not include any—

11 ‘‘(i) funds borrowed by a licensee from

12 any source;

13 ‘‘(ii) funds obtained through the issu14 ance of leverage; or

15 ‘‘(iii) funds obtained directly or indi16 rectly from any Federal, State, or local

17 government, or any government agency or

18 instrumentality, except for—

19 ‘‘(I) funds invested by an em20 ployee welfare benefit plan or pension

21 plan; and

22 ‘‘(II) any qualified nonprivate

23 funds (if the investors of the qualified

24 nonprivate funds do not control, di25 rectly or indirectly, the management,
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1 board of directors, general partners,

2 or members of the licensee);’’.

3 (c) NEW DEFINITIONS.—Section 103 of the Small

4 Business Investment Act of 1958 (15 U.S.C. 662) is

5 amended by striking paragraph (10) and inserting the fol6 lowing:

7 ‘‘(10) the term ‘leverage’ includes—

8 ‘‘(A) debentures purchased or guaranteed

9 by the Administration;

10 ‘‘(B) participating securities purchased or

11 guaranteed by the Administration; and

12 ‘‘(C) preferred securities outstanding as of

13 October 1, 1996;

14 ‘‘(11) the term ‘third party debt’ means any in15 debtedness for borrowed money, other than indebt16 edness owed to the Administration;

17 ‘‘(12) the term ‘smaller enterprise’ means any

18 small business concern that, together with its affili19 ates—

20 ‘‘(A) has—

21 ‘‘(i) a net financial worth of not more

22 than $6,000,000, as of the date on which

23 assistance is provided under this Act to

24 that business concern; and
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1 ‘‘(ii) an average net income for the 2-

2 year period preceding the date on which

3 assistance is provided under this Act to

4 that business concern, of not more than

5 $2,000,000, after Federal income taxes

6 (excluding any carryover losses); or

7 ‘‘(B) satisfies the standard industrial clas8 sification size standards established by the Ad9 ministration for the industry in which the small

10 business concern is primarily engaged;

11 ‘‘(13) the term ‘qualified nonprivate funds’

12 means any—

13 ‘‘(A) funds directly or indirectly invested in

14 any applicant or licensee on or before August

15 16, 1982, by any Federal agency, other than

16 the Administration, under a provision of law ex17 plicitly mandating the inclusion of those funds

18 in the definition of the term ‘private capital’;

19 ‘‘(B) funds directly or indirectly invested

20 in any applicant or licensee by any Federal

21 agency under a provision of law enacted after

22 September 4, 1992, explicitly mandating the in23 clusion of those funds in the definition of the

24 term ‘private capital’; and
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1 ‘‘(C) funds invested in any applicant or li2 censee by one or more State or local govern3 ment entities (including any guarantee extended

4 by those entities) in an aggregate amount that

5 does not exceed—

6 ‘‘(i) 33 percent of the private capital

7 of the applicant or licensee, if such funds

8 were committed for investment before the

9 date of enactment of the Small Business

10 Investment Company Improvement Act of

11 1996; or

12 ‘‘(ii) 20 percent of the private capital

13 of the applicant or licensee, if such funds

14 were committed for investment on or after

15 the date of enactment of the Small Busi16 ness Investment Company Improvement

17 Act of 1996;

18 ‘‘(14) the terms ‘employee welfare benefit plan’

19 and ‘pension plan’ have the same meanings as in

20 section 3 of the Employee Retirement Income Secu21 rity Act of 1974, and are intended to include—

22 ‘‘(A) public and private pension or retire23 ment plans subject to such Act; and

24 ‘‘(B) similar plans not covered by such Act

25 that have been established and that are main-
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1 tained by the Federal Government or any State

2 or political subdivision, or any agency or instru3 mentality thereof, for the benefit of employees;

4 ‘‘(15) the term ‘member’ means, with respect to

5 a licensee that is a limited liability company, a hold6 er of an ownership interest or a person otherwise ad7 mitted to membership in the limited liability com8 pany; and

9 ‘‘(16) the term ‘limited liability company’

10 means a business entity that is organized and oper11 ating in accordance with a State limited liability

12 company statute approved by the Administration.’’.

13 SEC. 3. ORGANIZATION OF SMALL BUSINESS INVESTMENT

14 COMPANIES.

15 (a) LIMITED LIABILITY COMPANIES.—Section

16 301(a) of the Small Business Investment Act of 1958 (15

17 U.S.C. 681(a)) is amended in the first sentence, by strik18 ing ‘‘body or’’ and inserting ‘‘body, a limited liability com19 pany, or’’.

20 (b) ISSUANCE OF LICENSE.—Section 301(c) of the

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

22 681(c)) is amended to read as follows:

23 ‘‘(c) ISSUANCE OF LICENSE.—

24 ‘‘(1) SUBMISSION OF APPLICATION.—Each new

25 applicant for a license to operate as a small business
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1 investment company under this Act shall submit to

2 the Administrator an application, in a form and in3 cluding such documentation as may be prescribed by

4 the Administrator.

5 ‘‘(2) PROCEDURES.—

6 ‘‘(A) STATUS.—Not later than 90 days

7 after the initial receipt by the Administrator of

8 an application under this subsection, the Ad9 ministrator shall provide the applicant with a

10 written report detailing the status of the appli11 cation and any requirements remaining for

12 completion of the application.

13 ‘‘(B) APPROVAL OR DISAPPROVAL.—With14 in a reasonable time after receiving a completed

15 application submitted in accordance with this

16 subsection and in accordance with such require17 ments as the Administrator may prescribe by

18 regulation, the Administrator shall—

19 ‘‘(i) approve the application and issue

20 a license for such operation to the appli21 cant if the requirements of this section are

22 satisfied; or

23 ‘‘(ii) disapprove the application and

24 notify the applicant in writing of the dis25 approval.
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1 ‘‘(3) MATTERS CONSIDERED.—In reviewing and

2 processing any application under this subsection, the

3 Administrator—

4 ‘‘(A) shall determine whether—

5 ‘‘(i) the applicant meets the require6 ments of subsections (a) and (c) of section

7 302; and

8 ‘‘(ii) the management of the applicant

9 is qualified and has the knowledge, experi10 ence, and capability necessary to comply

11 with this Act;

12 ‘‘(B) shall take into consideration—

13 ‘‘(i) the need for and availability of fi14 nancing for small business concerns in the

15 geographic area in which the applicant is

16 to commence business;

17 ‘‘(ii) the general business reputation

18 of the owners and management of the ap19 plicant; and

20 ‘‘(iii) the probability of successful op21 erations of the applicant, including ade22 quate profitability and financial soundness;

23 and

24 ‘‘(C) shall not take into consideration any

25 projected shortage or unavailability of leverage.
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1 ‘‘(4) EXCEPTION.—

2 ‘‘(A) IN GENERAL.—Notwithstanding any

3 other provision of this Act, the Administrator

4 may, in the discretion of the Administrator and

5 based on a showing of special circumstances

6 and good cause, approve an application and

7 issue a license under this subsection with re8 spect to any applicant that—

9 ‘‘(i) has private capital of not less

10 than $3,000,000;

11 ‘‘(ii) would otherwise be issued a li12 cense under this subsection, except that

13 the applicant does not satisfy the require14 ments of section 302(a); and

15 ‘‘(iii) has a viable business plan rea16 sonably projecting profitable operations

17 and a reasonable timetable for achieving a

18 level of private capital that satisfies the re19 quirements of section 302(a).

20 ‘‘(B) LEVERAGE.—An applicant licensed

21 pursuant to the exception provided in this para22 graph shall not be eligible to receive leverage as

23 a licensee until the applicant satisfies the re24 quirements of section 302(a).’’.
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1 (c) SPECIALIZED SMALL BUSINESS INVESTMENT

2 COMPANIES.—Section 301(d) of the Small Business In3 vestment Act of 1958 (15 U.S.C. 681(d)) is repealed.

4 SEC. 4. CAPITAL REQUIREMENTS.

5 (a) INCREASED MINIMUM CAPITAL REQUIRE6 MENTS.—Section 302(a) of the Small Business Invest7 ment Act of 1958 (15 U.S.C. 682(a)) is amended by strik8 ing ‘‘(a)’’ and all that follows through ‘‘The Administra9 tion shall also determine the ability of the company,’’ and

10 inserting the following:

11 ‘‘(a) AMOUNT.—

12 ‘‘(1) IN GENERAL.—Except as provided in para13 graph (2), the private capital of each licensee shall

14 be not less than—

15 ‘‘(A) $5,000,000; or

16 ‘‘(B) $10,000,000, with respect to each li17 censee authorized or seeking authority to issue

18 participating securities to be purchased or guar19 anteed by the Administration under this Act.

20 ‘‘(2) EXCEPTION.—The Administrator may, in

21 the discretion of the Administrator and based on a

22 showing of special circumstances and good cause,

23 permit the private capital of a licensee authorized or

24 seeking authorization to issue participating securi25 ties to be purchased or guaranteed by the Adminis-
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1 tration to be less than $10,000,000, but not less

2 than $7,500,000, if the Administrator determines

3 that such action would not create or otherwise con4 tribute to an unreasonable risk of default or loss to

5 the Federal Government.

6 ‘‘(3) ADEQUACY.—In addition to the require7 ments of paragraph (1), the Administrator shall—

8 ‘‘(A) determine whether the private capital

9 of each licensee is adequate to assure a reason10 able prospect that the licensee will be operated

11 soundly and profitably, and managed actively

12 and prudently in accordance with its articles;

13 and

14 ‘‘(B) determine that the licensee will be

15 able’’.

16 (b) EXEMPTION FOR CERTAIN LICENSEES.—Section

17 302(a) of the Small Business Investment Act of 1958 (15

18 U.S.C. 682(a)) is amended by adding at the end the fol19 lowing new paragraph:

20 ‘‘(4) EXEMPTION FROM CAPITAL REQUIRE21 MENTS.—The Administrator may, in the discretion

22 of the Administrator, exempt from the capital re23 quirements in paragraph (1) any licensee licensed

24 under subsection (c) or (d) of section 301 before the
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1 date of enactment of the Small Business Investment

2 Company Improvement Act of 1996, if—

3 ‘‘(A) the licensee certifies in writing that

4 not less than 50 percent of the aggregate dollar

5 amount of its financings after the date of enact6 ment of the Small Business Investment Com7 pany Improvement Act of 1996 will be provided

8 to smaller enterprises; and

9 ‘‘(B) the Administrator determines that—

10 ‘‘(i) the licensee has a record of prof11 itable operations;

12 ‘‘(ii) the licensee has not committed

13 any serious or continuing violation of any

14 applicable provision of Federal or State

15 law or regulation; and

16 ‘‘(iii) such action would not create or

17 otherwise contribute to an unreasonable

18 risk of default or loss to the United States

19 Government.

20 Provided further, That no licensee with less than

21 $2,500,000 in private capital shall receive additional

22 leverage from the Administration.’’.

23 (c) DIVERSIFICATION OF OWNERSHIP.—Section

24 302(c) of the Small Business Investment Act of 1958 (15

25 U.S.C. 682(c)) is amended to read as follows:
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1 ‘‘(c) DIVERSIFICATION OF OWNERSHIP.—The Ad2 ministrator shall ensure that the management of each li3 censee applying for a license after the date of enactment

4 of the Small Business Investment Company Improvement

5 Act of 1996 is sufficiently diversified from and unaffiliated

6 with the ownership of the licensee in a manner that en7 sures independence and objectivity in the financial man8 agement and oversight of the investments and operations

9 of the licensee.’’.

10 SEC. 5. BORROWING.

11 (a) DEBENTURES.—Section 303(b) of the Small

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

13 amended in the first sentence, by striking ‘‘(but only’’ and

14 all that follows through ‘‘terms)’’.

15 (b) THIRD PARTY DEBT.—Section 303(c) of the

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

17 683(c)) is amended to read as follows:

18 ‘‘(c) THIRD PARTY DEBT.—The Administrator—

19 ‘‘(1) shall not permit a licensee having out20 standing leverage to incur third party debt that

21 would create or contribute to an unreasonable risk

22 of default or loss to the Federal Government; and

23 ‘‘(2) shall permit such licensees to incur third

24 party debt only on such terms and subject to such
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1 conditions as may be established by the Adminis2 trator, by regulation or otherwise.’’.

3 (c) REQUIREMENT TO FINANCE SMALLER ENTER4 PRISES.—Section 303(d) of the Small Business Invest5 ment Act of 1958 (15 U.S.C. 683(d)) is amended to read

6 as follows:

7 ‘‘(d) REQUIREMENT TO FINANCE SMALLER ENTER8 PRISES.—The Administrator shall require each licensee,

9 as a condition of approval of an application for leverage,

10 to certify in writing that not less than 20 percent of the

11 aggregate dollar amount of the financings of the licensee

12 will be provided to smaller enterprises.’’.

13 (d) CAPITAL IMPAIRMENT REQUIREMENTS.—Section

14 303(e) of the Small Business Investment Act of 1958 (15

15 U.S.C. 683(e)) is amended to read as follows:

16 ‘‘(e) CAPITAL IMPAIRMENT.—Before approving any

17 application for leverage submitted by a licensee under this

18 Act, the Administrator—

19 ‘‘(1) shall determine that the private capital of

20 the licensee meets the requirements of section

21 302(a); and

22 ‘‘(2) shall determine, taking into account the

23 nature of the assets of the licensee, the amount and

24 terms of any third party debt owed by such licensee,

25 and any other factors determined to be relevant by
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1 the Administrator, that the private capital of the li2 censee has not been impaired to such an extent that

3 the issuance of additional leverage would create or

4 otherwise contribute to an unreasonable risk of de5 fault or loss to the Federal Government.’’.

6 (e) EQUITY INVESTMENT REQUIREMENT.—Section

7 303(g)(4) of the Small Business Investment Act of 1958

8 (15 U.S.C. 683(g)(4)) is amended by striking ‘‘and main9 tain’’.

10 (f) FEES.—Section 303 of the Small Business Invest11 ment Act of 1958 (15 U.S.C. 683) is amended—

12 (1) in subsection (b), in the fifth sentence, by

13 striking ‘‘1 per centum,’’ and all that follows before

14 the period at the end of the sentence and inserting

15 the following: ‘‘1 percent, plus an additional charge

16 of 1 percent per annum which shall be paid to and

17 retained by the Administration’’;

18 (2) in subsection (g)(2), by striking ‘‘1 per cen19 tum,’’ and all that follows before the period at the

20 end of the paragraph and inserting the following: ‘‘1

21 percent, plus an additional charge of 1 percent per

22 annum which shall be paid to and retained by the

23 Administration’’; and

24 (3) by adding at the end the following new sub25 sections:
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1 ‘‘(i) LEVERAGE FEE.—With respect to leverage

2 granted by the Administration to a licensee, the Adminis3 tration shall collect from the licensee a nonrefundable fee

4 in an amount equal to 3 percent of the face amount of

5 leverage granted to the licensee, payable upon the earlier

6 of the date of entry into any commitment for such leverage

7 or the date on which the leverage is drawn by the licensee.

8 ‘‘(j) CALCULATION OF SUBSIDY RATE.—All fees, in9 terest, and profits received and retained by the Adminis10 tration under this section shall be included in the calcula11 tions made by the Director of the Office of Management

12 and Budget to offset the cost (as that term is defined in

13 section 502 of the Federal Credit Reform Act of 1990)

14 to the Administration of purchasing and guaranteeing de15 bentures and participating securities under this Act.’’.

16 SEC. 6. LIABILITY OF THE UNITED STATES.

17 Section 308(e) of the Small Business Investment Act

18 of 1958 (15 U.S.C. 687(e)) is amended by striking ‘‘Noth19 ing’’ and inserting ‘‘Except as expressly provided other20 wise in this Act, nothing’’.

21 SEC. 7. EXAMINATIONS; VALUATIONS.

22 (a) EXAMINATIONS.—Section 310(b) of the Small

23 Business Investment Act of 1958 (15 U.S.C. 687b(b)) is

24 amended in the first sentence by inserting ‘‘which may be

25 conducted with the assistance of a private sector entity
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1 that has both the qualifications to conduct and expertise

2 in conducting such examinations,’’ after ‘‘Investment Divi3 sion of the Administration,’’.

4 (b) VALUATIONS.—Section 310(d) of the Small Busi5 ness Investment Act of 1958 (15 U.S.C. 687b(d)) is

6 amended to read as follows:

7 ‘‘(d) VALUATIONS.—

8 ‘‘(1) FREQUENCY OF VALUATIONS.—

9 ‘‘(A) IN GENERAL.—Each licensee shall

10 submit to the Administrator a written valuation

11 of the loans and investments of the licensee not

12 less often than semiannually or otherwise upon

13 the request of the Administrator, except that

14 any licensee with no leverage outstanding shall

15 submit such valuations annually, unless the Ad16 ministrator determines otherwise.

17 ‘‘(B) MATERIAL ADVERSE CHANGES.—Not

18 later than 30 days after the end of a fiscal

19 quarter of a licensee during which a material

20 adverse change in the aggregate valuation of

21 the loans and investments or operations of the

22 licensee occurs, the licensee shall notify the Ad23 ministrator in writing of the nature and extent

24 of that change.

25 ‘‘(C) INDEPENDENT CERTIFICATION.—
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1 ‘‘(i) IN GENERAL.—Not less than once

2 during each fiscal year, each licensee shall

3 submit to the Administrator the financial

4 statements of the licensee, audited by an

5 independent certified public accountant ap6 proved by the Administrator.

7 ‘‘(ii) AUDIT REQUIREMENTS.—Each

8 audit conducted under clause (i) shall in9 clude—

10 ‘‘(I) a review of the procedures

11 and documentation used by the li12 censee in preparing the valuations re13 quired by this section; and

14 ‘‘(II) a statement by the inde15 pendent certified public accountant

16 that such valuations were prepared in

17 conformity with the valuation criteria

18 applicable to the licensee established

19 in accordance with paragraph (2).

20 ‘‘(2) VALUATION CRITERIA.—Each valuation

21 submitted under this subsection shall be prepared by

22 the licensee in accordance with valuation criteria,

23 which shall—

24 ‘‘(A) be established or approved by the Ad25 ministrator; and
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1 ‘‘(B) include appropriate safeguards to en2 sure that the noncash assets of a licensee are

3 not overvalued.’’.

4 SEC. 8. TRUSTEE OR RECEIVERSHIP OVER LICENSEES.

5 (a) FINDING.—It is the finding of the Congress that

6 increased recoveries on assets in liquidation under the

7 Small Business Investment Act of 1958 are in the best

8 interests of the Federal Government.

9 (b) DEFINITIONS.—For purposes of this section—

10 (1) the term ‘‘Administrator’’ means the Ad11 ministrator of the Small Business Administration;

12 (2) the term ‘‘Administration’’ means the Small

13 Business Administration; and

14 (3) the term ‘‘licensee’’ has the same meaning

15 as in section 103 of the Small Business Investment

16 Act of 1958.

17 (c) LIQUIDATION PLAN.—

18 (1) IN GENERAL.—Not later than October 15,

19 1996, the Administrator shall submit to the Com20 mittees on Small Business of the Senate and the

21 House of Representatives a detailed plan to expedite

22 the orderly liquidation of all licensee assets in liq23 uidation, including assets of licensees in receivership

24 or in trust held by or under the control of the Ad25 ministration or its agents.
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1 (2) CONTENTS.—The plan submitted under

2 paragraph (1) shall include a timetable for liquidat3 ing the liquidation portfolio of small business invest4 ment company assets owned by the Administration,

5 and shall contain the Administrator’s findings and

6 recommendations on various options providing for

7 the fair and expeditious liquidation of such assets

8 within a reasonable period of time, giving due con9 sideration to the option of entering into one or more

10 contracts with private sector entities having the ca11 pability to carry out the orderly liquidation of simi12 lar assets.

13 (3) REPORT.—Not later than 90 days after the

14 date of enactment of this Act, the Comptroller Gen15 eral of the United States shall submit to the Com16 mittees on Small Business of the Senate and the

17 House of Representatives a report on the activities

18 and expenditures of the receiver’s agents employed

19 by or under contract with the Investment Division of

20 the Small Business Administration. The report shall

21 detail the qualifications and experience of the receiv22 er’s agents, their billing practices and procedures,

23 expenses, costs, overhead, and use of outside con24 tractors or attorneys.
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1 SEC. 9. REPEAL. OF PREFERRED STOCK REDEMPTION.

2 Section 303(f) of the Small Business Investment Act

3 of 1958 (15 U.S.C. 683(f)) is hereby repealed.

4 SEC. 10. TECHNICAL AND CONFORMING AMENDMENTS.

5 The Small Business Investment Act of 1958 (15

6 U.S.C. 661 et seq.) is amended in subsection (a) of section

7 303 by striking ‘‘debenture bonds’’ and inserting ‘‘securi8 ties,’’ and by striking subsection (f) and redesignating

9 subsequent subsections accordingly.

10 SEC. 11. EFFECTIVE DATE.

11 This Act and the amendments made by this Act shall

12 become effective on the date of enactment of this Act.

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