II 

114TH CONGRESS 

2D SESSION S. 3375 

To amend the Small Business Investment Act of 1958 to enhance the Small 

Business Investment Company Program and provide for a small business 

early-stage investment program. 

IN THE SENATE OF THE UNITED STATES 

SEPTEMBER 21, 2016 

Ms. BALDWIN (for herself and Mr. PETERS) introduced the following bill; 

which was read twice and referred to the Committee on Small Business 

and Entrepreneurship 

A BILL 

To amend the Small Business Investment Act of 1958 to 

enhance the Small Business Investment Company Program and provide for a small business early-stage investment 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. SHORT TITLE. 

4 This Act may be cited as the ‘‘Small Business Inno5 vation Act of 2016’’. 

6 SEC. 2. PROGRAM AUTHORIZATION. 

7 Section 303(b) of the Small Business Investment Act 

8 of 1958 (15 U.S.C. 683(b)) is amended, in the matter preVerDate Sep 11 2014 04:06 Sep 22, 2016 Jkt 059200 PO 00000 Frm 00001 Fmt 6652 Sfmt 6201 E:\BILLS\S3375.IS S3375

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1 ceding paragraph (1), in the first sentence, by inserting 

2 after ‘‘issued by such companies’’ the following: ‘‘, in a 

3 total amount that does not exceed $4,000,000,000 each 

4 fiscal year (adjusted annually to reflect increases in the 

5 Chained Consumer Price Index for All Urban Consumers 

6 (C–CPI–U), as published by the Bureau of Labor Statis7 tics of the Department of Labor)’’. 

8 SEC. 3. SMALL BUSINESS EARLY-STAGE INVESTMENT PRO9 GRAM. 

10 Title III of the Small Business Investment Act of 

11 1958 (15 U.S.C. 681 et seq.) is amended by adding at 

12 the end the following: 

13 ‘‘PART D—SMALL BUSINESS EARLY-STAGE 

14 INVESTMENT PROGRAM 

15 ‘‘SEC. 399A. DEFINITIONS. 

16 ‘‘In this part: 

17 ‘‘(1) EARLY-STAGE SMALL BUSINESS.—The 

18 term ‘early-stage small business’ means a small busi19 ness concern that— 

20 ‘‘(A) is domiciled in a State or Indian 

21 country (as defined in section 1151 of title 18, 

22 United States Code); and 

23 ‘‘(B) has not generated positive cash flow 

24 from operations in any fiscal year before the 

25 date on which a participating investment comVerDate Sep 11 2014 04:06 Sep 22, 2016 Jkt 059200 PO 00000 Frm 00002 Fmt 6652 Sfmt 6201 E:\BILLS\S3375.IS S3375

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1 pany makes an initial investment in the small 

2 business concern. 

3 ‘‘(2) ELIGIBLE APPLICANT.—The term ‘eligible 

4 applicant’ means a limited liability company or a 

5 limited partnership organized and chartered or oth6 erwise existing under Federal or State law for the 

7 purpose of performing the functions and conducting 

8 the activities contemplated under the program, in9 cluding those managed by a manager of a small 

10 business investment company. 

11 ‘‘(3) PARTICIPATING INVESTMENT COMPANY.— 

12 The term ‘participating investment company’ means 

13 an applicant approved under section 399E to partici14 pate in the program. 

15 ‘‘(4) PROGRAM.—The term ‘program’ means 

16 the early-stage investment program established 

17 under section 399B. 

18 ‘‘(5) SMALL BUSINESS CONCERN.—The term 

19 ‘small business concern’ has the same meaning given 

20 that term in section 3(a) of the Small Business Act 

21 (15 U.S.C. 632(a)). 

22 ‘‘(6) SMALL BUSINESS CONCERN IN A TAR23 GETED INDUSTRY.—The term ‘small business con24 cern in a targeted industry’ means a small business 

25 concern that is engaged primarily in researching, deVerDate Sep 11 2014 04:06 Sep 22, 2016 Jkt 059200 PO 00000 Frm 00003 Fmt 6652 Sfmt 6201 E:\BILLS\S3375.IS S3375

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1 veloping, manufacturing, producing, or bringing to 

2 market goods, products, or services in a targeted in3 dustry. 

4 ‘‘(7) TARGETED INDUSTRY.—The term ‘tar5 geted industry’ means any of the following business 

6 sectors: 

7 ‘‘(A) Advanced manufacturing. 

8 ‘‘(B) Agricultural technology. 

9 ‘‘(C) Biotechnology. 

10 ‘‘(D) Clean energy technology. 

11 ‘‘(E) Digital media. 

12 ‘‘(F) Environmental technology. 

13 ‘‘(G) Information technology. 

14 ‘‘(H) Life sciences. 

15 ‘‘(I) Water technology. 

16 ‘‘(8) TEMPORARY DEBT.—The term ‘temporary 

17 debt’ means borrowings of a participating invest18 ment company— 

19 ‘‘(A) with a term not to exceed 90 days 

20 from a regulated financial institution for the 

21 purpose of maintaining operating liquidity of 

22 the participating investment company or pro23 viding funds for a particular financing of a 

24 small business concern; and 


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1 ‘‘(B) that do not exceed 50 percent of the 

2 leveraged capital of the participating investment 

3 company. 

4 ‘‘SEC. 399B. ESTABLISHMENT OF PROGRAM. 

5 ‘‘The Administrator shall establish and carry out an 

6 early-stage investment program to provide equity financ7 ing to support early-stage small businesses in accordance 

8 with this part. 

9 ‘‘SEC. 399C. ADMINISTRATION OF PROGRAM. 

10 ‘‘The Administrator, acting through the Associate 

11 Administrator described in section 201, shall administer 

12 the program. 

13 ‘‘SEC. 399D. APPLICATIONS. 

14 ‘‘An eligible applicant that desires to participate in 

15 the program shall submit to the Administrator an applica16 tion that includes— 

17 ‘‘(1) a business plan describing how the eligible 

18 applicant intends to make successful venture capital 

19 investments in early-stage small businesses and di20 rect capital to small business concerns in targeted 

21 industries or other business sectors; 

22 ‘‘(2) information regarding the relevant venture 

23 capital investment qualifications and backgrounds of 

24 the individuals responsible for the management of 

25 the eligible applicant; and 


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1 ‘‘(3) a description of the extent to which the eli2 gible applicant meets the selection criteria and other 

3 requirements to participate in the program under 

4 section 399E. 

5 ‘‘SEC. 399E. SELECTION OF PARTICIPATING INVESTMENT 

6 COMPANIES. 

7 ‘‘(a) IN GENERAL.—Not later than 120 days after 

8 the date on which the Administrator receives an applica9 tion from an eligible applicant under section 399D, the 

10 Administrator shall make a determination to conditionally 

11 approve or disapprove the eligible applicant to participate 

12 in the program and shall transmit the determination to 

13 the eligible applicant electronically and in writing. A deter14 mination to conditionally approve an eligible applicant 

15 shall identify all conditions the eligible applicant is re16 quired to satisfy for the Administrator to provide final ap17 proval to the eligible applicant to participate in the pro18 gram, and shall provide a period of not less than 1 year 

19 for the eligible applicant to satisfy the conditions. 

20 ‘‘(b) SELECTION CRITERIA.—In making a determina21 tion under subsection (a), the Administrator shall con22 sider— 

23 ‘‘(1) the likelihood that the eligible applicant 

24 will meet the goals specified in the business plan of 

25 the eligible applicant; 


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1 ‘‘(2) the likelihood that the investments of the 

2 eligible applicant will create or preserve jobs in the 

3 United States, both directly and indirectly; 

4 ‘‘(3) the character and fitness of the manage5 ment of the eligible applicant; 

6 ‘‘(4) the experience and background of the 

7 management of the eligible applicant; 

8 ‘‘(5) the extent to which the eligible applicant 

9 will concentrate investment activities on early-stage 

10 small businesses; 

11 ‘‘(6) the likelihood that the eligible applicant 

12 will achieve profitability; 

13 ‘‘(7) the experience of the management of the 

14 eligible applicant with respect to establishing a prof15 itable investment track record; 

16 ‘‘(8) the extent to which the eligible applicant 

17 will concentrate investment activities on small busi18 ness concerns in targeted industries; and 

19 ‘‘(9) the extent to which the eligible applicant 

20 will concentrate investment activities on small busi21 ness concerns in targeted industries that have re22 ceived funds from a Federal agency, including— 

23 ‘‘(A) the National Institutes of Health; 

24 ‘‘(B) the National Science Foundation; and 


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1 ‘‘(C) funds received from a Federal agency 

2 under the Small Business Innovation Research 

3 Program or the Small Business Technology 

4 Transfer Program, as such terms are defined 

5 under section 9 of the Small Business Act (15 

6 U.S.C. 638). 

7 ‘‘(c) REGULATORY CAPITAL REQUIREMENTS.—To 

8 participate in the program, an eligible applicant shall have 

9 regulatory capital— 

10 ‘‘(1) in an amount that is not less than 

11 $20,000,000, unless the Administrator determines 

12 that the eligible applicant can have long-term finan13 cial viability with a lower amount of regulatory cap14 ital; and 

15 ‘‘(2) of which not more than 33 percent is from 

16 State or local government entities. 

17 ‘‘(d) NON-AFFILIATION REQUIREMENT.—To partici18 pate in the program, not less than 30 percent of the regu19 latory and leverageable capital of an eligible applicant 

20 shall come from 3 persons unaffiliated with the manage21 ment of the fund and unaffiliated with each other. 

22 ‘‘(e) THIRD-PARTY DEBT.—To participate in the 

23 program, an eligible applicant may not incur debt, other 

24 than leverage, unless the debt is temporary debt. 


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1 ‘‘SEC. 399F. EQUITY FINANCINGS. 

2 ‘‘(a) IN GENERAL.—The Administrator may make 

3 one or more equity financings to a participating invest4 ment company. 

5 ‘‘(b) EQUITY FINANCING AMOUNTS.— 

6 ‘‘(1) NON-FEDERAL CAPITAL.—An equity fi7 nancing made to a participating investment company 

8 under the program may not be in an amount that 

9 exceeds the amount of the capital of the partici10 pating investment company that is not from a Fed11 eral source and that is available for investment on 

12 or before the date on which an equity financing is 

13 drawn upon by the participating investment com14 pany. The capital of the participating investment 

15 company may include legally binding commitments 

16 with respect to capital for investment. 

17 ‘‘(2) LIMITATION ON AGGREGATE AMOUNT.— 

18 The aggregate amount of all equity financings made 

19 to a participating investment company under the 

20 program may not exceed $100,000,000. 

21 ‘‘(c) EQUITY FINANCING PROCESS.—In making an 

22 equity financing under the program, the Administrator 

23 shall commit an equity financing amount to a partici24 pating investment company, and the amount of each com25 mitment shall remain available to be drawn upon by a par26 ticipating investment company— 


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1 ‘‘(1) for new-named investments, during the 5- 

2 year period beginning on the date on which the com3 mitment is first drawn upon by the participating in4 vestment company; and 

5 ‘‘(2) for follow-on investments and management 

6 fees, during the 10-year period beginning on the 

7 date on which the commitment is first drawn upon 

8 by the participating investment company, with addi9 tional 1-year periods available at the discretion of 

10 the Administrator. 

11 ‘‘(d) COMMITMENT OF FUNDS.—Not later than 2 

12 years after the date on which funds are appropriated for 

13 the program, the Administrator shall make commitments 

14 for equity financings. 

15 ‘‘SEC. 399G. INVESTMENTS IN EARLY-STAGE SMALL BUSI16 NESSES. 

17 ‘‘(a) IN GENERAL.—As a condition of receiving an 

18 equity financing under the program, a participating in19 vestment company shall make all of the investments of the 

20 participating investment company made with amounts re21 ceived under the program, including securities, promissory 

22 notes, or other obligations, in small business concerns, of 

23 which at least 50 percent of the total amount of such in24 vestments shall be in early-stage small businesses in tar25 geted industries. 


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1 ‘‘(b) EVALUATION OF COMPLIANCE.—After a partici2 pating investment company has expended not less than 50 

3 percent of the amount of an equity financing commitment 

4 made under section 399F, the Administrator shall evalu5 ate the compliance of the participating investment com6 pany with the requirements under subsection (a). 

7 ‘‘(c) WAIVER.—The Administrator may waive the re8 quirements for a participating investment company under 

9 subsection (a) if the Administrator determines that it is 

10 in the best interest of the long term solvency of the fund 

11 established in section 399J. 

12 ‘‘SEC. 399H. PRO RATA INVESTMENT SHARES. 

13 ‘‘Each investment made by a participating invest14 ment company under the program shall be treated as com15 prised of capital from equity financings under the program 

16 according to the ratio that capital from equity financings 

17 under the program bears to all capital available to the par18 ticipating investment company for investment. 

19 ‘‘SEC. 399I. EQUITY FINANCING INTEREST. 

20 ‘‘(a) EQUITY FINANCING INTEREST.— 

21 ‘‘(1) IN GENERAL.—As a condition of receiving 

22 an equity financing under the program, a partici23 pating investment company shall convey an equity fi24 nancing interest to the Administrator in accordance 

25 with paragraph (2). 


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1 ‘‘(2) EFFECT OF CONVEYANCE.—The equity fi2 nancing interest conveyed under paragraph (1)— 

3 ‘‘(A) shall have all the rights and at4 tributes of other investors attributable to their 

5 interests in the participating investment com6 pany; 

7 ‘‘(B) shall not denote control or voting 

8 rights to the Administrator; and 

9 ‘‘(C) shall entitle the Administrator to a 

10 pro rata portion of any distributions made by 

11 the participating investment company equal to 

12 the percentage of capital in the participating in13 vestment company that the equity financing 

14 comprises, which shall be made at the same 

15 times and in the same amounts as any other in16 vestor in the participating investment company 

17 with a similar interest. 

18 ‘‘(3) ALLOCATIONS.—A participating invest19 ment company shall make allocations of income, 

20 gain, loss, deduction, and credit to the Adminis21 trator with respect to the equity financing interest 

22 as if the Administrator were an investor. 

23 ‘‘(b) MANAGER PROFITS.—As a condition of receiv24 ing an equity financing under the program, the manager 

25 profits interest payable to the managers of a participating 


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1 investment company under the program shall not exceed 

2 20 percent of profits, exclusive of any profits that may 

3 accrue as a result of the capital contributions of any such 

4 managers with respect to the participating investment 

5 company. Any excess of manager profits interest, less 

6 taxes payable thereon, shall be returned by the managers 

7 and paid to the investors and the Administrator in propor8 tion to the capital contributions and equity financings paid 

9 in. No manager profits interest (other than a tax distribu10 tion) shall be paid before the repayment to the investors 

11 and the Administrator of all contributed capital and equity 

12 financings made. 

13 ‘‘(c) DISTRIBUTION REQUIREMENTS.—As a condition 

14 of receiving an equity financing under the program, a par15 ticipating investment company shall make all distributions 

16 to all investors in cash and shall make distributions within 

17 a reasonable time after exiting investments, including fol18 lowing a public offering or market sale of underlying in19 vestments. 

20 ‘‘(d) RESERVE REQUIREMENTS.— 

21 ‘‘(1) IN GENERAL.—A participating investment 

22 company with an outstanding equity financing under 

23 the program shall, during the first 5 years of the 

24 term of each debenture which requires periodic inter25 est payments to Administration, maintain a reserve 


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1 sufficient to pay the interest and charges on the de2 benture for the first 21 payments due after the date 

3 of issuance. 

4 ‘‘(2) FORM.—The reserve required under this 

5 subsection may consist of any combination of— 

6 ‘‘(A) binding unfunded commitments from 

7 institutional investors of the participating in8 vestment company that may only be called for 

9 the purpose of— 

10 ‘‘(i) the payment of interest and 

11 charges to the Administration; or 

12 ‘‘(ii) the payment of any other 

13 amounts due to the Administration; and 

14 ‘‘(B) cash maintained in a separate bank 

15 account or separate investment account per16 mitted by the Administration by regulation and 

17 separately identified in the financial statements 

18 of the participating investment company as ‘re19 stricted cash’ available only for the purpose 

20 of— 

21 ‘‘(i) paying interest and charges to the 

22 Administration; or 

23 ‘‘(ii) the payment of any other 

24 amounts due to the Administration. 

25 ‘‘(3) REDUCTION OF REQUIRED AMOUNT.— 


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1 ‘‘(A) IN GENERAL.—The required reserve 

2 associated with a debenture shall be reduced on 

3 each payment date upon payment of the re4 quired interest and charges to the Administra5 tion. 

6 ‘‘(B) ELIMINATION.—If a participating in7 vestment company prepays a debenture before 

8 the due date for the twenty-first payment after 

9 the date on which the debenture is issued, the 

10 reserve requirement with respect to the deben11 ture shall be eliminated. 

12 ‘‘(4) INCLUSION IN FORMATION DOCUMENTS.— 

13 The formation documents for a participating invest14 ment company shall incorporate the reserve require15 ments under this subsection. 

16 ‘‘SEC. 399J. FUND. 

17 ‘‘(a) IN GENERAL.—There is established in the 

18 Treasury a separate account (in this section referred to 

19 as ‘the fund’) for equity financings which shall be available 

20 to the Administrator, subject to annual appropriations, as 

21 a revolving fund to be used for the purposes of the pro22 gram. All amounts received by the Administrator under 

23 the program, including any moneys, property, or assets 

24 derived by the Administrator from operations in connec25 tion with the program, shall be deposited in the fund. 


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1 ‘‘(b) FUNDS ADMINISTRATION.—Not more than 1 

2 percent of the total amount made available for the fund 

3 in a fiscal year may be used for funds administration. 

4 ‘‘SEC. 399K. APPLICATION OF OTHER SECTIONS. 

5 ‘‘To the extent not inconsistent with requirements 

6 under this part, the Administrator may apply sections 

7 309, 311, 312, 313, and 314 to activities under this part, 

8 and an officer, director, employee, agent, or other partici9 pant in a participating investment company shall be sub10 ject to the requirements under such sections. 

11 ‘‘SEC. 399L. ANNUAL REPORTING. 

12 ‘‘The Administrator shall include information on the 

13 performance of the program in the annual performance 

14 report of the Administration required to be submitted 

15 under section 10(a) of the Small Business Act (15 U.S.C. 

16 639(a)).’’. 

Æ 


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