Small Business Innovation Act of 2016

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. Short title This Act may be cited as the Small Business Innovation Act of 2016 2. Program authorization Section 303(b) of the Small Business Investment Act of 1958 ( 15 U.S.C. 683(b) issued by such companies , in a total amount that does not exceed $4,000,000,000 each fiscal year (adjusted annually to reflect increases in the Chained Consumer Price Index for All Urban Consumers (C–CPI–U), as published by the Bureau of Labor Statistics of the Department of Labor) 3. Small business early-stage investment program Title III of the Small Business Investment Act of 1958 ( 15 U.S.C. 681 et seq. D Small business early-stage investment program 399A. Definitions In this part: (1) Early-stage small business The term early-stage small business (A) is domiciled in a State or Indian country (as defined in section 1151 of title 18, United States Code); and (B) has not generated positive cash flow from operations in any fiscal year before the date on which a participating investment company makes an initial investment in the small business concern. (2) Eligible applicant The term eligible applicant (3) Participating investment company The term participating investment company (4) Program The term program (5) Small business concern The term small business concern 15 U.S.C. 632(a) (6) Small business concern in a targeted industry The term small business concern in a targeted industry (7) Targeted industry The term targeted industry (A) Advanced manufacturing. (B) Agricultural technology. (C) Biotechnology. (D) Clean energy technology. (E) Digital media. (F) Environmental technology. (G) Information technology. (H) Life sciences. (I) Water technology. (8) Temporary debt The term temporary debt (A) with a term not to exceed 90 days from a regulated financial institution for the purpose of maintaining operating liquidity of the participating investment company or providing funds for a particular financing of a small business concern; and (B) that do not exceed 50 percent of the leveraged capital of the participating investment company. 399B. Establishment of program The Administrator shall establish and carry out an early-stage investment program to provide equity financing to support early-stage small businesses in accordance with this part. 399C. Administration of program The Administrator, acting through the Associate Administrator described in section 201, shall administer the program. 399D. Applications An eligible applicant that desires to participate in the program shall submit to the Administrator an application that includes— (1) a business plan describing how the eligible applicant intends to make successful venture capital investments in early-stage small businesses and direct capital to small business concerns in targeted industries or other business sectors; (2) information regarding the relevant venture capital investment qualifications and backgrounds of the individuals responsible for the management of the eligible applicant; and (3) a description of the extent to which the eligible applicant meets the selection criteria and other requirements to participate in the program under section 399E. 399E. Selection of participating investment companies (a) In general Not later than 120 days after the date on which the Administrator receives an application from an eligible applicant under section 399D, the Administrator shall make a determination to conditionally approve or disapprove the eligible applicant to participate in the program and shall transmit the determination to the eligible applicant electronically and in writing. A determination to conditionally approve an eligible applicant shall identify all conditions the eligible applicant is required to satisfy for the Administrator to provide final approval to the eligible applicant to participate in the program, and shall provide a period of not less than 1 year for the eligible applicant to satisfy the conditions. (b) Selection criteria In making a determination under subsection (a), the Administrator shall consider— (1) the likelihood that the eligible applicant will meet the goals specified in the business plan of the eligible applicant; (2) the likelihood that the investments of the eligible applicant will create or preserve jobs in the United States, both directly and indirectly; (3) the character and fitness of the management of the eligible applicant; (4) the experience and background of the management of the eligible applicant; (5) the extent to which the eligible applicant will concentrate investment activities on early-stage small businesses; (6) the likelihood that the eligible applicant will achieve profitability; (7) the experience of the management of the eligible applicant with respect to establishing a profitable investment track record; (8) the extent to which the eligible applicant will concentrate investment activities on small business concerns in targeted industries; and (9) the extent to which the eligible applicant will concentrate investment activities on small business concerns in targeted industries that have received funds from a Federal agency, including— (A) the National Institutes of Health; (B) the National Science Foundation; and (C) funds received from a Federal agency under the Small Business Innovation Research Program or the Small Business Technology Transfer Program, as such terms are defined under section 9 of the Small Business Act ( 15 U.S.C. 638 (c) Regulatory capital requirements To participate in the program, an eligible applicant shall have regulatory capital— (1) in an amount that is not less than $20,000,000, unless the Administrator determines that the eligible applicant can have long-term financial viability with a lower amount of regulatory capital; and (2) of which not more than 33 percent is from State or local government entities. (d) Non-Affiliation requirement To participate in the program, not less than 30 percent of the regulatory and leverageable capital of an eligible applicant shall come from 3 persons unaffiliated with the management of the fund and unaffiliated with each other. (e) Third-Party debt To participate in the program, an eligible applicant may not incur debt, other than leverage, unless the debt is temporary debt. 399F. Equity financings (a) In general The Administrator may make one or more equity financings to a participating investment company. (b) Equity financing amounts (1) Non-Federal capital An equity financing made to a participating investment company under the program may not be in an amount that exceeds the amount of the capital of the participating investment company that is not from a Federal source and that is available for investment on or before the date on which an equity financing is drawn upon by the participating investment company. The capital of the participating investment company may include legally binding commitments with respect to capital for investment. (2) Limitation on aggregate amount The aggregate amount of all equity financings made to a participating investment company under the program may not exceed $100,000,000. (c) Equity financing process In making an equity financing under the program, the Administrator shall commit an equity financing amount to a participating investment company, and the amount of each commitment shall remain available to be drawn upon by a participating investment company— (1) for new-named investments, during the 5-year period beginning on the date on which the commitment is first drawn upon by the participating investment company; and (2) for follow-on investments and management fees, during the 10-year period beginning on the date on which the commitment is first drawn upon by the participating investment company, with additional 1-year periods available at the discretion of the Administrator. (d) Commitment of funds Not later than 2 years after the date on which funds are appropriated for the program, the Administrator shall make commitments for equity financings. 399G. Investments in early-stage small businesses (a) In general As a condition of receiving an equity financing under the program, a participating investment company shall make all of the investments of the participating investment company made with amounts received under the program, including securities, promissory notes, or other obligations, in small business concerns, of which at least 50 percent of the total amount of such investments shall be in early-stage small businesses in targeted industries. (b) Evaluation of compliance After a participating investment company has expended not less than 50 percent of the amount of an equity financing commitment made under section 399F, the Administrator shall evaluate the compliance of the participating investment company with the requirements under subsection (a). (c) Waiver The Administrator may waive the requirements for a participating investment company under subsection (a) if the Administrator determines that it is in the best interest of the long term solvency of the fund established in section 399J. 399H. Pro rata investment shares Each investment made by a participating investment company under the program shall be treated as comprised of capital from equity financings under the program according to the ratio that capital from equity financings under the program bears to all capital available to the participating investment company for investment. 399I. Equity financing interest (a) Equity financing Interest (1) In general As a condition of receiving an equity financing under the program, a participating investment company shall convey an equity financing interest to the Administrator in accordance with paragraph (2). (2) Effect of conveyance The equity financing interest conveyed under paragraph (1)— (A) shall have all the rights and attributes of other investors attributable to their interests in the participating investment company; (B) shall not denote control or voting rights to the Administrator; and (C) shall entitle the Administrator to a pro rata portion of any distributions made by the participating investment company equal to the percentage of capital in the participating investment company that the equity financing comprises, which shall be made at the same times and in the same amounts as any other investor in the participating investment company with a similar interest. (3) Allocations A participating investment company shall make allocations of income, gain, loss, deduction, and credit to the Administrator with respect to the equity financing interest as if the Administrator were an investor. (b) Manager profits As a condition of receiving an equity financing under the program, the manager profits interest payable to the managers of a participating investment company under the program shall not exceed 20 percent of profits, exclusive of any profits that may accrue as a result of the capital contributions of any such managers with respect to the participating investment company. Any excess of manager profits interest, less taxes payable thereon, shall be returned by the managers and paid to the investors and the Administrator in proportion to the capital contributions and equity financings paid in. No manager profits interest (other than a tax distribution) shall be paid before the repayment to the investors and the Administrator of all contributed capital and equity financings made. (c) Distribution requirements As a condition of receiving an equity financing under the program, a participating investment company shall make all distributions to all investors in cash and shall make distributions within a reasonable time after exiting investments, including following a public offering or market sale of underlying investments. (d) Reserve requirements (1) In general A participating investment company with an outstanding equity financing under the program shall, during the first 5 years of the term of each debenture which requires periodic interest payments to Administration, maintain a reserve sufficient to pay the interest and charges on the debenture for the first 21 payments due after the date of issuance. (2) Form The reserve required under this subsection may consist of any combination of— (A) binding unfunded commitments from institutional investors of the participating investment company that may only be called for the purpose of— (i) the payment of interest and charges to the Administration; or (ii) the payment of any other amounts due to the Administration; and (B) cash maintained in a separate bank account or separate investment account permitted by the Administration by regulation and separately identified in the financial statements of the participating investment company as restricted cash (i) paying interest and charges to the Administration; or (ii) the payment of any other amounts due to the Administration. (3) Reduction of required amount (A) In general The required reserve associated with a debenture shall be reduced on each payment date upon payment of the required interest and charges to the Administration. (B) Elimination If a participating investment company prepays a debenture before the due date for the twenty-first payment after the date on which the debenture is issued, the reserve requirement with respect to the debenture shall be eliminated. (4) Inclusion in formation documents The formation documents for a participating investment company shall incorporate the reserve requirements under this subsection. 399J. Fund (a) In general There is established in the Treasury a separate account (in this section referred to as the fund (b) Funds administration Not more than 1 percent of the total amount made available for the fund in a fiscal year may be used for funds administration. 399K. Application of other sections To the extent not inconsistent with requirements under this part, the Administrator may apply sections 309, 311, 312, 313, and 314 to activities under this part, and an officer, director, employee, agent, or other participant in a participating investment company shall be subject to the requirements under such sections. 399L. Annual reporting The Administrator shall include information on the performance of the program in the annual performance report of the Administration required to be submitted under section 10(a) of the Small Business Act ( 15 U.S.C. 639(a) .

Summary: Small Business Innovation Act of 2016 This bill amends the Small Business Investment Act of 1958 to authorize the Small Business Administration (SBA) to guarantee the payment of up to $4 billion per fiscal year for debentures or participating securities issued by small business investment companies (SBICs) to encourage the formation and growth of small businesses. The SBA must establish and carry out an early-stage investment program to provide, through participating investment companies, equity financing to support early-stage businesses that have not generated positive cash flow at any time prior to an initial investment by a participating investment company. The bill outlines participating investment company application requirements and selection and approval procedures. It allows the SBA to make one or more equity financings to a participating investment company, with a limit of $100 million to any one company. A participating investment company shall make all of its investments in small businesses, of which at least 50% shall be early-stage small businesses in specified targeted industries. A separate account is established for equity financings under the program.