I 
109TH CONGRESS 
1ST SESSION H. R. 3429 
To amend the Small Business Investment Act of 1958 to establish a 
participating debenture program. 
IN THE HOUSE OF REPRESENTATIVES 
JULY 26, 2005 
Mr. MANZULLO (for himself and Mr. RAMSTAD) introduced the following bill; 
which was referred to the Committee on Small Business 
A BILL 
To amend the Small Business Investment Act of 1958 to 
establish a participating debenture program. 
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled, 
SECTION 1. ESTABLISHMENT OF PARTICIPATING DEBEN-
TURES PROGRAM. 
(a) ESTABLISHMENT.—Section 303 of the Small 
Business Investment Act of 1958 (15 U.S.C. 683) is 
amended by adding at the end the following new sub-
section: 
‘‘(k) PARTICIPATING DEBENTURES.—
‘‘(1) GUARANTEE
OF
PARTICIPATING
DEBEN-
TURES.—The Administrator is authorized to guar-
antee the payment of the redemption price and in-
terest on a participating debenture issued by a small 
business investment company under such terms and 
conditions as the Administrator shall establish by 
regulation. 
‘‘(2) LIMITATION ON GUARANTEE OF PARTICI-
PATING
DEBENTURES.—A guarantee under para-
graph (1) shall not— 
‘‘(A) exceed the amount of the payment to 
which the guarantee applies; or 
‘‘(B) change the timing of such payment. 
‘‘(3) MAXIMUM LEVERAGE.—The Administrator 
may not guarantee a new participating debenture 
issued by a small business investment company if 
the aggregate unpaid principal balance of the par-
ticipating debentures issued by that small business 
investment company would exceed 200 percent of 
the leverageable capital of such company on the day 
after the company issued or distributed the new par-
ticipating debenture. 
‘‘(4) PURCHASE
OF
PARTICIPATING
DEBEN-
TURES.—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. 
‘‘(5) PARTICIPATING DEBENTURE DEFINED.— 
In this subsection, the term ‘participating debenture’ 
means a debt security that is— 
‘‘(A) in a form prescribed by the Adminis-
trator that obligates the issuing company to— 
‘‘(i) pay any unpaid accrued interest 
on that debt security on the date which is 
5 years after the date on which it is issued; 
‘‘(ii) pay interest accrued after the 
date that is 5 years after the date on 
which the debt security is issued semi-an-
nually; and 
‘‘(iii) pay any other amount as re-
quired by this subsection and 
‘‘(B) subject to the terms and conditions 
set forth in this subsection and to any addi-
tional terms and conditions as may be pre-
scribed by the Administrator that are consistent 
with this subsection. 
‘‘(6) REDEMPTION.—Not later than the date 
which is 10 years after the date on which it is
issued, a participating debenture shall be redeemed 
for an amount equal to the outstanding principal 
balance of such participating debenture plus any ac-
crued but unpaid interest due on such participating 
debenture as of the date on which it is redeemed. 
‘‘(7) INTEREST.— 
‘‘(A) IN GENERAL.—Interest on a partici-
pating debenture is preferred and cumulative 
and is pre-payable out of any gross receipts 
available for distribution and is payable at the 
scheduled interest payment dates and at the 
scheduled or accelerated maturity of the partici-
pating debenture. 
‘‘(B) 
INTEREST
ON
PRINCIPAL
BAL-
ANCE.—Interest on the principal balance out-
standing of a participating debenture shall ac-
crue on a daily basis, and unpaid accrued inter-
est shall compound semi-annually from the date 
of the issuance of such participating 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 one-eighth of 1 percent, plus an addi-
tional charge, in an amount established annu-
ally by the Administration, as necessary to re-
duce 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 pur-
chasing and guaranteeing participating deben-
tures under this Act, which rate may not exceed 
1.5 percent per annum, and which shall be paid 
to and retained by the Administration. 
‘‘(8) PAYMENT DEFAULTS.—If a small business 
investment company fails to pay any principal or in-
terest on a participating debenture when due (in-
cluding any mandatory prepayment out of gross re-
ceipts)— 
‘‘(A) the Administrator, in addition to any 
other remedies available by law, may demand 
immediate payment of the principal balance and 
accrued interest on any participating debenture 
issued by the small business investment com-
pany; and 
‘‘(B) the interest rate on any outstanding 
participating debentures issued by the small 
business investment company shall increase 
until all payment defaults are cured or waived,
up to a maximum of 300 basis points, at a rate 
of— 
‘‘(i) 50 basis points on the date on 
which the small business investment com-
pany defaults; 
‘‘(ii) 50 basis points on the date that 
is 6 months after the date on which the 
small business investment company de-
faults; and 
‘‘(iii) an additional 50 basis points at 
6-month intervals thereafter. 
‘‘(9) GROSS RECEIPTS DEFINED.—In this sub-
section, the term ‘gross receipts’ means any cash re-
ceived by a small business investment company, in-
cluding investment proceeds (return of capital and 
profit), interest, dividends, and fees (other than cap-
ital contributed by a partner, proceeds from the 
issuance of participating debentures, and any other 
money borrowed by the small business investment 
company). 
‘‘(10) LIQUIDATION
OF
SMALL
BUSINESS
IN-
VESTMENT COMPANY.—In the event of the liquida-
tion of a small business investment company issuing 
participating debentures under this subsection, a 
participating debenture shall be senior in priority for
all purposes to any equity interest in the issuing 
company, whenever created. In liquidation, unfunded 
commitments by private investors may, at the option 
of the Administration, be applied to pay accrued in-
terest and principal of outstanding participating de-
bentures. 
‘‘(11) 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 para-
graph, ‘equity capital’ means common or pre-
ferred 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 deter-
mined by the Administration. 
‘‘(12) OTHER DEBT.—A small business invest-
ment company issuing a participating debenture 
under this subsection shall have no debt other than 
debt obtained through issuing participating deben-
tures and temporary debt (as defined by the Admin-
istrator) in an amount equal to not more than 50
percent of the company’s private capital, and subject 
to any terms and conditions specified by the Admin-
istrator. 
‘‘(13) USE OF PROCEEDS.—Subject to regula-
tions issued by the Administrator, a small business 
investment company may use the proceeds of a par-
ticipating debenture issued by the company to pay 
the principal amount and accrued interest due on an 
outstanding participating debenture issued by that 
company. 
‘‘(14) DISTRIBUTION
OF
GROSS
RECEIPTS.— 
Except as otherwise provided in this subsection, a 
small business investment company shall utilize 
gross receipts, from any source or however cat-
egorized for Generally Accepted Accounting Prin-
ciples or tax accounting purposes, first for the pay-
ment of accrued interest on participating deben-
tures, then for repayment of participating debenture 
principal and contributed private capital, and finally 
for profit distributions, as follows: 
‘‘(A) PAST
DUE
INTEREST
AND
PRIN-
CIPAL.—Gross receipts shall be used within 10 
days of receipt— 
‘‘(i) to pay any past due interest 
(whether past due by its terms or by accel-
eration) on a participating debenture 
issued by the small business investment 
company; and 
‘‘(ii) if no past due interest is out-
standing, to repay any past due principal 
(whether past due by its terms or by accel-
eration) on such a debenture. 
‘‘(B) 
MANDATORY
INTEREST
PREPAY-
MENT.—If no unpaid accrued interest or past 
due principal is outstanding on any partici-
pating debenture issued by the small business 
investment company, then, not later than the 
last day of the calendar quarter in which any 
gross receipts are received (or, in the case of 
gross receipts received during the last 15 days 
of a calendar quarter, not later than the last 
day of the subsequent calendar quarter), the 
company shall use such receipts to prepay ac-
crued interest on the participating debentures 
issued by the company. Such prepayment shall 
be applied to such accrued interest in the order 
in which such interest would otherwise become 
due and payable. 
‘‘(C) AMORTIZATION
DISTRIBUTIONS.—If 
no unpaid accrued interest or past due principal
is outstanding on any participating debenture 
issued by the company, gross receipts shall be 
distributed to— 
‘‘(i) the Administrator, to amortize 
outstanding participating debenture lever-
age; and 
‘‘(ii) private investors in the small 
business investment company, 
pro rata according to the ratio of outstanding 
participating debenture leverage to outstanding 
leverageable capital at the time of distribution. 
‘‘(D) 
POST-AMORTIZATION
DISTRIBU-
TIONS.—If no accrued interest or principal is 
outstanding on any participating debenture 
issued by the small business investment com-
pany, and the company has no outstanding 
leverageable capital, gross receipts shall be dis-
tributed as follows: 
‘‘(i) Unless aggregate distributions to 
private investors under this subparagraph 
equal or exceed aggregate contributions to 
the capital of the company previously made 
by private investors, gross receipts shall be 
distributed to the Administration in an 
amount equal to the initial profit participa-
tion percentage of the total amount distrib-
uted, with any remaining gross receipts 
distributed to private investors. 
‘‘(ii) If aggregate distributions to pri-
vate investors under this subparagraph 
equal or exceed aggregate contributions to 
the capital of the company previously made 
by private investors, there shall be distrib-
uted to the Administration an amount 
equal to the final profit participation per-
centage of the total amount distributed, 
with any remaining gross receipts distrib-
uted to private investors. 
‘‘(E) MANAGEMENT EXPENSES.—For pur-
poses of calculating the amount to be distrib-
uted to the Administration pursuant to sub-
paragraph (D), except as otherwise prescribed 
by the Administration, the management ex-
penses of any company which issues partici-
pating 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. 
‘‘(F) DEFINITIONS.—In this paragraph:
‘‘(i) 
The 
term 
‘outstanding 
leverageable capital’ means any aggregate 
capital contributions received by a small 
business investment company from private 
investors which exceed aggregate distribu-
tions received by the private investors from 
the company. 
‘‘(ii) The term ‘initial profit participa-
tion percentage’ means 25 percent of the 
leverage ratio, reduced by the weighted av-
erage interest rate on the participating de-
bentures issued by the company. 
‘‘(iii) The term ‘final profit participa-
tion percentage’ means 50 percent of the 
leverage ratio, reduced by the weighted av-
erage interest rate on the participating de-
bentures issued by the company. 
‘‘(iv) The term ‘leverage ratio’ means 
the ratio of the aggregate amount of par-
ticipating debenture leverage previously 
drawn by the company (including such le-
verage that has been repaid) to the aggre-
gate amount of capital previously contrib-
uted to the company by private investors.
‘‘(v) The term ‘combined capital’ 
means the aggregate amount of private 
capital and outstanding leverage. 
‘‘(vi) The term ‘management ex-
penses’ includes management fees and any 
additional salaries, office expenses, travel, 
business development costs, office and 
equipment rental, bookkeeping, and the de-
velopment, investigation, and monitoring of 
investments paid by the small business in-
vestment 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 nor-
mal process of making and monitoring ven-
ture capital investments. 
‘‘(15) EXCEPTIONS
TO
THE
ORDER
OF
DIS-
TRIBUTIONS.—Notwithstanding paragraph 15(C), if 
no unpaid accrued interest (whether or not past due) 
and no past due principal is outstanding on any par-
ticipating debenture issued by a small business in-
vestment company, the following exceptions shall 
apply: 
‘‘(A) TAX DISTRIBUTIONS.— 
‘‘(i) SPECIAL DISTRIBUTION TO PRI-
VATE
INVESTORS.—Notwithstanding any 
outstanding principal that is not past due 
on participating debentures issued by the 
small business investment company, the 
company may make a special distribution 
of gross receipts or other cash to private 
investors without a corresponding distribu-
tion to the Administration if— 
‘‘(I) the small business invest-
ment company has an investment in a 
business that is organized as a limited 
liability company or as a partnership 
(referred to in this paragraph as a 
‘portfolio company’); 
‘‘(II) the portfolio company has 
income that is taxable to the members 
or partners of such portfolio company; 
‘‘(III) 
the 
portfolio 
company 
makes a distribution to the members 
or partners of such portfolio company 
in an amount equal to the tax liability
of such members or partners on the 
taxable income of the portfolio com-
pany assuming that each is taxed at 
the highest combined Federal, State, 
and local income tax rate applicable to 
individuals anywhere in the United 
States; and 
‘‘(IV) the small business invest-
ment company is organized as a lim-
ited liability company or a partnership 
such that any income of the portfolio 
company allocated to such small busi-
ness investment company is reallo-
cated to private investors, who are lia-
ble for the payment of taxes on such 
income as if such income were the in-
come of the private investors, regard-
less of whether such investors receive 
any cash with respect to such income. 
‘‘(ii) AMOUNT OF SPECIAL DISTRIBU-
TION.—The amount of the special distribu-
tion of gross receipts under clause (i) shall 
not exceed the amount that is the dif-
ference between—
‘‘(I) the estimated aggregate 
maximum tax liability of the private 
investors in the small business devel-
opment company for the income of 
any portfolio company in which the 
small business development company 
is invested during the calendar year 
that precedes the distribution; and 
‘‘(II) the aggregate amount dis-
tributed to such private investors 
(other than amounts distributed pur-
suant to this subparagraph) during 
the period beginning on April 15 of 
the calendar year preceding the dis-
tribution and ending on the date on 
which the distribution is made, but in 
no circumstances more than the ag-
gregate amount of tax distributions 
received by the small business invest-
ment company from investments in 
portfolio companies during the same 
period. 
‘‘(iii) TIMING OF SPECIAL DISTRIBU-
TION.—Any special distribution of gross
receipts under clause (i) shall be made not 
later than April 15 of each calendar year. 
‘‘(B) PAYMENT OF EXPENSES.—The small 
business investment company may— 
‘‘(i) use gross receipts to pay pre-
viously incurred expenses (including man-
agement fees) and other liabilities; and 
‘‘(ii) retain gross receipts in an ex-
pense reserve account in an amount which, 
together with any existing expense reserve 
of the company, shall not exceed the rea-
sonably anticipated expenses and other li-
abilities of the company (other than such 
expenses and liabilities as are prohibited by 
law) for the succeeding 12-month period. 
‘‘(C) PREPAYMENT.—Subject to any appli-
cable requirements under State law, the small 
business investment company may use gross re-
ceipts or other cash to prepay outstanding par-
ticipating debenture leverage and interest, in 
whole or in part, without penalty, and at any 
time. 
‘‘(16) RESTRICTIONS ON DISTRIBUTIONS.— 
‘‘(A) LIQUIDITY AND OTHER ADMINISTRA-
TIVE OR STATE LAW RESTRICTIONS.—No dis-
tribution shall be made except in accordance 
with the liquidity requirements and other appli-
cable restrictions on distributions established by 
the Administration or under applicable State 
law. 
‘‘(B) CAPITAL
IMPAIRMENT
OR
REGU-
LATORY VIOLATION.—If a small business invest-
ment company is in restricted operations or liq-
uidation by reason of capital impairment or reg-
ulatory violation, the maturity date of the par-
ticipating debentures issued by that company, 
including both principal and accrued interest, is 
subject to acceleration at the option of the Ad-
ministration, and, whether or not there has 
been such acceleration, up to 100 percent of all 
gross receipts and unfunded private investor 
commitments may, at the option of the Admin-
istration, be required to be distributed to the 
Administration until accrued interest and prin-
cipal on the participating debentures issued by 
the company have been paid in full, in accord-
ance with any terms and conditions the Admin-
istrator may establish by regulation. 
‘‘(17) DISTRIBUTIONS IN KIND.—
‘‘(A) ELECTION OF IN-KIND DISTRIBUTION 
OF SECURITIES.— 
‘‘(i) PUBLICLY TRADED AND MARKET-
ABLE SECURITIES.—A small business in-
vestment company that issues participating 
debentures may elect to make an in-kind 
distribution of securities at any time, sub-
ject to applicable securities laws and regu-
lations, if such securities are publicly trad-
ed and marketable. 
‘‘(ii) TREATMENT
AS
GROSS
RE-
CEIPTS.—For purposes of this subsection, 
such securities shall be treated as gross re-
ceipts and shall be subject to the priorities 
and restrictions applicable to gross receipts 
under this subsection and any regulation 
issued by the Administration that is appli-
cable to gross receipts. 
‘‘(B) TREATMENT
OF
ADMINISTRATION 
SHARE.—The company shall either deposit the 
Administration’s share of such securities with a 
trustee designated by the Administration, or re-
tain the Administration’s share, if the Adminis-
trator so directs and with the agreement of the 
company.
‘‘(C) RETENTION
OF
ADMINISTRATION 
SHARE.—If the company retains the Adminis-
tration’s share, it shall sell such share and 
promptly remit the proceeds to the Administra-
tion. 
‘‘(D) 
VALUE
OF
ADMINISTRATION 
SHARE.—For purposes of this paragraph, the 
value of the Administration’s share is— 
‘‘(i) the value of the publicly traded 
and marketable securities described in sub-
paragraph (A)(i), as of the date of dis-
tribution to the Administration under sub-
paragraph (B) or as of the initial date of 
retention under subparagraph (C); and 
‘‘(ii) the controlling value for the pur-
poses of determining the remaining liability 
of the company to the Administration; 
‘‘(E) ULTIMATE SALE OF ADMINISTRATION 
SHARE.—Upon 
the 
ultimate 
sale 
of 
the 
Adminsitration’s share or upon the small busi-
ness investment company’s ultimate sale of 
such share on behalf of the Administration, the 
Administration may receive an amount that is 
more 
or 
less 
than 
the 
value 
of 
the
Adminsitration’s share under subparagraph 
(D). 
‘‘(F) TRUSTEE
DEFINED.—In this para-
graph, the term ‘trustee’ means a person who 
is knowledgeable about and proficient in the 
marketing of thinly traded securities. 
‘‘(18) TIMING OF DISTRIBUTIONS.— 
‘‘(A) IN
GENERAL.—Subject to subpara-
graph (B) and paragraph (18), any gross re-
ceipts received by a small business investment 
company issuing participating debentures under 
this subsection that are not placed in an ex-
pense reserve pursuant to paragraph (16)(B) 
shall be distributed by the last day of the fiscal 
quarter in which such net receipts were received 
by the company, except that gross receipts re-
ceived after the date that is 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
DIS-
TRIBUTIONS.—Gross receipts consisting of mar-
ketable securities shall be distributed within six 
months of receipt, unless the small business in-
vestment company has obtained the prior con-
sent of the Administrator.
‘‘(19) REINVESTMENT OF GROSS RECEIPTS.— 
Subject to such regulations and restrictions as may 
be prescribed by the Administrator and the agree-
ment of the private investors in a small business in-
vestment company, any gross receipts that exceed 
the amount required to make payments to the Ad-
ministration as required by this subsection may be 
reinvested in qualified small businesses by the small 
business investment company. 
‘‘(20) 
POST-DISTRIBUTION
COMPUTATION.— 
After distributions have been made pursuant to this 
subsection, the Administration’s share of such dis-
tributions shall not be reduced or recomputed except 
as expressly provided in this subsection. 
‘‘(21) NO OWNERSHIP INTEREST IN ADMINIS-
TRATION.—This subsection shall not be construed as 
creating in the Administration any ownership inter-
est in any small business investment company which 
issues participating debentures. 
‘‘(22) CONFLICT WITH OTHER SUBSECTIONS.— 
‘‘(A) IN GENERAL.—In the event of a con-
flict between this subsection and any other pro-
vision of this Act, this subsection shall apply. 
‘‘(B) 
SPECIFIC
PROVISIONS.—In 
par-
ticular, this subsection supersedes subsections
(g) and (h) in their entirety with respect to all 
matters pertaining to participating deben-
tures.’’. 
(b) REGULATIONS.—The Administrator shall issue 
regulations to carry out subsection (k) of section 303 of 
the Small Business Investment Act of 1958 (15 U.S.C. 
683), as added by subsection (a), before the date that is 
180 days after the date of the enactment of this Act. 
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