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.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ‘‘Small Business Invest-
ment Company Reform Act of 1996’’.
SEC. 2. DEFINITIONS.
(a) SMALL BUSINESS CONCERN.—Section 103(5) of
the Small Business Investment Act of 1958 (15 U.S.C.
662(5)) is amended by inserting before the semicolon the
following: ‘‘, except that, for purposes of this Act, an in-
vestment by a venture capital firm, investment company
(including a small business investment company) employee
welfare benefit plan or pension plan, or trust, foundation,
or endowment that is exempt from Federal income tax-
ation—
‘‘(A) shall not cause a business concern to be
deemed not independently owned and operated;
‘‘(B) shall be disregarded in determining wheth-
er a business concern satisfies size standards estab-
lished pursuant to section 3(a)(2) of the Small Busi-
ness Act; and
‘‘(C) shall be disregarded in determining wheth-
er a small business concern is a smaller enterprise’’.
(b) PRIVATE CAPITAL.—Section 103(9) of the Small
Business Investment Act of 1958 (15 U.S.C. 662(9)) is
amended to read as follows:
‘‘(9) the term ‘private capital’—
‘‘(A) means the sum of—
‘‘(i) the paid-in capital and paid-in
surplus of a corporate licensee, the contrib-
uted capital of the partners of a partner-
ship licensee, or the equity investment of
the members of a limited liability company
licensee; and
‘‘(ii) unfunded binding commitments,
from investors that meet criteria estab-
lished by the Administrator, to contribute
capital to the licensee; provided that such
unfunded commitments may be counted as
private capital for purposes of approval by
the Administrator of any request for lever-
age, but leverage shall not be funded based
on such commitments; and
‘‘(B) does not include any—
‘‘(i) funds borrowed by a licensee from
any source;
‘‘(ii) funds obtained through the issu-
ance of leverage; or
‘‘(iii) funds obtained directly or indi-
rectly from any Federal, State, or local
government, or any government agency or
instrumentality, except for—
‘‘(I) funds invested by an em-
ployee welfare benefit plan or pension
plan; and
‘‘(II) any qualified nonprivate
funds (if the investors of the qualified
nonprivate funds do not control, di-
rectly or indirectly, the management,
board of directors, general partners,
or members of the licensee);’’.
(c) NEW DEFINITIONS.—Section 103 of the Small
Business Investment Act of 1958 (15 U.S.C. 662) is
amended by striking paragraph (10) and inserting the fol-
lowing:
‘‘(10) the term ‘leverage’ includes—
‘‘(A) debentures purchased or guaranteed
by the Administration;
‘‘(B) participating securities purchased or
guaranteed by the Administration; and
‘‘(C) preferred securities outstanding as of
October 1, 1996;
‘‘(11) the term ‘third party debt’ means any in-
debtedness for borrowed money, other than indebt-
edness owed to the Administration;
‘‘(12) the term ‘smaller enterprise’ means any
small business concern that, together with its affili-
ates—
‘‘(A) has—
‘‘(i) a net financial worth of not more
than $6,000,000, as of the date on which
assistance is provided under this Act to
that business concern; and
‘‘(ii) an average net income for the 2-
year period preceding the date on which
assistance is provided under this Act to
that business concern, of not more than
$2,000,000, after Federal income taxes
(excluding any carryover losses); or
‘‘(B) satisfies the standard industrial clas-
sification size standards established by the Ad-
ministration for the industry in which the small
business concern is primarily engaged;
‘‘(13) the term ‘qualified nonprivate funds’
means any—
‘‘(A) funds directly or indirectly invested in
any applicant or licensee on or before August
16, 1982, by any Federal agency, other than
the Administration, under a provision of law ex-
plicitly mandating the inclusion of those funds
in the definition of the term ‘private capital’;
‘‘(B) funds directly or indirectly invested
in any applicant or licensee by any Federal
agency under a provision of law enacted after
September 4, 1992, explicitly mandating the in-
clusion of those funds in the definition of the
term ‘private capital’; and
‘‘(C) funds invested in any applicant or li-
censee by one or more State or local govern-
ment entities (including any guarantee extended
by those entities) in an aggregate amount that
does not exceed—
‘‘(i) 33 percent of the private capital
of the applicant or licensee, if such funds
were committed for investment before the
date of enactment of the Small Business
Investment Company Improvement Act of
1996; or
‘‘(ii) 20 percent of the private capital
of the applicant or licensee, if such funds
were committed for investment on or after
the date of enactment of the Small Busi-
ness Investment Company Improvement
Act of 1996;
‘‘(14) the terms ‘employee welfare benefit plan’
and ‘pension plan’ have the same meanings as in
section 3 of the Employee Retirement Income Secu-
rity Act of 1974, and are intended to include—
‘‘(A) public and private pension or retire-
ment plans subject to such Act; and
‘‘(B) similar plans not covered by such Act
that have been established and that are main-
tained by the Federal Government or any State
or political subdivision, or any agency or instru-
mentality thereof, for the benefit of employees;
‘‘(15) the term ‘member’ means, with respect to
a licensee that is a limited liability company, a hold-
er of an ownership interest or a person otherwise ad-
mitted to membership in the limited liability com-
pany; and
‘‘(16) the term ‘limited liability company’
means a business entity that is organized and oper-
ating in accordance with a State limited liability
company statute approved by the Administration.’’.
SEC. 3. ORGANIZATION OF SMALL BUSINESS INVESTMENT
COMPANIES.
(a) 
LIMITED
LIABILITY
COMPANIES.—Section
301(a) of the Small Business Investment Act of 1958 (15
U.S.C. 681(a)) is amended in the first sentence, by strik-
ing ‘‘body or’’ and inserting ‘‘body, a limited liability com-
pany, or’’.
(b) ISSUANCE OF LICENSE.—Section 301(c) of the
Small Business Investment Act of 1958 (15 U.S.C.
681(c)) is amended to read as follows:
‘‘(c) ISSUANCE OF LICENSE.—
‘‘(1) SUBMISSION OF APPLICATION.—Each new
applicant for a license to operate as a small business
investment company under this Act shall submit to
the Administrator an application, in a form and in-
cluding such documentation as may be prescribed by
the Administrator.
‘‘(2) PROCEDURES.—
‘‘(A) STATUS.—Not later than 90 days
after the initial receipt by the Administrator of
an application under this subsection, the Ad-
ministrator shall provide the applicant with a
written report detailing the status of the appli-
cation and any requirements remaining for
completion of the application.
‘‘(B) APPROVAL OR DISAPPROVAL.—With-
in a reasonable time after receiving a completed
application submitted in accordance with this
subsection and in accordance with such require-
ments as the Administrator may prescribe by
regulation, the Administrator shall—
‘‘(i) approve the application and issue
a license for such operation to the appli-
cant if the requirements of this section are
satisfied; or
‘‘(ii) disapprove the application and
notify the applicant in writing of the dis-
approval.
‘‘(3) MATTERS CONSIDERED.—In reviewing and
processing any application under this subsection, the
Administrator—
‘‘(A) shall determine whether—
‘‘(i) the applicant meets the require-
ments of subsections (a) and (c) of section
302; and
‘‘(ii) the management of the applicant
is qualified and has the knowledge, experi-
ence, and capability necessary to comply
with this Act;
‘‘(B) shall take into consideration—
‘‘(i) the need for and availability of fi-
nancing for small business concerns in the
geographic area in which the applicant is
to commence business;
‘‘(ii) the general business reputation
of the owners and management of the ap-
plicant; and
‘‘(iii) the probability of successful op-
erations of the applicant, including ade-
quate profitability and financial soundness;
and
‘‘(C) shall not take into consideration any
projected shortage or unavailability of leverage.
‘‘(4) EXCEPTION.—
‘‘(A) IN GENERAL.—Notwithstanding any
other provision of this Act, the Administrator
may, in the discretion of the Administrator and
based on a showing of special circumstances
and good cause, approve an application and
issue a license under this subsection with re-
spect to any applicant that—
‘‘(i) has private capital of not less
than $3,000,000;
‘‘(ii) would otherwise be issued a li-
cense under this subsection, except that
the applicant does not satisfy the require-
ments of section 302(a); and
‘‘(iii) has a viable business plan rea-
sonably projecting profitable operations
and a reasonable timetable for achieving a
level of private capital that satisfies the re-
quirements of section 302(a).
‘‘(B) LEVERAGE.—An applicant licensed
pursuant to the exception provided in this para-
graph shall not be eligible to receive leverage as
a licensee until the applicant satisfies the re-
quirements of section 302(a).’’.
(c) SPECIALIZED SMALL BUSINESS INVESTMENT
COMPANIES.—Section 301(d) of the Small Business In-
vestment Act of 1958 (15 U.S.C. 681(d)) is repealed.
SEC. 4. CAPITAL REQUIREMENTS.
(a) 
INCREASED
MINIMUM
CAPITAL
REQUIRE-
MENTS.—Section 302(a) of the Small Business Invest-
ment Act of 1958 (15 U.S.C. 682(a)) is amended by strik-
ing ‘‘(a)’’ and all that follows through ‘‘The Administra-
tion shall also determine the ability of the company,’’ and
inserting the following:
‘‘(a) AMOUNT.—
‘‘(1) IN GENERAL.—Except as provided in para-
graph (2), the private capital of each licensee shall
be not less than—
‘‘(A) $5,000,000; or
‘‘(B) $10,000,000, with respect to each li-
censee authorized or seeking authority to issue
participating securities to be purchased or guar-
anteed by the Administration under this Act.
‘‘(2) EXCEPTION.—The Administrator may, in
the discretion of the Administrator and based on a
showing of special circumstances and good cause,
permit the private capital of a licensee authorized or
seeking authorization to issue participating securi-
ties to be purchased or guaranteed by the Adminis-
tration to be less than $10,000,000, but not less
than $7,500,000, if the Administrator determines
that such action would not create or otherwise con-
tribute to an unreasonable risk of default or loss to
the Federal Government.
‘‘(3) ADEQUACY.—In addition to the require-
ments of paragraph (1), the Administrator shall—
‘‘(A) determine whether the private capital
of each licensee is adequate to assure a reason-
able prospect that the licensee will be operated
soundly and profitably, and managed actively
and prudently in accordance with its articles;
and
‘‘(B) determine that the licensee will be
able’’.
(b) EXEMPTION FOR CERTAIN LICENSEES.—Section
302(a) of the Small Business Investment Act of 1958 (15
U.S.C. 682(a)) is amended by adding at the end the fol-
lowing new paragraph:
‘‘(4) EXEMPTION
FROM
CAPITAL
REQUIRE-
MENTS.—The Administrator may, in the discretion
of the Administrator, exempt from the capital re-
quirements in paragraph (1) any licensee licensed
under subsection (c) or (d) of section 301 before the
date of enactment of the Small Business Investment
Company Improvement Act of 1996, if—
‘‘(A) the licensee certifies in writing that
not less than 50 percent of the aggregate dollar
amount of its financings after the date of enact-
ment of the Small Business Investment Com-
pany Improvement Act of 1996 will be provided
to smaller enterprises; and
‘‘(B) the Administrator determines that—
‘‘(i) the licensee has a record of prof-
itable operations;
‘‘(ii) the licensee has not committed
any serious or continuing violation of any
applicable provision of Federal or State
law or regulation; and
‘‘(iii) such action would not create or
otherwise contribute to an unreasonable
risk of default or loss to the United States
Government.
Provided further, That no licensee with less than
$2,500,000 in private capital shall receive additional
leverage from the Administration.’’.
(c) DIVERSIFICATION
OF
OWNERSHIP.—Section
302(c) of the Small Business Investment Act of 1958 (15
U.S.C. 682(c)) is amended to read as follows:
‘‘(c) DIVERSIFICATION
OF OWNERSHIP.—The Ad-
ministrator shall ensure that the management of each li-
censee applying for a license after the date of enactment
of the Small Business Investment Company Improvement
Act of 1996 is sufficiently diversified from and unaffiliated
with the ownership of the licensee in a manner that en-
sures independence and objectivity in the financial man-
agement and oversight of the investments and operations
of the licensee.’’.
SEC. 5. BORROWING.
(a) DEBENTURES.—Section 303(b) of the Small
Business Investment Act of 1958 (15 U.S.C. 683(b)) is
amended in the first sentence, by striking ‘‘(but only’’ and
all that follows through ‘‘terms)’’.
(b) THIRD PARTY DEBT.—Section 303(c) of the
Small Business Investment Act of 1958 (15 U.S.C.
683(c)) is amended to read as follows:
‘‘(c) THIRD PARTY DEBT.—The Administrator—
‘‘(1) shall not permit a licensee having out-
standing leverage to incur third party debt that
would create or contribute to an unreasonable risk
of default or loss to the Federal Government; and
‘‘(2) shall permit such licensees to incur third
party debt only on such terms and subject to such
conditions as may be established by the Adminis-
trator, by regulation or otherwise.’’.
(c) REQUIREMENT TO FINANCE SMALLER ENTER-
PRISES.—Section 303(d) of the Small Business Invest-
ment Act of 1958 (15 U.S.C. 683(d)) is amended to read
as follows:
‘‘(d) REQUIREMENT TO FINANCE SMALLER ENTER-
PRISES.—The Administrator shall require each licensee,
as a condition of approval of an application for leverage,
to certify in writing that not less than 20 percent of the
aggregate dollar amount of the financings of the licensee
will be provided to smaller enterprises.’’.
(d) CAPITAL IMPAIRMENT REQUIREMENTS.—Section
303(e) of the Small Business Investment Act of 1958 (15
U.S.C. 683(e)) is amended to read as follows:
‘‘(e) CAPITAL IMPAIRMENT.—Before approving any
application for leverage submitted by a licensee under this
Act, the Administrator—
‘‘(1) shall determine that the private capital of
the licensee meets the requirements of section
302(a); and
‘‘(2) shall determine, taking into account the
nature of the assets of the licensee, the amount and
terms of any third party debt owed by such licensee,
and any other factors determined to be relevant by
the Administrator, that the private capital of the li-
censee has not been impaired to such an extent that
the issuance of additional leverage would create or
otherwise contribute to an unreasonable risk of de-
fault or loss to the Federal Government.’’.
(e) EQUITY INVESTMENT REQUIREMENT.—Section
303(g)(4) of the Small Business Investment Act of 1958
(15 U.S.C. 683(g)(4)) is amended by striking ‘‘and main-
tain’’.
(f) FEES.—Section 303 of the Small Business Invest-
ment Act of 1958 (15 U.S.C. 683) is amended—
(1) in subsection (b), in the fifth sentence, by
striking ‘‘1 per centum,’’ and all that follows before
the period at the end of the sentence and inserting
the following: ‘‘1 percent, plus an additional charge
of 1 percent per annum which shall be paid to and
retained by the Administration’’;
(2) in subsection (g)(2), by striking ‘‘1 per cen-
tum,’’ and all that follows before the period at the
end of the paragraph and inserting the following: ‘‘1
percent, plus an additional charge of 1 percent per
annum which shall be paid to and retained by the
Administration’’; and
(3) by adding at the end the following new sub-
sections:
‘‘(i) LEVERAGE FEE.—With respect to leverage
granted by the Administration to a licensee, the Adminis-
tration shall collect from the licensee a nonrefundable fee
in an amount equal to 3 percent of the face amount of
leverage granted to the licensee, payable upon the earlier
of the date of entry into any commitment for such leverage
or the date on which the leverage is drawn by the licensee.
‘‘(j) CALCULATION OF SUBSIDY RATE.—All fees, in-
terest, and profits received and retained by the Adminis-
tration under this section shall be included in the calcula-
tions made by the Director of the Office of Management
and Budget to offset the cost (as that term is defined in
section 502 of the Federal Credit Reform Act of 1990)
to the Administration of purchasing and guaranteeing de-
bentures and participating securities under this Act.’’.
SEC. 6. LIABILITY OF THE UNITED STATES.
Section 308(e) of the Small Business Investment Act
of 1958 (15 U.S.C. 687(e)) is amended by striking ‘‘Noth-
ing’’ and inserting ‘‘Except as expressly provided other-
wise in this Act, nothing’’.
SEC. 7. EXAMINATIONS; VALUATIONS.
(a) EXAMINATIONS.—Section 310(b) of the Small
Business Investment Act of 1958 (15 U.S.C. 687b(b)) is
amended in the first sentence by inserting ‘‘which may be
conducted with the assistance of a private sector entity
that has both the qualifications to conduct and expertise
in conducting such examinations,’’ after ‘‘Investment Divi-
sion of the Administration,’’.
(b) VALUATIONS.—Section 310(d) of the Small Busi-
ness Investment Act of 1958 (15 U.S.C. 687b(d)) is
amended to read as follows:
‘‘(d) VALUATIONS.—
‘‘(1) FREQUENCY OF VALUATIONS.—
‘‘(A) IN
GENERAL.—Each licensee shall
submit to the Administrator a written valuation
of the loans and investments of the licensee not
less often than semiannually or otherwise upon
the request of the Administrator, except that
any licensee with no leverage outstanding shall
submit such valuations annually, unless the Ad-
ministrator determines otherwise.
‘‘(B) MATERIAL ADVERSE CHANGES.—Not
later than 30 days after the end of a fiscal
quarter of a licensee during which a material
adverse change in the aggregate valuation of
the loans and investments or operations of the
licensee occurs, the licensee shall notify the Ad-
ministrator in writing of the nature and extent
of that change.
‘‘(C) INDEPENDENT CERTIFICATION.—
‘‘(i) IN GENERAL.—Not less than once
during each fiscal year, each licensee shall
submit to the Administrator the financial
statements of the licensee, audited by an
independent certified public accountant ap-
proved by the Administrator.
‘‘(ii) AUDIT
REQUIREMENTS.—Each
audit conducted under clause (i) shall in-
clude—
‘‘(I) a review of the procedures
and documentation used by the li-
censee in preparing the valuations re-
quired by this section; and
‘‘(II) a statement by the inde-
pendent certified public accountant
that such valuations were prepared in
conformity with the valuation criteria
applicable to the licensee established
in accordance with paragraph (2).
‘‘(2) VALUATION
CRITERIA.—Each valuation
submitted under this subsection shall be prepared by
the licensee in accordance with valuation criteria,
which shall—
‘‘(A) be established or approved by the Ad-
ministrator; and
(2) CONTENTS.—The plan submitted under
paragraph (1) shall include a timetable for liquidat-
ing the liquidation portfolio of small business invest-
ment company assets owned by the Administration,
and shall contain the Administrator’s findings and
recommendations on various options providing for
the fair and expeditious liquidation of such assets
within a reasonable period of time, giving due con-
sideration to the option of entering into one or more
contracts with private sector entities having the ca-
pability to carry out the orderly liquidation of simi-
lar assets.
(3) REPORT.—Not later than 90 days after the
date of enactment of this Act, the Comptroller Gen-
eral of the United States shall submit to the Com-
mittees on Small Business of the Senate and the
House of Representatives a report on the activities
and expenditures of the receiver’s agents employed
by or under contract with the Investment Division of
the Small Business Administration. The report shall
detail the qualifications and experience of the receiv-
er’s agents, their billing practices and procedures,
expenses, costs, overhead, and use of outside con-
tractors or attorneys.
SEC. 9. REPEAL. OF PREFERRED STOCK REDEMPTION.
Section 303(f) of the Small Business Investment Act
of 1958 (15 U.S.C. 683(f)) is hereby repealed.
SEC. 10. TECHNICAL AND CONFORMING AMENDMENTS.
The Small Business Investment Act of 1958 (15
U.S.C. 661 et seq.) is amended in subsection (a) of section
303 by striking ‘‘debenture bonds’’ and inserting ‘‘securi-
ties,’’ and by striking subsection (f) and redesignating
subsequent subsections accordingly.
SEC. 11. EFFECTIVE DATE.
This Act and the amendments made by this Act shall
become effective on the date of enactment of this Act.
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