Source: https://www.everycrsreport.com/reports/R41456.html
Timestamp: 2019-04-23 00:42:04+00:00

Document:
The Small Business Administration’s (SBA’s) Small Business Investment Company (SBIC) program is designed to enhance small business access to venture capital by stimulating and supplementing “the flow of private equity capital and long-term loan funds which small-business concerns need for the sound financing of their business operations and for their growth, expansion, and modernization, and which are not available in adequate supply.” Facilitating the flow of capital to small businesses to stimulate the national economy was, and remains, the SBIC program’s primary objective.
As of December 31, 2018, there were 305 privately owned and managed SBA-licensed SBICs providing small businesses private capital the SBIC has raised (called regulatory capital) and funds the SBIC borrows at favorable rates (called leverage) because the SBA guarantees the debenture (loan obligation). SBICs pursue investments in a broad range of industries, geographic areas, and stages of investment. Some SBICs specialize in a particular field or industry, and others invest more generally. Most SBICs concentrate on a particular stage of investment (i.e., startup, expansion, or turnaround) and geographic area.
The SBIC program currently has invested or committed about $30.3 billion in small businesses, with the SBA’s share of capital at risk about $14.5 billion. In FY2018, the SBA committed to guarantee $2.52 billion in SBIC small business investments. SBICs invested another $2.98 billion from private capital for a total of $5.50 billion in financing for 1,151 small businesses.
In recent years, some Members of Congress have argued that the program should be expanded as a means to stimulate economic activity and create jobs. For example, P.L. 113-76, the Consolidated Appropriations Act, 2014, increased the annual amount of leverage the SBA is authorized to provide to SBICs to $4 billion from $3 billion. P.L. 114-113, the Consolidated Appropriations Act, 2016, increased the amount of outstanding leverage allowed for two or more SBIC licenses under common control (the multiple licenses/family of funds limit) to $350 million from $225 million. P.L. 115-187, the Small Business Investment Opportunity Act of 2017, increased the amount of outstanding leverage allowed for individual SBICs to $175 million from $150 million. Others worry that an expanded SBIC program could result in losses and increase the federal deficit. In their view, the best means to assist small business, promote economic growth, and create jobs is to reduce business taxes and exercise federal fiscal restraint.
Some Members have also proposed that the program target additional assistance to startup and early stage small businesses, which are generally viewed as relatively risky investments but also as having a relatively high potential for job creation. During the Obama Administration, the SBA established a five-year, early stage SBIC initiative. Early stage SBICs are required to invest at least 50% of their investments in early stage small businesses, defined as small businesses that have never achieved positive cash flow from operations in any fiscal year. The SBA stopped accepting new applicants for the early stage SBIC initiative in 2017.
This report describes the SBIC program’s structure and operations, focusing on SBIC eligibility requirements, investment activity, and program statistics. It also includes information concerning the SBIC program’s debenture SBIC program, participating securities SBIC program, impact investment SBIC program (targeting underserved markets and communities facing barriers to access to credit and capital), and early stage SBIC initiative.
The Small Business Administration's (SBA's) Small Business Investment Company (SBIC) program is designed to enhance small business access to venture capital by stimulating and supplementing "the flow of private equity capital and long-term loan funds which small-business concerns need for the sound financing of their business operations and for their growth, expansion, and modernization, and which are not available in adequate supply." Facilitating the flow of capital to small businesses to stimulate the national economy was, and remains, the SBIC program's primary objective.
The SBIC program currently has invested or committed about $30.3 billion in small businesses, with the SBA's share of capital at risk about $14.5 billion. In FY2018, the SBA committed to guarantee $2.52 billion in SBIC small business investments. SBICs invested another $2.98 billion from private capital for a total of $5.50 billion in financing for 1,151 small businesses.
This report describes the SBIC program's structure and operations, focusing on SBIC eligibility requirements, investment activity, and program statistics. It also includes information concerning the SBIC program's debenture SBIC program, participating securities SBIC program, impact investment SBIC program (targeting underserved markets and communities facing barriers to access to credit and capital), and early stage SBIC initiative.
The Small Business Administration (SBA) administers several programs to support small businesses, including loan guaranty programs to enhance small business access to capital; programs to increase small business opportunities in federal contracting; direct loans for businesses, homeowners, and renters to assist their recovery from natural disasters; and access to entrepreneurial education to assist with business formation and expansion.1 It also administers the Small Business Investment Company (SBIC) program.
The SBIC program was created to address concerns raised in a Federal Reserve Board report to Congress that identified a gap in the capital markets for long-term funding for growth-oriented small businesses. The report noted that the SBA's loan programs were "limited to providing short-term and intermediate-term credit when such loans are unavailable from private institutions" and that the SBA "did not provide equity financing."3 Equity financing (or equity capital) is money raised by a company in exchange for a share of ownership in the business. Ownership is represented by owning shares of stock outright or having the right to convert other financial instruments into stock. Equity financing allows a business to obtain funds without incurring debt, or without having to repay a specific amount of money at a particular time. The Federal Reserve Board's report concluded there was a need for a federal government program to "stimulate the availability of capital funds to small business" to assist these businesses in gaining access to long-term financing and equity financing.4 Facilitating the flow of capital to small businesses to stimulate the national economy was, and remains, the SBIC program's primary objective.
In recent years, some Members of Congress have argued that the program should be expanded as a means to stimulate economic activity and create jobs. For example, P.L. 113-76, the Consolidated Appropriations Act, 2014, increased the annual amount of leverage the SBA is authorized to provide to SBICs to $4 billion from $3 billion and P.L. 114-113, the Consolidated Appropriations Act, 2016, increased the amount of outstanding leverage allowed for two or more SBIC licenses under common control (the multiple licenses/family of funds limit) to $350 million from $225 million.8 In addition, P.L. 115-187, the Small Business Investment Opportunity Act of 2017, increased the amount of outstanding leverage allowed for individual SBICs to $175 million from $150 million.
Others worry that an expanded SBIC program could result in losses and increase the federal deficit. In their view, the best means to assist small business, promote economic growth, and create jobs is to reduce business taxes and exercise federal fiscal restraint.
Some Members and small business advocates have also proposed that the program target additional assistance to startup and early stage small businesses, which are generally viewed as relatively risky investments but also as having a relatively high potential for job creation. For example, during the 113th Congress, S. 1285 and H.R. 30, the Small Business Investment Enhancement and Tax Relief Act, would have authorized the Administration to establish a separate SBIC program for early stage small businesses. In addition, as part of the Obama Administration's Startup America Initiative, the SBA established a five-year, $1 billion early stage SBIC initiative in 2012. Early stage SBICs are required to allocate at least 50% of their investments in early stage small businesses, defined as small businesses that have never achieved positive cash flow from operations in any fiscal year.
This report examines the SBIC program's structure and operations, focusing on SBIC eligibility requirements, investment activity, and program statistics. It includes information concerning the SBA's debenture SBIC program, participating securities SBIC program, impact investment SBIC program (targeting underserved markets and communities facing barriers to access to credit and capital), and early stage SBIC initiative.
There are two types of SBICs. Investment companies licensed under Section 301(c) of the Small Business Investment Act of 1958, as amended, are referred to as original, or regular, SBICs. Investment companies licensed under Section 301(d) of the act, called Specialized Small Business Investment Companies (SSBICs), focus on providing financing to small business entrepreneurs "whose participation in the free enterprise system is hampered because of social or economic disadvantage."12 Section 301(d) was repealed by P.L. 104-208, the Omnibus Consolidated Appropriations Act, 1997 (Title II of Division D, the Small Business Programs Improvement Act of 1996). As a result, no new SSBIC licenses have been issued since October 1, 1996. However, existing SSBICs were "grandfathered" and allowed to remain in the program.
With few exceptions, SBICs and SSBICs are subject to the same eligibility requirements and operating rules and regulations. Therefore, the term SBIC is usually used to refer to both SBICs and SSBICs.
Five types of regular SBICs exist. Debenture SBICs, impact investment SBICs, and early stage SBICs receive leverage through the issuance of debentures.13 Debentures are debt obligations issued by SBICs and held or guaranteed by the SBA.14 Participating securities SBICs receive leverage through the issuance of participating securities. Participating securities are redeemable, preferred, equity-type securities, often in the form of limited partnership interests, preferred stock, or debentures with interest payable only to the extent of earnings.15 Bank-owned, non-leveraged SBICs do not receive leverage.16 This report focuses on the four types of regular SBICs that receive leverage from the SBA.
After receiving the firm's application, a member of the SBA's Program Development Office reviews the MAQ; assesses the investment company's proposal in light of the program's minimum requirements and management qualifications; performs initial due diligence, including making reference telephone calls; and prepares a written recommendation to the SBA's Investment Division's Investment Committee (composed of senior members of the division).
If, after reviewing the MAQ and the SBA's Program Development Office's evaluation, the Investment Committee concludes, by majority vote at a regularly scheduled meeting, that the investment company's management team may be qualified for a license, that management team is invited to the SBA's headquarters in Washington, DC, for an in-person interview. If, following the interview, the Investment Committee votes to proceed, the investment company is provided a "Green Light" letter formally inviting it to proceed to the final licensing phase of the application process.
As discussed below, new applications for the participating securities program, impact investment program, and early stage SBIC initiative are no longer being accepted.
The eligibility requirements and application process for small businesses requesting financial assistance from a SBIC is provided in the Appendix.
P.L. 85-699 authorized the SBA to select companies to participate in the SBIC program and to purchase debentures from those companies to provide additional funds to invest in small businesses. Initially, debenture SBICs were required to have a private capital investment of at least $300,000 to participate in the SBIC program.
P.L. 102-366, the Small Business Credit and Business Opportunity Enhancement Act of 1992 (Title IV, the Small Business Equity Enhancement Act of 1992), authorized the SBA to guarantee participating securities. Participating securities are redeemable, preferred, equity-type securities issued by SBICs in the form of limited partnership interests, preferred stock, or debentures with interest payable only to the extent of earnings.
On April 7, 2011, the SBA announced it was establishing a $1 billion impact investment SBIC initiative (up to $150 million in leverage in FY2012 and up to $200 million in leverage per fiscal year thereafter until the limit is reached). SBA-licensed impact investment SBICs are required to invest at least 50% of their financings, "which target areas of critical national priority including underserved markets and communities facing barriers to access to credit and capital."38 These areas initially included businesses located in underserved communities (as defined by the SBA), the education sector, and the clean energy sector.39 Impact investment SBICs are required to have a minimum private capital investment of at least $5 million and are subject to the same conditions as debenture SBICs concerning the source of the funds.
On April 27, 2012, the SBA published a final rule in the Federal Register establishing a $1 billion early stage SBIC initiative (up to $150 million in leverage in FY2012 and up to $200 million in leverage per fiscal year thereafter until the limit is reached).46 As mentioned previously, the SBA is no longer seeking new applicants for the early stage SBIC initiative.
Early stage SBICs are required to invest at least 50% of their financings in early stage small businesses, defined as small businesses that have never achieved positive cash flow from operations in any fiscal year.47 In recognition of the higher risk associated with investments in early stage small businesses, the initiative included "several new regulatory provisions intended to reduce the risk that an early stage SBIC would default on its leverage and to improve SBA's recovery prospects should a default occur."48 For example, early stage SBICs are required to raise more regulatory capital (at least $20 million) than debenture SBICs, impact investment SBICs (at least $5 million), and participating securities SBICs (at least $10 million). They are also subject to special distribution rules to require pro rata repayment of SBA leverage when making distributions of profits to their investors. In addition, early stage SBICs are provided less leverage (up to 100% of regulatory capital, $50 million maximum) than debenture SBICs and participating securities SBICs (up to 200% of regulatory capital, $175 million maximum per SBIC and $350 million for two or more SBICs under common control) and impact investment SBICs (up to 200% of regulatory capital, $175 million maximum).
Sources: U.S. Small Business Administration, Office of Investment and Innovation, "Early Stage Small Business Investment Companies," January 2012; U.S. Small Business Administration, "Correspondence with the author," May 2, 2012; and U.S. Small Business Administration, "SBA Announces $50 Million Increase Match in its SBIC Early Stage Fund and $70 Million Bump in its Impact Investment Fund," June 6, 2013, at https://www.sba.gov/content/sba-announces-50-million-increase-match-its-sbic-early-stage-fund-and-70-million-bump-its.
a. A licensed debenture SBIC or a licensed impact investment SBIC in good standing, with a demonstrated need for funds, may apply to the SBA for leverage of up to 300% of its private capital. However, the SBA has traditionally approved a maximum of 200% of private capital. Also, a debenture SBIC licensed on or after October 1, 2009, may elect to have a maximum leverage amount of $175 million per SBIC and $250 million for two or more licenses under common control if it has invested at least 50% of its financings in low-income geographic areas and certifies that at least 50% of its future investments will be in low-income geographic areas. P.L. 114-113, the Consolidated Appropriations Act, 2016, increased the multiple licenses/family of funds limit to $350 million from $225 million. The act did not address the multiple licenses/family of funds limit for financings in low-income geographic areas. Presumably, SBICs would apply the $350 million multiple licenses/family of funds limit for all of its financings, including those in low-income geographic areas.
In 1999, the SBA introduced the low and moderate income investments (LMI) initiative to encourage SBICs to invest in small businesses located in inner cities and rural areas "that have severe shortages of equity capital" because investments in those areas "often are of a type that will not have the potential for yielding returns that are high enough to justify the use of participating securities."68 This ongoing initiative provides incentives to SBICs that invest in small businesses that have at least 50% of their employees or tangible assets located in a low-to-moderate income area (LMI Zone) or have at least 35% of their full-time employees with their primary residence in an LMI Zone.69 For example, unlike regular SBIC debentures that typically have a 10-year maturity, LMI debentures are available in two maturities, for 5 years and 10 years, plus the stub period. The stub period is the time between the debenture's issuance date and the next March 1 or September 1. The stub period allows all LMI debentures to have common March 1 or September 1 maturity dates to simplify administration of the program.
A SBIC applies to the SBA for financial assistance (leverage) to secure the "SBA's conditional commitment to reserve a specific amount of leverage" for the SBIC's future use.74 If the application is approved, a SBIC draws down the leverage as it makes financial commitments.
The SBA accepts draw applications from SBICs twice a month. When the SBA approves the draw, it issues a payment voucher to a SBIC (called an approval notice). The payment voucher has a term of approximately 60 days and provides a SBIC with the ability to draw funds on a daily basis.
Debenture SBICs obtain leverage from the sale of SBA-guaranteed debenture participation trust certificates. SBA-guaranteed debenture participation trust certificates may have a term of up to 15 years, although only one outstanding SBA-guaranteed debenture participation trust certificate has a term exceeding 10 years and all recent public offerings have specified a term of 10 years.81 Debenture SBICs are required to make semiannual payments on the interest due on the debenture, semiannual payments on the SBA's annual charge, and a lump sum principal payment to investors at maturity.82 SBICs are allowed to prepay SBA-guaranteed debentures without penalty. However, a SBA-guaranteed debenture must be prepaid in whole and not in part and can only be prepaid on a semiannual payment date. The debenture's coupon (interest) rate is determined by market conditions and the interest rate of 10-year Treasury securities at the time of the sale.83 Also, as mentioned previously, LMI debentures are available in two maturities, for 5 years and 10 years (plus the stub period).
Because the SBA guarantees the debenture, investors are more likely to purchase a debenture participation trust certificate as opposed to others available on the market. They are also more likely to accept a lower coupon (interest) rate than what would be expected without the SBA's guarantee.84 As a result, the SBIC program enhances a SBIC's access to venture capital and reduces its cost of raising additional financial resources.
Although the SBA is no longer issuing new commitments for participating securities, the SBA is authorized to accept an application from licensed participating securities SBICs for leverage of up to 200% of their private capital.86 Also, no fund management team may exceed the allowable maximum amount of leverage of $175 million per SBIC and $350 million for two or more licenses under common control.
Participating securities SBICs obtained leverage by issuing SBA-guaranteed participating securities. The SBA pooled these participating securities and sold SBA-guaranteed participating securities certificates, representing an undivided interest in the pool, to investors through periodic public offerings. SBA participating securities may have a term of up to 15 years, but all recent public offerings had a specified a term of 10 years.
Impact investment SBICs obtain leverage in the same way debenture SBICs obtain leverage—through the issuance of SBA-guaranteed debentures with a term of up to 10 years. They are also subject to the same terms and conditions as debenture SBICs, except they were provided an expedited application review process when new applications to the impact investment program were being accepted.
Early stage SBICs obtain leverage in the same way that debenture SBICs obtain leverage—through the issuance of SBA-guaranteed debentures with a term of up to 10 years. However, early stage debentures come in two forms: early stage standard debentures and early stage discounted debentures.
Early stage standard SBIC debentures are similar to standard SBIC debentures, but, instead of requiring semiannual payments on the debenture's interest and on the SBA's annual charge, they require quarterly payments on the debenture's interest and on the SBA's annual charge. In addition, early stage SBICs must maintain a reserve sufficient to pay the interest on the debenture and on the SBA's annual charges for the first 21 payment dates following the date of issuance (five years plus the length of time between the issue date and the next March 1, June 1, September 1, or December 1).99 Because early stage standard debentures require early stage SBICs to make quarterly payments, they are most appropriate for investments in small businesses that have established a positive cash flow enabling them to pay interest or dividends to the early stage SBIC.
Early stage discounted debentures are issued at a discount (less than face value) equal to the first five years of interest on the debenture and the first five years of annual SBA charges. The discount eliminates the need for early stage SBICs to make interest payments on the debenture and to make payments on the SBA's annual charge for five years from the date of issuance, plus the stub period.100 Early stage SBICs make quarterly payments on the debenture's interest and on the SBA's annual charge during years 6 through 10. They are also responsible for paying the debenture's principal amount when the debenture reaches its maturity date.
Because early stage discounted debentures do not require interest payments or payments on the SBA's annual charge for five years, they are most appropriate for investments in small businesses that have not established a positive cash flow to pay interest or dividends to the early stage SBIC. As a result, early stage discounted debentures are designed to encourage investments in early stage small businesses, which by definition have not established a positive cash flow.
As shown in Table 2, the number of debenture SBICs has generally increased in recent years. However, the total number of licensed SBICs has stayed relatively the same in recent years, primarily due to the planned reduction in the number of participating securities SBICs and SSBICs.
Sources: U.S. Small Business Administration, "SBIC Program Overview," September 30, 2013 and September 30, 2018.
Overall, SBICs pursue investments in a broad range of industries, geographic areas, and stages of investment. Some individual SBICs specialize in a particular field or industry and others invest more generally. Most SBICs concentrate on a particular stage of investment (i.e., startup, expansion, or turnaround) and identify a geographic area in which to focus.
As shown in Table 3, the total amount of SBIC financing declined during the recession (December 2007-June 2009), reached prerecession levels in FY2011, and has generally increased since then. In FY2018, the SBA committed to guarantee $2.52 billion in SBIC small business investments. SBICs invested another $2.98 billion from private capital for a total of $5.50 billion in financing for 1,151 small businesses.
In addition, the amount of SBA leverage as a share of total financing provided has generally increased in recent years. For example, the SBA's leverage commitments accounted for 26.7% of total financing in FY2007, compared with 46.6% in FY2014, 40.6% in FY2015, 42.0% during FY2016, 34.2% in FY2017, and 45.8% in FY2018.
Sources: U.S. Small Business Administration, "Performance and Financial Highlights, FY2007," February 4, 2008, p. 4; U.S. Small Business Administration, "FY2008 Budget Request and Performance Plan," 2007, p. 23; U.S. Small Business Administration, "SBIC Program Overview," January 23, 2009; September 30, 2015, and September 30, 2018.
As shown in Table 4, in FY2018, SBICs made 130 financings (4.8% of all financings) amounting to $132.4 million (2.4% of the total amount of financings) to minority-owned and -controlled small businesses.
Source: U.S. Small Business Administration, Office of Legislative and Congressional Affairs, "Correspondence with the author," December 20, 2018.
Notes: Ownership is defined as owning at least 50% of the small business.
During the 111th Congress, S. 1831, the Small Business Venture Capital Act of 2009, was introduced on October 21, 2009, and referred to the Senate Committee on Small Business and Entrepreneurship. No further action was taken on the bill. It would have encouraged SBIC investments in women-owned small businesses and socially and economically disadvantaged small business concerns by increasing the amount of leverage available to SBICs that invest at least 50% of their financings in small business concerns owned and controlled by women or socially and economically disadvantaged small business concerns.
As shown in Table 5, in FY2018, SBICs provided financing to small businesses located in 48 states, the District of Columbia and Puerto Rico, with the most financing taking place in California (392 financings totaling over $1.0 billion), Texas (276 financings totaling $427.6 million), and New York (233 financings totaling $482.6 million).
Source: U.S. Small Business Administration, Office of Investment and Innovation, "SBIC Program – Financing to Businesses by State, FY2014 to FY2018," at https://www.sba.gov/sites/default/files/2018-11/SBICProgram_FinancingbyState_FYs2014to2018.pdf.
A comparison of the state-by-state distribution of private-sector venture capital fund investments in 2018 and SBIC financings in FY2018 (see Table 5) suggests the Urban Institute's finding that SBICs investments were more evenly distributed across the nation than private-sector venture capital fund investments from 1997 to 2005 continues to be the case today. For example, during 2018, California (55.3%), New York (13.2%), Massachusetts (9.4%), and Texas (2.2%) received the largest shares of the total dollar volume invested by private venture capital funds. The four states accounted for more than four-fifths (80.1%) of the total dollar volume invested by private venture capital funds during that time period.123 In contrast, the four states with the largest share of the total volume invested by SBICs in FY2018 (California at 19.1%, New York, New York at 8.8%, Texas at 7.8%, and Illinois at 6.2%) accounted for 41.9% of the total dollar volume invested by SBICs.
As part of its Startup America Initiative, on January 31, 2012, the Obama Administration recommended that the SBIC program's annual authorization be increased to $4 billion from $3 billion and that the amount of SBA leverage available to licensees under common control (the multiple licenses/family of funds limit) be increased to $350 million from $225 million.127 On April 27, 2012, the SBA also published a final rule in the Federal Register establishing the $1 billion Early Stage Innovation SBIC Initiative (up to $150 million in SBA leverage in FY2012 and up to $200 million in SBA leverage per fiscal year thereafter until the limit is reached) to encourage SBIC program investments in early stage small businesses. As will be discussed, several bills have been introduced during recent Congresses to expand the SBIC program by increasing its annual authorization to $4 billion (enacted), increasing the multiple licenses/family of funds limit to $350 million (enacted), increasing the individual SBIC fund limit to $175 million (enacted), or authorizing a SBIC program specifically designed to encourage SBIC investments in business startups and other early stage small businesses (introduced).
Some Members and small business advocates have proposed legislation to establish a "permanent" congressionally authorized SBIC program to target additional assistance to startup and early stage small businesses, which are generally viewed as relatively risky investments but also as having a relatively high potential for job creation. Advocates of targeting additional assistance to startup and early stage small businesses argue that the SBA's participating securities program was created to fill a perceived investment gap resulting from the SBA's debenture program's focus on mid- and later-stage small businesses. Because the SBA is no longer providing new licenses or leverage for participating securities SBICs, several Members have introduced legislation to create a new SBA program that would focus on the investment needs of startup and early stage small businesses.
As mentioned previously, in 2012, the SBA established the early stage SBIC initiative to encourage SBIC investments in early stage small businesses. Also, during the 113th Congress, H.R. 30, the Small Business Investment Enhancement and Tax Relief Act, and S. 1285, the Small Business Innovation Act of 2013, would have authorized the Administration to establish a separate SBIC program for early stage small businesses. The Small Business Innovation Act (of 2016) was reintroduced (S. 3375) during the 114th Congress.
During the 112th Congress, H.R. 3219, the Small Business Investment Company Modernization Act of 2011, would have encouraged greater utilization of the SBIC program by increasing the maximum amount of outstanding SBA leverage available to any single licensed SBIC from the lesser of 300% of its private capital or $150 million to the lesser of 300% of its private capital or $200 million if a majority of the managers of the company are experienced in managing one or more SBIC licensed companies. It would also have increased the maximum amount of outstanding SBA leverage available to two or more licenses under common control to $350 million from $225 million.
S. 2136, a bill to increase the maximum amount of leverage permitted under title III of the Small Business Investment Act of 1958, would have encouraged greater use of the SBIC program by increasing the maximum amount of outstanding SBA leverage available to two or more licenses under common control to $350 million from $225 million. It also would have increased the SBIC program's authorization level to $4 billion from $3 billion.
On March 15, 2012, S.Amdt. 1833, the INVEST in America Act of 2012, was offered on the Senate floor as an amendment in the nature of a substitute to H.R. 3606, the Jumpstart Our Business Startups Act, which had previously passed the House. Two of the provisions in the amendment proposed to encourage greater use of the SBIC program by (1) increasing the maximum amount of outstanding SBA leverage available to two or more licenses under common control to $350 million from $225 million and (2) increasing the SBIC program's authorization level to $4 billion from $3 billion. The Senate later passed H.R. 3606 with amendments, which did not address the SBIC program. The House accepted the Senate amendments and passed the bill, which President Obama signed into law (P.L. 112-106).
S. 3442, the SUCCESS Act of 2012, and S. 3572, the Restoring Tax and Regulatory Certainty to Small Businesses Act of 2012, would have, among other provisions, increased the SBIC program's authorization amount to $4 billion from $3 billion, increased the multiple licenses/family of funds limit to $350 million from $225 million, and annually adjusted the maximum outstanding leverage amount available to both individual SBICs and SBICs under common control to account for inflation.
In addition, H.R. 6504, the Small Business Investment Company Modernization Act of 2012, which was passed by the House on December 18, 2012, would have increased the SBIC program's multiple licenses/family of funds limit to $350 million from $225 million.
During the 113th Congress, as mentioned previously, P.L. 113-76 increased the annual leverage amount the SBA is authorized to provide to SBICs to $4 billion from $3 billion. In addition to increasing the program's authorization amount to $4 billion, S. 511, the Expanding Access to Capital for Entrepreneurial Leaders Act (EXCEL Act) would have increased the program's multiple licenses/family of funds limit to $350 million from $225 million. S. 1285, would have, among other provisions, also increased the program's multiple licenses/family of funds limit to $350 million.
During the 114th Congress, P.L. 114-113, the Consolidated Appropriations Act, 2016, increased the SBIC program's multiple licenses/family of funds limit to $350 million.143 In addition, H.R. 5968, the Small Business Investment Opportunity Act of 2016, introduced on September 8, 2016, and referred to the House Committee on Small Business, would have increased the maximum amount of leverage available to SBICs to 300% of the SBIC's private capital (200% in practice) or $170 million, whichever is less, from the current maximum of 300% of the SBIC's private capital (200% in practice) or $150 million, whichever is less.
During the 115th Congress, P.L. 115-187, the Small Business Investment Opportunity Act of 2017, increased the maximum amount of leverage for individual SBICs to $175 million from $150 million.
As mentioned previously, P.L. 113-76 increased the annual leverage amount the SBA is authorized to provide to SBICs to $4 billion from $3 billion, P.L. 114-113, the Consolidated Appropriations Act, 2016, increased the SBIC program's multiple licenses/family of funds limit to $350 million, and P.L. 115-187, the Small Business Investment Opportunity Act of 2017, increased the maximum amount of leverage for individual SBICs to $175 million.
Advocates of increasing the SBIC program's leverage limits have argued that these actions are necessary to help fill a perceived gap in the SBA's "array of capital access programs."146 In addition, they argue that the demise of the SBIC participating securities program and the current "underutilization" of the SBIC debentures program is preventing many small firms from accessing the capital necessary to fully realize their economic potential and assist in the national economic recovery.147 On the other hand, others worry about the potential risk that an expanded SBIC program has for the taxpayer, especially if investments are targeted at startup and early stage small businesses which, by definition, have a more limited credit history and a higher risk for default than businesses that have established positive cash flow.
The amendment [S.Amdt. 1833] I and Senator Landrieu introduced would also help small companies access capital by modifying the Small Business Investment Company, SBIC, Program to raise the amount of SBIC debt the Small Business Administration, SBA, can guarantee from $3 billion to $4 billion. It would also increase the amount of SBA guaranteed debt a team of SBIC fund managers who operate multiple funds can borrow. The SBIC provisions in this amendment have bipartisan support, are noncontroversial, come at no cost to taxpayers and will create jobs. We do not get many bills of this kind in the Senate anymore.
One of the most difficult challenges facing new small businesses today is access to capital. The SBIC Program has helped companies like Apple, FedEx, Callaway Golf, and Outback Steakhouse become household names. As entrepreneurs and other aspiring small business owners well know, it takes money to make money. This legislation ensures that our entrepreneurs and high-growth companies have access to the resources they need so they can continue to drive America's economic growth and job creation in these challenging times. There is no reason why Congress should not approve this amendment to ensure capital is getting into the hands of America's job creators.
The debenture SBIC program is designed to provide equity injections to small businesses that have been operational and have a track record of cash-flow and profits. … The program is financially sound because the structure of repayments ensures that the government will not suffer significant losses. Thus, no changes are needed to the program and it operates on a zero subsidy basis without an appropriation. The SBA budget is fully supportive of this program and we concur in that recommendation, including raising the program level from $3 billion to $4 billion.
As these quotations attest, congressional debate concerning the SBIC program has primarily involved assessments of the ability of small businesses to access capital from the private sector and evaluations of the program's risk, the effect of proposed changes on the program's risk, and the potential impact of the program's risk on the federal deficit. Empirical analysis of economic data can help inform debate concerning the ability of small businesses to access capital from the private sector and the extent of the program's risk, the effect of proposed changes on the program's risk, and the potential impact of the program's risk on the federal deficit. Additional data concerning SBIC investment impact on recipient job creation and firm survival might also prove useful.
Only businesses that meet the SBA's definition of "small" may participate in the SBIC program. Businesses must meet either the SBA's size standard for the industry in which they are primarily engaged or the SBA's alternative size standard for the SBIC program. SBICs use the size standard that is most likely to qualify the company, typically the alternative size standard for the SBIC program. The current SBIC alternative size standard, which became effective on July 14, 2014, is tangible net worth not in excess of $19.5 million and average net income after federal income taxes (excluding any carry-over losses) for the preceding two completed fiscal years not in excess of $6.5 million.153 All of a company's subsidiaries, parent companies, and affiliates are considered in determining if it meets the size standard.
U.S. Small Business Administration (SBA), "Fiscal Year 2019 Congressional Budget Justification and FY2017 Annual Performance Report," pp. 2-4, at https://www.sba.gov/sites/default/files/aboutsbaarticle/SBA_FY_2019_CBJ_APR_2_12_post.pdf.
U.S. Congress, House Committee on Banking and Currency, Small Business Investment Act of 1958, report to accompany S.3651, 85th Cong., 2nd sess., June 30, 1958, H.Rept. 85-2060 (Washington: GPO, 1958), pp. 4, 5.
Small business investment companies must invest in small businesses, which are defined as those with less than $19.5 million in tangible net worth and average after-tax income for the preceding two years of less than $6.5 million, or businesses qualifying as small under the SBA's NAICS industry code size standards.
SBA, "SBIC Program: Fiscal Year Data for the period ending December 31, 2018," at https://www.sba.gov/article/2019/mar/28/quarterly-data-december-31-2018.
According to a U.S. Government Accountability (GAO) report released on January 27, 2016, "About 70% (130 of 187) of debenture SBICs—the most common SBIC fund type—were managed by 69 multiple licensees in 2014.... The proportion of debenture SBICs managed by multiple licensees has sharply increased, rising from about 20% in 2005 to about 70% in 2014... For debenture SBICs specifically, multiple licensees also increased their share of total SBA leverage during 2005–2014. These SBICs held about 24% of SBA leverage in 2005, but about 74% of the approximately $7 billion in SBA leverage in 2014.... from 2009 to 2014, no more than 2.8% of multiple licensees reached the then-applicable $225 million leverage limit ... The Small Business Investor Alliance and some SBIC fund managers told us they believed the leverage limit nonetheless has a significant effect because it deters some SBIC managers who want to substantially grow their fund over the long-term from continuing to participate in the program.... SBIC characteristics, including geographic distribution and management demographics, were largely similar for single and multiple licensees.... Multiple licensees, in the aggregate, demonstrated better investment performance than single licensees from 2005 to 2014." See GAO, Small Business Investment Companies: Characteristics and Investment Performance of Single and Multiple Licensees, GAO-16-107, January 27, 2016, pp. 8, 10, 11, 13, at https://www.gao.gov/assets/680/674813.pdf.
The proposed changes would have allowed early stage applicants to apply at any time, similar to other SBIC applicants, instead of only during limited time frames identified in the Federal Register (which the SBA has published on an annual basis since 2012); allowed early stage SBICs to obtain an unsecured line of credit without SBA approval under specified conditions; allowed an application from an applicant under common control with an existing early stage SBIC that has outstanding debentures or debenture commitments; and increased the initiative's maximum leverage commitment of 100% of regulatory capital or $50 million, whichever is less, to 100% of regulatory capital or $75 million, whichever is less. See SBA, "Small Business Investment Companies (SBIC); Early Stage Initiative," 83 Federal Register 26875, June 11, 2018; and SBA, "Small Business Investment Companies (SBIC); Early Stage Initiative," 81 Federal Register 64075-64080, September 19, 2016.
SBA, "Small Business Investment Companies (SBIC); Early Stage Initiative," 83 Federal Register 26875, June 11, 2018.
In addition, S. 2831, A bill to amend the Small Business Investment Act of 1958 to provide priority for applicants for a license to operate as a small business investment company that are located in a disaster area, was introduced on April 21, 2016, and reported favorably, with an amendment, by the Senate Committee on Small Business and Entrepreneurship on May 24, 2016. The bill would require the SBA Administrator to give priority to an application for a license to operate as a SBIC that is from an applicant located in a disaster area. The bill would also prohibit the SBA from including the cost basis of any investment made by a SBIC in a small business concern located in a major disaster area during the one-year period beginning on the date of the disaster declaration when determining if that SBIC has reached its leverage limit.
P.L. 92-595, the Small Business Investment Act Amendments of 1972.
A debenture SBIC may issue and have outstanding both guaranteed debentures and participating securities, provided that the total amount of participating securities outstanding does not exceed 200% of its private capital. See 13 C.F.R. §107.1170. The SBA stopped issuing new commitments for participating securities on October 1, 2004.
Commercial banks may invest up to 5% of their capital and surplus to partially or wholly own a SBIC. Bank investments in a SBIC are presumed by federal regulatory agencies to be a "qualified investment" for Community Reinvestment Act purposes. See P.L. 90-104, the Small Business Act Amendments of 1967; The Board of Governors of the Federal Reserve Board, "Small Business Investment Companies," 33 Federal Register 6967, May 9, 1968; and SBA, "Small Business Investment Companies (SBICs)," Small Business Notes, 2009, at http://www.smallbusinessnotes.com/business-finances/small-business-investment-companies-sbics.html. H.R. 2364, the Investing in Main Street Act of 2017, would increase to 15% the 5% limit on commercial bank investments in SBICs. The bill was favorably reported by the House Committee on Small Business on June 15, 2017.
SBA, "For SBIC Applicants: Phase III: Licensing Review," at https://www.sba.gov/content/phase-iii-licensing-review.
SBA, "For SBIC Applicants: Phase I, Initial Review," at https://www.sba.gov/content/phase-i-initial-review.
SBA, "Small Business Investment Companies-Administrative Fees," 82 Federal Register 52174-52186, November 13, 2017. An applicant under common control with one of more licenses must submit a written request to the SBA, and the initial licensing fee, to be considered for a license and is exempt from the requirement to submit a MAQ unless otherwise determined by the SBA in its discretion.
A control person is generally defined as someone with the power to direct corporate management and policies.
General partners in most private equity and hedge funds are compensated in two ways. First, to the extent that they contribute their capital in the funds, they share in the appreciation of the assets. Second, they charge the limited partners two kinds of annual fees: a percentage of total fund assets (usually in the 1% to 2% range) and a percentage of the fund's earnings (usually 15% to 25%, once specified benchmarks are met). The latter performance fee is called "carried interest" and is treated, or characterized, as capital gains under current tax rules. See CRS Report RS22717, Taxation of Private Equity and Hedge Fund Partnerships: Characterization of Carried Interest, by Donald J. Marples.
SBA, "SBIC Management Assessment Questionnaire and License Application: Form 2181," at https://www.sba.gov/content/application-forms.
SBA, "Small Business Investment Companies-Administrative Fees," 82 Federal Register 52179, November 13, 2017.
The final licensing fee is $20,000 from December 13, 2017, to September 30, 2018; and is scheduled to increase to $25,000 from October 1, 2018, to September 30, 2019; $30,000 from October 1, 2019, to September 30, 2020; and $35,000 from October 1, 2020, to September 30, 2021. The final SBIC licensing fee is in addition to the initial SBIC licensing fee (currently a combined total of $35,000). Beginning on October 1, 2021, the SBA will annually adjust both the initial and final SBIC licensing fees for inflation. See ibid., p. 52185.
SBA, "SBIC Program: Fiscal Year Data for the period ending September 30, 2018," at https://www.sba.gov/article/2018/nov/16/fiscal-year-data-period-ending-september-30-2018.
U.S. Congress, House Committee on Small Business, Private Equity for Small Firms: The Importance of the Participating Securities Program, 109th Cong., 1st sess., April 13, 2005, Serial No. 109-10 (Washington: GPO, 2005), pp. 5, 33; and SBA, "SBIC Program: FAQs 7. What is the status of the Participating Securities Program?" at https://www.sba.gov/content/faqs.
SBA, "Offering Circular, Guaranteed 4.727% Participating Securities Participation Certificates, Series SBIC-PS 2009-10 A," February 19, 2009, at https://www.sba.gov/content/sbic-ps-2009-10-cusip-831641-ep6.
13 C.F.R. §107.1500. A SBIC that wishes to be eligible to issue participating securities must have regulatory capital of at least $10 million unless it can demonstrate to the SBA's satisfaction that it can be financially viable over the long-term with a lower amount, but not less than $5 million. See 13 C.F.R. §107.210. It must also maintain sufficient liquidity to avoid a condition of "Liquidity Impairment," defined as a liquidity ratio (total current funds available divided by total current funds required) of less than 1.2. See 13 C.F.R. §107.1505. The only type of debt, other than leverage, than a SBIC that has applied to issue participating securities or have outstanding participating securities is permitted to incur is temporary debt. Temporary debt is defined as short-term borrowings from a regulated financial institution, a regulated credit company, or a non-regulated lender approved by the SBA for the purpose of maintaining the SBIC's operating liquidity or providing funds for a particular financing of a small business. The total outstanding borrowings, not including leverage, may not exceed 50% of a SBIC's leveraged capital, and all such borrowings must be fully paid off for at least 30 consecutive days during a SBIC's fiscal year so that it has no outstanding third-party debt for 30 days. See 13 C.F.R. §107.570. A SBIC issuing participating securities is required to invest an amount equal to the original issue price of such securities solely in equity capital investments (e.g., common or preferred stock, limited partnership interests, options, warrants, or similar equity instruments). See 13 C.F.R. §107.1505.
U.S. Congress, House Committee on Small Business, Subcommittee Markup of Legislation Affecting the SBA Capital Access Programs, 111th Cong., 1st sess., October 8, 2009, H.Doc. no. 111-050 (Washington: GPO, 2009), pp. 7, 10, 11, 187-194; U.S. Congress, House Committee on Small Business, Full Committee Hearing on Increasing Capital for Small Business, 111th Cong., 1st sess., October 14, 2009, H.Doc. no. 111-051 (Washington: GPO, 2009), pp. 1, 2, 40, 98; and U.S. Congress, House Committee on Small Business, Small Business Financing and Investment Act of 2009, report to accompany H.R. 3854, 111th Cong., 1st sess., October 26, 2009, H.Rept. 111-315 (Washington: GPO, 2009), pp. 3, 4, 10-12.
SBA, "SBIC Program: Fiscal Year Data for the period ending December 31, 2018," at https://www.sba.gov/article/2019/mar/28/quarterly-data-december-31-2018. There were 149 participating securities SBICs at the end of FY2008, 127 at the end of FY2009, 107 at the end of FY2010, 97 at the end of FY2011, 86 at the end of FY2012, 63 at the end of FY2013, 53 at the end of FY2014, 46 at the end of FY2015, 41 at the end of FY2016, 33 at the end of FY2017, and 25 at the end of FY2018.
SBA, "Impact Investment Initiative," at https://www.sba.gov/sites/default/files/files/Impact_Investment_Call_for_Action.pdf; and SBA, Office of Congressional and Legislative Affairs, "Correspondence with the author," July 31, 2014.
The SBA defines underserved communities as low or moderate income (LMI) enterprises located in LMI Zones, as defined in 13 C.F.R. 107.50; qualified low-income community investments (QLICIs) located in low-income communities (LICs), as defined by the New Markets Tax Credit (NMTC) program in 26 C.F.R. 1.45D-1(d)1; rural business concerns located in rural areas as defined in 7 C.F.R. 4290.502; and, small business concerns located in economically distressed areas (EDAs), as defined by Section 3013 of the Public Works and Economic Development Act (PWEDA) of 1965, as amended, 42 U.S.C. 3161.
SBA, "SBA Announces $50 Million Increase Match in its SBIC Early Stage Fund and $70 Million Bump in its Impact Investment Fund," June 6, 2013, at https://www.sba.gov/content/sba-announces-50-million-increase-match-its-sbic-early-stage-fund-and-70-million-bump-its. Also, effective October 1, 2014, among other changes, the SBA eliminated the program's $200 million collective, per-fiscal-year leverage cap; added advanced manufacturing to the list of eligible sectors; provided eligibility to businesses that receive Small Business Innovation Research or Small Business Technology Transfer grants; and permitted, through December 1, 2014, existing debenture SBICs to apply to opt-into the program if they meet the program's requirements. See SBA, "SBA Expands Impact Investment Fund," September 25, 2014, at https://www.sba.gov/about-sba/sba-newsroom/press-releases-media-advisories/sba-expands-impact-investment-fund.
SBA, "Impact Investment Fund Grows Threefold," January 27, 2015, at https://www.sba.gov/content/impact-investment-fund-grows-threefold; SBA, "Directory of Impact SBICs," at https://www.sba.gov/content/directory-impact-sbics; and SBA, "SBIC Directory," at https://www.sba.gov/funding-programs/investment-capital#paragraph-11.
SBA Office of Congressional and Legislative Affairs, "Correspondence with the author," December 20, 2018.
SBA, "Small Business Investment Companies (SBIC); Early Stage Initiative," 83 Federal Register 26874, June 11, 2018. Impact investment SBIC applicants would have received a 60% discount on the licensing fee and a 10% discount on the examination base fee. They also could have simultaneously applied as an early stage SBIC not subject to the call and timing provisions identified under 13 C.F.R. 107.300. The proposed rule also imposed certain penalties if an impact investment SBIC did not adhere to its impact strategy or impact investment SBIC rules. See ibid; and SBA, "Small Business Investment Company Program-Impact SBICs," 81 Federal Register 5666-5676, February 3, 2016.
SBA, "Small Business Investment Companies (SBIC); Early Stage Initiative," 83 Federal Register 26875, June 11, 2018. The SBA indicated that due to the risk associated with this class of SBICs the proposed rule was expected to increase the cost to all SBICs by increasing the annual fee by approximately 6.1 basis points.
SBA, "Small Business Investment Companies—Early Stage SBICs," 77 Federal Register 25043, 25050, April 27, 2012.
The deadline for completing the four-step application process for applicants with signed commitments for at least $15 million in regulatory capital and evidence of their ability to raise the remaining $5 million in regulatory capital was July 30, 2012. The deadline for all other applicants was May 15, 2013. Applicants must first complete a Management Assessment Questionnaire (MAQ), then, if invited, complete an interview process, then receive a Green Light letter, and, finally, submit the SBIC license application, consisting of SBA Form 2181 and SBA Form 2182. See SBA, "Small Business Investment Companies—Early Stage SBICs," 77 Federal Register 25775-25779, May 1, 2012.
SBA, "SBA's Growth Capital Program Sets Record For Third Year in a Row $2.95 Billion in Financing for Small Businesses in FY12," at https://www.sba.gov/content/sbas-growth-capital-program-sets-record-third-year-row; and SBA, "The Small Business Investment Company (SBIC) Program: Annual Report FY2012," p. 20, at https://www.sba.gov/sites/default/files/files/SBIC%20Program%20FY%202012%20Annual%20Report.pdf.
SBA, "Small Business Investment Companies—Early Stage SBICs," 77 Federal Register 74908-74913, December 18, 2012; SBA, "Small Business Investment Companies—Early Stage SBICs," 79 Federal Register 6665, February 4, 2014; SBA, "Small Business Investment Companies—Early Stage SBICs," 79 Federal Register 18750, April 3, 2014; SBA, "Small Business Investment Companies—Early Stage SBICs," 80 Federal Register 1575-1579, January 12, 2015; and SBA, "Small Business Investment Companies—Early Stage SBICs," 81 Federal Register 5508-5511, February 2, 2016.
SBA, "Small Business Investment Companies‒Early Stage," 80 Federal Register 14034, March 18, 2015; and SBA, Office of Innovation and Investment, slides, "SBIC Early Stage Innovation Program," at https://www.sba.gov/sites/default/files/articles/OII_Early_Stage_Slide_Deck_January_2016.pdf.
SBA, Office of Congressional and Legislative Affairs, "Correspondence with the author," December 20, 2018.
SBA, "Small Business Investment Companies (SBIC); Early Stage Initiative," 81 Federal Register 64075-64080, September 19, 2016. The proposed changes were based in part on feedback received on an earlier, advance notice of proposed rulemaking. See SBA, "Small Business Investment Companies‒Early Stage," 80 Federal Register 14034, March 18, 2015. The proposed changes would have allowed early stage applicants to apply at any time, similar to other SBIC applicants, instead of only during limited time frames identified in the Federal Register (which the SBA has published on an annual basis since 2012); allowed early stage SBICs to obtain an unsecured line of credit without SBA approval under specified conditions; allowed an application from an applicant under common control with an existing early stage SBIC that has outstanding debentures or debenture commitments; and increased the initiative's maximum leverage commitment of 100% of regulatory capital or $50 million, whichever is less, to 100% of regulatory capital or $75 million, whichever is less.
SBA, "Small Business Investment Companies (SBIC); Early Stage Initiative," 81 Federal Register 64075, September 19, 2016.
13 C.F.R. §107.800. A SBIC is not allowed to become a general partner in any unincorporated business or become jointly or severally liable for any obligations of an unincorporated business.
13 C.F.R. §107.810; and 13 C.F.R. §107.840.
13 C.F.R. §107.815. Debt securities are instruments evidencing a loan with an option or any other right to acquire equity securities in a small business or its affiliates, a loan that by its terms is convertible into an equity position, or a loan with a right to receive royalties that are excluded from the cost of money.
13 C.F.R. §107.865. The period of time that a SBIC may exercise control over a small business for purposes connected with its investment through ownership of voting securities, management agreements, voting trusts, majority representation on the board of directors, or otherwise is "limited to the seventh anniversary of the date on which such control was initially acquired, or any earlier date specified by the terms of any investment agreement." With the SBA's prior written approval, a SBIC "may retain control for such additional period as may be reasonably necessary to complete divestiture of control or to ensure the financial stability of the portfolio company."
A tier of SBA leverage equals the amount of a SBIC's private (regulatory) capital. A SBIC approved for less than two tiers of SBA leverage must not invest more than 20% of its private capital in any one small business if the SBIC's plan contemplates one tier of leverage and no more than 25% of its private capital if its plan contemplates 1.5 tiers of leverage. See 13 C.F.R. §107.740; and SBA, "American Recovery and Reinvestment Act of 2009: Implementation of SBIC Program Changes," letter from Harry Haskins, acting associate administrator for Investment, to All Small Business Investment Companies (SBICs) and Applicants, May 4, 2009, p. 2.
Ibid. A SBIC may provide venture capital financing to disadvantaged concerns engaged in relending or reinvesting activities (except agricultural credit companies and banking and savings and loan institutions not insured by a federal agency). Without SBA approval, these financings, at the end of the fiscal year, may not exceed a SBIC's regulatory capital. A disadvantaged concern is defined as a small business that is at least 50% owned, controlled, and managed, on a day-to-day basis, by a person or persons whose participation in the free enterprise system is hampered because of social or economic disadvantages.
The SBA has a general interest rate ceiling of 19% for a loan and 14% for a debt security, with provisions for a higher interest rate under specified circumstances. See 13 C.F.R. §107.855. A SBIC is allowed to collect a nonrefundable application fee of no more than 1% of the amount of financing requested from a small business to review its financing application, a closing fee of no more than 2% of the amount of financing requested from a small business concern for a loan, charged no earlier than the date of the first disbursement, and a closing fee of no more than 4% of the amount of financing requested from a small business concern for a debt security or equity security financing, charged no earlier than the date of the first disbursement. A SBIC is also allowed to charge a small business for reasonable out-of-pocket expenses, other than management expenses incurred to process the small business's financing application. See 13 C.F.R. §107.860.
SBA, "Small Business Investment Companies," 64 Federal Register 52645, September 30, 1999.
SBA, "Small Business Investment Companies," 64 Federal Register 52641-52646, September 30, 1999. LMI Zones are areas located in a HUBZone; an Urban Empowerment Zone or Urban Enterprise Community designated by the Secretary of the U.S. Department of Housing and Urban Development; a Rural Empowerment Zone or Rural Enterprise Community as designated by the Secretary of the U.S. Department of Agriculture; an area of low income or moderate income as recognized by the Federal Financial Institutions Examination Council; or a county with persistent poverty as classified by the U.S. Department of Agriculture's Economic Research Service. See 13 C.F.R. §107.50.
SBA, "For SBICs: Background Information on Low or Moderate Income (LMI) Debentures," at https://www.sba.gov/content/low-or-moderate-income-lmi-debentures.
P.L. 110-140, the Energy Independence and Security Act of 2007, §1205. Energy Saving Debentures.
SBA, "Energy Saving Debentures: FAQs," at https://www.sba.gov/content/energy-savings-debentures-faqs.
SBA, "Funding the SBIC Program: An Overview," at https://www.sba.gov/sbic/funding-sbic-program. The SBA is required by statute to issue guarantees "at periodic intervals of not less than every 12 months and shall do so at such shorter intervals as it deems appropriate, taking into consideration the amount and number of such guarantees or trust certificates." See 15 U.S.C. §687m.
SBA, "Funding the SBIC Program: An Overview," at https://www.sba.gov/sbic/funding-sbic-program.
To view recent SBIC debenture offering circulars see SBA, "SBIC Debentures Offering Circulars," at https://www.sba.gov/category/lender-navigation/sba-loan-programs/sbic-program/program-data-performance/information-tru-1.
13 C.F.R. §107.1130; and 13 C.F.R. §107.1210. The annual fee for debentures at the time of the leverage commitment in FY2019 is 0.094%. The annual fee was 0.742% in FY2015, 0.672% in FY2016, 0.347% in FY2017, and 0.222% in FY2018. The participating securities program is no longer issuing new leverage commitments. See SBA, "SBIC Program: Annual Charge," at https://www.sba.gov/document/support-object-object-annual-charge.
13 C.F.R. §107.1120; 13 C.F.R. §107.1150; and SBA, "American Recovery and Reinvestment Act of 2009: Implementation of SBIC Program Changes," letter from Harry Haskins, Acting Associate Administrator for Investment, to All Small Business Investment Companies (SBICs) and Applicants, May 4, 2009, p. 1.
One debenture has a term of 10 years and 29 weeks. See SBA, "Offering Circular, $1,192,235,000, Guaranteed 2.829% Debenture Participation Certificates, Series SBIC 2015-10 B," September 14, 2015, at https://www.sba.gov/content/sbic-2015-10-b-cusip-831641-fe0.
SBA, "Small Business Investment Companies (SBICs)," Small Business Notes, 2009, at http://www.smallbusinessnotes.com/business-finances/small-business-investment-companies-sbics.html; and SBA, "For SBIC Applicants: Financing Options Explained," at https://www.sba.gov/content/financing-options-explained.
13 C.F.R. §107.50; and 13 C.F.R. §107.1150.
The coupon (interest) rate on SBA debentures is based on the 10-year Treasury rate (adjusted to the nearest 1/8th of 1%) plus a market-driven spread, currently about 70-90 basis points. See 13 C.F.R. §107.50; and SBA, "Trust Certificate Rates: SBIC Debenture Pools," at https://www.sba.gov/content/trust-certificate-rates-sbic-debenture-pools. The coupon rate for the most recent sale of a SBA debenture certificate, which took place on March 14, 2016, was 2.507%.
U.S. Congress, House Committee on Small Business, Small Business Financing and Investment Act of 2009, report to accompany H.R. 3854, 111th Cong., 1st sess., October 26, 2009, H.Rept. 111-315 (Washington: GPO, 2009), p. 11; and SBA, "SBIC Program: FAQs: 8. What investment styles and fund types fit best with the SBIC Program?" at https://www.sba.gov/content/faqs.
13 C.F.R. §107.1500; and SBA, "Offering Circular, Guaranteed 4.727% Participating Securities Participation Certificates, Series SBIC-PS 2009-10 A," February 19, 2009, pp. 7, 14, at https://www.sba.gov/content/sbic-ps-2009-10-cusip-831641-ep6.
SBA, "Offering Circular, Guaranteed 4.727% Participating Securities Participation Certificates, Series SBIC-PS 2009-10 A," February 19, 2009, p. 2, at https://www.sba.gov/content/sbic-ps-2009-10-cusip-831641-ep6.
Ibid., pp. 2, 3. Also, see U.S. Congress, House Committee on Small Business, Private Equity for Small Firms: The Importance of the Participating Securities Program, 109th Cong., 1st sess., April 13, 2005, Serial No. 109-10 (Washington: GPO, 2005), p. 5.
The coupon rate for the most recent sale of a SBA guaranteed participating securities participation certificate, which took place on February 25, 2009, was 4.727%. SBA, "Offering Circular, Guaranteed 4.727% Participating Securities Participation Certificates, Series SBIC-PS 2009-10 A," February 19, 2009, p. 1, at https://www.sba.gov/content/sbic-ps-2009-10-cusip-831641-ep6.
U.S. Congress, House Committee on Small Business, Small Business Financing and Investment Act of 2009, report to accompany H.R. 3854, 111th Cong., 1st sess., October 26, 2009, H.Rept. 111-315 (Washington: GPO, 2009), p. 11; and SBA, "SBIC Program: FAQs 7. What is the status of the Participating Securities Program?" at https://www.sba.gov/content/faqs.
SBA, "SBIC Program: Fiscal Year Data for the period ending December 31, 2018," at https://www.sba.gov/article/2019/mar/28/quarterly-data-december-31-2018. As of March 5, 2019, the six Specialized SBICs had private capital of $65.7 million. Of these Specialized SBICs, five had no outstanding financings guaranteed by the SBA and one, with private capital of $49.4 million, had $40.6 million of outstanding SBA guaranteed debenture borrowings. See SBA, "Offering Circular, $986,840,000, Guaranteed 3.113% Debenture Participation Certificates, Series SBIC 2019-10 A," March 12, 2019, p. 8, at https://www.sba.gov/article/2019/mar/13/sbic-2019-10a-cusip-831641-fm2.
SBA, "Impact Investment Small Business Investment Company ("SBIC") Fund," p. 1, at https://www.sba.gov/sites/default/files/files/Impact_Investment_Call_for_Action.pdf.
SBA, "SBA Licenses First Impact Investment Fund in Michigan," July 26, 2011, at https://www.sba.gov/content/sba-licenses-first-impact-investment-fund-michigan. The license was dated April 25, 2011. Mezzanine financing is a hybrid of debt and equity financing and is typically used to finance the expansion of an existing business. It provides the lender the right to convert to an ownership or equity interest in the company if the loan is not paid back in time and in full. It is generally subordinated to debt provided by senior lenders such as banks and venture capital companies. Another license was awarded to SJF Ventures, which has offices in New York, San Francisco, and Durham. It reportedly will serve a licensing and oversight role and will not receive leverage from the SBA. See "SBA chooses firm with a clean-tech profile as its newest investment partner, Washington Post, March 8, 2012, at http://www.washingtonpost.com/business/on-small-business/sba-chooses-firm-with-a-clean-tech-profile-as-its-newest-investment-partner/2012/03/08/gIQAKgmPzR_story.html.
SBA, "Start-Up America Impact Investment SBIC Initiative Policy Update," September 26, 2012, at https://www.sba.gov/sites/default/files/files/External%20Impact%20Memo%202012-09-26%20final.pdf; and SBA, "SBA Announces $50 Million Increase Match in its SBIC Early Stage Fund and $70 Million Bump in its Impact Investment Fund," June 6, 2013, at https://www.sba.gov/content/sba-announces-50-million-increase-match-its-sbic-early-stage-fund-and-70-million-bump-its.
SBA, "Small Business Investment Companies—Early Stage SBICs," 77 Federal Register 25043, April 27, 2012.
13 C.F.R. §107.1181. The required reserve is reduced on each payment date upon payment of the required interest and charges.
SBA, Office of Congressional and Legislative Affairs, "Correspondence with the author," May 2, 2012.
13 C.F.R. §107.630; and 13 C.F.R. §107.690.
SBA, "FY 2012 Congressional Budget Justification and FY 2010 Annual Performance Report," p. 60, at https://www.sba.gov/sites/default/files/aboutsbaarticle/FINAL%20FY%202012%20CBJ%20FY%202010%20APR_0.pdf. The SBA issued 23 new SBIC licenses (21 to debenture SBICs and 2 to bank-owned, non-leveraged SBICs) in FY2010; 22 new SBIC licenses (18 to debenture SBICs and 4 to bank-owned, non-leveraged SBICs) in FY2011; 30 new SBIC licenses (27 to debenture SBICs and 3 to bank-owned, non-leveraged SBICs) in FY2012; 34 new SBIC licenses (29 to debenture SBICs and 5 to bank-owned, non-leveraged SBICs) in FY2013; 30 new SBIC licenses (24 to debenture SBICs and 6 to bank-owned, non-leveraged SBICs) in FY2014; 25 new SBIC licenses (22 to debenture SBICs and 3 to bank-owned, non-leveraged SBICs) in FY2015; 21 new SBIC licenses (17 to debenture SBICs and 4 to bank-owned, non-leveraged SBICs) in FY2016; 15 new SBIC licenses (11 to debenture SBICs and 4 to bank-owned, non-leveraged SBICs) in FY2017; and 25 new SBIC licenses (21 to debenture SBICs and 4 to bank-owned, non-leveraged SBICs) in FY2018.
SBA, "Offering Circular, $986,840,000, Guaranteed 3.113% Debenture Participation Certificates, Series SBIC 2019-10 A," March 12, 2019, p. 7, at https://www.sba.gov/article/2019/mar/13/sbic-2019-10a-cusip-831641-fm2. The SBA has occasionally provided a selected list of firms that have received SBIC financing, including AOL, Apple Computer, Build-a-Bear, Compaq Computer, Costco Wholesale Corporation, FedEx, Intel, Jenny Craig, Inc., Nutrisystem, Outback Steakhouse, Sports Authority, Staples, and Sun Microsystems, on its website. For example, see SBA, Office of Investment and Innovation, "Early Stage SBIC Program," slide presentation, January 2016, at https://www.sba.gov/sites/default/files/articles/SBIC-Early-Stage-Initiative.pdf.
SBA, Office of Investment and Innovation, "SBIC Program – Financing to Businesses by State, FY2014 to FY2018," at https://www.sba.gov/sites/default/files/2018-11/SBICProgram_FinancingbyState_FYs2014to2018.pdf.
PricewaterhouseCoopers, National Venture Capital Association, "MoneyTree™ Report, National Aggregate Data," at http://www.pwcmoneytree.com/.
Kenneth Temkin and Brett Theodos, with Kerstin Gentsch, "The Debenture Small Business Investment Company Program: A Comparative Analysis of Investment Patterns with Private Venture Capital Equity," Washington, DC: The Urban Institute, January 2008, p. 3, at http://www.urban.org/UploadedPDF/411601_sbic_gap_analysis.pdf.
Kenneth Temkin and Brett Theodos, with Kerstin Gentsch, "The Debenture Small Business Investment Company Program: A Comparative Analysis of Investment Patterns with Private Venture Capital Equity," Washington, DC: The Urban Institute, January 2008, pp. 2, 26, at http://www.urban.org/UploadedPDF/411601_sbic_gap_analysis.pdf.
U.S. Congress, House Committee on Small Business, Full Committee Hearing on Legislation Updating and Improving the SBA's Investment and Surety Bond Programs, 110th Cong., 1st sess., September 6, 2007, Serial Number 110-44 (Washington: GPO, 2007), p. 15.
U.S. Congress, House Committee on Small Business, Full Committee Hearing On Increasing Capital For Small Business, 111th Cong., 1st sess., October 14, 2009, committee document no. 111-051 (Washington: GPO, 2009), p. 89.
Kenneth Temkin and Brett Theodos, with Kerstin Gentsch, "The Debenture Small Business Investment Company Program: A Comparative Analysis of Investment Patterns with Private Venture Capital Equity," Washington, DC: The Urban Institute, January 2008, pp. 3, 18-24, at http://www.urban.org/UploadedPDF/411601_sbic_gap_analysis.pdf.
PricewaterhouseCoopers, National Venture Capital Association, "Venture Capital Investments, Regional Aggregate Data," at https://www.pwcmoneytree.com/Reports/Homepage%20RegionalAgg.xlsx.
13 C.F.R. §107.1120; and 13 C.F.R. §107.1150. Previously, "the total principal amount of outstanding debentures and participating securities guaranteed by SBA and issued by any SBIC or group of commonly controlled SBICs may not, in general, exceed at any one time an amount equal to three times such SBIC's Private Capital or [in 2008] $130.6 million, whichever is less, of which no more than two times the SBIC's Private Capital may be represented by participating securities." See SBA, "Offering Circular, Guaranteed 5.725% Debenture Participation Certificates, Series SBIC 2008-10 B," September 18, 2008, at https://www.sba.gov/content/sbic-2008-10-b-cusip-831641-en1. P.L. 102-366, the Small Business Credit and Business Opportunity Enhancement Act of 1992, set the maximum leverage amount for SBICs and SBICs under common control at $90 million. Licensees under common control were allowed to have aggregate outstanding leverage over $90 million only if the SBA gave them permission to do so. P.L. 105-135, the Small Business Reauthorization Act of 1997, set the maximum leverage amount for SBICs and SBICs under common control at $90 million and added the requirement that the amount be adjusted annually for inflation.
13 C.F.R. §107.1150; and 13 C.F.R. §107.710.
The White House, "Startup America Legislative Agenda," January 31, 2012, at https://obamawhitehouse.archives.gov/blog/2012/01/31/legislative-agenda-startup-america.
Rep. Edward Perlmutter, "Providing for Further Consideration of H.R. 5297, Small Business Jobs and Credit Act of 2010, Roll No. 368," Congressional Record, daily edition, vol. 156, no. 91 (June 17, 2010), pp. H4608, H4609.
H.R. 5297, the Small Business Lending Fund Act of 2010, §399L. Definitions.
Ibid. The nine targeted industries are agricultural technology, energy technology, environmental technology, life science, information technology, digital media, clean technology, defense technology, and photonics technology. A similar $200 million Small Business Early Stage Investment Program was included in H.R. 3854, the Small Business Financing and Investment Act of 2009, which was passed by the House on October 29, 2009, by a vote of 389-32. It is awaiting action in the Senate.
Sen. Al Franken, "Small Business Lending Fund Act of 2010," Rollcall Vote No. 237 Leg., Congressional Record, daily edition, vol. 156, part 125 (September 16, 2010), p. S7158.
P.L. 111-240, the Small Business Jobs Act of 2010, §1131. Small Business Intermediary Lending Pilot Program.
SBA, "Small Businesses Have New Non-Profit Sources for SBA-financed Loans," August 4, 2011, at https://www.sba.gov/content/small-businesses-have-new-non-profit-sources-sba-financed-loans; and SBA, "Intermediary Lending Pilot Program (ILP) Intermediaries, FY2011 /FY2012," at https://www.sba.gov/sites/default/files/files/ILP_Intermediaries_150218.pdf.
U.S. Congress, House Committee on Small Business, Small Business Financing and Investment Act of 2009, report to accompany H.R. 3854, 111th Cong., 1st sess., October 26, 2009, H.Rept. 111-315, p. 2. For the arguments presented by various organizations advocating programs to assist early stage small businesses and startups, see U.S. Congress, House Committee on Small Business, Subcommittee on Finance and Tax Hearing on Legislative Proposals to Reform the SBA's Capital Access Programs, 111th Cong., 1st sess., July 23, 2009, H.Doc. no. 111-039 (Washington: GPO, 2009), pp. 10-12, 60-67; and U.S. Congress, House Committee on Small Business, Full Committee Hearing on Increasing Access to Capital for Small Business, 111th Cong., 1st sess., October 14, 2009, H.Doc. no. 111-051 (Washington: GPO, 2009), pp. 33-35, 50-54, 63-69, 86-99.
Rep. Nydia Velázquez, "Small Business Jobs and Credit Act of 2010," House debate, Congressional Record, daily edition, vol. 156, no. 90 (June 16, 2010), p. H4516.
Rep. Sam Graves, "Small Business Jobs and Credit Act of 2010," House debate, Congressional Record, vol. 156, no. 90 (June 16, 2010), p. H4516.
Ibid; and Rep. Jeff Flake, "Small Business Early Stage Investment Act of 2009," House debate, Congressional Record, vol. 155, no. 171 (November 18, 2009), p. H13083. Note: H.R. 3738, the Small Business Early-Stage Investment Act of 2009, was one of eight bills merged into H.R. 3854, the Small Business Financing and Investment Act of 2009, and was later added to H.R. 5297, Small Business Jobs and Credit Act of 2010, by H.Res. 1436.
U.S. Congress, House Committee on Small Business, Full Committee Hearing On Increasing Capital For Small Business, 111th Cong., 1st sess., October 14, 2009, H.Doc. no. 111-051 (Washington: GPO, 2009), pp. 32, 87.
H.R. 3854, the Small Business Financing and Investment Act of 2009, §401. Increased Investment from States; and H.R. 5554, the Small Business Assistance and Relief Act of 2010, §591. Increased Investment from States.
H.R. 3854, §401. Increased Investment From States, §403. Revised Leverage Limitations For Successful SBICs, and §408. Program Levels; and H.R. 5554, §591. Increased Investment from States, §593. Revised Leverage Limitations for Successful SBICs, and §598. Program Levels.
The White House, "Startup America Legislative Agenda," at https://obamawhitehouse.archives.gov/sites/default/files/uploads/startup_america_legislative_agenda.pdf.
Previously, S. 552, the Small Business Investment Company Capital Act of 2015, and its House companion bill, H.R. 1023, would have increased that limit to $350 million. The Senate Committee on Small Business and Entrepreneurship reported S. 552 on June 10, 2015. The bill was placed on the Senate Legislative Calendar under General Orders. The House Committee on Small Business reported H.R. 1023 on June 25, 2015, and the House passed it on July 13, 2015.
SBA, "Fiscal Year 2011 Congressional Budget Justification and FY2009 Annual Performance Report," p. 52, at https://www.sba.gov/sites/default/files/aboutsbaarticle/Congressional_Budget_Justification.pdf.
SBA, "SBA Project Plan, Section 505: SBIC Program Changes," June 16, 2010, at https://www.sba.gov/sites/default/files/recovery_act_reports/sba_sbic_plan.pdf.
U.S. Congress, House Committee on Small Business, Small Business Financing and Investment Act of 2009, report to accompany H.R. 3854, 111th Cong., 1st sess., October 26, 2009, H.Rept. 111-315 (Washington: GPO, 2009), p. 3.
U.S. Congress, House Committee on Small Business, Full Committee Hearing on Increasing Capital for Small Business, 111th Cong., 1st sess., October 14, 2009, H. Doc. no. 111-051 (Washington: GPO, 2009), pp. 88-91; and Rep. Nydia Velázquez, "Small Business Jobs and Credit Act of 2010," House debate, Congressional Record, daily edition, vol. 156, no. 90 (June 16, 2010), p. H4516.
Rep. Nydia Velázquez, "Small Business Financing and Investment Act of 2009," House debate, Congressional Record, daily edition, vol. 155, no. 159 (October 29, 2009), pp. H12074, H12075; Sen. Mary Landrieu, "Statements on Introduced Bills and Joint Resolutions," remarks in the Senate, Congressional Record, daily edition, vol. 155, no. 185 (December 10, 2009), p. S12910; The White House, "Remarks by the President on Job Creation and Economic Growth," December 8, 2009, at https://obamawhitehouse.archives.gov/realitycheck/the-press-office/remarks-president-job-creation-and-economic-growth; and The White House, "Startup America Legislative Agenda," at https://obamawhitehouse.archives.gov/sites/default/files/uploads/startup_america_legislative_agenda.pdf.
Sen. Olympia Snowe, "Jumpstart Our Business Startups Act," remarks in the Senate, Congressional Record, vol. 158, no. 45 (March 19, 2012), p. S15845.
National Federation of Independent Business, "Payroll Tax Holiday," Washington, DC, at http://www.nfib.com/issues-elections/issues-elections-item/cmsid/49039/; and NFIB, "Government Spending," Washington, DC, at http://www.nfib.com/issues-elections/issues-elections-item/cmsid/49051/.
Rep. Sam Graves, "Views and Estimates of the Committee on Small Business on Matters to be set forth in the Concurrent Resolution on the Budget for Fiscal Year 2013," Washington, DC, pp. 4, 5, at http://smbiz.house.gov/UploadedFiles/Views_and_Estimates_FY_2013.pdf. Also, see Rep. Sam Graves, "Views and Estimates of the Committee on Small Business on Matters to be set forth in the Concurrent Resolution on the Budget for Fiscal Year 2012," Washington, DC, pp. 4, 5, at http://smbiz.house.gov/UploadedFiles/March_17_Views_and_Estimates_Letter.pdf.
Rep. Steve Chabot, "Views and Estimates of the Committee on Small Business on Matters to be set forth in the Concurrent Resolution on the Budget for Fiscal Year 2016," Washington, DC, p. 6, at http://smallbusiness.house.gov/uploadedfiles/2-12-2015_views_and_estimates_document.pdf.
SBA, "Small Business Size Standards: Inflation Adjustment to Monetary Based Size Standards," 79 Federal Register 33647-33669, June 12, 2014. The previous SBIC alternative size standard, which was established in 1994, was tangible net worth not in excess of $18 million and average net income after federal income taxes (excluding any carry-over losses) for the preceding two completed fiscal years not in excess of $6 million. See SBA, "Small Business Size Standards: Increase Size Standard of Small Business Concerns Eligible for Assistance by Small Business Investment Companies," 59 Federal Register 16953-16956, April 8, 1994. The 1994 final rule used net worth, as opposed to tangible net worth. In 1996, the SBA replaced net worth with tangible net worth for both the 504/CDC loan guaranty program and the SBIC program "because items such as goodwill have no tangible value and should not be taken into account during calculation of net worth for loan approval purposes." See SBA, "Small Business Size Standards," 61 Federal Register 3282, January 31, 1996. The previous alternative SBIC size standard of no more than $6 million in net worth and no more than $2 million in after-tax net income was established in 1979. The previous alternative SBIC size standard was a small business concern that does not have assets exceeding $9.0 million, does not have net worth in excess of $4.0 million, and does not have after-tax average net income for the preceding two years in excess of $400,000. See SBA, "Small Business Size Standards: Increase Size Standard of Small Business Concerns for Assistance by Small Business Investment Companies or by Development Companies," 44 Federal Register 55815, September 28, 1979. Also, see 13 C.F.R. §107.700; 13 C.F.R. §107.710; 13 C.F.R. §121.301(c)(1) and 13 C.F.R. §121.301(c)(2).
SBA, "Small Business Investment Companies – Leverage Eligibility and Portfolio Diversification Requirements," 74 Federal Register 33912, July 14, 2009.
Ibid.; and SBA, "Small Business Investment Companies – Leverage Eligibility and Portfolio Diversification Requirements," 74 Federal Register 33912, July 14, 2009.
13 C.F.R. §107.720. SBICs are generally prohibited from investing in passive businesses. SBIC program regulations provide for two exceptions. The first provides conditions under which an SBIC may structure an investment though up to two levels of passive entities to make an investment in a non-passive business that is a subsidiary of the passive business directly financed by the SBIC. The second enables a partnership SBIC, with SBA's prior approval, to provide financing to a small business through a passive, wholly owned C corporation, but only if a direct financing would cause the SBIC's investors to incur Unrelated Business Taxable Income. A passive C corporation formed under the second exception is commonly known as a blocker corporation. The SBA has issued a proposed rule to expand and clarify the use of SBIC passive business investments. See SBA, "Small Business Investment Companies; Passive Business Expansion & Technical Clarifications," 80 Federal Register 60077-60082, October 5, 2015.
SBA, "All SBIC Licensees By State," at https://www.sba.gov/content/sbic-directory.
Small Business Investor Alliance (formerly the National Association of Small Business Investment Companies), "SBIC Financing: Step-by-Step," Washington, DC, at http://www.sbia.org/?page=sbic_financing.
SBA, "SBIC Program: Seeking Financing for your Small Business," at https://www.sba.gov/offices/headquarters/ooi/resources/4905.

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