SBA New Markets Venture Capital Program
Released: 2019-01-11T00:00:00

New Markets Venture Capital Program Overview

The Small Business Administration (SBA) administers several programs to support small businesses, including loan guaranty programs to enhance small business access to capital; venture capital programs, including the now inactive New Markets Venture Capital (NMVC) program, to foster small business expansion; 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.

Authorized by P.L. 106-554 , the Consolidated Appropriations Act, 2001 (Appendix H: the New Markets Venture Capital Program Act of 2000), the NMVC program is designed to

promote economic development and the creation of wealth and job opportunities in low-income geographic areas and among individuals living in such areas by encouraging developmental venture capital investments in smaller enterprises primarily located in such areas; and address the unmet equity investment needs of small enterprises located in low-income geographic areas.

Modeled on the SBA's Small Business Investment Company (SBIC) program, SBA-selected, privately owned and managed NMVC companies provide funding and operational assistance to small businesses. To do so, they use private capital the NMVC company has raised (called regulatory capital ) and up to 150% of that amount (called leverage ) from the sale of SBA-guaranteed 10-year debentures, or loan obligations , to third parties, subject to the availability of funds. Because the SBA guarantees the debenture, the SBA is able to obtain favorable interest rates. NMVC companies are responsible for meeting the terms and conditions set forth in the debenture. At least 80% of the investments must be in small businesses located in a low-income area, as defined in the statute.

Specialized Small Business Investment Companies (SSBICs) established under the SBIC program are also eligible for NMVC operational assistance grants, which are awarded on a dollar-to-dollar matching basis. Six NMVC companies participated in the program.

The NMVC program was appropriated $21.952 million in FY2001 to support up to $150 million in SBA-guaranteed debentures and up to $30 million for operational assistance grants for FY2001 through FY2006. The funds were provided in a lump sum in FY2001 and were to remain available until expended. The SBA subsequently provided $72.0 million in leverage to NMVC companies in FY2002 and FY2003 ($12.5 million in FY2002 and $59.5 million in FY2003) and $14.4 million for operational assistance grants ($3.75 million in FY2002 and $10.65 million in FY2003). In 2003, the unobligated balances of $10.5 million for NMVC debenture subsidies and $13.75 million for operational assistance grants were rescinded. The program continued to operate, with the number and amount of financing declining in recent years as the program's initial investments expired and NMVC companies increasingly engaged only in additional follow-on financings with the small businesses in their portfolios.

The NMVC program's active unpaid principal balance (which is comprised of the SBA guaranteed portion and the unguaranteed portion of the NMVC companies' unpaid principal balance) peaked at $698 million in FY2008, and then fell each year thereafter until reaching $0 in FY2018.

No bills have been introduced since the 112 th Congress concerning the NMVC program. However, more than 30 bills were introduced in previous Congresses to either expand or amend the program. Many of these bills would have increased the program's funding (a list and summary of bills introduced by Congress to provide the program additional funding appears in the Appendix ). For example, during the 112 th Congress, H.R. 2872 , the Job Creation and Urban Revitalization Act of 2011, would have provided the NMVC program such subsidy budget authority as may be necessary to guarantee $75 million of debentures and $15 million for operational assistance grants for FY2012 through FY2013. The bill was referred to the House Committee on Small Business, but no further action was taken on it.

This report examines the NMVC program's legislative origins and describes the program's eligibility and performance requirements for NMVC companies, eligibility requirements for small businesses seeking financing, and definition of low-income areas. It also reviews regulations governing the SBA's financial assistance to NMVC companies and provides program statistics.

This report concludes with an examination of (1) efforts to eliminate the program based on concerns that it duplicated other SBA programs and is relatively expensive, (2) the rescission of the program's unobligated funding in 2003, and (3) congressional efforts to provide the program additional funds.

Legislative Origins

105th Congress

On September 15, 1998, the Senate Committee on Small Business conducted a markup of several bills pending before the committee, including H.R. 3412 , the Small Business Investment Company Technical Corrections Act of 1998, which the House had passed. Senator Christopher Bond, chair of the Senate Committee on Small Business, proposed an amendment in the nature of a substitute to H.R. 3412 incorporating the full texts of S. 2372 , the Year 2000 Readiness Act, and S. 2407 , the Small Business Programs Restructuring and Reform Act of 1998, as well as provisions from S. 2448 , the Small Business Loan Enhancement Act. The committee also debated and approved by unanimous voice votes seven amendments to the substitute amendment. One of the seven approved amendments was a precursor of the NMVC program.

The Community Development Venture Capital Demonstration Program

The amendment, offered by Senator Paul Wellstone, would have authorized a $20 million, four-year technical assistance program—the Community Development Venture Capital Demonstration Program—to provide grants, on a matching dollar-to-dollar basis, to experienced community development venture capital (CDVC) firms that invest in small businesses located in economically distressed areas, such as inner cities and poor rural counties. The grants would be used to provide technical expertise and operating assistance to new, emerging, less experienced CDVC organizations. The program's stated purpose was "to develop and expand a new but growing field of organizations that use the tools of venture capital to create good jobs, productive wealth, and entrepreneurial capacity that benefit disadvantaged people and economically distressed communities." The program's advocates argued that despite difficulties associated with making investments in economically distressed areas, some successful CDVCs had produced "a 'double bottom line' of not only financial returns, but also social benefits in the form of good jobs and healthier communities."

On September 15, 1998, the committee reported H.R. 3412 , as amended, by a vote of 18-0. On September 30, 1998, the Senate passed the bill, with an amendment, by unanimous consent. The House did not act on the bill.

106th Congress

On January 19, 1999, President Bill Clinton announced during his State of the Union Address support for what was later called the "New Markets Investment Initiative." The proposed initiative was comprised of several programs, including a New Markets Tax Credit program and a New Markets Venture Capital program, to encourage economic development in economically distressed areas. President Clinton subsequently drew attention to the initiative by taking three separate trips to underserved inner city and rural communities, visiting Phoenix, Arizona, and the Pine Ridge Indian Reservation in South Dakota on July 7, 1999, and Los Angeles, California, and Anaheim, California, on July 8, 1999 (trip 1); Newark, New Jersey, and Hartford, Connecticut, on November 4, 1999 (trip 2); and Hermitage, Arkansas, and Chicago, Illinois, on November 5, 1999 (trip 3). During his remarks in Chicago, President Clinton announced that he had reached an agreement with House Speaker Dennis Hastert (who was present) to develop a bipartisan legislative initiative on developing new market investments as a means to revitalize impoverished communities.

SBA's Low- or Moderate-Income Initiative

In a related development, on February 9, 1999, the SBA proposed several incentives to encourage companies participating in its SBIC program to "expand their investment activity into economically distressed inner cities and rural areas." After receiving public comments on several proposed incentives, the SBA issued a final rule on September 30, 1999, implementing the SBIC low- or moderate-income (LMI) initiative.

The ongoing LMI initiative is designed 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." SBICs that invest in small businesses with at least 50% of their employees or tangible assets located in a low- or moderate-income area (LMI zone) or at least 35% of their full-time employees with their primary residence in an LMI zone are eligible for the incentives. For example, unlike regular SBIC debentures that typically have a 10-year maturity, LMI debentures are available in 2 maturities, 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.

In addition, LMI debentures are issued at a discount so that the proceeds an SBIC receives for the sale of a debenture are reduced by (1) the debenture's interest costs for the first five years, plus the stub period; (2) the SBA's annual fee for the debenture's first five years, plus the stub period; and (3) the SBA's 2% leverage fee. As a result, these interest costs and fees are effectively deferred, freeing SBICs from the requirement to make interest payments on LMI debentures or to pay the SBA's annual fees on LMI debentures for the first five years of a debenture, plus the stub period.

As shown in Table 1 , in FY2018, SBICs made 609 investments in small businesses located in an LMI zone, totaling $1.026 billion — 18.6% of the total amount invested.

The Community Development and Venture Capital Act of 2000

On September 16, 1999, Senator John Kerry introduced S. 1594 , the Community Development and Venture Capital Act of 2000. The bill included several provisions in President Clinton's New Markets Investment Initiative. The bill had three main parts: a New Markets Venture Capital Program, very similar to the present program, to encourage investment in economically distressed communities; a Community Development Venture Capital Assistance Program to expand the number of community development venture capital firms and professionals devoted to investing in economically distressed communities; and BusinessLINC, a mentoring program to link established, successful businesses with small business owners in economically stagnant or deteriorating communities to facilitate the development of small businesses in those areas.

After conducting two hearings and sponsoring a roundtable discussion on the Community Development and Venture Capital Act of 2000, the Senate Committee on Small Business reported the bill, as amended, by a vote of 16-1, on July 26, 2000. In the report accompanying the bill, Senator Christopher Bond, chair of the Senate Committee on Small Business, argued that the SBIC program had "proven to be an extremely successful public-private sector partnership with the government" and mentioned the SBA's LMI initiative as a new means to encourage SBICs to make investments in LMI zones. However, he argued that "as successful as the SBIC program is, it does not sufficiently reach areas of our country that need economic development the most." He added that although SBICs invested $771 million in LMI zones in 1999, "the vast majority of those investments were very large and not at all comparable to the type of investments [NMVC] funds would make." Senator Bond argued that the committee was approving the bill because it was necessary

to expand the number of smaller investments being made to small businesses in the poorest areas, low-income geographic areas, and to fill another gap in access to capital that small businesses face. Investments for NMVC funds typically will range from $50,000 to $300,000 versus the $300,000 to $5 million range found in the Agency's SBIC program."

The Senate did not take further action on the bill.

The New Markets Venture Capital Program Act of 2000

On December 14, 2000, Representative (later Senator) Jim Talent, chair of the House Committee on Small Business, introduced H.R. 5663 , the New Markets Venture Capital Program Act of 2000. The bill had two parts: the current New Markets Venture Capital Program and BusinessLINC. The next day, the bill was incorporated by reference in the conference report accompanying H.R. 4577 , the Consolidated Appropriations Act, 2001, which became law ( P.L. 106-554 ) on December 21, 2000.

On January 22, 2001, the SBA published an interim final rule in the Federal Registe r indicating its intention to establish the NMVC program. The SBA's final rule, which formally established the NMVC program, was published in the Federal Registe r on May 23, 2001.

NMVC Company Eligibility and Performance Requirements

P.L. 106-554 specified that venture capital companies interested in participating in the program must submit

a detailed application to the SBA that includes, among other items, a business plan describing how the company intends to make successful developmental venture capital investments in identified low-income geographic areas, and information regarding the community development finance or relevant venture capital qualifications and general reputation of the company's management.

In addition, an NMVC company must

be a newly formed for-profit entity or a newly formed for-profit subsidiary of an existing entity; be organized under state law solely for the purpose of performing the functions and conducting the activities contemplated under the act; be organized either as a corporation, a limited partnership, or a limited liability company; show, to the SBA's satisfaction, that its current or proposed management team is qualified and has the knowledge, experience, and capability in community development finance or relevant venture capital finance necessary for investing in the types of businesses contemplated by the act; and have a primary objective of economic development of low-income areas.

On January 22, 2001, the SBA solicited applications from venture capital companies and SSBICs to participate in the NMVC program. The SBA had planned to offer another round of applications for the program during the first quarter of 2003. However, the second round of applications was canceled because, as mentioned previously, P.L. 108-7 , the Consolidated Appropriations Resolution, 2003, which became law on February 20, 2003, rescinded the program's unobligated funding.

The SBA received 23 applicants from companies interested in participating in the NMVC program, and conditionally approved 7 of them. Final approval is subject to the applicant meeting several conditions. For example, applicants are required to raise, within 18 months of being conditionally approved, at least $5 million in private capital or in binding capital commitments from one or more investors (other than federal agencies or departments) that meet criteria established by the administrator (the private funds are called regulatory capital ). Applicants also must have in place binding commitments from sources other than the SBA that are payable or available over a multiyear period not to exceed 10 years that amount to not less than 30% of the total amount of regulatory capital and commitments raised (30% of $5 million = $1.5 million). This additional funding is necessary to guarantee the applicant's ability to meet the required dollar-to-dollar matching contribution for operational assistance grants.

Six of the seven companies granted conditional approval subsequently met all of the program requirements (one in April 2002, three in March 2003, one in April 2003, and one in August 2003) and were accepted into the program after signing a formal participation agreement with the SBA. The six NMVC companies initially raised $48 million in private capital and were subsequently provided $72 million in leverage. The companies are

Adena Ventures, L.P., Athens, Ohio, approved on April 24, 2002, with targeted low-income areas in Ohio, West Virginia, and Maryland; New Markets Venture Partners, College Park, Maryland, approved on March 5, 2003, with targeted low-income areas in Maryland, Virginia, and the District of Columbia; CEI Community Ventures Fund, LLC, Portland, Maine, approved on March 21, 2003, with targeted low-income areas in Maine, New Hampshire, and Vermont; Murex Investments I, L.P., Philadelphia, Pennsylvania, approved on March 31, 2003, with targeted low-income areas in Pennsylvania, New Jersey, and Delaware; Penn Venture Partners, LP, Harrisburg, Pennsylvania, approved on April 23, 2003, with targeted low-income areas in Pennsylvania; Southern Appalachian Fund, L.P., London, Kentucky, approved on August 8, 2003, with targeted low-income areas in Kentucky, Tennessee, Georgia, Alabama, and Mississippi.

NMVC companies are subject to various reporting requirements. For example, for each fiscal year, NMVC companies must file an annual financial statement with the SBA that has been audited by an independent public accountant acceptable to the SBA. The statement must include an assessment of the social, economic, or community development impact of each financing; the number of full-time equivalent jobs created as a result of the financing; the impact on the revenues and profits of the business being financed; and the impact on the taxes paid by the business being financed and by its employees. The statement must also include a listing of the number and percentage of the business's employees that reside in a low-income area. In addition, NMVC companies are required to submit to the SBA a portfolio financing report for each financing made within 30 days of the closing date.

Eligibility of Small Businesses and Low-Income Geographic Areas

NMVC companies are required to provide financial assistance and operational assistance only to small businesses as defined under the SBA's SBIC program. The business must either meet the SBA's size standard for the industry in which it is primarily engaged or have a maximum net worth of no more than $19.5 million and average after-tax net income for the preceding two years of not more than $6.5 million. All of the company's subsidiaries, parent companies, and affiliates are considered in the size standard determination.

In addition, at the close of each NMVC company's fiscal year, at least 80% of the company's total financings (in total dollars) and 80% of the total number of concerns in that company's portfolio must be small businesses that, at the time of the financing, had their principal offices located in a low-income area (low-income enterprises). NMVC companies that fail to reach these required percentages at the end of any fiscal year must be in compliance by the end of the following fiscal year. They are not eligible for additional leverage from the SBA until they reach the required percentages.

The act defines a low-income area as any census tract, or equivalent county division as defined by the Bureau of the Census, that meets any of the following criteria:

a poverty rate of 20% or more; if located in a metropolitan area, at least 50% of its households have an income that is below 60% of the area median gross income; if not located in a metropolitan area, has a median household income that does not exceed 80% of the statewide median household income; is located within a historically underutilized business zone (HUBZone); is located in an urban empowerment zone or urban enterprise community as designated by the Department of Housing and Urban Development; or is located in a rural empowerment zone or rural enterprise community as designated by the Department of Agriculture.

NMVC Leverage

NMVC companies invest funds they have raised themselves, their regulatory capital, in small businesses. In addition, they can receive up to 150% of that amount from the SBA, subject to the availability of funds. NMVC companies follow essentially the same process for obtaining SBA funding as prescribed under the SBIC program. The SBA's funding, or leverage, comes from the sale to third parties of 10-year securities (or debentures), which are backed by the full faith and credit of the United States. Because the SBA guarantees the timely payment of the principal and interest due on the securities, the SBA is able to obtain favorable interest rates. NMVC companies are responsible for meeting the terms and conditions set forth in the debenture.

NMVC debentures are deferred-interest debentures issued at a discount (less than face value) equal to the first five years' interest to eliminate the need for NMVC companies to make interest payments during that period. As a result, NMVC companies make no payments on the debenture for five years from the date of issuance, plus the stub period, which ensures that all NMVC debentures have common prepayment and maturity dates of either March 1 or September 1. NMVC companies make semiannual interest payments on the face amount of the debenture during years 6 to 10, and they are responsible for paying the debenture's principal amount when the debenture reaches its maturity date.

NMVC companies receive leverage from the SBA in a two-step process. First, they submit a request to the SBA for a conditional commitment to reserve a specific amount of leverage for future use. This request authorizes the SBA to sell the requested debenture amount to a third party at an interest rate approved by the SBA or to pool the requested debenture amount with other requests, providing each request with the same maturity date, interest rates, and conditions. The NMVC companies then apply to the SBA to draw against the SBA's leverage commitment. These requests may come at any time during the term of the SBA's leverage commitment.

Although authorized to do so, the SBA does not pool NMVC debentures. Through an agreement with the SBA, the Federal Home Loan Bank of Chicago (FHLB) has purchased and held all outstanding NMVC debentures since issuance. The interest rate on each NMVC debenture was determined by FHLB using a spread over FHLB's cost of funds as of the date of each issuance.

The SBA does not allow NMVC companies to prepay their draws for a period of 12 months (plus the stub period) after issuance. Prepayments are permitted after that waiting period, but only on March 1 or September 1 of each year. The cost of prepayment is the present value of the NMVC debenture on the semiannual date chosen for prepayment.

After receiving funds, NMVC companies make equity investments in small businesses of their choice. Equity investments are typically in the form of common or preferred stock and sometimes in the form of subordinated debt with equity features (as long as the debt is not amortized and provides for interest payments contingent upon and limited to the extent of earnings) or limited partnership interests, options, warrants, and similar equity investment instruments.

Operational Assistance Grants

The SBA is authorized to award grants to NMVC companies and SSBICs to provide free operational assistance to small businesses financed, or expected to be financed, under the program. The grants must be used to provide management, marketing, and other technical assistance to help a small business with its business development. The grants have a dollar-to-dollar matching requirement and cannot be used for general and administrative expenses, including overhead. Matching resources may be in the form of (1) cash; (2) in-kind contributions; (3) binding commitments for cash or in-kind contributions that are payable or available over a multiyear period acceptable to the SBA but not to exceed 10 years; or (4) an annuity, purchased with funds other than regulatory capital, from an insurance company acceptable to the SBA that may be payable over a multiyear period acceptable to the SBA but not to exceed 10 years.

NMVC companies and SSBICs are eligible for an operational assistance grant award equal to the amount of matching resources the company has raised, subject to the availability of funds. NMVC companies must use at least 80% of both the grant funds and their matching resources to provide free operational assistance to small businesses located in a low-income area. SSBICs must use both the grant funds awarded by the SBA and their matching resources to provide free operational assistance to small businesses "in connection with a low-income investment made by the SSBIC with regulatory capital raised after September 21, 2000."

Program Statistics

As shown in Table 2 , NMVC companies received operational assistance grants in FY2002 and FY2003 and started making equity investments in small businesses in FY2002.

Since the program's inception, NMVC companies invested more than $81.4 million in 71 different small businesses. The program reached its peak, in terms of the amount of financings, in FY2007, investing nearly $16.3 million in 35 different small businesses that year. Since then, the amount of financings each year generally declined—falling to no new financings in FY2016 as the program's initial investments expired and NMVC companies engaged only in additional follow-on financings with the small businesses in their portfolios.

As mentioned previously, the NMVC program's active unpaid principal balance (including both the SBA guaranteed portion and the unguaranteed portion of the NMVC companies' unpaid principal balance) peaked at $698 million in FY2008, and then fell each year thereafter until reaching $0 in FY2018.

Congressional Issues

The NMVC program has not received any additional funding since 2001. Opposition to the program within Congress began to gain momentum when President George W. Bush recommended in his FY2002 budget request that the NMVC program be eliminated, arguing that the program is relatively expensive and duplicative of other federal programs:

The Administration supports the objectives of the New Markets Venture Capital (NMVC) program but believes those objectives can be achieved more efficiently and at a lower cost through other existing programs. Several vehicles and incentives to direct investment into economically distressed communities already exist. Communities targeted by NMVC have access to a wide range of private for-profit and economic development programs, including the federally supported community development financial institutions administered through the Department of Treasury. In addition, SBA's SBIC program, which has 412 licensed venture capital companies with total capital resources amounting to $17.7 billion, is implementing incentives to encourage investment in economically distressed areas.

The NMVC program is also expensive relative to the impact that it is expected to have. The total cost of the program in FY2001 is $52 million, not including administrative cost of running the program. Since the program is expected to generate $150-$200 million of investment activity, it will yield only $3.00-$4.00 of investment for every taxpayer dollar spent. In comparison, under the Small Business Investment Company (SBIC) program, there is no cost associated with the debenture portion of the program.

Others argued that the NMVC program's targeted clientele of small businesses located in economically distressed areas is inherently too risky for government involvement. In their view, NMVC companies are "designed and chartered to operate (as profit-making firms) in a market niche that mainstream venture capital firms will not touch."

The program's advocates contended that the NMVC program is necessary precisely because mainstream venture capital firms generally avoided investments in small businesses located in economically distressed areas. In their view, the NMVC program is an essential part of a larger federal effort, which includes tax incentives, to fill a market niche in private-sector venture capital investments and, in the process, help to revitalize areas experiencing long-term economic difficulties. They also objected to the Bush Administration's argument that the program is duplicative of other federal programs. In their view, the NMVC program is targeted at a clientele that is not being adequately served by other federal programs.

The Bush Administration continued to recommend the program's elimination in each of its subsequent budget requests. As mentioned previously, during congressional consideration of the FY2003 budget the unobligated balances of $10.5 million for NMVC debenture subsidies and $13.75 million for operational assistance grants were rescinded.

Since then, more than 30 bills have been introduced to amend the NMVC program, including bills to

reduce the amount of capital NMVC companies must raise to become eligible for operational assistance grants, eliminate the matching requirement for operational assistance grants, create an Office of New Markets Venture Capital within the SBA, require the SBA to provide conditionally approved NMVC companies a full two years to meet all program requirements, provide increased financing to small manufacturers, and amend the program's definition for low-income area to correspond with the definition used by the New Market Tax Credits program (Section 45D(e) of the Internal Revenue Code of 1986) (26 U.S.C. 45D(e)).

Many of these bills also included provisions to provide the NMVC program additional funding.

Legislative Efforts to Provide Additional NMVC Funding

As shown in Table A-1 in the Appendix , during the 108 th Congress, two bills were introduced, one in the House and one in the Senate, to provide the NMVC program "such subsidy budget authority as may be necessary to guarantee $75 million of debentures" and $15 million for operational assistance grants over FY2004 and FY2005. Neither bill was enacted.

During the 109 th Congress, an amendment was offered during the House during floor debate on H.R. 2862 , the Science, State, Justice, Commerce, and Related Agencies Appropriations Act, 2006, to provide "$30 million in debenture guarantees and $5 million for operational assistance grants to fund the creation of a fresh round of New Market Venture Capital companies … paid for by using funds from the Small Business Administration's salary and expense account." The amendment failed by voice vote. A bill introduced in the House would have authorized an expansion of the NMVC program to include the selection of an NMVC company whose primary objective would be the economic development of small businesses located in Hurricane Katrina-affected areas. The bill would have authorized "such subsidy budget authority as may be necessary to guarantee … $50 million of debentures issued by the Gulf Region New Markets Venture Capital Company … and $10 million for grants to the Gulf Region New Markets Venture Capital Company." Another House bill would have provided the NMVC program "such subsidy budget authority as may be necessary to guarantee $100 million of debentures and $25 million for operational assistance grants for FY2006 through FY2008." Neither bill was enacted.

During the 110 th Congress, four bills were introduced, two in the House and two in the Senate, to provide the NMVC program additional funding. One of the House bills would have provided the NMVC program such subsidy budget authority as may be necessary to guarantee $100 million of debentures and $25 million for operational assistance grants for FY2007 through FY2009. The other House bill would have provided the NMVC program such subsidy budget authority as may be necessary to guarantee $30 million of debentures and $5 million for operational assistance grants for FY2008 through FY2010. The two Senate bills would have provided the NMVC program $20 million for operational assistance grants. None of these bills was enacted.

During the 111 th Congress, two bills were introduced in the House to provide the NMVC program additional funding. One of the bills would have provided the NMVC program such subsidy budget authority as may be necessary to guarantee $100 million of debentures and $25 million for operational assistance grants for FY2009 through FY2011. The other bill would have provided the NMVC program such subsidy budget authority as may be necessary to guarantee $100 million of debentures and $20 million for operational assistance grants for FY2010 through FY2011.

During the 112 th Congress, one bill was introduced to provide additional funding for the NMVC program. Representative Nydia Velázquez introduced H.R. 2872 , the Job Creation and Urban Revitalization Act of 2011, on September 8, 2011. The bill would have provided the NMVC program such subsidy budget authority as may be necessary to guarantee $75 million of debentures and $15 million for operational assistance grants for FY2012 through FY2013. The bill was referred to the House Committee on Small Business on September 8, 2011. No further action was taken on the bill.

As mentioned earlier, no bills have been introduced since the 112 th Congress concerning the NMVC program.

Related SBIC Program Developments

P.L. 111-5 , the American Recovery and Reinvestment Act of 2009 (ARRA), included provisions designed to encourage SBIC investments in low-income areas. The act allowed an SBIC licensed on or after October 1, 2009, to elect to have a maximum leverage amount of $175 million instead of $150 million (later increased to $175 million) if that SBIC has invested at least 50% of its financings in low-income geographic areas, as defined under the NMVC program, and certified that at least 50% of its future investments will be in low-income geographic areas. ARRA also increased the maximum amount of leverage available for two or more licenses under common control to $250 million from $225 million if these requirements are met.

In addition, on April 7, 2011, the SBA announced a $1 billion impact investment SBIC initiative (providing up to $150 million in leverage in FY2012 and up to $200 million in leverage per fiscal year thereafter until the limit is reached).

Under this initiative, SBA-licensed impact investment debenture 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." To receive an impact investment, a small business must meet at least one of the following criteria:

be located in or, at the time of the initial investment, have at least 35% of its full-time employees residing in an LMI zone as defined in 13 C.F.R. Section 107.50 or be located in an economically distressed area as defined by Section 3011 of the Public Works and Economic Development Act of 1965, as amended (an area with per capita income of 80% or less of the national average or an unemployment rate that is, for the most recent 24-month period for which data are available, at least 1% greater than the national average unemployment rate); or be in an industrial sector that the SBA has identified as a national priority (currently clean energy, education, and advanced manufacturing).

Initially, an impact investment SBIC could receive up to $80 million in SBA leverage. On June 6, 2013, the SBA announced that it was increasing the maximum leverage available to impact investment SBICs to $150 million.

On September 25, 2014, the SBA announced several changes to the impact investment program designed to "broaden access to the fund." The agency announced that it was continuing the program beyond FY2016. Additionally, 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. Subject to the SBA's approval, impact investment SBICs may devise a customized definition of an "impact investment" during the licensing process.

On February 3, 2016, the SBA published a proposed rule in the Federal Register to provide regulations for impact investment SBICs regarding licensing, leverage eligibility, fees, and reporting and compliance requirements. The proposed regulations were an indication of the SBA's intent at that time to continue the impact investment SBIC initiative indefinitely.

At the end of FY2018, there were nine licensed, impact investment SBICs (two in 2011, one in 2012, two in 2014, two in 2015, and two in 2016). As of September 30, 2018, they managed more than $905 million in assets and had investments in 81 small businesses. During FY2018, these SBICs invested $106.8 million in 35 small businesses.

After reviewing the impact investment SBIC initiative's performance, on September 28, 2017, the SBA's Office of Investment and Innovation (OII) published a letter addressed to SBIC participants, applicants, and all other interested parties indicating that as of November 1, 2017, it would no longer accept new management assessment questionnaires from applicants interested in participating in the impact investment SBIC initiative. The letter indicated that the SBA was also terminating the 2011/2012 Impact Investment Fund Policy letter that the SBA had used to form the initiative's impact investment fund. The OII's letter indicated that the SBA was taking these actions for several reasons, including that "few qualified funds applied to be licensed as Impact SBICs," that "many of these SBICs would have applied to the SBIC program regardless of the existence of the Impact Policy," and "the results produced were not commensurate with the time and resources expended by SBA to maintain it." In addition, on June 11, 2018, the SBA published a notice in the Federal Register withdrawing the proposed rule published on February 3, 2016, that would have created regulations for the impact investment SBIC initiative because the "SBA has determined that the cost is not commensurate with the benefits."

Concluding Observations

The SBA's LMI and impact investment initiatives are designed to encourage SBIC investments in LMI areas. In recent years, the amount of SBIC program investments in LMI zones has generally increased (see Table 1 ). The NMVC program is no longer active (it does not have any active unpaid principal balance) and the amount and number of its financings were lower than anticipated by its original sponsors and below levels desired by its advocates. Some argue that the increased levels of SBIC investments in LMI areas in recent years, coupled with the SBA's efforts to encourage SBIC investments in such areas, may diminish the need for the NMVC program. NMVC advocates disagree.

In FY2018, SBICs provided 609 financings totaling $1.026 billion to small businesses located in a LMI income area, an average investment of $1.685 million. NMVC advocates argue, as Senator Bond did when the NMVC program was proposed, that the NMVC program targets small businesses seeking much smaller investments.

The debate over the NMVC program's future, particularly whether the program should be provided additional funding, is, in many ways, reflective of broader disagreements about the role of government, and the SBA, in private enterprise. Some believe the federal government and the SBA should take an active role in assisting small businesses to access capital—through the provision of loan guarantees, equity financing, and management training—to further the economic recovery. In their view, the SBA's programs fill a market niche by providing loans to small businesses unable to get credit elsewhere, equity financings to small businesses often overlooked by private investors, and training for new and aspiring entrepreneurs unable to find affordable training elsewhere. They assert that increasing funding for the NMVC program will create jobs by making capital available to entrepreneurs unable to find it in the private marketplace.

Others worry about the long-term adverse economic effects of the federal deficit. Instead of supporting increased funding for federal spending programs, they advocate business tax reduction, reform of financial credit market regulation, and federal fiscal restraint as the best means to assist small businesses, generate economic growth, and create jobs. They are particularly interested in achieving greater government efficiency by eliminating federal spending programs, such as the NMVC program, that they perceive are duplicative of others.

Appendix. Legislative Efforts to Provide Additional Funding for the NMVC Program