49 Attachment C

# The U.S. SBICs: Overview and Reaulatorv Framework<sup>6 5</sup>

Overview.- In 1958, the U.S. introduced the Small Business<sup>Investment</sup> Act, which authorized the Small Business Administration<sup>(SBA) to license,</sup> regulate and help finance Small Business Investment Companies<sup>(SBICs).66</sup> SBICs are essentially closed-end investment trusts which provide both managerial and capital assistance to start-up firms.<sup>SBA seeks to minimize</sup> its oversight of SBICs. Once licensed, each SBIC is subject<sup>to annual</sup> reporting and on-site examination by the SBA, and is<sup>required to meet certain</sup> statutory and regulatory restrictions regarding approved<sup>investments and</sup> operating rules. The regulations are geared toward protecting<sup>the interests</sup> of small business concerns and the integrity of the program,<sup>and to insure its</sup> overall effectiveness.

By law, an SBIC can be organized in any state, as either<sup>a corporation</sup> or a limited partnership. Most SBICs are owned by<sup>relatively small groups of</sup> local investors. Some SBICs are corporations with publicly<sup>traded stock; some</sup> are privately held; others are subsidiaries of corporations.

Funding.- SBICs can obtain financing through a number<sup>of means:</sup> acquiring private equity capital, publicly selling Ptock,<sup>taking advantage of</sup> government leverage, issuing debt securities, and<sup>obtaining loans. An SBIC in</sup> good standing with demonstrated need for funds can apply<sup>to the SBA for the</sup> sale or to obtain SBA guarantee of its debentures. SBICs<sup>with private capital</sup> of at least $1,000,000 (the current minimum required<sup>for an SBIC to become</sup> licensed) may receive up to three guaranteed debenture dollars<sup>for each dollar</sup> of the SBICs private capital. In addition, an SBIC with<sup>at least 65% of its</sup> total funds available -.or investment invested in venture<sup>capital can receive</sup> an additional, or fourth dollar of leverage in excess of<sup>$35,000,000. In</sup> recent times, however, SBA funds have been severely limited<sup>due to budget</sup> cuts, which have led to a decrease in the growth of<sup>SBICs.</sup> The regular SBIC can choose a three, five, seven, or ten<sup>year debenture</sup> maturity date. Until the debenture matures, the SBIC must pay interest<sup>semi-</sup> annually. The rate of interest on each debenture<sup>issue is determined by the</sup> Secretary of the U.S. Treasury at the time of sale. The rate is based<sup>on the</sup> current average market yield4 of outstanding U.S. Treasury<sup>obligations which</sup> have remaining periods to maturity comparable to those<sup>of the newly-issued</sup> debentures.

Although repayment of the principal is due in full at the debenture's maturity, an SBIC in good standing may apply for the<sup>sale or SBA guarantee of</sup> new debentures in order to refund its maturing debentures.

65 The description below has been mostly extracted from materials published by the U.S. Small Business Administration.

66 Note that SBA also has a program in which it provides a 65 to 90 percent guarantee against default on bank borrowings by a small concern.