SBA Small Business Investment Company Program

June 15, 2017 (R41456)
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Contents

Tables

Appendixes

Summary

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 March 31, 2017, there were 316 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 $29.2 billion in small businesses, with the SBA's share of capital at risk about $14.6 billion. In FY2016, the SBA committed to guarantee $2.51 billion in SBIC small business investments. SBICs invested another $3.48 billion from private capital for a total of nearly $6.0 billion in financing for 1,201 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 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. 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. In addition, the SBA established a five-year, $1 billion early stage debenture SBIC initiative in 2012. Early stage debenture 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.

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, $1 billion impact investment SBIC debenture program (targeting underserved markets and communities facing barriers to access to credit and capital), and $1 billion early stage debenture SBIC initiative (targeting early stage small businesses).


SBA Small Business Investment Company Program

SBIC 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; 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.

Authorized by P.L. 85-699, the Small Business Investment Act of 1958, as amended, the SBIC program is designed to "improve and stimulate the national economy in general and the small-business segment thereof in particular" 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."2

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.

The SBA does not make direct investments in small businesses. It partners with privately owned and managed SBICs licensed by the SBA to provide financing to small businesses with private capital the SBIC has raised (called regulatory capital) and with funds (called leverage) the SBIC borrows at favorable rates because the SBA guarantees the debenture (loan obligation).5 As of March 31, 2017, there were 316 licensed SBICs participating in the SBIC program.6 In FY2016, the SBA provided $2.51 billion in leverage to SBICs.7

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, H.R. 2333, the Small Business Investment Opportunity Act of 2017, would increase the amount of outstanding leverage allowed for each SBIC to $175 million from $150 million. The bill, as amended, was favorably reported by the House Committee on Small Business on June 15, 2017.

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 debenture SBIC initiative in 2012. Early stage debenture 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 (targeting early stage small businesses).

This report also discusses legislative efforts that led to an increase in (1) the maximum annual leverage the SBA is authorized to provide to SBICs and (2) the maximum amount of outstanding leverage allowed for two or more SBIC licenses under common control.9

SBIC Types

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."10 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 debenture SBICs, and early stage debenture SBICs receive leverage through the issuance of debentures.11 Debentures are debt obligations issued by SBICs and held or guaranteed by the SBA.12 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.13 Bank-owned, non-leveraged SBICs do not receive leverage.14 This report focuses on the four types of regular SBICs that receive leverage from the SBA.

SBIC Eligibility Requirements

A SBIC can be organized in any state as either a corporation, a limited partnership (LP), or a limited liability company (LLCs must be organized under Delaware law). Most SBICs are owned by relatively small groups of local investors, although many are partially owned, and some (47 of 313) are wholly owned, by commercial banks. A few SBICs are corporations with publicly traded stock.15

One of the primary criteria for licensure as a SBIC is having qualified management. The SBA reviews and approves a prospective SBIC's management team based upon its professional capabilities and character. Specifically, the SBA examines the SBIC's management team and looks for

SBIC Application Process

Applying for a SBIC debenture license is a multi-step process, beginning with the submission of the SBA Management Assessment Questionnaire (MAQ). The questionnaire includes, among others, questions concerning

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 interview. If, following the interview, the Investment Committee votes to proceed, the investment company is provided a "Green Light" letter formally inviting it to file a license application along with a base filing fee of $10,000, plus an additional $5,000 for partnerships or LLC SBICs ($15,000 total). If the license is approved, all SBIC principals must complete the SBA's SBIC Regulations training classes. Obtaining a SBIC license for the first time usually takes four to six months from the time of the initial submission of the MAQ to issuance of the license.20

As will be discussed, new applications for the participating securities program are no longer being accepted. Impact investment debenture SBIC applicants are required to submit the same documents, follow the same process, and meet the same standards as applicants seeking a debenture SBIC license. However, impact investment debenture SBICs are provided an expedited review process.21

The application process for an early stage debenture SBIC license is similar to the application process for a SBIC debenture license with two major differences: the SBA only accepts applications to the early stage innovation program during specific time periods published "from time to time" in the Federal Register (currently done annually) and places "particular emphasis on managers' skills and experience in evaluating and investing in early stage companies."22 Also, early stage debenture SBIC applicants must pay a partnership licensee fee plus an additional $10,000, for a total application fee of $25,000.23

The eligibility requirements and application process for small businesses requesting financial assistance from a SBIC is provided in the Appendix.

SBIC Capital Investment Requirements

Debenture SBICs

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.

Debenture SBICs are now required to have a private capital investment of at least $5 million (called regulatory capital).24 The SBA has discretion to license an applicant with regulatory capital of $3 million if the applicant has satisfied all licensing standards and requirements, has a viable business plan reasonably projecting profitable operations, and has a reasonable timetable for achieving regulatory capital of at least $5 million.25 At least 30% of a debenture SBIC's regulatory and leverageable capital must come from three people unaffiliated with the fund's management and unaffiliated with each other.26 Also, no more than 33% of a SBIC's regulatory capital may come from state or local government entities.27

Participating Securities SBICs

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.

In 1994, the SBA established the SBIC Participating Securities Program (SBIC PSP) to encourage the formation of participating securities SBICs that would make equity investments in startup and early stage small businesses. The SBA created the program to fill a perceived investment gap created by the SBIC debenture program's focus on mid- and later-stage small businesses. The SBA stopped issuing new commitments for participation securities on October 1, 2004, beginning a process to end the program, which continues.28

The SBA stopped issuing new commitments for participating securities primarily because the program experienced a projected loss of $2.7 billion during the early 2000s as investments in technology startup and early stage small businesses lost much of their stock value at that time. The SBA found that "the fees payable by SBICs for participating securities leverage are not sufficient to cover the projected net losses in the participating securities program."29 The SBA continued to honor its existing commitments to participating securities SBICs, which were allowed to continue operations. However, these securities SBICs were required to comply with special rules concerning minimum capital, liquidity, non-SBA borrowing, and equity investing.30 In recent years, some Members have expressed interest in either revising the program or starting a new program modeled on certain aspects of the SBIC PSP to assist startup and early stage small businesses.31

The SBA is no longer issuing new commitments for participating securities, and each year several participating securities SBICs leave the program because their leverage commitments are retired. As of March 31, 2017, there were 39 participating securities SBICs in the SBIC program, with $249.5 million in outstanding capital at risk.32 To be part of the SBIC program, a participating securities SBIC must have regulatory capital of at least $10 million. The SBA has discretion to require less than $10 million in regulatory capital if the licensee can demonstrate that it can be financially viable over the long term with a lower amount. In this circumstance, the regulatory amount required may not be lower than $5 million.33 At least 30% of a participating securities SBIC's regulatory and leverageable capital must come from three people unaffiliated with the fund's management and unaffiliated with each other.34 Also, no more than 33% of a SBIC's regulatory capital can come from state or local government entities.35

Impact Investment Debenture SBICs

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 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."36 These areas initially included businesses located in underserved communities (as defined by the SBA), the education sector, and the clean energy sector.37 Impact investment debenture 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.

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.38

There are currently nine licensed, impact investment SBICs (two in 2011, one in 2012, two in 2014, two in 2015, and two in 2016).39 As of September 30, 2016, they managed more than $715.8 million in assets and had investments in 48 small businesses. In FY2016, impact investment SBICs invested $76.1 million in 20 small businesses.40

On September 25, 2014, the SBA announced several changes to the impact investment program to "broaden access to the fund."41 The agency announced that it will continue the initiative beyond FY2016 and, in recognition of its now anticipated permanent status, renamed the initiative the Impact Investment Fund. 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.42 Also, subject to the SBA's approval, impact investment SBICs may devise a customized definition of an "impact investment" during the licensing process.

Early Stage Debenture SBICs

On April 27, 2012, the SBA published a final rule in the Federal Register establishing a $1 billion early stage debenture 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).43 Early stage debenture 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.44

In recognition of the higher risk associated with investments in early stage small businesses, the initiative includes "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."45 For example, early stage debenture SBICs must raise more regulatory capital (at least $20 million) than debenture SBICs, impact investment debenture 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, as will be discussed, early stage debenture 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, $150 million maximum per SBIC and $350 million for two or more SBICs under common control) and impact investment debenture SBICs (up to 200% of regulatory capital, $150 million maximum).

On May 1, 2012, the SBA published a notice in the Federal Register announcing its first annual call for venture capital fund managers to submit an application to become a licensed early stage debenture SBIC.46 Thirty-three venture capital funds submitted preliminary application materials. After these materials were examined and interviews held, the SBA announced on October 23, 2012, that it had issued Green Light letters to six funds, formally inviting them to file license applications.47

The SBA's second, third, fourth, and fifth annual calls for venture capital fund managers to submit an application to become a licensed early stage debenture SBIC took place on December 18, 2012, February 4, 2014, January 12, 2015, and February 2, 2016, respectively.48

To date, five of the 63 investment funds that have applied to participate in the program have been granted an early stage SBIC license.49 As of September 30, 2016, the five early stage SBICs had raised $246.9 million in private capital, received $78.0 million in SBA-guaranteed leverage, had $105.3 million in outstanding commitments, and invested $160.7 million in 62 small businesses. In FY2016, early stage SBICs invested $66.2 million in 45 small businesses.50

On September 19, 2016, the SBA published a notice of proposed rulemaking in the Federal Register, which included proposed changes to the early stage SBIC initiative to "make material improvements to the program" and "attract more qualified early stage fund managers."51 The SBA also indicated its intention to continue the initiative beyond its initial five-year term.52 Included among the proposed changes are to

Key Features of Regular SBIC Types

Table 1 provides five key features distinguishing the SBA's debenture SBICs, participating securities SBICs, impact investment debenture SBICs, and early stage debenture SBICs:

Table 1. Key Features of the SBA's Debenture, Participating Securities, Impact Investment Debenture, and Early Stage Debenture SBICs

Program Requirement

Debenture SBICs

Participating Security SBICs (no longer accepting new investments)

Impact Investment Debenture SBICs

Early Stage Debenture SBICs

Private Capital

$5 million minimum

$10 million minimum

$5 million minimum

$20 million minimum

SBA Leverage

200% of private capital up to $150 million per SBIC or $350 million for two or more SBICs under common controla

200% of private capital up to $150 million per SBIC or $350 million for two or more SBICs under common control

200% of private capital up to $150 million; limited to 100% of private capital during any 12-month perioda

100% of private capital up to $50 million

Investments

Broad range of equity investments but generally later stage and mezzanine

Broad range of equity investments

Broad range of equity investments but generally later stage and mezzanine; at least 50% in underserved markets and communities facing barriers to access to credit and capital

Broad range of equity investments; at least 50% in early stage small businesses (no positive cash flow in any fiscal year prior to first financing)

Leverage Description

Interest and SBA annual charge payable semiannually through maturity

SBA paid interest to bond holders; SBICs only owed and repaid SBA out of profits

Interest and SBA annual charge payable semiannually through maturity

Standard: 5 years interest reserve required, interest and SBA annual charge payable quarterly through maturity OR

Discounted: interest and SBA annual charge discounted for first 5 years plus the "stub" period; interest and SBA annual charge payable quarterly thereafter through maturity

Profit Participation

None

SBA typically received about 8% of any profits

None

None

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.

SBIC Investments in Small Businesses

SBICs provide equity capital to small businesses in various ways, including by

SBICs are subject to statutory and regulatory restrictions concerning the nature of their approved investments. For example, SBICs are not allowed to

The SBA also regulates the interest rates and fees SBICs are allowed to charge small businesses on loans, debt securities, and equity financing.65

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."66 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.67 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.

In addition, LMI debentures are issued at a discount so that the proceeds that a SBIC receives for the sale of a debenture is 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 pay the SBA's annual fees on LMI debentures for the first five years of a debenture, plus the stub period.68

In FY2016, SBICs made 682 investments in small businesses located in a LMI Zone, totaling $1.319 billion—about 22.0% of the total amount invested.69

In 2007, P.L. 110-140, the Energy Independence and Security Act of 2007, authorized the SBA to issue Energy Saving Debentures for the purpose of making "Energy Saving Qualified Investments," defined in the act as an investment "in a small business concern that is primarily engaged in researching, manufacturing, developing, or providing products, goods, or services that reduce the use or consumption of non-renewable energy resources."70 Energy Saving Debentures are structured as a discount debenture similar to LMI debentures. For example, there are no interest payments or SBA annual charge for the first five years of the Energy Saving Debenture, plus the stub period between the debenture's issuance date and the next March 1 or September 1 payment date.71

Leverage

Leverage Drawdown

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.72 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.

A debenture is executed in conjunction with each draw and held by an agent of a bank selected by the SBA (Federal Home Loan Bank of Chicago), which provides interim funding to the SBIC until a "SBIC's debenture(s) can be pooled with others and sold to the public, a process that occurs every six months [each March and September]."73 During the interim period, the bank charges a SBIC the London Interbank Offered Rate (LIBOR), plus a 30 basis point premium.74

The SBA determines the size of the debenture pool two weeks prior to each scheduled pooling date. All of "the debentures scheduled to be pooled are purchased and pooled together by an entity called the Investment Trust which is managed by the Bank of New York Mellon," and, as the pooling occurs, "the SBA signs an agreement with the Trust to guarantee all the interest and principal payments due on each of the debentures in the pool."75 The trust then securitizes the pool of debentures and issues new securities called trust certificates. Underwriters are hired to sell the trust certificates to investors in the public market. An offering circular is issued to notify investors of the trust certificates' availability, the terms of the securities, and information concerning how they can be purchased.76

The SBA operates the SBIC program on a zero-subsidy basis. To recoup its expenses should defaults occur, the SBA is authorized to charge SBICs a 3% origination fee for each debenture and for each participating security issued (1% at commitment and 2% at draw), an annual fee (not to exceed 1.38% for debentures and 1.46% for participating securities) on the leverage drawn, which is fixed at the time of the leverage commitment, and other administrative and underwriting fees that are adjusted annually.77

Debenture SBIC Leverage Requirements

A licensed debenture SBIC in good standing with a demonstrated need for funds may apply to the SBA for financial assistance (leverage) of up to 300% of its private capital. However, the SBA has traditionally approved debenture SBICs for a maximum of 200% of their private capital, and no fund management team may exceed the allowable maximum amount of leverage of $150 million per SBIC and $350 million for two or more licenses under common control.78 A SBIC licensed on or after October 1, 2009, may elect to have a maximum leverage amount of $175 million per SBIC 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.79

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.80 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.81 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.82 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.83 As a result, the SBIC program enhances a SBIC's access to venture capital and reduces its cost of raising additional financial resources.

Because debenture SBICs are required to make semiannual interest payments on the debenture and semiannual payments on the SBA's annual charge, they tend to focus their investments on mid- and later-stage small businesses that have a positive cash flow. Businesses with a positive cash flow have resources available to make payments to the debenture SBIC, either in the form of interest payments or dividends. In many instances, small businesses with positive cash flow are seeking capital for expansion.84

Participating Securities SBIC Leverage Requirements

Although the SBA is no longer issuing new commitments for participating securities, the SBA is authorized to accept an application from a licensed participating securities SBIC for leverage of up to 200% of its private capital.85 Also, no fund management team may exceed the allowable maximum amount of leverage of $150 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.

There were 35 public offerings of SBA-guaranteed participating securities certificates since the start of the participating securities program, amounting to just under $10.3 billion. The final SBA-guaranteed participating securities certificate, for $332 million, had a term of 10 years and was offered to investors on February 19, 2009, with delivery of the certificates on February 25, 2009.86

SBIC participating securities certificates provide for quarterly payments to investors from dividends on preferred stock, interest on an income bond, or a priority return on a preferred limited partnership equal to a specified interest rate on the principal amount and a lump sum principal payment at maturity. A participating securities SBIC is obligated to make these quarterly payments "only to the extent it has sufficient profits available to make such payments."87 If a participating securities SBIC is unable to make any required payment, the SBA will make the payment on its behalf. Because startup and early stage small businesses often are not initially profitable, the SBA included language in its participating securities' offering circulars that it "anticipates that it will be called upon routinely to make such … payments for the SBICs in the early years of the lives of such SBICs" and that it "expects to be reimbursed [by the SBIC] any amounts paid … under its guarantee over the life of a participating security."88

Because the SBA guaranteed the certificate, investors were more likely to purchase a SBIC participating securities certificate as opposed to others available on the market. They were also more likely to accept a lower payment rate than what would be expected without the SBA's guarantee.89

In addition, participating securities SBICs are more likely than debenture SBICs to invest in startup and early stage small businesses because the SBA is willing to make a participating securities SBIC's required quarterly payments to investors, at least during the early years of the investment. Because participating securities SBICs are not required to make these quarterly payments, they are encouraged to focus on a small business's long-term prospects for growth and profitability rather than on its prospects for having immediate, positive cash flow.90

As of March 31, 2017, the SBA had a guarantee on an outstanding unpaid principal balance of $10.4 billion in SBIC debentures, $213.9 million in SBIC participating securities, and $88.3 million in other, primarily SSBIC, financings.91 The SBA also had an outstanding commitment on nearly $3.9 billion in SBIC debentures and $2.6 million in other, primarily SSBIC, financings.92

Impact Investment Debenture SBIC Leverage Requirements

As mentioned previously, the SBA announced on April 7, 2011, that it was establishing a $1 billion Impact Investment SBIC Initiative to "target areas of critical national priority including underserved markets and communities facing barriers to access to credit and capital."93 On July 26, 2011, the SBA announced that the first impact investment debenture SBIC license had been awarded to InvestMichigan! Mezzanine Fund.94

Licensed impact investment debenture SBICs may apply to the SBA for leverage of up to 300% of their private capital, limited to $150 million. In addition, they may receive leverage amounting to no more than 100% of their private capital during any fiscal year (subject to the $150 million limit). The SBA is expected to limit impact investment debenture SBICs to a maximum of 200% of their private capital, up to $150 million.95

Impact investment debenture 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 are provided an expedited application review process.

Early Stage Debenture SBIC Leverage Requirements

On April 27, 2012, the SBA 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). A licensed early stage SBIC may apply to the SBA for leverage of up to 100% of its private capital, limited to $50 million. The SBA does not consider applications from an early stage SBIC applicant that is under common control with another early stage SBIC applicant or an existing early stage SBIC (unless the existing early stage SBIC has no outstanding leverage or leverage commitments and will not seek additional leverage in the future).96

Early stage debenture 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).97 Because early stage standard debentures require early stage debenture 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 debenture 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 debenture 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.98 Early stage debenture 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 debenture 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.

Reporting Requirements

Once licensed, each SBIC is required to file with the SBA an annual financial report that includes an audit by a SBA-approved independent public accountant. SBICs are also subject to annual on-site regulatory compliance examinations99 and required to provide the SBA

SBIC Program Statistics

As of March 31, 2017, there were 316 licensed SBICs in operation (223 debenture SBICs, 39 participating securities SBICs, 46 bank-owned, non-leveraged SBICs, and 8 SSBICs).104

As shown in Table 2, the number of debenture SBICs has generally increased in recent years. However, there are fewer licensed SBICs today than in FY2008, primarily due to the planned reduction in the number of participating securities SBICs and SSBICs.

The SBA has made it a goal to increase the number of new SBIC licenses issued each year, with an emphasis on new debenture SBICs licenses, "to position the program for continued growth."105

Table 2. Number of Licensed SBICs by Type, FY2008-FY2017

SBIC Type

FY 2008

FY 2009

FY 2010

FY 2011

FY 2012

FY 2013

FY 2014

FY 2015

FY 2016

FY 2017 (3/31/2017)

Debenture

129

126

140

143

158

175

187

205

216

223

Participating Security

149

127

107

97

86

63

53

46

41

39

Bank-Owned/ Non-Leveraged

54

48

47

46

44

43

45

43

47

46

Specialized SBICs

16

14

13

13

13

11

9

9

9

8

Total

348

315

307

299

301

292

294

303

313

316

Sources: U.S. Small Business Administration, "SBIC Program Overview," January 23, 2009; U.S. Small Business Administration, "Small Business Investment Company (SBIC) Program Overview, as of September 30, 2013;" and U.S. Small Business Administration, "SBIC Program Overview, as of March 31, 2017."

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.

Total Financing

From the inception of the SBIC program to December 31, 2016, SBICs have invested approximately $83.6 billion in approximately 175,760 financings to small concerns.106 As mentioned previously, as of March 31, 2017, the SBA had a guarantee on an outstanding unpaid principal balance of $10.4 billion in SBIC debentures, $213.9 million in SBIC participating securities, and $88.3 million in other, primarily SSBIC, financings.107 The SBA also had an outstanding commitment on nearly $3.9 billion in SBIC debentures and $2.6 million in other, primarily SSBIC, financings.108

Including private investment, as of March 31, 2017, the SBIC program had invested or committed about $29.2 billion in small businesses, with the SBA's share of capital at risk about $14.6 billion.109

In FY2016, SBICs made 2,962 financings. The average financing amount was $2,022,854 ($2,186,317 for debenture SBICs and $381,057 for participating securities SBICs).110 In FY2016, SBIC funds were used primarily for acquiring an existing business (57.8%) and also for operating capital (17.2%), refinancing or refunding debt (12.3%), purchasing machinery or equipment (1.6%), research and development (2.3%), a new building or plant construction (0.7%), marketing activities (1.3%), plant modernization (0.1%), land acquisition (0.2%), and other uses (6.4%).111

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 continued to increase since then. In FY2016, the SBA committed to guarantee $2.51 billion in SBIC small business investments. SBICs invested another $3.48 billion from private capital for a total of almost $6.0 billion in financing for 1,201 small businesses.

In addition, the amount of SBA leverage as a share of total financing provided has generally increased since FY2005, peaking at 61.6% in FY2012. For example, the SBA's leverage commitments accounted for 12.3% of total financing in FY2005, 16.5% in FY2006, and 26.7% in FY2007, compared with 59.6% in FY2012, 61.6% in FY2013, 46.6% in FY2014, 40.6% in FY2015, and 42.0% during FY2016.

Table 3. SBIC Investments, FY2005-FY2016

($ in millions)

Year

SBA Leverage/Guarantee Commitments

Private-Sector Investment

Total Financing

Number of Small Businesses Financed

FY2005

$355

$2,540

$2,895

2,298

FY2006

$477

$2,420

$2,897

2,121

FY2007

$708

$1,940

$2,648

2,057

FY2008

$1,029

$1,398

$2,427

1,905

FY2009

$788

$1,068

$1,856

1,481

FY2010

$1,165

$882

$2,047

1,331

FY2011

$1,828

$1,005

$2,833

1,339

FY2012

$1,924

$1,303

$3,227

1,094

FY2013

$2,156

$1,342

$3,498

1,068

FY2014

$2,549

$2,916

$5,465

1,085

FY2015

$2,553

$3,733

$6,286

1,210

FY2016

$2,514

$3,478

$5,992

1,201

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; U.S. Small Business Administration, "SBIC Program Overview, as of September 30, 2015," and U.S. Small Business Administration, "SBIC Program Overview," as of September 30, 2016.

The SBA was authorized to issue up to $3 billion in SBIC leverage from 2005 through 2013. As mentioned previously, P.L. 113-76, the Consolidated Appropriations Act, 2014, increased that annual SBIC-leverage amount to $4 billion. For comparative purposes, private venture capital firms invested $25.8 billion in 3,374 deals in 2010, $36.3 billion in 4,168 deals in 2011, $32.7 billion in 4,589 deals in 2012, $35.8 billion in 4,985 deals in 2013, $58.9 billion in 5,656 deals in 2014, $74.2 billion in 5,552 deals in 2015, and $59.3 million in 4,799 deals in FY2016.112

In 2008, the Urban Institute released an analysis comparing debenture SBIC investments made from 1997 to 2005 to private-sector venture capital investments made during that time period in second stage business loans, third stage business loans, and bridge loans "because these investments are likely to be of the same character (debt with equity features) as those made by debenture SBICs."113 The Urban Institute found that debenture SBIC investments accounted for more than 62% of all venture capital financings in second stage business loans, third stage business loans, and bridge loans in the United States during that time period. However, because the average amount of a SBIC debenture investment was much smaller than the industry average, SBIC debenture investments accounted for "only 8% of total dollars invested."114

Financing to Specific Demographic Groups

As shown in Table 4, in FY2016, SBICs made 85 financings (2.9% of all financings) amounting to $141.4 million (2.4% of the total amount of financings) to minority-owned and -controlled small businesses.

Table 4. SBIC Financing, Minority-Owned Small Businesses, FY2016

Small Business Ownership Demographic

Number of Financings

Percentage of Financings

$ Amount of Financings

Percentage of Total $ Amount of Financings

Black-Owned

36

1.2%

$41,093,434

0.7%

Asian Owned

34

1.1%

$43,624,977

0.7%

Hispanic-Owned

15

0.5%

$56,690,271

0.9%

Native American-Owned

0

0.0%

$0

0.0%

Subtotal

85

2.9%

$141,408,682

2.4%

Other (Nonminority)

2,877

97.1%

$5,850,285,247

97.6%

Total—All Financings

2,962

100.0%

$5,991,693,929

100.00%

Source: U.S. Small Business Administration, Office of Legislative and Congressional Affairs, "Correspondence with the author," November 15, 2016.

Notes: Ownership is defined as owning at least 50% of the small business.

In addition, in FY2016, SBICs made 35 financings (1.2% of all financings) totaling $77.3 million (1.3% of the total amount of financings) to women-owned small businesses and 20 financings (0.7% of all financings) totaling nearly $42.9 million (0.7% of the total amount of financings) to veteran-owned small businesses.115

Research concerning private venture capital investment in minority-owned or women-owned small businesses is limited. As a result, it is difficult to find the data necessary to compare the SBIC program's investment in minority-owned or women-owned small businesses to the private sector's investment in these firms.116

In 2007, the SBA acknowledged at a congressional hearing on its investment programs that "women and minority representation in [the SBIC program] is low" and has been for many years.117 The SBA reported at that time that it did not control the investments made by SBICs, but it has tried to increase women and minority representation in the SBIC program by reaching out to venture capital firms, trade organizations, and others to better understand why women and minority representation in the SBIC program is low and by "finding debenture firms with minority representation on their investment committees and in senior management."118 However, despite these efforts, in 2009, the Small Business Investor Alliance (then called the National Association of Small Business Investment Companies) asserted at a congressional hearing on the SBA's capital access programs that the SBA's SBIC licensing process "has done an abysmal job at attracting and licensing funds led by women and minorities."119

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.

Financing by State

As shown in Table 5, in FY2015, SBICs provided financing to small businesses located in 46 states, with the most financing taking place in California (438 financings totaling $1.01 billion), Texas (269 financings totaling $701.9 million), and Florida (217 financings totaling $476.6 million).

Table 5. SBIC Financing by State, FY2016

($ in millions)

State

# of Financings

Amount of Financings

State

# of Financings

Amount of Financings

Alabama

8

$71.4

Montana

4

$23.0

Alaska

0

$0.0

Nebraska

2

$11.8

Arizona

79

$95.5

Nevada

12

$16.7

Arkansas

5

$6.5

New Hampshire

9

$34.5

California

483

$1,041.3

New Jersey

81

$166.8

Colorado

84

$160.3

New Mexico

10

$17.2

Connecticut

32

$102.5

New York

247

$373.1

Delaware

9

$20.3

North Carolina

114

$164.5

District of Columbia

5

$6.0

North Dakota

16

$15.0

Florida

176

$418.5

Ohio

95

$297.0

Georgia

124

$250.6

Oklahoma

32

$52.1

Hawaii

0

$0.0

Oregon

14

$34.7

Idaho

7

$22.1

Pennsylvania

99

$254.4

Illinois

222

$386.0

Puerto Rico

3

$9.0

Indiana

34

$32.8

Rhode Island

4

$15.7

Iowa

4

$18.6

South Carolina

36

$98.4

Kansas

36

$75.4

South Dakota

2

$0.4

Kentucky

12

$15.4

Tennessee

44

$100.2

Louisiana

29

$55.2

Texas

273

$527.4

Maine

5

$26.1

Utah

57

$90.6

Maryland

36

$61.3

Vermont

2

$16.5

Massachusetts

126

$264.3

Virginia

36

$75.6

Michigan

44

$107.7

Washington

28

$41.9

Minnesota

83

$145.3

West Virginia

0

$0.0

Mississippi

22

$21.5

Wisconsin

29

$78.0

Missouri

46

$68.2

Wyoming

2

$4.0

Total

 

 

 

2,962

$5,991.7

Source: U.S. Small Business Administration, Office of Investment and Innovation, "SBIC Program – Financing to Businesses by State, FY2012 to FY2016," at https://www.sba.gov/sites/default/files/articles/SBICProgram_FinancingsbyStateMM_FYs2012to2016.pdf.

The previously mentioned 2008 Urban Institute comparative analysis of debenture SBIC financing from 1997 to 2005 found that the dollar volume of investments from debenture SBICs was more evenly distributed across the nation than from comparable private venture capital funds. For example, the Urban Institute found that California (45.8%) and Massachusetts (12.9%) received the largest share of the total dollar volume invested by private venture capital funds from 1997 to 2005. The two states accounted for more than half (58.7%) of the total dollar volume invested by private venture capital funds. In contrast, New York (18.7%) and California (11.1%) received the largest share of the total dollar volume invested by debenture SBICs from 1997 to 2005. The two states accounted for less than one-third (29.8%) of the total dollar volume invested by debenture SBICs. Also, the top 10 states in terms of their share of the total dollar volume invested accounted for nearly 84% of the total invested by private venture capital funds, compared with 64% for debenture SBICs.120

A comparison of the state-by-state distribution of private-sector venture capital fund investments and SBIC financings in FY2016 (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 the first three quarters in FY2016, California (56.7%), New York (11.1%), Massachusetts (10.7%), and Florida (2.7%) received the largest shares of the total dollar volume invested by private venture capital funds. The four states accounted for more than four-fifths (81.2%) of the total dollar volume invested by private venture capital funds during that time period.121 In contrast, the four states with the largest share of the total volume invested by SBICs in FY2016 (California at 17.4%, Texas at 8.8%, Florida at 7.0%, and Illinois at 6.4%) accounted for 39.6% of the total dollar volume invested by SBICs.

Financing by Industry

As shown in Table 6, SBIC financings in FY2016 were made in a variety of industries, led by investments in manufacturing; professional, scientific, and technical services; information; and wholesale trade.

The 2008 Urban Institute comparative analysis of SBIC financings from 1997 to 2005 found that "SBIC financing is less concentrated by industry than financing from private venture capital firms" and "total financings by SBICs are much less likely to be in high-tech industries" than comparable private-sector venture capital investment firms.122 The Urban Institute found that, unlike SBICs, "the value of investments by private venture capital firms is predominately directed towards information and finance," with computer and Internet firms receiving roughly half of all private-sector investments.123

Table 6. SBIC Financing by Industry FY2016

Industry

Number of Financings

Percentage of Financings

$ Amount of Financings

Percentage of $ Amount of Financings

Manufacturing

735

24.8%

$1,544,997,275

25.8%

Professional, Scientific, and Technical Services

462

15.6%

$865,929,656

14.6%

Information

290

9.8%

$666,374,842

11.1%

Wholesale Trade

256

8.6%

$539,995,904

9.0%

Health Care and Social Assistance

233

7.9%

$591,590,995

9.9%

Administrative and Support and Waste Management

192

6.5%

$405,724,999

6.8%

Retail Trade

177

6.0%

$278,246,790

4.6%

Construction

116

3.9%

$172,800,764

2.9%

Accommodation and Food Services

114

3.8%

$176,892,076

3.0%

Transportation and Warehousing

81

2.7%

$103,672,277

1.7%

Mining

78

2.6%

$44,589,859

0.7%

Real Estate and Rental Leasing

56

1.9%

$137,469,681

2.3%

Finance and Insurance

54

1.8%

$164,976,428

2.8%

Educational Services

47

1.6%

$78,835,415

1.3%

Arts, Entertainment, and Recreation

19

0.6%

$53,858,251

0.9%

Agriculture, Forestry, Fishing and Hunting

7

0.2%

$34,500,000

0.6%

Management of Companies and Enterprises

2

0.1%

$7,025,000

0.1%

Utilities

2

0.1%

$5,941,041

0.1%

Other Industries

41

1.4%

$118,272,676

2.0%

Total

2,962

100.0%

$5,991,693,929

100.0%

Source: U.S. Small Business Administration, Office of Investment and Innovation, "Correspondence with the author," November 15, 2016.

Legislative Activity

P.L. 111-5, the American Recovery and Reinvestment Act of 2009 (ARRA), included provisions designed to increase the amount of leverage issued under the SBIC program by increasing the maximum amount of leverage available to an individual SBIC to 300% of its private capital or $150 million, whichever is less, and by increasing the maximum amount of leverage available for two or more licenses under common control to $225 million.124 It also encouraged SBIC investment in smaller enterprises by requiring SBICs licensed after the date of its enactment (February 17, 2009) to certify that at least 25% of all future financing dollars are invested in smaller enterprises. ARRA defined smaller enterprises as firms having either a net worth of no more than $6 million and average after-tax net income for the preceding two years of no more than $2 million or meeting the SBA's size standard for its industry classification.125

ARRA also encouraged SBIC investments in low-income areas by allowing a SBIC licensed on or after October 1, 2009, to elect to have a maximum leverage amount of $175 million, and $250 million for two or more licenses under common control, if the SBIC has invested at least 50% of its financings in low-income geographic areas and certified that at least 50% of its future investments will be in low-income geographic areas.126

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), or authorizing a SBIC program specifically designed to encourage SBIC investments in business startups and other early stage small businesses (introduced).

Legislation to Target Additional Assistance to Startup and Early Stage Small Businesses

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.

For example, during the 111th Congress, the House passed, by a vote of 241-182, H.R. 5297, the Small Business Jobs and Credit Act of 2010.128 Among its provisions, as passed by the House, H.R. 5297 would have authorized a $1 billion Small Business Early Stage Investment Program. The proposed program would have provided equity investment financing of up to $100 million in matching funds to each participating investment company. It would have required participating investment companies to invest in small businesses, with at least 50% of the financing in early stage small businesses, defined as those small businesses not having "gross annual sales revenues exceeding $15 million in any of the previous three years."129 The proposed program emphasized venture capital investments in startup companies operating in nine targeted industries.130

H.R. 5297, as subsequently approved by Congress and signed into law by President Obama on September 27, 2010 (P.L. 111-240, the Small Business Jobs Act of 2010), did not include legislative language authorizing a Small Business Early Stage Investment Program.131 However, it authorized a three-year Intermediary Lending Pilot Program to provide direct loans to not more than 20 eligible nonprofit lending intermediaries each year, totaling not more than $20 million and $1 million per intermediary at an interest rate of 1%. The intermediaries, in turn, may make loans to new or growing small businesses, not to exceed $200,000 per business.132 The Intermediary Lending Pilot Program was funded for two years. Thirty-six lenders currently participate in the program.133

As mentioned previously, the SBA subsequently established, in 2012, the $1 billion Early Stage Innovation 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.

Discussion

Advocates of efforts to encourage capital investment in startup and early stage small businesses, including Members of Congress who have served on the House or Senate Small Business Committees, have argued that the SBA's elimination of the SBIC participating securities program has created a gap "in the SBA's existing array of capital access programs, particularly in the provision of capital to early stage small businesses in capital-intensive industries."134 As Representative Nydia Velázquez argued on the House floor during congressional consideration of H.R. 5297:

This legislation, Mr. Chairman, also recognizes that capital markets are changing dramatically. Credit standards are stricter, and small businesses are now looking not only to loans and to credit cards to finance their operations, but they are also looking to equity investment to turn their ideas into reality. This has become even more pronounced as asset values have declined, leaving entrepreneurs with less collateral to borrow against. Unfortunately, small firms' access to venture capital and to equity investment has declined. Last year, such investments plummeted from $28 billion in 2008 to only $17 billion last year. This is due, in part, to the previous administration's decision to terminate the SBA's largest pure equity financing program—the Small Business Investment Company Participating Securities program. This has left many entrepreneurs who need equity investment to fulfill their business plans without a source of such financing.135

Opponents of efforts to encourage capital investment in startup and early stage small businesses have argued that such efforts could "pile unnecessary risk or costs onto taxpayers at a time when we're dealing with record debt and unsustainable deficit spending."136 During consideration of the proposed Small Business Early Stage Investment Program, opponents argued that it was untested, that it would likely encourage risky investments, and that the legislation required "only 50% of the funding … to be invested" in early stage small businesses.137

Legislation to Increase SBIC Financing Levels

In 2009, the Small Business Investor Alliance characterized the SBIC program as "dramatically underused."138 It argued that the program's financing levels would increase if (1) the SBA further improved its licensing processing procedures to make them more timely and objective, (2) the percentage of SBIC regulatory capital allowed from state or local government entities was increased from its present maximum of 33%, and (3) the SBIC program's multiple licenses/family of funds limit (at that time $225 million for two or more licenses under common control) was increased to allow SBICs to have a series of investment funds in place, in which, for example, "one fund could be winding down, another could be at peak, and another could just be ramping up."139

During the 111th Congress, H.R. 3854, the Small Business Financing and Investment Act of 2009, which was passed by the House on October 29, 2009, and H.R. 5554, the Small Business Assistance and Relief Act of 2010, which was not reported after being referred to five committees for consideration, proposed to encourage greater use of the SBIC program by increasing the maximum percentage of SBIC regulatory capital allowed from state or local government entities to 45% from 33%.140 Both measures would have also increased the SBIC program's multiple licenses/family of funds limit to $350 million from $225 million; increased the SBIC program's limit of $250 million to $400 million for multiple funds under common control that were licensed after September 30, 2009, and invested 50% of their dollars in low-income geographic areas; and increased the SBIC program's authorization level from to $5.5 billion from $3 billion in FY2011.141

The Obama Administration also recommended, as part of its Startup America Initiative (which included the SBA's $1 billion early stage debenture SBIC initiative and $1 billion impact investment SBIC initiative), that the 112th Congress adopt legislation to increase the SBIC program's annual authorization to $4 billion from $3 billion. The Administration recommended as well that the 112th Congress adopt legislation to increase the amount of SBA leverage available to licensees under common control to $350 million from $225 million.142

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, H.R. 2333, the Small Business Investment Opportunity Act of 2017, would increase the maximum amount of leverage for each SBIC to $175 million from $150 million. As mentioned previously, the bill, as amended, was favorably reported by the House Committee on Small Business on June 15, 2017.

Discussion

In 2010, the SBA announced that one of its goals for the SBIC program was to increase its "acceptance in the marketplace and increase the number of funds licensed and the amount of leverage issued so as to improve capital access for small businesses."144 The SBA asserted that ARRA's changes to the SBIC program would help it to achieve this goal. ARRA increased the maximum leverage available to SBICs to up "to three times the private capital raised by the SBIC, or $150 million, whichever is less, and $225 million for multiple licensees under common control" and increased "the maximum leverage amounts to $175 million for single funds and $250 million for multiple funds under common control who are licensed after September 30, 2009, and invest 50% of their dollars in low income geographic areas."145

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 and P.L. 114-113, the Consolidated Appropriations Act, 2016, increased the SBIC program's multiple licenses/family of funds limit to $350 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.

Concluding Observations

Some Members of Congress have argued that the SBA should be provided additional resources to assist small businesses in acquiring capital necessary to start, continue, or expand operations and create jobs.148 In their view, encouraging greater utilization of the SBIC program will increase small business access to capital, result in higher levels of job creation and retention, and promote economic growth. For example, on March 19, 2012, during Senate consideration of the INVEST in America Act of 2012, then-Senator Olympia Snowe argued

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.

This amendment will spur investment in capital-starved startup small businesses, which will play a critical role in leading the Nation of the devastating economic downturn from which we have yet to emerge. For those who may be unfamiliar, despite significant entrepreneurial demand for small amounts of capital, because of their substantial size, most private investment funds cannot dedicate resources to transactions below $5 million. The Nation's SBICs are working to fill that gap, especially even during these challenging times.149

Others worry about the potential risk an expanded SBIC program may have for increasing 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.150 For example, Representative Sam Graves, then-chair of the House Committee on Small Business, indicated in the Small Business Committee's FY2013 "views and estimates" letter to the House Budget Committee that the House Small Business Committee supported an increase in the SBIC program's authorization to $4 billion from $3 billion. However, he indicated that the committee opposed funding for the SBA's early stage debenture SBIC initiative and impact investment SBIC initiative because of their potential to generate losses that could lead to higher SBIC fees or to the need to provide federal funds to subsidize the SBIC program. Representative Graves wrote in the FY2013 views and estimates letter that

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.

Presumably, some of the additional program level (which will cost the federal government no money) will be used to support two new variations in the Debenture SBIC Program [the early stage debenture SBIC initiative and the impact investment SBIC initiative] … Neither initiative has received authority from Congress nor had its operational principles assessed by the Committee prior to implementation. The Committee reiterates its recommendation from last year's views and estimates – no funds should be allocated from the additional debenture program levels for these two programs. The Committee on the Budget also should provide further protection to the existing debenture SBIC program by requiring any modifications to the program, whether a pilot program or not, be based on a new subsidy calculation that ensures the current debenture program will operate at zero subsidy without any increase in fees due to losses stemming from the Impact and Early Stage Innovation programs.151

The House Committee on Small Business's FY2016 views and estimates letter reiterated the committee's opposition to the funding of these two initiatives and recommended that any modifications to the SBIC program "whether a pilot program or not, be based on a new subsidy calculation that ensures the current debenture program will operate at zero subsidy without any increase in fees."152

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.

Appendix. Small Business Eligibility Requirements and Application Process

Small Business Eligibility Requirements

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.

In addition, since 1997, the SBA has required SBICs to set aside a specified percentage of their financing for "businesses at the lower end of the permitted size range," primarily because "the financial size standards applicable to the SBIC program are considerably higher than those used in other SBA programs."154 P.L. 111-5 requires SBICs licensed after the date of its enactment (February 17, 2009) to certify that at least 25% of their future financing is invested in smaller enterprises. A smaller enterprise is a company that, together with any affiliates, either has net worth of no more than $6 million and average after-tax net income for the preceding two years of no more than $2 million or meets the SBA's size standard in the industry in which the applicant is primarily engaged.155

A SBIC licensed on or before February 17, 2009, that has not received any SBA leverage commitments after February 17, 2009, must have at least 20% of its aggregate financing dollars (plus 100% for leverage commitments over $90 million) invested in smaller enterprises.156

A SBIC licensed on or before February 17, 2009, that has received a SBA leverage commitment after February 17, 2009, must meet the 20% threshold (plus 100% for leverage commitments over $90 million) for financing provided before the date of the first leverage commitment issued after February 17, 2009, and the 25% threshold for financing made after such date.157

SBICs are not allowed to invest in the following: other SBICs, finance and investment companies or finance-type leasing companies, unimproved real estate, companies with less than 51% of their assets and employees in the United States, passive or casual businesses (those not engaged in a regular and continuous business operation), or companies that will use the proceeds to acquire farmland.158 In addition, SBICs may not provide funds for a small business whose primary business activity is deemed contrary to the public interest or if the funds will be used substantially for a foreign operation.159

Small Business Application Process

Small business owners interested in receiving SBIC financing can search for active SBICs using the SBA's SBIC directory.160 The directory provides contact information for all licensed SBICs, sorted by state. It also includes the SBIC's preferred minimum and maximum financing size range, the type of capital provided (e.g., equity, mezzanine, subordinated debt, 1st and 2nd lien secured term, or preferred stock), funding stage preference (e.g., early stage, growing and expansion stage, or later stage), industry preference (e.g., business services, manufacturing, environmental services, or distribution), geographic preference (e.g., national, regional, or specific state or states), and a description of the firm's focus (e.g., equity capital to later stage companies for expansion and acquisition or targeting companies with revenues of at least $5 million and profitability at the time of financing).161

After locating a suitable SBIC, the small business owner presents the SBIC a business plan that addresses the business's operations, management, financial condition, and funding requirements. The typical business plan includes the following information:

Because SBICs typically receive hundreds of business plans per year, the SBA recommends that small business owners seek a personal referral or introduction to the particular SBIC fund manager being targeted to increase "the likelihood that the business plan will be carefully considered."163 According to the Small Business Investor Alliance, "a thorough study an SBIC must undertake before it can make a final decision could take several weeks or longer."164

Author Contact Information

[author name scrubbed], Senior Specialist in American National Government ([email address scrubbed], [phone number scrubbed])

Footnotes

1.

U.S. Small Business Administration (SBA), "Fiscal Year 2018 Congressional Budget Justification and FY2016 Annual Performance Report," pp. 2-4, at https://www.sba.gov/sites/default/files/aboutsbaarticle/FINAL_SBA_FY_2018_CBJ_May_22_2017c.pdf.

2.

15 U.S.C. §661.

3.

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.

4.

Ibid., p. 5.

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.

6.

SBA, "SBIC Program Overview, as of March 31, 2017," at https://www.sba.gov/sites/default/files/articles/Quarterly_Data_as_of_March_31_2017.pdf.

7.

Ibid.

8.

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 http://www.gao.gov/assets/680/674813.pdf.

9.

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.

10.

P.L. 92-595, the Small Business Investment Act Amendments of 1972.

11.

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.

12.

13 C.F.R. §107.50.

13.

Ibid.

14.

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.

15.

SBA, "For SBIC Applicants: Phase III: Licensing Review," at https://www.sba.gov/content/phase-iii-licensing-review.

16.

SBA, "For SBIC Applicants: Phase I, Initial Review," at https://www.sba.gov/content/phase-i-initial-review.

17.

A control person is generally defined as someone with the power to direct corporate management and policies.

18.

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 [author name scrubbed].

19.

SBA, "SBIC Management Assessment Questionnaire and License Application: Form 2181," at https://www.sba.gov/content/application-forms.

20.

SBA, "SBIC Program Overview, as of March 31, 2017," at https://www.sba.gov/sites/default/files/articles/Quarterly_Data_as_of_March_31_2017.pdf.

21.

SBA "Expedited Licensing for Impact SBICs Applying for an Impact SBIC License," at https://www.sba.gov/content/expedited-licensing-impact-sbics.

22.

SBA, "Small Business Investment Companies—Early Stage SBICs," 77 Federal Register 25052, April 27, 2012.

23.

Ibid.

24.

13 C.F.R. §107.210.

25.

Ibid.

26.

13 C.F.R. §107.150.

27.

13 C.F.R. §107.230.

28.

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.

29.

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.

30.

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.

31.

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.

32.

SBA, "SBIC Program Overview, as of March 31, 2017," at https://www.sba.gov/sites/default/files/articles/Quarterly_Data_as_of_March_31_2017.pdf. 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, and 41 at the end of FY2016.

33.

13 C.F.R. §107.210.

34.

13 C.F.R. §107.150.

35.

13 C.F.R. §107.230.

36.

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.

37.

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.

38.

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.

39.

SBA, "Impact Investment Fund Grows Threefold," January 27, 2015, at https://www.sba.gov/content/impact-investment-fund-grows-threefold; and SBA, "Directory of Impact SBICs," at https://www.sba.gov/content/directory-impact-sbics.

40.

SBA Office of Congressional and Legislative Affairs, "Correspondence with the author," November 15, 2016.

41.

SBA, "SBA Expands Impact Investment Fund," September 25, 2014, at https://www.sba.gov/content/sba-expands-impact-investment-fund.

42.

Ibid.

43.

SBA, "Small Business Investment Companies—Early Stage SBICs," 77 Federal Register 25043, 25050, April 27, 2012.

44.

Ibid., pp. 25051-25053.

45.

Ibid., p. 25043.

46.

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.

47.

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.

48.

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.

49.

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.

50.

SBA, Office of Congressional and Legislative Affairs, "Correspondence with the author," November 15, 2016.

51.

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.

52.

SBA, "Small Business Investment Companies (SBIC); Early Stage Initiative," 81 Federal Register 64075, September 19, 2016.

53.

The specified conditions are: "(1) The line of credit is limited to the lesser of 20% of Regulatory Capital or total unfunded binding commitments from Institutional Investors minus any such commitments included in the Interest Reserve under § 107.1181 … (2) The term of the line of credit does not exceed 24 months … (3) The line of credit is held by a federally regulated financial institution … (4) All borrowings under the line of credit: (i) Are not secured third-party debt, as that term is defined under § 107.550(a); (ii) Are for the purpose of maintaining the Early Stage SBIC's operating liquidity or providing funds for a particular Financing of a Small Business; (iii) Must be fully paid off for at least 30 consecutive days during the Early Stage SBIC's fiscal year." See SBA, "Small Business Investment Companies (SBIC); Early Stage Initiative," 81 Federal Register 64077, September 19, 2016.

54.

SBA, "Small Business Investment Companies (SBIC); Early Stage Initiative," 81 Federal Register 64076-64078, September 19, 2016.

55.

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.

56.

13 C.F.R. §107.810; and 13 C.F.R. §107.840.

57.

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.

58.

13 C.F.R. §107.820.

59.

13 C.F.R. §107.730.

60.

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."

61.

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.

62.

13 C.F.R. §107.720.

63.

Ibid.

64.

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.

65.

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.

66.

SBA, "Small Business Investment Companies," 64 Federal Register 52645, September 30, 1999.

67.

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.

68.

SBA, "For SBICs: Background Information on Low or Moderate Income (LMI) Debentures," at https://www.sba.gov/content/low-or-moderate-income-lmi-debentures.

69.

SBA, Office of Congressional and Legislative Affairs, "Correspondence with the author," December 1, 2016. In FY2014, SBICs made 475 investments in small businesses located in a LMI Zone, totaling $1.03 billion—about 18.8% of the total amount invested. In FY2015, SBICs made 513 investments in small businesses located in a LMI Zone, totaling $988.4 million—about 15.7% of the total amount invested.

70.

P.L. 110-140, the Energy Independence and Security Act of 2007, §1205. Energy Saving Debentures.

71.

SBA, "Energy Saving Debentures: FAQs," at https://www.sba.gov/content/energy-savings-debentures-faqs.

72.

13 C.F.R. §107.1100.

73.

SBA, "Funding the SBIC Program: An Overview," at https://www.sba.gov/content/funding-sbic-program-overview. 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.

74.

SBA, "Funding the SBIC Program: An Overview," at https://www.sba.gov/content/funding-sbic-program-overview.

75.

Ibid.

76.

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.

77.

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 FY2017 is 0.347%. The annual fee was 0.672% in FY2016, 0.742% in FY2015, and 0.355% in FY2014. The participating securities program is no longer issuing new leverage commitments. See SBA, "SBIC Program: Annual Charge," at https://www.sba.gov/content/annual-charge.

78.

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.

79.

P.L. 111-5, the American Recovery and Reinvestment Act of 2009, authorized debenture SBICs licensed on or after October 1, 2009 to 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. See 13 C.F.R. §107.1150. According to 13 C.F.R. §108.50, a low-income area is

(1) any population census tract that has a poverty rate that is not less than 20% or (a) if located within a metropolitan area, 50% or more of the households in that census tract have an income equal to less than 60% of the area median gross income; or (b) if not located within a metropolitan area, the median household income in that census tract does not exceed 80% of the statewide median household income; or (c) has been determined by the SBA Administrator to contain a substantial population of low-income individuals in residence, an inadequate access to investment capital, or other indications of economic distress; or (2) any area located within (i) a Historically Underutilized Business Zone; (ii) an Urban Empowerment Zone or Urban Enterprise Community (as designated by the Secretary of the United States Department of Housing and Urban Development); or (iii) a Rural Empowerment Zone or Rural Enterprise Community (as designated by the Secretary of the United States Department of Agriculture).

80.

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.

81.

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.

82.

13 C.F.R. §107.50; and 13 C.F.R. §107.1150.

83.

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%.

84.

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.

85.

13 C.F.R. §107.1170.

86.

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.

87.

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.

88.

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.

89.

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.

90.

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.

91.

SBA, "SBIC Program Overview, as of March 31, 2017," at https://www.sba.gov/sites/default/files/articles/Quarterly_Data_as_of_March_31_2017.pdf.

92.

Ibid.

93.

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.

94.

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.

95.

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.

96.

SBA, "Small Business Investment Companies—Early Stage SBICs," 77 Federal Register 25052, April 27, 2012.

97.

13 C.F.R. §107.1181. The required reserve is reduced on each payment date upon payment of the required interest and charges.

98.

SBA, Office of Congressional and Legislative Affairs, "Correspondence with the author," May 2, 2012.

99.

13 C.F.R. §107.630; and 13 C.F.R. §107.690.

100.

13 C.F.R. §107.640.

101.

13 C.F.R. §107.650.

102.

Ibid.

103.

13 C.F.R. §107.660.

104.

SBA, "SBIC Program Overview, as of March 31, 2017," at https://www.sba.gov/sites/default/files/articles/Quarterly_Data_as_of_March_31_2017.pdf.

105.

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 6 new SBIC licenses (5 to debenture SBICs and 1 to a bank-owned/non-leveraged SBIC) in FY2008; 11 new SBIC licenses (8 to debenture SBICs and 3 to bank-owned, non-leveraged SBICs) in FY2009; and 23 new SBIC licenses (21 to debenture SBICs and 2 to bank-owned, non-leveraged SBICs) in FY2010. The SBA issued 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; and 21 new SBIC licenses (17 to debenture SBICs and 4 to bank-owned, non-leveraged SBICs) in FY2016.

106.

SBA, "Offering Circular, $1,071,645,000, Guaranteed 2.845% Debenture Participation Certificates, Series SBIC 2017-10 A," March 21, 2017, p. 7, at https://www.sba.gov/sites/default/files/articles/SBIC_2017-10A_-_Offering_Circular_Unsecured.pdf. The SBA has a selected list of firms that have received SBIC financing, including Apple Computer, Compaq Computer, Costco Wholesale Corporation, FedEx, Intel, Jenny Craig, Inc., Outback Steakhouse, Sports Authority, Staples, and Sun Microsystems, on its website. See SBA, "SBIC Program Overview," at https://www.sba.gov/content/sbic-program-overview.

107.

SBA, "SBIC Program Overview, as of March 31, 2017," at https://www.sba.gov/sites/default/files/articles/Quarterly_Data_as_of_March_31_2017.pdf.

108.

Ibid.

109.

Ibid.

110.

SBA, Office of Congressional and Legislative Affairs, "Correspondence with the author," December 1, 2016.

111.

Ibid.

112.

PricewaterhouseCoopers, National Venture Capital Association, "MoneyTree™ Report, National Aggregate Data," at http://www.pwcmoneytree.com/.

113.

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.

114.

Ibid., p. 1.

115.

Six of these financings, totaling $15.0 million, were categorized as both women-owned and veteran-owned. SBA, Office of Congressional and Legislative Affairs, "Correspondence with the author," December 1, 2016.

116.

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.

117.

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.

118.

Ibid.

119.

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.

120.

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.

121.

PricewaterhouseCoopers, National Venture Capital Association, "Venture Capital Investments, Regional Aggregate Data," at https://www.pwcmoneytree.com/Reports/Homepage%20RegionalAgg.xlsx.

122.

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, 11-17, at http://www.urban.org/UploadedPDF/411601_sbic_gap_analysis.pdf.

123.

Ibid., p. 11.

124.

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.

125.

13 C.F.R. §107.1150; and 13 C.F.R. §107.710.

126.

13 C.F.R. §107.1150.

127.

The White House, "Startup America Legislative Agenda," January 31, 2012, at http://www.whitehouse.gov/sites/default/files/uploads/startup_america_legislative_agenda.pdf.

128.

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.

129.

H.R. 5297, the Small Business Lending Fund Act of 2010, §399L. Definitions.

130.

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.

131.

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.

132.

P.L. 111-240, the Small Business Jobs Act of 2010, §1131. Small Business Intermediary Lending Pilot Program.

133.

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.

134.

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.

135.

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.

136.

Rep. Sam Graves, "Small Business Jobs and Credit Act of 2010," House debate, Congressional Record, vol. 156, no. 90 (June 16, 2010), p. H4516.

137.

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.

138.

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.

139.

Ibid., pp. 88, 89.

140.

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.

141.

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.

142.

The White House, "Startup America Legislative Agenda," at http://www.whitehouse.gov/sites/default/files/uploads/startup_america_legislative_agenda.pdf.

143.

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.

144.

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.

145.

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.

146.

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.

147.

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.

148.

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 http://www.whitehouse.gov/the-press-office/remarks-president-job-creation-and-economic-growth; and The White House, "Startup America Legislative Agenda," at http://www.whitehouse.gov/sites/default/files/uploads/startup_america_legislative_agenda.pdf.

149.

Sen. Olympia Snowe, "Jumpstart Our Business Startups Act," remarks in the Senate, Congressional Record, vol. 158, no. 45 (March 19, 2012), p. S15845.

150.

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/.

151.

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.

152.

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.

153.

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).

154.

SBA, "Small Business Investment Companies – Leverage Eligibility and Portfolio Diversification Requirements," 74 Federal Register 33912, July 14, 2009.

155.

13 C.F.R. §107.710.

156.

Ibid.

157.

Ibid.; and SBA, "Small Business Investment Companies – Leverage Eligibility and Portfolio Diversification Requirements," 74 Federal Register 33912, July 14, 2009.

158.

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.

159.

Ibid.

160.

SBA, "All SBIC Licensees By State," at https://www.sba.gov/content/sbic-directory.

161.

Ibid.

162.

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.

163.

SBA, "SBIC Program: Seeking Financing for your Small Business," at https://www.sba.gov/offices/headquarters/ooi/resources/4905.

164.

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.