[Congressional Bills 109th Congress]
[From the U.S. Government Publishing Office]
[H.R. 3429 Introduced in House (IH)]







109th CONGRESS
  1st Session
                                H. R. 3429

   To amend the Small Business Investment Act of 1958 to establish a 
                    participating debenture program.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                             July 26, 2005

  Mr. Manzullo (for himself and Mr. Ramstad) introduced the following 
      bill; which was referred to the Committee on Small Business

_______________________________________________________________________

                                 A BILL


 
   To amend the Small Business Investment Act of 1958 to establish a 
                    participating debenture program.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. ESTABLISHMENT OF PARTICIPATING DEBENTURES PROGRAM.

    (a) Establishment.--Section 303 of the Small Business Investment 
Act of 1958 (15 U.S.C. 683) is amended by adding at the end the 
following new subsection:
    ``(k) Participating Debentures.--
            ``(1) Guarantee of participating debentures.--The 
        Administrator is authorized to guarantee the payment of the 
        redemption price and interest on a participating debenture 
        issued by a small business investment company under such terms 
        and conditions as the Administrator shall establish by 
        regulation.
            ``(2) Limitation on guarantee of participating 
        debentures.--A guarantee under paragraph (1) shall not--
                    ``(A) exceed the amount of the payment to which the 
                guarantee applies; or
                    ``(B) change the timing of such payment.
            ``(3) Maximum leverage.--The Administrator may not 
        guarantee a new participating debenture issued by a small 
        business investment company if the aggregate unpaid principal 
        balance of the participating debentures issued by that small 
        business investment company would exceed 200 percent of the 
        leverageable capital of such company on the day after the 
        company issued or distributed the new participating debenture.
            ``(4) Purchase of participating debentures.--The 
        Administrator may authorize a trust or pool acting on behalf of 
        the Administration to purchase participating debentures issued 
        by a small business investment company under such terms and 
        conditions as the Administrator shall establish by regulation.
            ``(5) Participating debenture defined.--In this subsection, 
        the term `participating debenture' means a debt security that 
        is--
                    ``(A) in a form prescribed by the Administrator 
                that obligates the issuing company to--
                            ``(i) pay any unpaid accrued interest on 
                        that debt security on the date which is 5 years 
                        after the date on which it is issued;
                            ``(ii) pay interest accrued after the date 
                        that is 5 years after the date on which the 
                        debt security is issued semi-annually; and
                            ``(iii) pay any other amount as required by 
                        this subsection and
                    ``(B) subject to the terms and conditions set forth 
                in this subsection and to any additional terms and 
                conditions as may be prescribed by the Administrator 
                that are consistent with this subsection.
            ``(6) Redemption.--Not later than the date which is 10 
        years after the date on which it is issued, a participating 
        debenture shall be redeemed for an amount equal to the 
        outstanding principal balance of such participating debenture 
        plus any accrued but unpaid interest due on such participating 
        debenture as of the date on which it is redeemed.
            ``(7) Interest.--
                    ``(A) In general.--Interest on a participating 
                debenture is preferred and cumulative and is pre-
                payable out of any gross receipts available for 
                distribution and is payable at the scheduled interest 
                payment dates and at the scheduled or accelerated 
                maturity of the participating debenture.
                    ``(B) Interest on principal balance.--Interest on 
                the principal balance outstanding of a participating 
                debenture shall accrue on a daily basis, and unpaid 
                accrued interest shall compound semi-annually from the 
                date of the issuance of such participating debenture, 
                at a rate determined by the Secretary of the Treasury 
                taking into consideration the current average market 
                yield on outstanding marketable obligations of the 
                United States with remaining periods to maturity 
                comparable to the average maturities on such 
                securities, adjusted to the nearest one-eighth of 1 
                percent, plus an additional charge, in an amount 
                established annually by the Administration, as 
                necessary to reduce to zero the cost (as defined in 
                section 502 of the Federal Credit Reform Act of 1990 (2 
                U.S.C. 661a)) to the Administration of purchasing and 
                guaranteeing participating debentures under this Act, 
                which rate may not exceed 1.5 percent per annum, and 
                which shall be paid to and retained by the 
                Administration.
            ``(8) Payment defaults.--If a small business investment 
        company fails to pay any principal or interest on a 
        participating debenture when due (including any mandatory 
        prepayment out of gross receipts)--
                    ``(A) the Administrator, in addition to any other 
                remedies available by law, may demand immediate payment 
                of the principal balance and accrued interest on any 
                participating debenture issued by the small business 
                investment company; and
                    ``(B) the interest rate on any outstanding 
                participating debentures issued by the small business 
                investment company shall increase until all payment 
                defaults are cured or waived, up to a maximum of 300 
                basis points, at a rate of--
                            ``(i) 50 basis points on the date on which 
                        the small business investment company defaults;
                            ``(ii) 50 basis points on the date that is 
                        6 months after the date on which the small 
                        business investment company defaults; and
                            ``(iii) an additional 50 basis points at 6-
                        month intervals thereafter.
            ``(9) Gross receipts defined.--In this subsection, the term 
        `gross receipts' means any cash received by a small business 
        investment company, including investment proceeds (return of 
        capital and profit), interest, dividends, and fees (other than 
        capital contributed by a partner, proceeds from the issuance of 
        participating debentures, and any other money borrowed by the 
        small business investment company).
            ``(10) Liquidation of small business investment company.--
        In the event of the liquidation of a small business investment 
        company issuing participating debentures under this subsection, 
        a participating debenture shall be senior in priority for all 
        purposes to any equity interest in the issuing company, 
        whenever created. In liquidation, unfunded commitments by 
        private investors may, at the option of the Administration, be 
        applied to pay accrued interest and principal of outstanding 
        participating debentures.
            ``(11) Investment obligation.--
                    ``(A) In general.--Any company issuing a 
                participating debenture under this Act shall invest or 
                commit to invest an amount equal to the outstanding 
                face value of such participating debenture solely in 
                equity capital.
                    ``(B) Equity capital.--In this paragraph, `equity 
                capital' means common or preferred stock or a similar 
                instrument, including subordinated debt with equity 
                features which is not amortized and which provides for 
                interest payments from appropriate sources, as 
                determined by the Administration.
            ``(12) Other debt.--A small business investment company 
        issuing a participating debenture under this subsection shall 
        have no debt other than debt obtained through issuing 
        participating debentures and temporary debt (as defined by the 
        Administrator) in an amount equal to not more than 50 percent 
        of the company's private capital, and subject to any terms and 
        conditions specified by the Administrator.
            ``(13) Use of proceeds.--Subject to regulations issued by 
        the Administrator, a small business investment company may use 
        the proceeds of a participating debenture issued by the company 
        to pay the principal amount and accrued interest due on an 
        outstanding participating debenture issued by that company.
            ``(14) Distribution of gross receipts.--Except as otherwise 
        provided in this subsection, a small business investment 
        company shall utilize gross receipts, from any source or 
        however categorized for Generally Accepted Accounting 
        Principles or tax accounting purposes, first for the payment of 
        accrued interest on participating debentures, then for 
        repayment of participating debenture principal and contributed 
        private capital, and finally for profit distributions, as 
        follows:
                    ``(A) Past due interest and principal.--Gross 
                receipts shall be used within 10 days of receipt--
                            ``(i) to pay any past due interest (whether 
                        past due by its terms or by acceleration) on a 
                        participating debenture issued by the small 
                        business investment company; and
                            ``(ii) if no past due interest is 
                        outstanding, to repay any past due principal 
                        (whether past due by its terms or by 
                        acceleration) on such a debenture.
                    ``(B) Mandatory interest prepayment.--If no unpaid 
                accrued interest or past due principal is outstanding 
                on any participating debenture issued by the small 
                business investment company, then, not later than the 
                last day of the calendar quarter in which any gross 
                receipts are received (or, in the case of gross 
                receipts received during the last 15 days of a calendar 
                quarter, not later than the last day of the subsequent 
                calendar quarter), the company shall use such receipts 
                to prepay accrued interest on the participating 
                debentures issued by the company. Such prepayment shall 
                be applied to such accrued interest in the order in 
                which such interest would otherwise become due and 
                payable.
                    ``(C) Amortization distributions.--If no unpaid 
                accrued interest or past due principal is outstanding 
                on any participating debenture issued by the company, 
                gross receipts shall be distributed to--
                            ``(i) the Administrator, to amortize 
                        outstanding participating debenture leverage; 
                        and
                            ``(ii) private investors in the small 
                        business investment company,
                pro rata according to the ratio of outstanding 
                participating debenture leverage to outstanding 
                leverageable capital at the time of distribution.
                    ``(D) Post-amortization distributions.--If no 
                accrued interest or principal is outstanding on any 
                participating debenture issued by the small business 
                investment company, and the company has no outstanding 
                leverageable capital, gross receipts shall be 
                distributed as follows:
                            ``(i) Unless aggregate distributions to 
                        private investors under this subparagraph equal 
                        or exceed aggregate contributions to the 
                        capital of the company previously made by 
                        private investors, gross receipts shall be 
                        distributed to the Administration in an amount 
                        equal to the initial profit participation 
                        percentage of the total amount distributed, 
                        with any remaining gross receipts distributed 
                        to private investors.
                            ``(ii) If aggregate distributions to 
                        private investors under this subparagraph equal 
                        or exceed aggregate contributions to the 
                        capital of the company previously made by 
                        private investors, there shall be distributed 
                        to the Administration an amount equal to the 
                        final profit participation percentage of the 
                        total amount distributed, with any remaining 
                        gross receipts distributed to private 
                        investors.
                    ``(E) Management expenses.--For purposes of 
                calculating the amount to be distributed to the 
                Administration pursuant to subparagraph (D), except as 
                otherwise prescribed by the Administration, the 
                management expenses of any company which issues 
                participating debentures under this subsection shall 
                not be greater than 2.5 percent of the combined capital 
                of the company per year, plus, in the case of a company 
                with combined capital of less than $20,000,000, an 
                additional $125,000.
                    ``(F) Definitions.--In this paragraph:
                            ``(i) The term `outstanding leverageable 
                        capital' means any aggregate capital 
                        contributions received by a small business 
                        investment company from private investors which 
                        exceed aggregate distributions received by the 
                        private investors from the company.
                            ``(ii) The term `initial profit 
                        participation percentage' means 25 percent of 
                        the leverage ratio, reduced by the weighted 
                        average interest rate on the participating 
                        debentures issued by the company.
                            ``(iii) The term `final profit 
                        participation percentage' means 50 percent of 
                        the leverage ratio, reduced by the weighted 
                        average interest rate on the participating 
                        debentures issued by the company.
                            ``(iv) The term `leverage ratio' means the 
                        ratio of the aggregate amount of participating 
                        debenture leverage previously drawn by the 
                        company (including such leverage that has been 
                        repaid) to the aggregate amount of capital 
                        previously contributed to the company by 
                        private investors.
                            ``(v) The term `combined capital' means the 
                        aggregate amount of private capital and 
                        outstanding leverage.
                            ``(vi) The term `management expenses' 
                        includes management fees and any additional 
                        salaries, office expenses, travel, business 
                        development costs, office and equipment rental, 
                        bookkeeping, and the development, 
                        investigation, and monitoring of investments 
                        paid by the small business investment company, 
                        but does not include the cost of services 
                        provided by specialized outside consultants, 
                        outside lawyers and outside auditors, who 
                        perform services not generally expected of a 
                        venture capital company nor does such term 
                        include the cost of services provided by any 
                        affiliate of the company which are not part of 
                        the normal process of making and monitoring 
                        venture capital investments.
            ``(15) Exceptions to the order of distributions.--
        Notwithstanding paragraph 15(C), if no unpaid accrued interest 
        (whether or not past due) and no past due principal is 
        outstanding on any participating debenture issued by a small 
        business investment company, the following exceptions shall 
        apply:
                    ``(A) Tax distributions.--
                            ``(i) Special distribution to private 
                        investors.--Notwithstanding any outstanding 
                        principal that is not past due on participating 
                        debentures issued by the small business 
                        investment company, the company may make a 
                        special distribution of gross receipts or other 
                        cash to private investors without a 
                        corresponding distribution to the 
                        Administration if--
                                    ``(I) the small business investment 
                                company has an investment in a business 
                                that is organized as a limited 
                                liability company or as a partnership 
                                (referred to in this paragraph as a 
                                `portfolio company');
                                    ``(II) the portfolio company has 
                                income that is taxable to the members 
                                or partners of such portfolio company;
                                    ``(III) the portfolio company makes 
                                a distribution to the members or 
                                partners of such portfolio company in 
                                an amount equal to the tax liability of 
                                such members or partners on the taxable 
                                income of the portfolio company 
                                assuming that each is taxed at the 
                                highest combined Federal, State, and 
                                local income tax rate applicable to 
                                individuals anywhere in the United 
                                States; and
                                    ``(IV) the small business 
                                investment company is organized as a 
                                limited liability company or a 
                                partnership such that any income of the 
                                portfolio company allocated to such 
                                small business investment company is 
                                reallocated to private investors, who 
                                are liable for the payment of taxes on 
                                such income as if such income were the 
                                income of the private investors, 
                                regardless of whether such investors 
                                receive any cash with respect to such 
                                income.
                            ``(ii) Amount of special distribution.--The 
                        amount of the special distribution of gross 
                        receipts under clause (i) shall not exceed the 
                        amount that is the difference between--
                                    ``(I) the estimated aggregate 
                                maximum tax liability of the private 
                                investors in the small business 
                                development company for the income of 
                                any portfolio company in which the 
                                small business development company is 
                                invested during the calendar year that 
                                precedes the distribution; and
                                    ``(II) the aggregate amount 
                                distributed to such private investors 
                                (other than amounts distributed 
                                pursuant to this subparagraph) during 
                                the period beginning on April 15 of the 
                                calendar year preceding the 
                                distribution and ending on the date on 
                                which the distribution is made, but in 
                                no circumstances more than the 
                                aggregate amount of tax distributions 
                                received by the small business 
                                investment company from investments in 
                                portfolio companies during the same 
                                period.
                            ``(iii) Timing of special distribution.--
                        Any special distribution of gross receipts 
                        under clause (i) shall be made not later than 
                        April 15 of each calendar year.
                    ``(B) Payment of expenses.--The small business 
                investment company may--
                            ``(i) use gross receipts to pay previously 
                        incurred expenses (including management fees) 
                        and other liabilities; and
                            ``(ii) retain gross receipts in an expense 
                        reserve account in an amount which, together 
                        with any existing expense reserve of the 
                        company, shall not exceed the reasonably 
                        anticipated expenses and other liabilities of 
                        the company (other than such expenses and 
                        liabilities as are prohibited by law) for the 
                        succeeding 12-month period.
                    ``(C) Prepayment.--Subject to any applicable 
                requirements under State law, the small business 
                investment company may use gross receipts or other cash 
                to prepay outstanding participating debenture leverage 
                and interest, in whole or in part, without penalty, and 
                at any time.
            ``(16) Restrictions on distributions.--
                    ``(A) Liquidity and other administrative or state 
                law restrictions.--No distribution shall be made except 
                in accordance with the liquidity requirements and other 
                applicable restrictions on distributions established by 
                the Administration or under applicable State law.
                    ``(B) Capital impairment or regulatory violation.--
                If a small business investment company is in restricted 
                operations or liquidation by reason of capital 
                impairment or regulatory violation, the maturity date 
                of the participating debentures issued by that company, 
                including both principal and accrued interest, is 
                subject to acceleration at the option of the 
                Administration, and, whether or not there has been such 
                acceleration, up to 100 percent of all gross receipts 
                and unfunded private investor commitments may, at the 
                option of the Administration, be required to be 
                distributed to the Administration until accrued 
                interest and principal on the participating debentures 
                issued by the company have been paid in full, in 
                accordance with any terms and conditions the 
                Administrator may establish by regulation.
            ``(17) Distributions in kind.--
                    ``(A) Election of in-kind distribution of 
                securities.--
                            ``(i) Publicly traded and marketable 
                        securities.--A small business investment 
                        company that issues participating debentures 
                        may elect to make an in-kind distribution of 
                        securities at any time, subject to applicable 
                        securities laws and regulations, if such 
                        securities are publicly traded and marketable.
                            ``(ii) Treatment as gross receipts.--For 
                        purposes of this subsection, such securities 
                        shall be treated as gross receipts and shall be 
                        subject to the priorities and restrictions 
                        applicable to gross receipts under this 
                        subsection and any regulation issued by the 
                        Administration that is applicable to gross 
                        receipts.
                    ``(B) Treatment of administration share.--The 
                company shall either deposit the Administration's share 
                of such securities with a trustee designated by the 
                Administration, or retain the Administration's share, 
                if the Administrator so directs and with the agreement 
                of the company.
                    ``(C) Retention of administration share.--If the 
                company retains the Administration's share, it shall 
                sell such share and promptly remit the proceeds to the 
                Administration.
                    ``(D) Value of administration share.--For purposes 
                of this paragraph, the value of the Administration's 
                share is--
                            ``(i) the value of the publicly traded and 
                        marketable securities described in subparagraph 
                        (A)(i), as of the date of distribution to the 
                        Administration under subparagraph (B) or as of 
                        the initial date of retention under 
                        subparagraph (C); and
                            ``(ii) the controlling value for the 
                        purposes of determining the remaining liability 
                        of the company to the Administration;
                    ``(E) Ultimate sale of administration share.--Upon 
                the ultimate sale of the Adminsitration's share or upon 
                the small business investment company's ultimate sale 
                of such share on behalf of the Administration, the 
                Administration may receive an amount that is more or 
                less than the value of the Adminsitration's share under 
                subparagraph (D).
                    ``(F) Trustee defined.--In this paragraph, the term 
                `trustee' means a person who is knowledgeable about and 
                proficient in the marketing of thinly traded 
                securities.
            ``(18) Timing of distributions.--
                    ``(A) In general.--Subject to subparagraph (B) and 
                paragraph (18), any gross receipts received by a small 
                business investment company issuing participating 
                debentures under this subsection that are not placed in 
                an expense reserve pursuant to paragraph (16)(B) shall 
                be distributed by the last day of the fiscal quarter in 
                which such net receipts were received by the company, 
                except that gross receipts received after the date that 
                is 15 days before the end of a fiscal quarter shall be 
                distributed by the last day of the subsequent fiscal 
                quarter.
                    ``(B) Exceptions to timing of distributions.--Gross 
                receipts consisting of marketable securities shall be 
                distributed within six months of receipt, unless the 
                small business investment company has obtained the 
                prior consent of the Administrator.
            ``(19) Reinvestment of gross receipts.--Subject to such 
        regulations and restrictions as may be prescribed by the 
        Administrator and the agreement of the private investors in a 
        small business investment company, any gross receipts that 
        exceed the amount required to make payments to the 
        Administration as required by this subsection may be reinvested 
        in qualified small businesses by the small business investment 
        company.
            ``(20) Post-distribution computation.--After distributions 
        have been made pursuant to this subsection, the 
        Administration's share of such distributions shall not be 
        reduced or recomputed except as expressly provided in this 
        subsection.
            ``(21) No ownership interest in administration.--This 
        subsection shall not be construed as creating in the 
        Administration any ownership interest in any small business 
        investment company which issues participating debentures.
            ``(22) Conflict with other subsections.--
                    ``(A) In general.--In the event of a conflict 
                between this subsection and any other provision of this 
                Act, this subsection shall apply.
                    ``(B) Specific provisions.--In particular, this 
                subsection supersedes subsections (g) and (h) in their 
                entirety with respect to all matters pertaining to 
                participating debentures.''.
    (b) Regulations.--The Administrator shall issue regulations to 
carry out subsection (k) of section 303 of the Small Business 
Investment Act of 1958 (15 U.S.C. 683), as added by subsection (a), 
before the date that is 180 days after the date of the enactment of 
this Act.
                                 <all>