Participating debenture companies

Part A of title III of the Small Business Investment Act of 1958 (15 U.S.C. 681 et seq.) is amended by adding at the end the following:

321.

Participating debenture companies

(a)

Definitions

As used in this section, the following definitions shall apply: (1)

General partner

The term general partner means an investor in a small business investment company that participates in the daily management of the small business investment company, and may include a managing partner in a limited liability company. (2)

Gross receipts

The term gross receipts means any cash received by a small business investment company, including investment proceeds (both return of capital and profit), interest, dividends, and fees, other than capital contributed by a partner, the proceeds of the issuance of participating debentures, and other money (if any) borrowed by the small business investment company. (3)

Interim funding provider

The term interim funding provider means any entity that providers funding guaranteed by the Administration to a licensed company in between the periodic pools created by any trustee. (4)

Licensed company

The term licensed company means a small business investment company authorized to issue participating debentures by a license issued under section 301 for that purpose. (5)

Limited partner

The term limited partner means an investor in a small business investment company, other than the Administrator, that does not participate in the daily management of the small business investment company. (6)

Participating debenture

The term participating debenture means a debt security that is— (A)in a form prescribed by the Administrator that obligates the issuing company to pay— (i)on the fifth anniversary of the date of issuance of the debenture, all accrued interest on that debenture that has not previously been paid; (ii)semiannually thereafter, interest accruing after the fifth anniversary of the date of issuance of the debenture; and (iii)any other amount required by this subsection; and (B)is 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. (7)

Private collateral

The term private collateral means any money that any private partner has contractually committed to invest in a licensed company during the most recent licensing of the licensed company, but that has not yet been paid to the licensed company. (8)

Trustee

The term trustee means an entity that combines any securities, interests, or obligations from licensed companies in the participating debenture program under subsection (b) into pools and issues trust certificates. (9)

Trust certificate

The term trust certificate means a certificate issued by the trustee that represents an interest in a particular pool of any securities, interests, or obligations from licensed companies in the participating debenture program. (10)

Trust certificate holder

The term trust certificate holder means an investor that purchases a trust certificate. (b)

Participating debentures program

(1)

Guarantee of participating debentures

(A)

Redemption price and interest

The Administrator is authorized to guarantee the payment of the redemption price and interest on a participating debenture issued by a licensed company to the interim funding provider under such terms and conditions as the Administrator shall establish by regulation. (B)

Repayment in default

The Administration is authorized to guarantee the repayment to the interim funding provider in the event of a default by a licensed company, of the funds advanced by the interim funding provider to the licensed company pursuant to the agreement between the Administration and the licensed company, under such terms and conditions as the Administrator shall establish by regulation. (C)

Trust certificates

The Administrator is authorized to guarantee the payment of the redemption price and interest on a trust certificate issued by the trustee to the trust certificate holders under such terms and conditions as the Administrator shall establish by regulation. (2)

Guarantee fee

The Administration is authorized to charge a separate fee— (A)under paragraph (1)(A), to the interim funding provider; (B)under paragraph (1)(B), to the licensed company; and (C)under paragraph (1)(C), to the trustee. (3)

Zero-subsidy

Each of the fees authorized under paragraph (2) shall be sufficient to reduce the cost of each corresponding guarantee in paragraph (1) to zero, as that term is defined under the Federal Credit Reform Act of 1990. (4)

Matching payment streams

With respect to any participating debenture issued by a licensed company, or with respect to any security issued representing an interest in a pool of such securities, the amount and schedule of— (A)the interest payment obligations of the Administration to the trust certificate holders shall be equal to the amount and schedule of the interest obligations of the licensed company to the Administration; and (B)the principal redemption obligations of the Administration to the trust certificate holders shall be the same as the amount and schedule of the licensed company's principal redemption obligations to the Administration. (5)

Interest to interim funding provider

(A)

Right to receive interest

For the advancing of monies to a licensed company pursuant to the license of that company, the interim funding provider shall have the right to receive interest from the licensed company. (B)

Amounts

The interest authorized under subparagraph (A) shall be calculated based on the time period beginning on the date on which the interim funding provider advances the funding, and ending when the interim funding provider provides the securities of the licensed company to a trustee for the purpose of pooling those securities and selling interests in that pool. (C)

Collection of interest

The interim funding provider may collect interest referred to in this paragraph by withholding money from the money advanced to the licensed company by the interim funding provider. (6)

Maximum leverage

Notwithstanding any other provision of this subsection, the Administrator may not guarantee a new participating debenture to be issued by a small business investment company, and the company shall not make any distribution to its private investors, if immediately after such issuance or distribution the aggregate unpaid principal balance of the participating debentures issued by the company would exceed 200 percent of the leverageable capital of the licensed company. (7)

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. (8)

Redemption

Not later than 10 years after the date on which it is issued, a participating debenture shall be redeemed for an amount equal to its outstanding principal balance plus any accrued but unpaid interest on such participating debenture as of the date on which it is redeemed. (9)

Interest

(A)

In general

Interest on a participating debenture is preferred and cumulative and is prepayable out of any gross receipts available for distribution and is in any event payable 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 semiannually from the date of issuance of the 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 1/8 of 1 percent, plus an additional charge, in an amount established annually by the Administrator, 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. (10)

Payment defaults

(A)

In general

In the event of a failure of a small business investment company to pay any principal or interest on a participating debenture when due (including any mandatory prepayment out of gross receipts), the licensed company shall be in default, and shall be subject to the provisions of subparagraphs (B) through (D). (B)

Acceleration

The Administration, in addition to any other remedies it may have, may demand immediate payment of the principal balance and accrued interest on any or all participating debentures issued by the defaulting company. (C)

Default rate of interest

The interest rate on the participating debenture with respect to which the payment default occurred may increase, at the discretion of the Administrator, by not greater than 50 basis points from the date of the payment default, and by not greater than an additional 50 basis points on each 6-month anniversary of that date, up to a maximum total increase of 300 basis points, until all of the payment defaults of the defaulting company have been cured or waived. (D)

Private collateral

The Administration may apply the private collateral of the licensed company to pay any interest or principal payment that has not been paid on time according to the payment schedule for the licensed company. (11)

Liquidation of licensed company

In the event of the liquidation of a licensed company issuing participating debentures under this subsection, a participating debenture shall be senior in priority for all purposes to any interest in the issuing company, whenever created. In liquidation, the private collateral of the licensed company may, at the option of the Administrator, be applied to pay accrued interest and principal of outstanding participating debentures. (12)

Default of a licensed company

In the event of the default of a licensed company issuing participating debentures under this subsection— (A)a participating debenture shall be senior in priority for all purposes to any interest in the issuing company, whenever created; and (B)at the option of the Administrator, the private collateral of the licensed company may be applied to pay accrued interest and principal on outstanding participating debentures. (13)

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 subparagraph, the term 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 Administrator. (14)

Other debt

A licensed company issuing a participating debenture under this subsection shall have no debt other than leverage obtained in accordance with this Act, and temporary debt in an amount equal to not more than 50 percent of the private capital of the company. (15)

Use of proceeds

Unless otherwise determined by the Administration, a licensed company may use the proceeds of a participating debenture issued by the company to pay the principal amount and accrued interest due on outstanding participating debentures issued by that company, if the company has outstanding equity capital invested in an amount equal to the amount being refinanced. (16)

Distribution of gross receipts

(A)

In general

Except as otherwise provided in this subsection, gross receipts, from any source or however categorized for generally accepted accounting principles or tax accounting purposes, shall be utilized 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 provided in subparagraphs (B) through (G). (B)

Past due interest and principal

Gross receipts shall first be used, within 10 days of receipt— (i)to pay any past due interest on participating debentures issued by the licensed company; and (ii)when there is no past due interest outstanding, to repay any past due principal on such debentures (whether such interest and principal are past due by their terms or by acceleration). (C)

Mandatory interest prepayment

If no unpaid accrued interest or past due principal is outstanding on any participating debenture issued by a licensed company, the company shall use its gross receipts, not later than the end of the calendar quarter in which they were received (or the following calendar quarter, if received within 15 days before the end of a calendar quarter) to prepay accrued interest on the participating debentures issued by the company, which prepayments will be applied to such accrued interest in the order in which such interest would otherwise become due and payable. (D)

Amortization distributions

If no unpaid accrued interest or past due principal is outstanding on any participating debenture issued by a licensed company, the company shall distribute its gross receipts— (i)to the Administration to amortize outstanding participating debenture leverage; and (ii)to its private investors, pro rata according to the ratio of outstanding participating debenture leverage to outstanding leverageable capital at the time of distribution. (E)

Post-amortization distributions

If no accrued interest or principal is outstanding on any participating debenture issued by a licensed company, and the company has no outstanding leverageable capital, the gross receipts of the company shall— (i)until aggregate distributions to private investors under this subparagraph equal aggregate contributions to the capital of the company previously made by private investors, be distributed to the Administration, an amount equal to the initial profit participation percentage of the total amount being distributed with the remaining gross receipts distributed to the 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, be distributed to the Administration an amount equal to the final profit participation percentage of the total amount being distributed, with the remaining gross receipts distributed to the private investors; and (iii)in the case of any post-amortization distributions to the Administration pursuant to this subparagraph, be deemed to constitute additional interest (not accrued interest). (F)

Management expenses

For purposes of calculating the amount to be distributed to the Administration pursuant to subparagraph (E), 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. (G)

Definitions

In this paragraph— (i)the term combined capital means the aggregate amount of private capital and outstanding leverage; (ii)the term final profit participation percentage means 50 percent of the leverage ratio, reduced by the weighted average interest rate on the financing commitments issued by the company; (iii)the term initial profit participation percentage means 25 percent of the leverage ratio, reduced by the weighted average interest rate on the financing commitments issued by the company; (iv)the term leverage ratio means the ratio of the aggregate amount of financing commitment leverage previously drawn by the company (including leverage that has been repaid, and not solely the maximum amount at any one time outstanding, if different) to the aggregate amount of capital previously contributed to the company by private investors (not solely the maximum amount at any one time outstanding, if different); (v)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 licensed 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; and (vi)the term outstanding leverageable capital means any aggregate capital contributions received by a licensed company from private investors which exceed aggregate distributions received by the private investors from the company. (17)

Exceptions to order of distributions

(A)

In general

Notwithstanding paragraph (16)(D), if no unpaid accrued interest (whether or not past due) and no past due principal is outstanding on any participating debenture issued by the licensed company subparagraph (B) through (D) of this paragraph shall apply. (B)

Tax distributions

(i)

In general

The company may make a special distribution of gross receipts or other cash to its private investors without a corresponding distribution to the Administration while principal is outstanding on participating debentures issued by the company, if— (I)the licensed company has an investment in a business (referred to in this subparagraph as the portfolio company) organized as a limited liability company (referred to in this subparagraph as an LLC) or as a partnership; (II)the portfolio company has income which will be taxable to its members or partners; (III)the portfolio company makes a distribution to its members or partners in an amount equal to their assumed tax liability on the portfolio company’s taxable income (referred to in this subparagraph as a tax distribution); or (IV)the small business investment company is itself a partnership or an LLC, so that any portfolio company income allocated to it is reallocated to the private investors, and it is they who are liable for payment of tax on that income as if it was their own income, whether or not they receive any cash in respect of that income. (ii)

Authority to make distribution

In circumstances described in clause (i), the issuing company may, prior to April 15 of each calendar year, distribute to its private investors up to an amount equal to the difference between— (I)the estimated aggregate maximum tax liability of the private investors on the income of portfolio companies organized as LLCs or partnerships during the preceding calendar year; and (II)the aggregate amount distributed to the private investors (other than pursuant to this subparagraph) since April 15 of the preceding calendar year, but in no event more than the aggregate amount of tax distributions that the issuing company received from all of its portfolio companies during the preceding calendar year. (C)

Expenses

A small business investment company may use its gross receipts to pay previously incurred expenses (including management fees) and other liabilities and it may, in addition, retain additional gross receipts in an expense reserve account in an amount which, added to any existing expense reserve, does not exceed such reasonably anticipated expenses and other liabilities for the following 12-month period, provided such expenses and other liabilities are not prohibited under regulations established by the Administrator or other applicable law. (D)

Prepayment

Subject to any applicable State law requirements, a 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 at any time. (18)

Restrictions on distributions

(A)

Liquidity and other administrative or state law restrictions

A distribution under this subsection may not violate liquidity requirements or other applicable restrictions on distributions in regulations issued by the Administrator 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 Administrator, and, whether or not there has been such acceleration, up to 100 percent of all gross receipts and the private collateral of the licensed company may, at the option of the Administrator, 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 that the Administrator may establish by regulation. (19)

Distributions in kind

(A)

Election of in-kind distribution of 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 (or marketable securities). Marketable securities distributed in kind shall be deemed to be gross receipts for purposes of this subsection, and their distribution shall be subject to the priorities and restrictions applicable to gross receipts under this subsection and to applicable regulations issued by the Administrator. (B)

Treatment of administration share

The licensed company shall either deposit the Administration share of such securities with a trustee designated by the Administrator, or retain the Administration share, if the Administrator so directs and with the agreement of the company. (C)

Retention of administration share

If the company retains the Administration share, it shall sell such share and promptly remit the proceeds to the Administration. (D)

Value of administration’s share

For purposes of this paragraph, the value of the Administration share is— (i)the value of the securities, 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, except that the Administration may receive a greater or lesser amount upon its ultimate sale of such share or upon the ultimate sale by the company of such share on behalf of the Administration. (20)

Timing of distributions

(A)

In general

Subject to paragraphs (16) and (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 (18)(C) shall be distributed by the last day of the fiscal quarter in which such gross receipts were received by the company, except that gross receipts received within 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; marketable securities

Gross receipts consisting of marketable securities shall be distributed within 6 months of the date of receipt, unless the small business investment company has obtained the prior consent of the Administrator. (21)

Reinvestment of gross receipts

Subject to such regulations and restrictions as may be prescribed by the Administrator, and by the agreement of the private investors in a small business investment company, any gross receipts that exceed the amount needed to make payments required to be made to the Administration under this subsection, may at the option of the company be reinvested in qualified small businesses. (c)

Post-distribution computation

After distributions have been made pursuant to this section, the Administration share of such distributions shall not be reduced or recomputed, except as expressly provided in this section. (d)

No ownership interest to administration

This section shall not be construed as creating in the Administration any ownership interest in any small business investment company which issues participating debentures. (e)

Conflict with other provisions

(1)

In general

In the event of a conflict between this subsection and any other provision of this part A, this subsection shall apply. (2)

Specific provisions

In particular, the provisions of this section supersede subsections (g) and (h) of section 303 in their entirety with respect to all matters pertaining to participating debentures issued by a licensed company covered by this section.