[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]



 
                       FULL COMMITTEE HEARING ON
                        LEGISLATION UPDATING AND
                     IMPROVING THE SBA'S INVESTMENT
                        AND SURETY BOND PROGRAMS

=======================================================================

                      COMMITTEE ON SMALL BUSINESS
                 UNITED STATES HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 6, 2007

                               __________

                          Serial Number 110-44

                               __________

         Printed for the use of the Committee on Small Business


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                   HOUSE COMMITTEE ON SMALL BUSINESS

                NYDIA M. VELAZQUEZ, New York, Chairwoman


HEATH SHULER, North Carolina         STEVE CHABOT, Ohio, Ranking Member
CHARLIE GONZALEZ, Texas              ROSCOE BARTLETT, Maryland
RICK LARSEN, Washington              SAM GRAVES, Missouri
RAUL GRIJALVA, Arizona               TODD AKIN, Missouri
MICHAEL MICHAUD, Maine               BILL SHUSTER, Pennsylvania
MELISSA BEAN, Illinois               MARILYN MUSGRAVE, Colorado
HENRY CUELLAR, Texas                 STEVE KING, Iowa
DAN LIPINSKI, Illinois               JEFF FORTENBERRY, Nebraska
GWEN MOORE, Wisconsin                LYNN WESTMORELAND, Georgia
JASON ALTMIRE, Pennsylvania          LOUIE GOHMERT, Texas
BRUCE BRALEY, Iowa                   DEAN HELLER, Nevada
YVETTE CLARKE, New York              DAVID DAVIS, Tennessee
BRAD ELLSWORTH, Indiana              MARY FALLIN, Oklahoma
HANK JOHNSON, Georgia                VERN BUCHANAN, Florida
JOE SESTAK, Pennsylvania             JIM JORDAN, Ohio

                  Michael Day, Majority Staff Director

                 Adam Minehardt, Deputy Staff Director

                      Tim Slattery, Chief Counsel

               Kevin Fitzpatrick, Minority Staff Director

                                 ______

                         STANDING SUBCOMMITTEES

                    Subcommittee on Finance and Tax

                   MELISSA BEAN, Illinois, Chairwoman


RAUL GRIJALVA, Arizona               DEAN HELLER, Nevada, Ranking
MICHAEL MICHAUD, Maine               BILL SHUSTER, Pennsylvania
BRAD ELLSWORTH, Indiana              STEVE KING, Iowa
HANK JOHNSON, Georgia                VERN BUCHANAN, Florida
JOE SESTAK, Pennsylvania             JIM JORDAN, Ohio

                                 ______

               Subcommittee on Contracting and Technology

                      BRUCE BRALEY, IOWA, Chairman


HENRY CUELLAR, Texas                 DAVID DAVIS, Tennessee, Ranking
GWEN MOORE, Wisconsin                ROSCOE BARTLETT, Maryland
YVETTE CLARKE, New York              SAM GRAVES, Missouri
JOE SESTAK, Pennsylvania             TODD AKIN, Missouri
                                     MARY FALLIN, Oklahoma

        .........................................................

                                  (ii)

  
?

           Subcommittee on Regulations, Health Care and Trade

                   CHARLES GONZALEZ, Texas, Chairman


RICK LARSEN, Washington              LYNN WESTMORELAND, Georgia, 
DAN LIPINSKI, Illinois               Ranking
MELISSA BEAN, Illinois               BILL SHUSTER, Pennsylvania
GWEN MOORE, Wisconsin                STEVE KING, Iowa
JASON ALTMIRE, Pennsylvania          MARILYN MUSGRAVE, Colorado
JOE SESTAK, Pennsylvania             MARY FALLIN, Oklahoma
                                     VERN BUCHANAN, Florida
                                     JIM JORDAN, Ohio

                                 ______

            Subcommittee on Urban and Rural Entrepreneurship

                 HEATH SHULER, North Carolina, Chairman


RICK LARSEN, Washington              JEFF FORTENBERRY, Nebraska, 
MICHAEL MICHAUD, Maine               Ranking
GWEN MOORE, Wisconsin                ROSCOE BARTLETT, Maryland
YVETTE CLARKE, New York              MARILYN MUSGRAVE, Colorado
BRAD ELLSWORTH, Indiana              DEAN HELLER, Nevada
HANK JOHNSON, Georgia                DAVID DAVIS, Tennessee

                                 ______

              Subcommittee on Investigations and Oversight

                 JASON ALTMIRE, PENNSYLVANIA, Chairman


CHARLIE GONZALEZ, Texas              LOUIE GOHMERT, Texas, Ranking
RAUL GRIJALVA, Arizona               LYNN WESTMORELAND, Georgia

                                 (iii)

  
?

                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page

Velazquez, Hon. Nydia M..........................................     1
Chabot, Hon. Steve...............................................     2
Altmire, Hon. Jason..............................................     4
Jordan, Hon. Jim.................................................     5

                               WITNESSES


PANEL I
Preston, Hon. Steven C., United States Small Business 
  Administration.................................................     6


PANEL II
Peterson, Hon. William G., American Insurance Association and the 
  Surety and Fidelity Association of America.....................    16
More, Robert J., National Venture Capital Association............    18
Koenig, Dr. Scott, Biotechnology Industry Organization (BIO).....    20
Atkinson, Dr. Robert, Information Technology and Innovation 
  Foundation.....................................................    22
Mercer, Lee, National Association of Small Business Investment 
  Companies......................................................    25
Phillips, Ron, Community Development Venture Capital Alliance....    26

                                APPENDIX


Prepared Statements:
Velazquez, Hon. Nydia M..........................................    38
Chabot, Hon. Steve...............................................    40
Altmire, Hon. Jason..............................................    42
Preston, Hon. Steven C., United States Small Business 
  Administration.................................................    44
Peterson, Hon. William G., American Insurance Association and the 
  Surety and Fidelity Association of America.....................    58
More, Robert J., National Venture Capital Association............    66
Koenig, Dr. Scott, Biotechnology Industry Organization (BIO).....    75
Atkinson, Dr. Robert, Information Technology and Innovation 
  Foundation.....................................................    80
Mercer, Lee, National Association of Small Business Investment 
  Companies......................................................    85
Phillips, Ron, Community Development Venture Capital Alliance....    92

                                  (v)

  


                 FULL COMMITTEE HEARING ON LEGISLATION
                    UPDATING AND IMPROVING THE SBA'S
                INVESTMENT AND AND SURETY BOND PROGRAMS

                              ----------                              


                      Thursday, September 6, 2007

                     U.S. House of Representatives,
                               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 10:00 a.m., inRoom 
2360, Rayburn House Office Building, Hon. Nydia M. Velazquez 
[chair of the Committee] Presiding.
    Present: Representatives Velazquez, Shuler, Michaud, 
Cuellar, Moore, Altmire, Clarke, Chabot, Graves, Akin, 
Musgrave, Davis, Fallin, and Jordan

           OPENING STATEMENT OF CHAIRWOMAN VELAZQUEZ

    ChairwomanVelazquez. Good morning, I am pleased to call 
this hearing to order. In today's hearing, the committee will 
examine a proposal to improve the Small Business 
Administration's existing investment programs and establish a 
new Angel investment program. This enhancement, which expands 
access to venture capital, will help modernize the SBA so that 
its service offering meet the needs of America's entrepreneurs. 
In June, this committee received testimony from key members of 
the investment community who describes the challenges facing 
our Nation's small businesses.
    Small business relied on venture capital investment to form 
the pursuit of new ideas, indeed many well-known companies 
began a small business that grew to prominence with the help of 
venture capital. Several companies like Google, IBM and 
Microsoft would not be the industry leaders they are today if 
it were not for venture capital investment, yet despite this 
importance, it remains extremely difficult for small businesses 
to attract investments. This is particularly true for two key 
segments of the business community, early stage businesses and 
those located in low income communities.
    Over the last 5 years, there has been a steady movement of 
venture capital away from small business startups and to work 
later stage businesses, this has not only limited the ability 
of small businesses to expand and grow, but also hindered their 
ability to generate innovative, new ideas and new products. 
Venture capital represents the life blood for these businesses, 
without it these start-up companies will never reach their full 
potential, perhaps no Federal agency is better positioned to 
address this problem than the SBA.
    Unfortunately, the administration has failed to press these 
advantages for the benefit of the small business community, it 
continues to withhold the support necessary for the new markets 
program to achieve its full potential. Similarly, the SBA has 
failed to explore new strategies that has proven successful at 
increasing venture capital investments in start ups. And 
perhaps most notably, the agency continues to follow outdated 
policies that restrict the flow of venture capital and other 
forms of investment to small firms. The committee print being 
considered will begin to reverse these policies, this proposal 
will renew our commitment to increase investments in low income 
areas by restoring for them NMVC program it also features a 
renewed focus on small manufacturing companies providing much 
needed help to communities that have suffered from a loss of 
their industries.
    A new Angel Investment Program will also be established. 
This will fill the void for stiff capital that has been created 
by the elimination of the participating securities program. 
This emerging strategy is already enjoying widespread success 
in the private sector and will be a vital step in ensuring that 
start up in early stage businesses have the capital they need 
to grow stronger. The proposal will simplify and streamline the 
treatment of small businesses receiving venture capital 
investments. This change will ensure that entrepreneur has 
unimpeded access to this key form of financing. Together, these 
initiatives will strengthens SBA's commitment to improve 
investments in small businesses and automatically improve 
innovation among our Nation's entrepreneurs.
    Our small businesses have always been the incubators for 
new ideas and investment has been the fuel for this great 
engine of American economic development. As this country 
continues to rely on entrepreneurs to spur economic development 
and create jobs the need for equity capital will only continue 
to grow. I would like to extend our thanks to all of the 
witness who will be testifying today. I am sure that their 
unique view and comments on the proposed legislation will be 
insightful as the committee moves forward in the legislative 
process on this very important subject.
    [The prepared statement of Ms. Velazquez may be found in 
the Appendix on page 38.]

    ChairwomanVelazquez. I now yield to the ranking member, Mr. 
Chabot, for his opening statement.

                OPENING STATEMENT OF MR. CHABOT

    Mr.Chabot. Thank you, Madame Chairwoman, and I want to 
thank you for holding this important hearing to address 
legislation that would update the Small Business Administration 
programs that provide long term capital and surety bonds to 
small businesses. Recent events in the financial market show 
that small businesses will continue to face difficulties 
raising credit in capital through normal commercial markets. 
Those business owners with solid credit scores and balance 
sheets will have to spend more to obtain credit. Those without 
stellar credentials may find credit in capital very scarce. 
Such gaps in the commercial finance markets are problematic 
because small businesses are the most significant component for 
creating new jobs in the economy. An economy that faces some 
uncertainty due to problems in the housing market will have the 
situation exacerbated by any limitations on small business 
growth resulting from restrictions on availability of capital.
    During the past 6 years, this committee has heard from a 
variety of sources that conventional debt and equity markets do 
not provide adequate resources to small businesses, 
particularly new small businesses, ones that do not have a 
track record of cash flow and solid earnings. The committee 
also already has passed legislation that addresses improvements 
in the market for debt. Today the committee is considering 
legislation to rectify issues in the equity market for small 
business. Some of changes proposed in this legislation we are 
considering today are appropriate and necessary technical 
changes, for example, special small business investment 
companies called new called new market venture capital 
companies are hampered because the definition of new markets in 
a Small Business Investment Act is more restrictive than the 
one in the Tax Code.
    It certainly makes sense to modify the Small Business 
Investment Act to improve the capabilities of new market 
venture capital companies to invest in poor areas. Another 
appropriate technical change involves raising the limits on the 
amount of leverage available to small business investment 
companies, rather than using an index for inflation. This 
change will provide these SBICs with greater certainty 
concerning the amount of funds that will be made available by 
the SBA, these and the other technical changes in the bill to 
improve the existing equity program, in my opinion, makes 
sense.
    However I am not yet convinced that we need to create 
completely new programs to provide equity capital to small 
businesses, rather than continue to reform and improve existing 
programs. I would be very interested in hearing from our 
witnesses, their views on the best approach that the committee 
can take to ensure that small businesses have access to equity 
capital given the recent tumult in the financial markets. The 
other program that we are examining today is the SBA's 
guarantee of surety bonds, surety bonds generally are required 
to assuage the buyer of services that the supplier will finish 
the contract or some substitute will be found to do so. Surety 
bonds are used in many industries, although they are most 
prevalent in construction contracts. If a contract requires a 
surety bond small businesses, particularly one without a 
significant track record may not be able to bid because the 
business will be unable to obtain a surety bond at a reasonable 
cost.
    The SBA surety bond program provides an important tool to 
increase the competitive capacity of small businesses to bid on 
various contracts, including those offered by the Federal 
government. The technical changes that we are considering for 
the surety bond program will enhance its availability and 
utility for small businesses. In turn, an improved surety bond 
program will enhance the competitive capacity of small 
businesses to win contracts that require the proffer of a 
surety bond.
    Finally, the bill makes drastic changes to the definition 
of small business by eviscerating the long-held standard that a 
small business is one that is independently owned and operated. 
Title V of the bill we are considering will enable venture 
capital companies to own, control and operate numerous small 
businesses, numerous small businesses without any affiliation 
standard at all. This will enable venture funded small 
government contractors to take advantage of economies of scale 
and scope that truly independent small businesses will not and 
arguably provide an unfair advantage.
    In the long run, this will reduce competition in the 
government marketplace and increased costs to the taxpayer, 
that is our concern. I am willing to hear what advice our 
witnesses will have on reducing the potential significant 
adverse consequences on small businesses of this change, and 
hopefully we will be able to work something out between now and 
the future when this is taken up in the legislation, and as I 
have said in the past, this committee, and especially the 
Chair, I think myself in particular, and our staff have had a 
very good relationship thus far in this Congress. I hope we 
will work it out, although there are some challenges that we 
face.
    I thank the chairwoman for holding this hearing and thank 
the witnesses who will be testifying this morning and look 
forward to the ideas offered by our distinguished panelists and 
I yield back the balance of my time.
    ChairwomanVelazquez. Thank you, Mr. Chabot. Let me state 
what we are considering today is the footprint of this 
legislation that has not been introduced. You have valid 
concerns, I hope at the end of this hearing today we could sit 
down and work out those differences because I think that some 
of the concerns and the points that you address will be 
addressed today during the process of this hearing.
    Now I recognize Mr. Altmire for an opening statement.

                OPENING STATEMENT OF MR. ALTMIRE

    Mr.Altmire. Thank you, Chairwoman Velazquez, for today's 
hearing and for your continued work on behalf of America's 
small businesses. I appreciate your leadership and the 
opportunity I have had working with you and the committee's 
staff in drafting legislation to improve access to equitable 
capital for America's small businesses. I also want to thank 
the ranking member and his staff for helping us work through 
some of these issues and improvement to strengthen this bill 
going forward.
    The previous hearing this committee held on June 21st 
examined many of the challenges that small businesses face in 
acquiring investment capital. High levels of risk, regulatory 
and compliance costs, the cost of capital assets, limited cash 
flow just to name a new. The primary source of investment 
assistance through the SBA is the small business investment 
company program, it is a public private partnership that has 
invested $48 billion in more than 100,000 small businesses 
since 1958.
    Notable success stories include Intel, Apple Computer, 
Whole Foods, Staples, Quiznos and Costco. The SBA's other two 
investment program, the new market venture capital program and 
surety bond program, have, however, demonstrated limited 
success. Onlysix companies currently participate in the NMVC 
program and the surety bond program has become an increasingly 
unattractive option for some small businesses.
    All three SBA investment programs are designed to provide 
our Nation's small business start ups with access to equity 
capital in order to foster innovation and create more jobs in 
our communities, unfortunately these programs have fallen short 
creating an environment where it is difficult for startups to 
attract initial investment.
    Today, we have an opportunity to discuss how to address 
these challenges and beginning consideration of a legislative 
solution that I will soon introduce, the Small Business 
Investment Improvements Act of 2007. This bill will strengthen 
the SBIC program, expand the NMVC program, and improve the 
surety bond program also establishing a new office of Angel 
investment, the changes this legislation proposes to the 
current fracture of the SBIC program will bring it up to date 
with today's practices, it simplifies how the maximum live 
registration caps are calculated and revises the limitation on 
aggregate investment to increase overall investment in small 
business.
    Further it will provide incentives to target investments to 
businesses owned by veterans, women and minorities. Changes 
will also be made to the NMVC program by providing incentives 
for investment in small manufacturing companies in low income 
areas and expanding the program. Doing so will ensure a wider 
distribution of investment nationwide and create opportunities 
for more small businesses to benefit from the program.
    Finally, this bill will establish the office of Angel 
Investment that will focus on increasing equity investment in 
small business. Within the new Office of Angel Investment, an 
Angel Investment program will be developed to matched Angel 
groups with early stage small businesses. A Federal Angel 
network will be made available through SBA's Web site and grant 
initiatives will be established to increase awareness about the 
benefits of Angel investing to both entrepreneurs and 
investors.
    The Small Business Investment Improvement Act of 2007 will 
reduce many of the barriers that small businesses face when 
seeking to obtain equity investment through the SBA and its 
private partners. Small businesses are the backbone of our 
economy generating 57 million jobs a year insuring that they 
are able to obtain vital capital at crucial points in 
development are of paramount importance to all of us on this 
committee. I hope my colleagues will join me in support of this 
effort. Again, I want to thank the Chair and the ranking member 
for their assistance with this bill and for holding this 
hearing today.
    ChairwomanVelazquez. Thank you.
    The Chair recognizes Mr. Jordan.

                OPENING STATEMENT OF MR. JORDAN

    Mr.Jordan. I think we had some terrible flooding in the 
midwest the last couple of weeks, and serious damage was done 
in our district. Mr. Preston, along with his team, has been in 
our district has been in our district working hard. When we 
visited you had been traveling for a week in Ohio in our 
district and appreciate the administrator taking time to come 
talk to local leaders. More importantly, families and 
individual business owners impacted by the floods, so we 
appreciate that very much.
    Mr.Preston. Thank you.
    ChairwomanVelazquez. Any other statements?
    We will proceed with our first panel. It is with great 
pleasure that we welcome Administrator Preston. He is the 22nd 
administrator of the U.S. Business Administration and agency 
that advocates on behalf of the nation's small businesses helps 
advance our economy and assists in providing financial 
assistance following a disaster.

  STATEMENT OF HON. STEVEN C. PRESTON, ADMINISTRATOR, UNITED 
              STATES SMALL BUSINESS ADMINISTRATION

    Mr.Preston. Thank you very much, Chairwoman Velazquez, 
Ranking Member Chabot, and other members of the committee, good 
morning. Since 1958, the SBA's SBIC program has invested over 
$50 billion in over 100,000 small businesses. Forty years of 
performance supporting the Nation's economy. The debenture 
program has formed the backbone of this program and it operated 
without a cost to the taxpayer for the last 7 years. In 2006 
alone, the SBIC debenture licensees invested $1.2 billion. 
About 25 percent of those investments went to low and moderate 
income areas, amounting to more than $300 million in LMI 
investments last year. We continue to focus on making more 
capital available to LMIs through outreach and education, we 
also continue to aid under the market venture program, which 
has made over 47 million in equity investments in 55 portfolio 
companies over the last 5 years. New market venture cap 
companies have also provided over $10 million in operational 
assistance in actual or potential portfolio companies.
    To date, none of the new market venture capital groups have 
repaid the debentures and the licensees have not yet fully 
invested their leverage, that is not to imply anybody's 
default, we are not at the repayment phase of the program. We 
continue to support the new markets program and will assess the 
potential of the program as investment results become clear. In 
addition to SBA's program, many of, you mentioned the Angel 
market. Private sector Angel investing has grown, to be a 
significant source of capital for start ups. It has grown 
steadily since 2001, it is now over $25 billion which is up 
almost 11 percent from last year and has been aided by many of 
the macro economic policies of the administration. While Angel 
Investment is a source of critical seed capital for 
entrepreneurs, the administration believes that stable pro 
investment policies are the most effective method of 
encouraging activity among Angels. Over the past 5 years, Angel 
Investment has grown 65 percent and created 540,000 jobs in the 
last three years.
    The administration believes that the best way to strengthen 
this investment is through an economic framework then 
encouraged investment at all levels through broad based and 
reasonable tax rates and reduced regulatory impediments. The 
administration firmly believes that the economic policy has 
been a factor in the rebound of the sector.
    I would like to now turn to the draft legislation more 
specifically regarding the debenture program. SBA has no 
opposition to many of the proposed changes in Title I, these 
changes can't clarify the formula which think is very helpful 
in the current program without increasing risk, they also 
should have low cost impact in the program, the less 
complicated rules should encourage funds to participate in the 
program. We do think the current tiered structure should 
remain, or that the maximum leverage should be limited to two 
tiers. We are concerned that a third tier would increase risk 
to the program and many funds receive income in returns of 
capital that mitigate the need for that third tier.
    In Section 102 we believe the language targeting low income 
communities already in a Small Business Investment Act 
accomplishes the demographic affect desired. Turning to new 
markets venture capital. While the initial investments appear 
promising, we think it is premature to judge the program's 
overall effectiveness, six of the firms are in the investment 
stage, none of them are making payments on debentures right 
now. Until that happens, it is difficult for us to judge the 
individual performance of these groups or of the overall 
program. Also, since there are no fees or returns to cover the 
programs losses, the cost of the program will equal the 
operating support we provide the program in addition to the 
overall debenture losses, there is no offset to that. The goals 
of the program are important.
    At this time, we think it is difficult to assess the total 
cost benefit relationship there. We will support the proposal 
to amend the definition of LMI as discussed. Turning to the 
Angel capital provision, while the administration believes 
encouraging private investment and small business is important 
we do not support the subsidy supported in this bill. Angel 
investing represents pure venture capital. We assuming that the 
bill would allow the government to participate in the return on 
a pari passu basis with the Angel investors, we suggested that 
we would like to talk about clarifying the language to make 
sure we understand what that looks like.
    If that is the case, once again, we would want to work with 
you on clarification. More fundamentally we do not see how the 
program would increase the likelihood of wealthy Angel 
investors to invest along side the government in target 
investments. I think once they find attractive investments, we 
believe they will do so with or without government support, 
especially considering the size of this marketplace and the 
connectedness of it and increasing connectedness of it.
    Also, Angel investors typically do invest side by side as 
we look forward at the SBA investment is limited as described 
in the bill. When portfolio companies require follow on 
capital, Angel investors could create deals beyond that cap 
level which would allow them to increase their returns at SBA's 
expense so we would want to talk about how to deal with those 
issues.
    We welcome the suggested improvements in the surety bond 
program, participation has diminished. While SBA has made a 
number of regulatory and administrative changes there is a 
limit to our ability to affect changes without statutory 
authority so I am glad our recent regulatory effort is working, 
we heard favorable feedback from the industry and also 
acknowledge the need for some legislative changes. We recently 
saw the language concerning ownership interest in venture 
capital firms while the SBA encourages venture capital 
investment in small businesses we are concerned about this 
provision the basic premise of small business size status, 
independent ownership and control could be circumvented by the 
provision, it could allow large venture capitalists to own 
several small businesses without affecting the size statuses. 
Furthermore such concerns could compete for and obtain contract 
set aside for small business concerns as well as grants and 
other forms of assistance reserved to small businesses. We 
continue to work hard to strengthen our impact through the 
investment division, but we have tempered those efforts with 
prudence and fiscal oversight focus. We have also increased our 
oversight to address problems and worked to improve our 
relationship and to reach out to industry leadership to work 
toward common solutions in many of the programs we have. Thank 
you for the opportunity to testify before the committee and I 
look forward to answering any questions you might have.
    [The prepared statement of Administrator Preston may be 
found in the Appendix on page 44.]

    ChairwomanVelazquez. Thanks you, Mr. Preston.
    In June, we conducted a hearing on this topic and we heard 
from one of the witnesses, Mr. John Wade, John May, a widely 
recognized Angel investor and current chairman of the Angel 
Capital Association. The committee was told to consider 
creating a government fund that automatically coinvests with 
Angel, this is a way to spur economic development with low 
cost.
    The model we have proposed in the bill does just this, but 
your answer to creating a new proposal that will start a 
greater investment is always no. So you tell us that the 
administration's policies are sufficient to meet the need for 
investment in small businesses, but this is what we have, Mr. 
Preston, you have eliminated participating securities, you have 
done nothing to move the debenture program to early stage 
firms. Last year, only 3.4 percent of all SBIC financing went 
to black owned small businesses, only 1.3 percent went to 
Hispanic owned businesses, only 2.3 percent went to women-owned 
businesses, and last year SBA licenses only 10, none of which 
were for early stage. Five years ago, the SBA license, 40 new 
SBICs, more than half of which were for early stage investment. 
So my answer is do these numbers, my question really reflect an 
agency with sufficient tools to meet the investment mission?
    Mr.Preston. Madam Chair, you covered a lot of ground in 
that comment. Let me just make a couple of comments. First of 
all, I think we are doing a lot with early stage investors. As 
you know, about a third of our 7a program goes to early stage 
investors, this debt capital but is very significant. Almost $5 
billion in 7a went to early stage last year. When you look at 
LMI areas, I think I already noted that 25 percent of the 
debenture cap program today is going to LMI areas. If you look 
at the lending programs to minorities you will see we have a 
very significant percentage of lending programs going to 
minorities, you made a number of comments.
    ChairwomanVelazquez. With all due respect, Mr. Preston, 
this is about Angel capital, Angel Investment, this is about 
venture capital, this is not about that, 7a is not venture 
capital.
    Mr.Preston. I understand that, but we are talking about 
getting capital to early stage businesses overall and there are 
a number of tiers of capital and we play a significant role in 
some of those tiers. I would say when you look at a $25 billion 
Angel marketplace and you consider launching a $25 million 
program where the government co invests pari passu, I, having 
spent much of my career in this business, am suspicious whether 
or not that would energize investment in the areas that you are 
targeting. If I am a venture capitalist or an Angel investor 
and putting a million dollars into an investment, asking the 
government for a million dollars and going through our programs 
first, asking for one of my partners for a million to invest in 
what I think is a good business, I know where they will go.
    ChairwomanVelazquez. You are not answering my question. My 
question is, how do you react to the fact that you are saying 
this is not important, this model is not the answer because we 
have all these other programs, but when we look at the 
performance they fall short when it comes to women-owned 
businesses, to Hispanic-owned businesses, to black and low 
income areas.
    Mr.Preston. As I mentioned, the debenture program has about 
25 percent in LMI, that is over $300 million. What I would also 
tell you is we are working on a number of initiatives, we would 
be happy to have your staff over to go through them. We 
recently hired to head all of our lending and investment 
operations Grady Hedgesbeth. He was Mike Dukakis's secretary of 
economic affairs, he is working on designing a number of 
vehicles with us, he has a deep economic development 
background, and he was the founder and president of the first 
bank, owned Urban Investment Bank up in Boston, which provided 
mezzanine and equity financing to minority and inner city 
businesses. This is the person we have leading the design of 
our new initiatives in our outreach. We are looking 
extensively, we are working with Treasury on CDFI.
    ChairwomanVelazquez. I guess he has a lot of work to do. 
With these numbers I would suggest that you go back and sit 
down and present this picture to him, because the numbers speak 
for themselves.
    Lets talk about the reasons that you are citing for not 
creating the Angel program, you are saying the risk to the 
government. The proposed legislation however, Mr. Preston, will 
require Angels to much dollar for dollar the capital received 
from the SBA, thus giving Angels more risk than due private 
investors in the SBIC program. Why are you willing to put the 
government at greater risk in the SBIC program and not in this 
new Angel program?
    Mr.Preston. In the SBIC program, in the debenture program, 
we are looking at a current pay instrument and it is a 
different kind of investment. I would say is I have been out 
there talking not only with many inner city companies, but 
people who work in this industry, I know you have held hearings 
and you know very well from your own district the challenges 
that people have, I believe what we need to do, and this is 
what we are focusing on, is a much greater focus on outreach, 
on financial education, on helping people understand the 
opportunities in the inner city. I am not sure that a co-
investment with Angels is the way to do it, I do not think it 
is an outreach vehicle. I think there is a real awareness 
issue.
    And also think and this is what I have heard continually 
when I've done the round tables, inner city investing and rural 
investing can be very good business. I am very concerned about 
the perspective that somehow we have to help people because it 
is not good business. You have great transportation, proximity 
to customers, public transportation, you have work for sets 
available often real estate is cheaper. My view is there is a 
different way to address the issue.
    ChairwomanVelazquez. The reality here is this is not about 
the perception, it is about improving the investment in early 
stage companies, in Hispanic-owned business, women-owned 
businesses, black-owned businesses, and low income areas. I 
think this program, the Angel program, put the government at 
the lower risk than those of SBIC. SBA lost nearly $3 billion 
in the SBIC program in the last 6 years. We are putting 
controls, so we question the type of controls that you think 
you have in place to prevent the SBIC from getting the 
government to lose the money.
    Mr.Preston. I agree the participating securities program 
has lost a lot of money. I think it was a poorly structured 
program and I don't think the government was protected based on 
its structure, so I would concur with you that the particular 
program has come at great cost to the taxpayer.
    ChairwomanVelazquez. Mr. Preston, currently your agency 
considers venture capital companies as affiliates with their 
business investments. As a result, the SBA adds the investment 
companies employees with the employees from companies receiving 
investment and with every other business in which the 
investment firm is invested. If the total number of employees 
exceeds 500 then the entire organization viewed as a whole by 
the SBA is not considered a small business, does your agency 
follow this same affiliation policy in the context of companies 
that receive investment from SBIC approved investors?
    Mr.Preston. I do not know.
    ChairwomanVelazquez. The answer is no.
    Mr.Preston. So I figured you knew. You wouldn't have asked 
the question.
    ChairwomanVelazquez. Why does your agency treat investment 
different when it comes from private venture capital as an 
opposed to an SBIC licensed SBIC.
    Mr.Preston. My concern on this legislation, is that you 
have large affiliated groups getting small business contracts, 
we want to do everything we can to help those small businesses 
who truly are small businesses get those contracts that may be 
able to be dealt with through greater clarification of the 
definition in your bill.
    ChairwomanVelazquez. In your testimony, you have suggested 
that the way we are treating venture capital has insufficient 
safeguards.
    Mr.Preston. Yes.
    ChairwomanVelazquez. I disagree. The bill that we have 
under consideration, or the draft bill, first, it will not 
require that the venture capital firm itself be a small 
business;two, prohibit a large company from controlling the 
venture capital company;three, require that the venture capital 
firm have fewer than 500 employees, require that the venture 
capital firm be located in the United States. There should 
certainly forestall concerns that we are allowing a large 
corporation to set up a venture capital company to invest in 
small businesses in order to obtain contracts. Under your own 
risk recertification rule from November last year, as long as a 
large corporation acquired a small business by the end of June 
of this year, it gets a free pass for the small firm's 
contracts for the next 5 years.
    We have certainly not done anything remotely so egregious 
here. To the contrary, we have taken steps to prevent such 
abuses. How can you say that these safeguards are insufficient?
    Mr.Preston. Madame Chairwoman, I think a venture capital 
firm with 50 people or even 100 people can be a very, very 
significant enterprise. If you are looking at the employee base 
of the firm itself, you will get an enormous amount of leverage 
off of that employee base. Now, if you want we can get into the 
recertification discussion, but specifically with this bill, I 
am concerned that if you are looking at the people who work at 
the fund itself, you are missing--a 100-person fund can 
leverage billions and billions of dollars.
    ChairwomanVelazquez. What about the SBIC with 50 employees 
or 500, they are not restricted.
    Mr.Preston. The SBICs in practice are relatively small 
funds. If you see an inconsistency in the SBIC piece, I would 
be happy to address that separately, I am addressing what you 
have in your bill right now, and that's what I'm trying to 
focus on.
    ChairwomanVelazquez. The venture capital firms that we are 
talking about are small firms, these are not large firms.
    Mr.Preston. All I am saying is I think as we draft the 
language in this legislation which should make sure that is, in 
fact, the case, a 400-person venture capital firm is enormous. 
I think the largest firms in the country may not even be that 
big, I think it is very important we put the property 
restrictions in it.
    ChairwomanVelazquez. We do, sir, we do, sir.
    Mr.Preston. If it is the right firm and we put some 
safeguards in there, it may be fine and many of the small 
businesses we should be working with.
    ChairwomanVelazquez. We will be working with you, we will 
be working with a minority. Let me say this, no one in this 
committee has fought nail and tooth regarding big businesses 
taking away fair contracting tended to go to small business, I 
am not going to jeopardize this here.
    Mr.Preston. Ma'am, I have ever never ever doubted your 
commitment to small business and I do not think you could doubt 
mine, I think we can work on this collaboratively.
    ChairwomanVelazquez. I recognize Mr. Chabot.
    Mr.Chabot. Thank you, Madam Chair. Administrator Preston, 
thank you for your appearance here this morning. I think I 
understood you to say the investment community--first of all, 
there is about $25 billion that is already being invested by 
the Angel.
    Mr.Preston. Yes.
    Mr.Chabot. And this is a program, 25 or 100 million, 
depending on the way one looks at it. As a practical matter, 
the investment community may see government involvement as a 
yellow flag, that this is an area that is risky, and therefore 
could potentially have the opposite impact. Did you say that in 
so many words?
    Mr.Preston. What I said in so many words is a broad and 
deep market with a fair degree of connectedness among 
investors, the connectedness is growing. I think these Angel 
networks that are merging are very favorable for small business 
and very favorable to enhance investment. And as a result, I am 
suspicious of the value an Angel investor would see in calling 
up us for money with going through a government process in 
getting qualified and dealing with filings as opposed to going 
to somebody sells. There is no kind of added return to them, we 
are not enhancing their return, and so I guess I view this as 
limited value.
    Now, I do agree with the chairwoman in saying and I 
appreciate that our return would be pari passu, I think this is 
important to do this. To the chairwoman's earlier comment that 
is not what happened in the participating security program, and 
that is one of the reasons the government lost so much money.
    Mr.Chabot. Thank you. I think you stated it is your belief 
that the best way to strengthen the Angel investment market is 
not necessarily through the government market, but rather 
through creating an economic framework that encourages 
investment at all levels, I think you specifically said, I 
think your terminology was the macro economic policies of the 
administration; could you elaborate a little bit?
    Mr.Preston. I think through a favorable tax environment 
that encourages investing and people's ability to get returns 
out without an onerous tax burden is very favorable, a 
favorable regulatory environment. Since the beginning of the 
administration, we have sense a growth in the Angel market. I 
would also mention, Mr. Chabot, that we do see an outreach 
opportunity here and an access issue in certain areas of our 
country. I hear it time and again out in the field. We do think 
it is important for us to play a role there.
    The other thing I would say, I would not disparage the 
importance of the lending program in this area. In your own 
State, you may not be aware, it is further north than your 
district, but we are actually doing a pilot right now where we 
are coupling our lending programs with equity investment as 
soft of a 1, 2 punch to give people a full capital structure 
when they are having had a hard time getting capital elsewhere. 
So there is a lot we can do that is very incremental here.
    Mr.Chabot. I think you noted that the proposed structure of 
the Angel Investment program could permit the possibility of a 
conflict of interest. Would you elaborate on that?
    Mr.Preston. This is something and this may be able to be 
dealt with through some of the language, but I think we are 
maxed out, if I recall, at $2 million. What may well happen is 
you look at follow on investments, we may come in on that first 
or second tier with a particular valuation and investment 
structure relative to the other investors, as you do follow-on 
investments, we may not have a seat at the table. Those could 
be done at a different valuation lower or higher, it could 
dilute our interest, there are a number of things that could 
happen that would be potentially detrimental to our interest in 
the program.
    Mr.Chabot. Thank you. Finally, you expressed some concern 
that the legislation does not provide for repayment of proceeds 
if the Angel investment is not profitable, could you give some 
examples where that sort of thing could happen?
    Mr.Preston. I am trying to recall the exact language, I 
think it described the repayment of as being out of profits and 
profits typically refer to returns over and above your original 
investment. My comment had to do with if there was a certain 
amount of capital and return that is returned to the investors 
that we participate in the entire pie, not just the profit 
piece. Based on our discussions at a staff level, we understand 
that is the intention, we just want to make sure that the 
language is as clear as possible.
    Mr.Chabot. Thank you very much, I have no further 
questions.
    ChairwomanVelazquez. Mr. Altmire.
    Mr.Altmire. Mr. Preston, I want to focus on one of the 
things that you had a discussion with the chairwoman about the 
new markets venture capital program is the only program that 
has been specifically designed to increase investment in small 
businesses in low income areas specifically. So can you talk 
about if you feel that this is still a worthwhile investment, 
if so why has it not been requested to be funded over the past 
4 years.
    Mr.Preston. It is the only program specifically designed 
and structured to go exclusively into those areas. Right now we 
are still in the funding stage of that program, we are not at a 
point where we have seen any returns coming out of it. In 
addition we do not know how it is performing. Secondly in terms 
of the cost of the program there are two elements to the cost, 
number 1, any loses in the program the government will fund 
because there are not any fees to cover it. Number 2, we 
provide operating costs, based on our estimates, we do not know 
where we will end up. We can easily see a loss of 30 percent on 
the money invested if you look at the operating costs and the 
potential losses in the program. If you look at, as an 
alternative, the debenture program where we are putting out 
$300 million and it is a zero subsidy program, we are putting 
out a lot more money out there at a zero cost to the taxpayer 
other than the administrative costs, so we have concerns with 
how it will ultimately turn out. In any case, it will be a 
fairly significant cost to the taxpayer.
    Mr.Altmire. In the interest of time with a vote on, I will 
condense my questions about Angel Investment. Can you talk 
about what you see as the value of mentorship with regard to 
Angel Investment with the programming, and does the agency 
support low cost mentorship and management advice through that 
program?
    Mr.Preston. I think, somehow getting mentorship counseling 
technical assistance for small business is very important. And 
obviously as you know we have a large network of people that we 
fund through SBDCs, women's business centers as well and our 
district network of 70 locations where we counseled over 
300,000 people last year, a million 4 overall, so small 
businesses at every stage can use counseling and mentoring.
    Mr.Altmire. Thank you.
    ChairwomanVelazquez. Will the gentleman yield?
    Mr.Altmire. Yes.
    ChairwomanVelazquez. I would like to follow up on your 
answer regarding the new markets venture capital program. Are 
you saying that you are just waiting to see when the program 
they repay to the government.
    Mr.Preston. The program has not begun to repay. We do know, 
based on the way the program is structured, that the cost will 
be the operating costs that we fund plus any losses, because 
unlike the debenture program, there are not fees in plus to 
cover those losses.
    ChairwomanVelazquez. Have you taken any steps to strengthen 
existing companies in this program?
    Mr.Preston. We provide millions of dollars of operational 
assistance.
    ChairwomanVelazquez. Have you done any evaluations to date?
    Mr.Preston. Yes. We looked at those programs to date.
    ChairwomanVelazquez. Do you have a report of how those 
companies are performing?
    Mr.Preston. We can share that with you.
    ChairwomanVelazquez. Will you be able provide today the 
committee with such a valuation?
    Mr.Preston. I do not know if we can turn that around today 
but we certainly can do that expeditiously.
    ChairwomanVelazquez. Now I recognize Ms. Clarke. No, lets 
take a recess here and we will come back and resume as soon as 
we finish voting.
    ChairwomanVelazquez. Ms. Clarke. The Committee is called 
back to order.
    Ms.Clarke. Thank you very much, Madam Chair, and Ranking 
Member Chabot, for holding this very important hearing today. 
As has already been stated by our Chair, Ms. Velazquez, the SBA 
funding and programs such as the SBIC's participating security 
program has had a negative impact on the SBA's ability to 
provide capital investment for minority entrepreneurs. Only 3.4 
percent of all financing in the SBIC program went to small 
businesses that were majority black-owned. About 1.4 percent of 
all SBIC investments went to small businesses that were 
Hispanic-owned. And 2.37 percent of the SBIC investments went 
to women-owned businesses.
    I was listening to your comments to our Chair, and you sort 
of did an exchange there where you said you have no doubt of 
our Chair's commitment and there should be no doubt of your 
commitment. But when you look at results like this--and I am 
really result-oriented--it would seem to me that there would be 
an urgency and a drive to see these types of results, you know, 
really change dramatically. And I kind of got the impression 
that there was no real urgency or recognition of how poor this 
performance truly, truly is. If your agency were a corporation 
that produced results like this, you would not survive. And I 
think we need to look at business as business, not as, you 
know, some sort of an entitlement or some sort of a social 
program. We are talking about worthy businesses and companies 
that are not being impacted by your mandate, by your goals. So 
I wanted to ask what goals you have set for your agency when 
you have such abysmal statistics.
    Mr.Preston. I think you are honing in on, very 
specifically, the debenture program and women and minorities. 
If you look at our other programs, all across the board, I 
think our statistics are very good in many of those areas.
    Ms.Clarke. Let's just then concentrate on another program, 
new markets venture capital. Despite that to date, despite the 
fact that Congress created this program to address unmet equity 
needs in low-income communities, to date the NMVC program has 
made a total of 149 million, including 62.4 million of non-
Federal funding, oriented towards low-income areas in some 15 
States throughout the United States. There are only six, six 
NMVC companies participating in the program, and the fiscal 
year 2008 budget allocates no resources to bring more companies 
into the program. The additional funding is crucial to ensure 
that the NMVC program meets its full potential to improve 
economic development in low-income communities. It is just, you 
know, the rhetoric is on one end, the results on the other. The 
emphasis is really not there. And, you know, you can't paint a 
picture of roses when the numbers say it all.
    Mr.Preston. Yeah, but I think it is important to talk about 
what numbers we are talking about. You are mixing LMI with 
women and minority. I think our LMI numbers for these 
investment programs are actually quite good. And we are working 
very hard to improve them. I think our women and minority 
numbers for most of our programs are very good. I am concerned 
in the debenture investment program--and that is what we are 
talking about--that these numbers are not very strong.
    Now let me tell you how we have been working to address 
those issues. First of all, we have been doing a tremendous 
amount of outreach to understand what the problem is. We did an 
entire symposium called Access to Venture Capital for Women and 
Minorities. We brought in a number of people from the Hill, 
from trade groups that are very focused on this issue.
    I mentioned earlier, ma'am, I am not sure if you were in 
the room when I mentioned this, but we hired a new person to 
run all of our investment programs, who headed--who was a 
secretary for economic development for Mike Dukakis in 
Massachusetts. He headed the first ever bank-owned venture firm 
that focused specifically on minority and inner-city 
investment. They put over a hundred million dollars out there. 
He is an expert in this area. He is working actively with us 
right now to look at designs to improve our investment in 
critical areas.
    So this issue with where the debenture program has invested 
over the years, specifically for the categories you mentioned 
is not new, and as such, it is an issue we are trying to 
understand.
    The other programs have done much more in those areas. We 
have tried to address this historically by finding venture 
firms. We don't control their investments in the debenture 
program. But we have tried to address historically by finding 
debenture firms with minority representation on their 
investment committees and in senior management. But that does 
not seem to have moved the needle dramatically at this point.
    But I think we have got, you know, a lot under development. 
We are looking at a number of different mechanisms. As I said 
to the chairwoman, we would be happy to get over here and go 
through all the different structures we are looking at. We are 
working with a number of people in various industry groups that 
really care about these issues to find structures that will 
have a lasting impact. So we are working on it. But this is, 
you know--but I don't disagree with you. I think the women and 
minority representation in that particular program is low.
    Ms.Clarke. Thank you, Madam Chair.
    ChairwomanVelazquez. Mr. Akin?
    Mr.Akin. I didn't have any questions.
    ChairwomanVelazquez. Mr. Chabot?
    Mr.Chabot. Nothing.
    ChairwomanVelazquez. We are good.
    Mr.Preston. I would love to come over and see you all and 
spend time with you.
    ChairwomanVelazquez. Sure. Thank you.
    Mr.Preston. We will schedule that.
    ChairwomanVelazquez. Sure, Mr. Preston. Thank you very much 
for your appearance this morning. The gentleman is excused.
    ChairwomanVelazquez. I would ask the witnesses of the 
second panel to please come forward.
    ChairwomanVelazquez. Mr. Peterson, are you ready? We are 
going to start with you.
    Mr.Peterson. Thank you, ma'am.
    ChairwomanVelazquez. Let me make an introduction. I just 
want to make sure that you know you are going to be the first 
witness.
    I want to welcome all of you. Our first witness is Mr. 
William Peterson. Mr. Peterson is Vice President and Public 
Affairs Officer for CNA Surety, a nationwide surety and 
fidelity funding company. Prior to his current position, Mr. 
Peterson served four terms in the South Dakota House of 
Representatives, and was majority leader in that body for 4 
years. Mr. Peterson appears today on behalf of the Surety and 
Fidelity Association of America and the American Insurance 
Association, which together represent the interests of surety 
and insurance companies nationwide. Mr. Peterson, you will have 
5 minutes to make your presentation. Welcome.

STATEMENT OF WILLIAM G. PETERSON, ASSISTANT VICE PRESIDENT AND 
 PUBLIC AFFAIRS OFFICER, CNA SURETY CORPORATION, SIOUX FALLS, 
 SOUTH DAKOTA; ON BEHALF OF AMERICAN INSURANCE ASSOCIATION AND 
         THE SURETY AND FIDELITY ASSOCIATION OF AMERICA

    Mr.Peterson. Thank you, Madam Chair. I am truly honored to 
be here with you and the other members of the Committee today 
and the other ladies and gentlemen present. I am a vice 
president and public affairs officer for CNA Surety Company, 
which is headquartered in Chicago, Illinois, although my office 
is in Sioux Falls, South Dakota. CNA Surety Company is the 
largest publicly traded surety and fidelity bonding company in 
the United States. We write bonds from the smallest commercial 
to multimillion-dollar contract bonds. We have been a 
participant in the SBA surety bond guarantee program since 
1994, and we are honored to be the Small Business 
Administration's partner of the year in both 2005 and 2006. We 
have been and continue to be a significant writer of these 
bonds under the bond guarantee program.
    My purpose today, Madam Chair and members of the Committee, 
is to be a strong advocate for our company and for our industry 
for the continuance of the SBA's bond guarantee program, but 
also to suggest some changes to it which we feel will make it a 
much stronger program both for contractors, small and emerging 
contractors, for the taxpayers, for the general public, and for 
the surety industry.
    I think we need to start with one simple question. Why is 
this program important? It is important because, ladies and 
gentlemen, our country has many unmet infrastructure needs, as 
was made apparent by the tragic collapse of the bridge in 
Minneapolis just a month ago. Small and emerging contractors in 
the United States can play an extremely important role in the 
rebuilding of America, and yet it is also true that 
historically small and emerging contractors have had difficulty 
in getting the bonds required for contract projects.
    The role of bonding companies, surety companies and 
contract bonds also will play an important role in the 
rebuilding of America, because bonds have one simple purpose: 
They are there to protect the taxpayer and those who would fall 
underneath the contract of a contract provision. We pay when a 
contractor either fails to perform their contract or fails to 
pay their subcontractors and others.
    Fortunately, there is a bridge to cover that between the 
small and emerging contractor and the surety industry. That 
bridge is the Small Business Administration and its bond 
guarantee program. This program will continue to play an 
important role as we move forward to rebuild the infrastructure 
of the United States. But a well-run program must assure the 
surety industry of a consistency of participation requirements 
and also administrative procedures.
    With that in mind, Madam Chair, we have five suggestions 
for improvement to this legislation and to the program which I 
would like to share briefly with the Committee today. First and 
most importantly, we would ask that this legislation would 
prevent in the future the unraveling of bond guarantees by the 
SBA. There are two parts to the bond guarantee program. There 
is part A, there is part B. I will not go into the details of 
those at this time. But there has been in the past, a past 
history, the Small Business Administration has rejected the 
claim even though the bond has been prior approved or the 
bonding company has been prior approved. That needs to stop. 
Once the company is approved, once the bond is approved, if 
there is a claim the Small Business Administration must step up 
and guarantee their payment under that bond.
    Secondly, we recognize as an industry that the SBA cannot 
be self-sufficient. We understand that a study is being 
proposed to look at the funding structure of the SBA. As an 
industry and as a company, we strongly support that study and 
are willing to participate in it.
    Third, we strongly believe that there needs to be an 
alternative dispute resolution agreement. Currently, if there 
is a dispute between the SBA and the surety, the only 
alternative we have is litigation. And as we all are aware, 
litigation is time-consuming and it is expensive. There are 
better ways to resolve disputes between our industry and the 
SBA.
    Fourth, we believe that there should be transparency of the 
fee structures of the SBA, and also a prohibition against price 
controls on surety. For many years we had to operate under the 
prices as established in 1987. That is 20 years ago, and a lot 
has changed.
    Finally, we also support increased staffing for the SBA 
across this country, and stronger surety education for SBA 
staff. We feel that will work to the benefit of the SBA, small 
and emerging contractors, and our industry.
    What I really want to do in conclusion, Madam Chair, is to 
make a very firm commitment to you, to the members of the 
Committee, to the SBA, and to small and emerging contractors 
that we as an industry stand by to help, that we are committed 
to making this program work for everyone. We will work with the 
SBA, we will work with small emerging contractors on these 
issues and others.
    I want to thank you for your time and attention today. It 
is truly appreciated, and I will stand by for your questions. 
Thank you, ma'am.
    ChairwomanVelazquez. Thank you.
    [The prepared statement of Mr. Peterson may be found in the 
Appendix on page 58.]

    ChairwomanVelazquez. Our next witness is Mr. Robert More. 
Mr. More is a partner at Domain Associates, a venture capital 
firm with offices in Princeton, New Jersey, and San Diego, 
California. Mr. More is testifying today on behalf of the 
National Venture Capital Association, a trade association based 
in Arlington, Virginia, that represents over 460 venture 
capital firms, which currently comprise approximately 90 
percent of all the venture capital under management in the 
United States. Welcome.

   STATEMENT OF ROBERT J. MORE, PARTNER, DOMAIN ASSOCIATES, 
   L.L.C., SAN DIEGO, CALIFORNIA; ON BEHALF OF THE NATIONAL 
                  VENTURE CAPITAL ASSOCIATION

    Mr.More. Thank you very much. Good morning. Domain 
Associates, for your information, we invest exclusively in 
young life sciences-focused businesses, and I am also a member 
of the NVCA, National Venture Capital Association. Thank you 
for the opportunity to share today the challenges that our 
small venture-backed businesses have faced as it relates to 
current SBA policies, and why we believe the Small Business 
Investment Expansion Act of 2007 is a positive step towards 
fostering the type of private-public partnership that will 
allow the United States to sustain its economic leadership for 
years to come.
    In 2006, venture-backed companies accounted for 10.1 
million jobs and 2.3 trillion in U.S. revenues. As the 
chairwoman mentioned earlier, companies that were once small 
venture-backed businesses include Google, Genentech, Starbucks, 
Microsoft, and Federal Express.
    Today I am here on behalf of the next Google or Genentech 
that is currently being funded by a venture capital firm and is 
significantly disadvantaged by current SBA policies. 
Specifically, we are troubled by the SBA's recent 
interpretation of its affiliation rule in determining whether a 
company meets the small business criteria. Under the existing 
affiliation requirements, a business concern can have no more 
than 500 employees, including its affiliates, to qualify as a 
small business. Under this requirement, most venture-backed 
businesses would meet the criteria. However, SBA has recently 
applied a formula which sweeps in the venture capital firm and 
the employees from every company in which the venture capital 
firm invests when considering a venture-backed company for 
small business classification.
    Unfortunately, I have been involved in one of those 
instances in the past year. Approximately 9 months ago, one of 
my firm's portfolio companies filed a new drug application with 
the FDA and requested a small business waiver for the FDA's 
application fee. The fee was approximately $900,000. The FDA 
requested that the SBA conduct a formal size determination with 
respect to the company's eligibility. The company filed the 
appropriate paperwork, which showed that during the 3-year 
period prior to the filing of the NDA, they averaged 7.25 
employees.
    A month later, the SBA notified the company that it had 
determined that Domain Associates controls the company, and 
requested information with respect to Domain's ownership in all 
of the other unrelated portfolio companies. If Domain was 
deemed to control any of the other companies, they would be 
deemed affiliates of this company and their employees would be 
counted in the total.
    We informed the SBA that Domain only has the right to elect 
one out of six directors, and neither Domain nor any of the 
three other venture capital firms invested have the ability to 
exercise control over the company. In response to this 
explanation, the size specialists at the SBA responded by 
saying, "That may be true, but the SBA does not deal in the 
real world."
    Last week the company was advised by the SBA that after 
more than 7 months they are still working on the matter. It is 
difficult to understand how the SBA justifies their position 
when it directly contradicts language in the Small Business 
Investment Act, which seems to address this very issue. 
Ownership by a venture capital firm should not trigger the 
affiliation rule for programs that were created under the SBIA. 
It appears that the SBA has a gross misperception that small 
businesses that receive venture backing should not be 
considered a small business.
    But our industry is focused on building companies that will 
commercialize a product or service. We typically enter an 
investment when the early-stage research has been completed. 
Therefore, a small business must leverage other sources of 
financing to bring research to the stage where it can be 
commercialized by having a venture capitalist. Without this SBA 
support, many technologies would linger on the shelf because 
they would not reach the stage where they could be brought to a 
venture capitalist.
    Intuitively, it would seem the SBA would want to fund 
venture-backed companies because these companies have already 
been vetted by professionals who think highly enough of the 
management team to invest. Unfortunately, this is not the case. 
The current interpretation by the SBA could be likened to a 
situation in which the NIH would refrain from funding any 
project at a well-endowed academic institution because they 
have a lot of money behind them.
    NVCA supports the Small Business Investment and Expansion 
Act, specifically Title V, which will resolve the SBA's 
affiliation issue and which will clarify SBA's affiliation 
rules by ensuring businesses with venture capital investment 
are not penalized.
    It will also put in place proper safeguards to ensure this 
cannot be exploited by large businesses by specifically 
defining a venture capital operating company. No other asset 
class supports the premise more that small businesses are the 
lifeblood of the U.S. company than venture capital. We are not 
sure what world the SBA operates in, but in our world of the 
small businesses, all small businesses should have access to 
the same benefits. We are confident that the proposed 
legislation is a positive step in keeping us all in the real 
world, and assuring that the United States maintains its 
competitive edge by supporting small businesses of all kinds.
    ChairwomanVelazquez. Thank you Mr. More.
    [The prepared statement of Mr. More may be found in the 
Appendix on page 66.]

    ChairwomanVelazquez. Our next witness is Dr. Scott Koenig. 
Dr. Koenig is the president and chief executive officer at 
MacroGenics, a Maryland-based company focused on research and 
development of products for the fields of oncology, 
inflammation, allergy, and infectious diseases. Dr. Koenig is 
also a member of the Board of Scientific Counselors at the 
National Institute of Allergy and Infectious Diseases at the 
National Institutes of Health, and is testifying today on 
behalf of the Biotechnology Industry Organization, a national 
organization that represents the interests of America's 
biotechnology industry. You have 5 minutes to make your 
presentation. Welcome.
    Dr.Koenig. Thank you very much, Chairwoman Velazquez, 
Ranking Member Chabot, and members of the Committee. I 
appreciate the opportunity to testify before the Committee 
regarding the Small Business Investment and Expansion Act, and 
the critical role venture capital in small biotechnology 
companies. I am Scott Koenig. I am the president and CEO of 
MacroGenics, a private venture-backed biotechnology company in 
Rockville, Maryland. Prior to this, I was senior vice president 
of MedImmune, and I have worked at the National Institute of 
Allergy and Infectious Diseases. I am also currently chairman 
of the board of Applied Genetic Therapy Corporation, in 
Alachua, Florida, which is also a venture-backed company.

  STATEMENT OF SCOTT KOENIG, M.D., Ph.D., PRESIDENT AND CHIEF 
EXECUTIVE OFFICER, MACROGENICS, ROCKVILLE, MARYLAND; ON BEHALF 
        OF THE BIOTECHNOLOGY INDUSTRY ORGANIZATION (BIO)

    Dr.Koenig. MacroGenics' mission is to develop immune-based 
therapies to treat patients with cancer, autoimmune disorders, 
allergy, and infectious diseases. MacroGenics was founded in 
2000, and has 87 employees. We do not yet have an FDA-approved 
therapy, and we just started our Phase 3 clinical testing of a 
monoclonal antibody to treat new onset juvenile diabetes 
patients, and have several other products in development.
    I am testifying today on behalf of the Biotechnology 
Industry Organization, BIO, which represents more than 1,100 
biotechnology companies and other organizations. The vast 
majority of BIO's members are small, early-stage research and 
development-oriented companies like mine, most with fewer than 
50 employees, and do not have marketed products.
    The largest obstacle to delivering on the scientific 
promise of biotechnologies is accessing sufficient capital to 
perform the research and development. Biotechnology research 
has a long road from pre-clinical research to FDA approval. It 
takes between 8 and 12 years to bring a biotechnology therapy 
to market, and costs between $800 million and $1.2 billion. 
Without product revenue, biotechnology companies are almost 
entirely reliant on the capital markets to fund the research 
and development.
    Typically, a biotechnology company will begin its fund-
raising for its lead product in development. In the case of 
MacroGenics, our lead product is this monoclonal antibody to 
treat patients with new onset juvenile diabetes, which we are 
now beginning the Phase 3 studies. To get to this point, we 
undertook three rounds of private funding, which has involved 
about a dozen venture capital companies. Despite the extensive 
fund-raising that a biotechnology company undertakes for the 
lead product, these funds are generally not interchangeable but 
are, rather, tied to specific milestones to support the lead 
product development.
    To develop an early-stage therapy, a company now has to 
find secondary sources of fund-raising. At the very earliest 
stages of development, this is particularly challenging. And it 
is in this capacity that other sources of financing, like the 
small business innovation research grants, have been 
instrumental.
    Venture capital financing plays a very critical road in the 
development of small biotechnology companies, especially since 
emerging biotechnology companies do not yet have an FDA-
approved product on the market, and therefore lack any 
significant sources of revenue. Unfortunately, small businesses 
do not have the internal resources to overcome and wait out the 
market imperfections. This is key, because if private capital 
market is the only financing option available to small biotech 
companies, then good science will inevitably be delayed. This 
will impact patients, which I care deeply about, and this will 
also impact the economic development of our high-technology 
industry and this part of our economy.
    This is not a criticism of the venture capital community. 
Venture capitalists are adept at evaluating scientific merit of 
research and the strength of a company's intellectual property 
and management. The U.S. Is the world leader in biotechnology, 
and this in large part can be attributed to our robust capital 
markets. However, some science is just too high-risk or too 
early-stage to entice venture capital investment. This 
particular failure in the private capital markets is often 
referred to as the "valley of death," because it is at this 
point at which good science can wither for lack of funding. At 
this juncture, a larger company can generally have access to 
capital through existing revenues or bank loans to overcome the 
shortfall. However, this is really not an option for a small 
biotechnology company. Because of the very long times for 
development of these biologics, small biotechnology companies 
may not be able to pay a loan for a decade or more, or may want 
to use the loan to pay the interest on the loan, and most banks 
won't provide that for them.
    The good news is that small investment can bridge this 
funding gap. Funding options available to small biotechnology 
companies include Angel investors, historically the SBIR 
grants, and more recently a very small, select set of venture 
capital philanthropists.
    However, funding gaps continue to persist. This is 
exacerbated by the SBA's use of outdated rules and regulations 
to define small businesses that in large part exclude many of 
the small biotechnology companies from accessing grants or 
programs. The SBA's decisions have real impacts on patients 
awaiting cures, our employees, and the economy.
    BIO supports and applauds the Committee's efforts to 
recognize the importance of private capital financing and the 
unique financing challenges facing small businesses. The Small 
Business Investment Expansion Act addresses the unique 
financing challenges of small businesses, and will modernize 
the SBA's rules. The Committee's foresight will help ensure 
that the SBA programs and grants assist both the mom-and-pop 
operations as well as the small cutting-edge technology 
companies.
    This legislation will also impact U.S. competitiveness. 
While the SBA holds onto outdated rules, other countries are 
moving forward to support and recruit high-technology 
companies. We cannot take for granted that the U.S. will always 
lead the world in biotechnology.
    Congress can continue to support small domestic 
biotechnology companies by allowing the government to partner 
with companies that need resources at key stages of development 
that are not readily available in the private capital markets.
    Again, I appreciate you allowing me to testify today.
    ChairwomanVelazquez. Thank you, Dr. Koenig.
    [The prepared statement of Dr. Koenig may be found in the 
Appendix on page 75.]

    ChairwomanVelazquez. Our next witness, Dr. Robert Atkinson. 
Dr. Atkinson is president of the Information Technology and 
Innovation Foundation, a Washington, D.C.-based technology 
policy think tank that is focused on issues of technology, 
innovation, and information policy. Dr. Atkinson has an 
extensive background in technology policy. He has conducted 
groundbreaking research projects on technology and innovation. 
He is a valued adviser to State and national policymakers, and 
a popular speaker on innovation policy nationally and 
internationally.
    You are welcome, sir, and the rule is 5 minutes. Thank you.

STATEMENT OF ROBERT ATKINSON, PRESIDENT, INFORMATION TECHNOLOGY 
          AND INNOVATION FOUNDATION, WASHINGTON, D.C.

    Mr.Atkinson. Thank you, Madam Chairwoman, and Mr. Chabot, 
and members of the Committee. I appreciate the opportunity to 
be here today to talk about the proposed legislation and the 
SBA investment programs. I want to talk about it somewhat in 
the context as the last speaker, in terms of national 
competitiveness in an economy--in a world economy where cost is 
really the driver of a lot of activity in Asia and other 
countries. The U.S. Competitive advantage has to be innovation, 
and entrepreneurship plays a critical role in that. So I think 
these issues that you are focusing on are central to our 
economic future.
    I have been involved in these issues for many years, early, 
early on, when I was with the Office of Technology Assessment, 
which was an arm Congress. I was the first director of the 
Rhode Island Economic Policy Council. In fact, when I was there 
we helped create an SBIC-funded venture fund in the State that 
was very successful, focused on small and early startup 
companies.
    I have also written extensively on these issues, most 
recently a Kauffman Foundation-funded report called the 2007 
State New Economy Index, which looked at a whole number of 
indicators, including entrepreneurship indicators by State, and 
found very interesting results of how entrepreneurship is 
actually active, and venture capital around the country.
    I am going to jump right into I think--kind of the main 
sort of point, I think, of this is there is clearly a debate 
about what the role of the Federal Government should be in this 
space. And there is no question that we have got the best 
venture capital markets, the best capital markets in the world 
in my view. And to be sure, there is no question that the 
lion's share of funding for entrepreneurial ventures should 
come, does come, and will come from the private sector. But 
that doesn't mean that there is not a role for government to 
fill in gaps and to go to some of the market failures.
    Our last speaker alluded to the "valley of death" being 
just one of the market failures. Let me suggest there are two 
big reasons why there is a critical role for government. One is 
in the last decade what we have seen is a significant increase 
in the amount of venture capital invested. It has doubled since 
1995-96, but according to NSF data, the share of that 
investment going to zero and first stage deals has dropped by 
half. So we have seen a big expansion of the industry, but much 
more focus on later-stage big deals. Again I don't blame the 
industry for doing that. I understand why that happens. But the 
result is that there is a gap there.
    The second gap relates to geography. Venture industry, 79 
percent of venture investments go to the top--go to 10 States. 
This is up from 2000 from 69 percent. So the industry actually 
at the peak in 2000, which was the peak of VC investing, the 
industry has actually gotten more concentrated.
    A large share of the funds go to two States, California and 
Massachusetts. Again, there is nothing wrong with that. I don't 
blame the industry for doing that. But what it means is large 
portions of the Nation simply don't have access to those kinds 
of investments. One of the responses to that is a number of 
States, at this count 44 States have established some sort of 
programs to fill that gap. Sometimes they partner with the 
private sector, sometimes with community organizations.
    For example, Pennsylvania's Ben Franklin partnership 
program guarantees up to 25 percent of the loss by a qualified 
investor who makes an investment in Pennsylvania venture firms.
    Wisconsin recently established an Angel network.
    So the States recognize that this market is not perfect, 
and they are acting. But I would argue that the Federal 
Government needs to work with the States, needs to complement 
what they are doing, if for no other reason than States, even 
though they are doing some of this activity, their 
inclination--having worked for a Governor I understand the 
inclination--is to go for very big deals, recruit the big 
company to come, do the press release, get a lot of credit. 
Building an entrepreneurial economy, it is hard to get credit 
for that. You don't see the results for many, many years. The 
results can be small at the beginning.
    So with regard to specific comments on the bill, again I 
commend the bill. I just make, I guess, a couple of comments. 
One is on the SBIC program, I strongly agree with the Committee 
on this, that the focus of SBIC should be pushed backwards to 
smaller deals, to earlier-stage deals. That is the market 
failure. I don't think we need to be substituting for the 
private sector here.
    One suggestion I might make would be you propose that 25 
percent go--at least 25 percent go to smaller enterprise, which 
I fully support. You might want to add, in my opinion, 
something on the size of the deal, perhaps saying some portion 
of the funds have to go to deals less than $2 million.
    With regard to the Angel fund, again I think there is a gap 
there. And I think providing an Angel fund is an important step 
to do that. One suggestion I might have would be to require 
more. Right now it is two Angels as part of the group. I would 
expand that to maybe five or even ten. I think having part of 
the goal of government here is to build networks, not just to 
provide money, and sending a message that we want more Angels 
to partner together.
    And more of my comments from the testimony--but my time is 
almost up, so my last point is I think we shouldn't 
underestimate the importance of the grant program that you 
proposed. Again, a lot of the market failure there is about 
information and coordination. And so I think having a grant 
program, particularly if States were to partner that or local 
communities, where they could then help build these networks 
and help them manage these networks, I think that would be very 
important.
    My one last suggestion would be perhaps adding a cash match 
requirement if government is going to be a player. I think we 
could help leverage that. I think States would be happy to 
participate and contribute some of their own funds to that.
    So, again, thank you, and I commend you for your efforts.
    ChairwomanVelazquez. Thank you, Dr. Atkinson.
    [The prepared statement of Mr. Atkinson may be found in the 
Appendix on page 80.]

    ChairwomanVelazquez. Our next witness is Mr. Lee Mercer. 
Mr. Mercer is president of the National Association of Small 
Business Investment Companies, and has served in that capacity 
since 1996. Before joining NASBIC, Mr. Mercer held positions in 
both the private and public sectors as a partner in a New 
Hampshire law firm, a government program manager for Digital 
Equipment Corporation, and president of two privately owned 
companies. Welcome.

  STATEMENT OF LEE MERCER, PRESIDENT, NATIONAL ASSOCIATION OF 
              SMALL BUSINESS INVESTMENT COMPANIES

    Mr.Mercer. Thank you. Madam Chair, Mr. Chabot, members of 
the Committee, thank you for the opportunity to appear today.
    On behalf NASBIC, I would like to start by saying that we 
support the SBIC provisions of the draft legislation under 
consideration. If enacted, they will improve the debenture 
program, make it more--
    ChairwomanVelazquez. Can you bring the microphone closer to 
you? Thank you.
    Mr.Mercer. Sorry. You would think I would learn after all 
these years.
    We do support the provisions, the SBIC provisions in the 
bill. If enacted, they will improve the debenture program and 
make it more attractive to private sector management teams and 
investors.
    As Administrator Preston emphasized, since its beginning in 
1958, the SBIC program has provided approximately 50 billion of 
long-term debt and equity capital to more than 100,000 small 
companies; 2.9 billion of that was invested in a little over 
2,100 companies in fiscal year 2006. And the numbers will be 
down slightly, but not too much in fiscal year 2007.
    Many of the most well-known companies in the country have 
received early financing from the program, including Intel, 
Apple, Callaway Golf, Whole Foods, Palm Computing, Staples, 
Quizno's, Federal Express, Outback Steakhouse, Costco, Mothers 
Work, Build-a-Bear Workshop, and finally Heelys, if anybody has 
seen those.
    Thirty percent of all SBIC investment dollars in fiscal 
year 2006 went to companies that had been in business only 2 
years or less at the time of investments. SBICs have been a 
crucial source of capital during those early and difficult 
years. SBIC financing supports jobs and job growth. Small 
businesses receiving SBIC financing in fiscal year 2006 
employed approximately 286,000 individuals, an average of 135 
employees per company, and the median was 35. SBICs play an 
important role in financing local businesses in States and 
geographic regions not generally served by non-SBIC private 
equity funds. Of the 2,100 U.S. small businesses that received 
2006 financing, 40 percent were located in LMI areas. They 
received 23 percent of the dollars invested that year.
    Now the SBIC program is at a critical crossroad. As 
detailed in my testimony, unleveraged bank SBIC program, long a 
leader in terms of dollars invested in small companies, has 
become a negligible part of the SBIC program in terms of 
dollars invested. Likewise, the participating security program 
is unfortunately, because it was an early-stage focus program, 
ramping out of existence. It is a victim of what we feel was an 
erroneous decision by OMB that the participating security is 
not a debt security for the purposes of the Credit Reform Act, 
and thus not a qualifying security for subsidy scoring 
purposes.
    That leaves the debenture program as the sole mainstay of 
the SBIC program at present. It has been growing slowly over 
the years, but not nearly fast enough to fill the void that is 
being left by the exit of the bank-owned SBICs and the 
participating security funds. However, the debenture program 
does have the potential to grow much larger if the SBIC program 
changes in the bill are enacted. They will simplify the 
program, always good for anygovernment-industry partnership, 
and make investment rules relative to the maximum that can be 
invested in any one company closer to industry norms. That is a 
critical provision to attract good managers and important to 
the portfolio companies themselves.
    These changes, together with the regulatory improvements 
being worked on by SBA, are what is needed to send a clear 
message to private management teams and private investors that 
the government truly does support the debenture SBIC program 
and wants to see it grow in effectiveness and helping to 
finance America's small businesses. Without them, we fear that 
the SBIC program will be marginalized over time. That is not a 
happy thought for a program that has been so important to the 
growth of American business.
    Thank you for your consideration of our views. We look 
forward to working with the Committee as you finalize this 
important legislation.
    ChairwomanVelazquez. Thank you, Mr. Mercer.
    [The prepared statement of Mr. Mercer may be found in the 
Appendix on page 85.]

    ChairwomanVelazquez. And now I recognize Mr. Michaud for 
the purpose of introducing our next witness.
    Mr.Michaud. Thank you very much, Madam Chair.
    The next witness is Ron Phillips, who is president and 
founder of Coastal Enterprises, Inc., a nonprofit community 
development corporation and community development financial 
institute based in Wiscasset, Maine. CEI works primarily in 
rural regions, creating jobs, affordable housing, and social 
services for people and places left out of the economic 
mainstream. CEI has also mobilized over $1.1 billion for 
financing and technical assistance in the development of small, 
medium and micro-businesses. Under its venture capital funds, 
CEI is making investments outside of Maine as well in northern 
New England, upstate New York, and other regions.
    I want to welcome Ron here today, look forward to your 
testimony. And you also have 5 minutes. Thank you.

STATEMENT OF RON PHILLIPS, COASTAL ENTERPRISES INC., WISCASSET, 
 MAINE; ON BEHALF OF THE COMMUNITY DEVELOPMENT VENTURE CAPITAL 
                            ALLIANCE

    Mr.Phillips. Thank you very much, Congressman, for your 
support. And that helps me with some of my time. I also want to 
thank Chairwoman Velazquez for inviting me to this hearing, and 
recognize as well Congressman Chabot, who also represents a new 
markets venture capital fund, which is one of the six funds 
that I also am representing here today, CEI Community Ventures, 
Inc. I also am a co-founder of the National Community 
Development Venture Capital Alliance, and was on the board. And 
that is a trade association for community development venture 
capital funds which are socially targeted, getting capital to 
small businesses, particularly small-scale capital in rural as 
well as urban regions.
    I do want to recognize and acknowledge, too, Congresswoman 
Moore, because I know this manufacturing issue has come up as 
to targeting more, because we have lost so many jobs overseas. 
And I have been very proud to say our industry, the community 
development venture capital industry, can count about 53 
percent of its investment in manufacturing firms in the markets 
they are working in. In our own case we count about 77 percent. 
So we have got a vast majority of our investment going into 
manufacturing.
    I am going to feature one story as I come to that. I have 
written comments. I have presented some of the recommendations 
in them, and I will get to them.
    But I want to get to the heart of this matter. We have 
worked with Angel investors, I would like to say, as well as 
institutional investors. And there is some promising 
opportunities to get into the Angel network. We have raised, in 
our new markets venture capital fund, for example, we have 
invested a small, but very powerful $5.8 million. Very small. 
Our average investment is about $700,000, much smaller than the 
average in this country. We want to keep this in mind because 
we are getting to smaller-scale businesses that are just 
starting, need this capital. But that capital has leveraged up 
26 million other dollars, most of it institutional dollars from 
banks and other places. We work very closely with banks, by the 
way, in our network. But interesting, $7 million has come from 
the Angel network that we work with for these companies. And I 
do believe that the relationship between the new markets 
venture capital company and the Angel network could be a very 
interesting place because we provide some of the formality of 
underwriting and screening deals, as well as the Angel 
networks, of course, bring their energy and passion to a 
particular kind of commitment. So I think there is some promise 
in there.
    Let me give you one story, if I could. I didn't bring my 
clam chowder with me, but in Whiting, Maine, a population of 
2,200, there was a company there called Look's Gourmet that was 
there for 100 years, a kind of a dormant company doing its 
thing, processing--the canning industry, which has been a 
prominent industry in that part of the State. Washington 
County, by the way, is the poorest county in Maine, as the 
Congressman knows, and it also is the first county in which the 
sun rises in America. It has those two features to it. So if 
you are ever there or travel there, keep that in mind.
    But Mike Cote, an entrepreneur, he used to work with 
Pepperidge Farms foods, knew a lot about food processing, he is 
in his fifties, looking for an opportunity, a Maine native, an 
entrepreneur, bought the company and moved up there with his 
significant person, and they took it--they have begun the 
process of taking this company forward. We have invested in it. 
We put operational assistance funds to it to help it in the 
business planning and marketing, and particularly the branding 
of this company. It is called the Bar Harbor brands. You can 
Google that and buy often and buy plenty if you would like. The 
company now employs 26. It has doubled its employment from 11. 
That is huge in a place like Whiting, Maine, with 2,200. And if 
you read the Ellsworth American, you will see and hear the 
bylines, entrepreneurial spirit hits that town. That is what 
New Markets Venture Capital company is all about. They are 
setting the stage, they are creating the economic framework to 
help these companies go forward.
    Now let me just end with some of my recommendations, and I 
have got many more ideas to offer if any questions come my way. 
The technical fixes are already incorporated in this. I just 
want to draw your attention to them. First, we recommended that 
the new markets venture capital become compatible with the new 
markets tax credit in terms of geographic regions and 
targeting. There are some details in there that if it does 
become more coterminous with the new markets tax credit, then 
we have now blended and made more efficient this program. That 
actually is the most important feature to this.
    We also have asked for more time to raise capital. It is 
very hard to raise capital. We want 2 years. And we have also 
asked for actually no matching funds to the operational grant 
program. The reason why, although I agree that it is important 
to get States and others to match funds, places like Maine, and 
States, and States' budgets are really pressed, and hard-
pressed, and rural areas are hard-pressed to come up with 
anything. So 10 percent of the total capital or up to $1 
million of grant money will really help smaller businesses get 
off the ground.
    Thank you very much. I would be glad to answer any 
questions.
    ChairwomanVelazquez. Thank you, Mr. Phillips.
    [The prepared statement of Mr. Phillips may be found in the 
Appendix on page 92.]

    ChairwomanVelazquez. I would like to address my first 
question to Dr. Atkinson. Administrator Preston's testimony 
suggested that the SBA debenture-based programs are adequate to 
fill the need for investment for startup and early-stage small 
businesses. Would you agree with this assessment?
    Mr.Atkinson. I would not agree with that, because while I 
think they are an important step, I think two things are 
problematic. One is that the deals, as I said, have moved up 
even in SBIC to bigger deals, which I think was not the purpose 
of the program initially. And so I think your legislation to 
move it back is filling an important gap. If you are a big 
company--if you are a company that wants a $20 million or a 
$100 million dollar investment and you have got the right 
financials, you can get it. You can get it no matter where you 
are.
    One of the key things about the way a lot of these 
investments work is you have to be within driving distance. So 
if you are not near that--so I think that is why--and I don't 
think the current programs work as well as they should, and I 
think the addition of an Angel program gets even more directly 
into that market gap.
    ChairwomanVelazquez. And that was my second question.
    So, Dr. Koenig, in his testimony Administrator Preston 
expressed concerns that this bill would have the effect of 
permitting large businesses to receive investment funding 
intended for small businesses. Is this a legitimate concern?
    Dr.Koenig. I absolutely disagree that is a concern. All we 
are trying to do is fix this definition. The size of the 
company, all those provisions are all still maintained in the 
rulings. The fact of the matter is that the venture capital 
business is, while investing in the companies, the companies 
themselves operate the business. So they really--individually 
there may be a number of venture capitalists who actually 
invest in a business, but their actual ownership position in 
the company is only a small portion of the total company. So we 
don't see that this creates any risk for the businesses.
    ChairwomanVelazquez. Mr. More-- thank you, Dr. Koenig--in 
your testimony you mentioned safeguards contained in the bill 
that will prevent the venture capital provisions in the bill 
from being exploited by large businesses. Can you comment on 
what those safeguards are and whether you believe they go far 
enough in protecting the interests of small businesses?
    Mr.More. I don't know that I am knowledgeable enough to 
comment on that, but certainly when you have a company like 
Merck that sets up a venture capital operating company, Merck 
is--as a company is larger than 500 employees. And you know, we 
see corporate venture capital going on all the time. I would 
say that is an issue that I would see addressed by that.
    ChairwomanVelazquez. And Mr. Phillips, Administrator 
Preston stated that with LMI debentures, the SBIC program can 
actually provide greater investment to businesses in low-income 
areas and at less cost than new markets venture capital 
companies. If this is true, what additional benefit does the 
new markets venture capital program provide that the SBIC 
program does not?
    Mr.Phillips. I think that is a very good question. I don't 
think I agree with the Administrator on that, and I have 
discussed that with him. The SBIC, first of all, its average 
investment is much larger. And I have already made the point 
that we are dealing with smaller-scale investment capital for 
starting, seed, and early-stage companies. So that is one 
difference.
    The second is the SBIC does not get involved on a hands-on 
technical basis with consistency with their portfolio 
companies. I am going to make that blanket statement. I am sure 
there are some SBICs that do very well that way, because part 
of the structure of a venture firm is to actually engage 
directly with a portfolio. But we get involved much more 
intensely with that, using the operational grant funds as an 
assistance to bring in specialized people to help with business 
plans, marketing, Web site, branding, and so forth development. 
Those are some of the things.
    The third reason is that we target to geographic areas. I 
think SBICs, many of them do a great job, are not necessarily 
in the business of targeting, let alone socially targeting. We 
often target to environmental as well as social benefits and 
job creation. So those are some of the distinctions I would 
point out.
    ChairwomanVelazquez. I guess you saw the exchange between 
the Administrator and myself regarding the new markets program.
    Mr.Phillips. Yes, I did.
    ChairwomanVelazquez. Even though he says that SBA intends 
to continue supporting the new markets program, it is simply 
too early to provide additional funding for the program. What 
effect is this wait-and-see approach having on small businesses 
that participate in the program?
    Mr.Phillips. I have an answer to that, actually, and he 
would understand this. And I would love to talk with him 
directly about it. When you are involved in venture capital in 
setting up funds and operating funds, you need to maintain your 
continuity. And if you wait until one fund is completely in, or 
the jury is in, and you haven't started the process to fund or 
develop your next fund, you are probably going to have a gap. 
And that is not a very good thing in the venture market if you 
have a team in the region and doing your work. So you have to 
start something. You have to put something in motion. You may 
not want to go into the particular project that is coming 
along, but you should at least get something going. And I would 
answer it at least that way.
    ChairwomanVelazquez. Mr. Mercer, Administrator Preston 
expressed concerns with the provision of the bill that will 
increase the maximum leverage limits for funds that invest in 
socially and economically disadvantaged small businesses. In 
your opinion, will this initiative restrict the investment 
decisions of SBIC licenses?
    Mr.Mercer. No. I would disagree with the Administrator on 
that, because the way--the important thing for a fund, be it an 
SBIC or any fund, is to have the ability to have a diversified 
portfolio to spread risk on the portfolio. And I think the way 
that provision is drafted would allow for a diversified 
portfolio to spread the risk.
    So, you know, the SSBIC program was a completely targeted 
program, and perhaps to too narrow a niche, where 100 percent 
of investments had to be in minority-owned enterprises. And 
SSBICs still exist. There are still I think 17 or 18 of them. 
But the fact is they are not--they are not raising additional 
capital. So it could be that even they are finding a too 
structured market too severe. So I think it is worth trying. 
You never know until you do try. And since it is such an 
important goal of Congress and most administrations, I would 
support it.
    ChairwomanVelazquez. Thank you, Mr. Mercer. Now I recognize 
Mr. Chabot.
    Mr.Chabot. Thank you very much, Madam Chair. Mr. Peterson, 
I think I will begin with you if I can.
    Mr.Peterson. Thank you, sir.
    Mr.Chabot. Have problems in the credit market affected the 
financial capacity of sureties to write bonds?
    Mr.Peterson. Not at this point; no, sir.
    Mr.Chabot. Do you anticipate that anytime in the future, or 
does that seem to be not something that is on the horizon?
    Mr.Peterson. You know, it is something that we are 
certainly conscious of. Anytime that the market undergoes some 
challenges it can have an effect on all of American businesses. 
But we don't really anticipate it having an effect on ours 
directly. We are an industry that is really tied to the 
business cycle. As the business climate improves and as 
economic activity expands, you know, our business improves and 
our activity expands as well. And conversely, when it 
contracts, the same thing happens to our industry. Credit 
markets obviously have a role to play in that, but they are not 
necessarily a significant determinant effect.
    Mr.Chabot. Thank you.
    Mr. Atkinson, I will go to you next. Are tax policies such 
as research and development tax credits and lower capital gains 
taxes just as important, or many would argue probably even more 
so, to the development of a venture capital industry as 
government contributions of actual capital? And if so, how does 
that work out of the scheme of things?
    Mr.Atkinson. I would agree with you that they are just as 
important, in fact maybe more important. I absolutely agree. I 
think for example the R&D tax credit, we just issued two 
reports on that which are on our Web site that show fairly 
conclusively, looking at academic research both in this country 
and around the world, that tax incentives for R&D are very 
effective and do fill a need.
    And by the way, I would add we used to be number one in 
most generous R&D tax credit in the world in 1990, and now we 
are number 16 among OECD nations. So I agree with that. I guess 
I just wouldn't look at it as an either/or. I certainly agree 
with you, though.
    Mr.Chabot. Thank you.
    Mr. Mercer, if I could turn to you next. And before I do, 
just kind of an observation. You mentioned some of the 
companies that have benefited in the participating security 
SBIC. One of them was Build-a-Bear. And many of us who are 
parents have maybe had that experience. I know if you are in 
Gatlinburg or Myrtle Beach, you can't pass one of those places 
without your kids wanting one, even if they have them in the 
past. They play with them for about 5 minutes until they see 
the next Build-a-Bear site, and then want another one. Also 
they have the--you know, once you get the bear that is not the 
end of the story. That is just the beginning, because then 
there is clothing for all these things. And try to convince 
your kid that their existing doll clothes will fit the Build-a-
Bear. It has to be the new stuff. What a racket. But they have 
done very well.
    Mr.Mercer. It is just a legal pyramid scheme.
    Mr.Chabot. One that has worked quite effectively, at least 
in my house. But in any event, the real question, the bill we 
have somewhat talked about, although I don't think it has been 
completely pulled together yet but it is still being 
considered, that offers increased leveraged availability to 
women-owned and socially disadvantaged small businesses. And 
are the current incentives for making capital available to 
these small businesses sufficient or insufficient? And how much 
will this help to increase capital available to those specific 
type of businesses I mentioned?
    Mr.Mercer. Well, let me start by saying that SBIC funds, 
indeed almost any venture fund or mezzanine fund, start with 
being gender-blind and ethnicity-blind. Most organizations 
don't even track the deals that they review, and they review 
hundreds if not thousands of potential deals each year, by 
whether the company is owned by a woman or a minority. So in 
the past, obviously with the SSBIC program, the government 
created a program that said, okay, if you want the benefits of 
a particular government program you must target 100 percent. 
And that program was terminated by Congress in 1996 because it 
simply became too expensive. The program was losing money. And 
so people have wrestled with this issue for years and not been 
able to come up with any good way to solve it.
    Clearly, I think the biggest problem is that business plans 
that might merit funding often don't get to the desk of an SBIC 
manager or any venture manager. And it has more to do with the 
networks that are involved and how those business plans get 
there than anything else. The approach that is suggested in the 
draft legislation says that more money will be available to an 
SBIC if it decides to agree to focus up to 50 percent, at least 
50 percent on women- and minority-owned businesses. Will it 
work? I don't know. But by offering an incentive of additional 
capital it may work. And I think that as long as it is not--
doesn't require that the fund focus--that the portfolio be so 
focused that it becomes too risky, I think it is perhaps a good 
experiment to try.
    Mr.Chabot. Thank you.
    Mr. Phillips, if I could go to you next. You had talked 
briefly about some of the investments made by Coastal 
Enterprises and the success that you had, particularly in more 
challenging areas, some of which are in my district, for 
example. Could you just discuss a couple of those again to tell 
us the type of areas that are benefited?
    Mr.Phillips. Yes. Thank you for that question. We have a 
diverse portfolio. In terms of venture capital, we have 
actually invested in about 40, 45 companies in that portfolio 
alone, and then overall about 1,700 small businesses throughout 
the State of Maine and to some extent rural New England and 
upstate New York. So we have quite a range. Most of our 
investing is sub-debt capital, not venture capital but sub-debt 
capital, which is near equity in many ways. It is a debt 
instrument.
    Our portfolio of companies are very diverse. We include 
child care centers, for example. But we will get involved with 
the fishing industry and fish processing, the farm sector and 
the timber industry. So a lot of it is natural resources. And 
these all have their challenges. They are all assets, however, 
to local and rural development, which is the way we approach 
these--our area.
    We also are working more closely with new immigrants and 
refugees that are coming into Maine. Maine has been a very 
white State, but we are also working in that area. And we do a 
lot of micro-enterprise lending.
    Now if we go down our portfolio and look at the character 
of it, I mentioned earlier most of it is manufacturing. A lot 
of it is in food processing, and naturally so, because you are 
in a rural area. That gets you into the concept of what a 
cluster industry might look like, if you invested more and more 
in the food processing sector. And that is going on not just in 
Maine, but in other parts of the country, as the consumers 
become more conscious of diet and natural and wholesome foods 
or organic foods. This is some of the character of our 
activity. Throughout that entire process we are looking at the 
job quality that gets created.
    We are very concerned about health benefits and the 
challenges, too, that businesses face in paying into health 
insurance programs. But livable wages and job quality are 
important. And we are also trying to back women in business, 
and run a very robust Woman in Business Development Initiative 
out of our organization.
    Mr.Chabot. Thank you very much.
    Madam Chair, in the interest of giving the other members 
that are here a chance to ask questions, I will yield back.
    ChairwomanVelazquez. Thank you. Mr. Michaud, you have any 
questions?
    Mr.Michaud. Thank you, Madam Chair. I have one question for 
Mr. Phillips.
    Dealing with the manufacturing businesses, as you know the 
Committee has set aside a portion of the new markets venture 
capital appropriations to companies that are primarily engaged 
in the development of and investment in small manufacturing. 
And I would like to know what percentage of CEI's investments 
go to small manufacturers? And how do you determine what type 
of business to invest in? And do you focus specifically on 
certain sectors?
    Mr.Phillips. Oh, boy. Thank you. I almost think I answered 
some of that before, but I will try again.
    Most of our portfolio is in manufacturing. So that is a 
good sign. I understand there is some language in the bill 
around this. And I get a little bit conflicted exactly how to 
do that, because I know in venture capital you have got to be 
flexible and be very careful about narrowing one's options in a 
fund, because you can get into some difficulty with that.
    At the same time, we are very sympathetic with the concept 
of manufacturing. My view is that different regions of the 
country have different assets and potential. So as much 
flexibility as possible ought to be in there. And already I 
think a lot of the funds, at least that I represent, are 
investing in manufacturing.
    How do we determine that? You are looking at what the 
competitive advantage is of your region. In Maine's case, I 
just mentioned the food processing sector. We also have energy, 
timber industry. As you well know, in different aspects of the 
timber industry. So you are looking to align capital with the 
competitive opportunities that exist within the actual 
geographic region you might be working with.
    Mr.Michaud. Do you think agencies, whether it is EDA, SBA, 
should be looking at--if they are going to invest, put money 
for economic development opportunities--they ought to look at 
clusters and that a certain portion of funds should be 
promulgated that the fact that they can get actually private 
sector funding in them?
    Mr.Phillips. I think cluster, some here might know more 
about that as a development strategy than myself, but I think 
cluster industries concept as a development strategy is not 
new. It has been around. There is a lot of a body of evidence 
and evaluation to show it is a very important way to do 
economic development in any particular region. There is a lot 
of networking.
    That Look's Gourmet, by the way, is in the food processing 
sector. But also the interesting thing is the mussels, and 
lobster shells, and clam shells that they produce as waste are 
bought by--are delivered to a local crafts person in Washington 
County who turns those into flatware, silverware for your 
dinner table. So you have very colorful sorts of things there. 
There are a lot of spin-offs around industry. And that is part 
of the image of what you are trying to do is create new 
synergies at that regional level. Thank you.
    Mr.Michaud. Thank you very much.RPTS DEANDCMN NORMAN
    Mr.Michaud. Thank you very much.
    Mr.Chabot. Let me ask one question. In your opinion, Mr. 
Mercer, what is the best way to get equity to small businesses? 
Is it best to create new programs or improve existing programs, 
if you have an opinion?
    Mr.Mercer. Thank you very much for that question, to quote 
the former Administrator of SBA. I might want to take a pass, 
but I will wade into the waters. There are two distinct things. 
You know, equity investing in this country is a continuum from 
family and friends and then Angels and then into more 
institutional and larger fund sizes. You essentially cannot 
have--if you remove any of the pieces of this capital markets 
continuum that has served our country so well, or if gaps form 
in any of those, then the country is ill-served. I am not in 
expert on Angel investing and so I would not want to say that 
the provisions in the draft legislation are not a good way to 
increase equity financing for small business because it 
presumably would increase equity financing for small business.
    I think the participating security program showed itself, 
at least in the early stages, the first several years, to be a 
very good vehicle for stimulating equity investing as well; 
although what I would say is that the size of those investments 
would probably be larger than the size of the typical Angel 
investment and would be at the next stage of investment.
    So you could go back and improve--you could resurrect the 
participating security SBIC program, literally by putting a 
provision in the Small Business Investment Act that says for 
the provisions of the Fair Credit Reform Act, for the purposes 
of the Fair Credit Reform Act, a participating security is a 
debt security for all purposes, and that would solve the 
problem.
    From an accounting standpoint it is a debt security. SBA 
requires the participating security funds themselves to carry 
it on their books as a debt security. It is only OMB who said 
it is not a debt security for the purposes of the Credit Reform 
Act. So you might want to improve the program by focusing it 
towards more early stage or--and you would still have a credit 
subsidy problem that might carry a subsidy rate of 24 percent. 
So there are things you would have to do to solve it.
    But I do not think the two programs are mutually exclusive. 
I do not think that is the case. I do not want--I guess that is 
my answer.
    ChairwomanVelazquez. If I may, Mr. Mercer, but you know 
also the changes that you will want to see for the program will 
have to be supported by the Budget Committee, and they are not 
willing to do so.
    Mr.Mercer. I understand that CBO-- well, the participating 
security program exists in law right now and new leverage could 
be provided as long as it was on a dollar-for-dollar 
appropriation. Clearly that is not going to happen. The program 
will not ever exist unless it is a credit subsidy program. In 
order to get to be a credit subsidy program, the security has 
to be considered a debt security. Right now it is not.
    Mr.Chabot. Reclaiming my time.
    ChairwomanVelazquez. Sure.
    Mr.Chabot. Mr. Koenig, if the capital community--assuming 
it is very astute in evaluating the market potential of a 
firm--and it does not make an investment, should that not be an 
indication perhaps to the government that it should not make an 
SBI or award?
    Dr.Koenig. Not at all. As Mr. Atkinson was pointing out, 
the way the venture capital community has funded the 
biotechnology industry has evolved over time. In the early 
nineties there was a lot more opportunity for companies at an 
earlier stage to get to the public markets. Companies that had 
less developed programs could put out public offerings to get 
other access to capital.
    What has happened since the year 2000 is that much of the 
venture capital money is going to later-stage opportunities. 
And so because it has taken a lot more money to develop any 
more programs and get to the public markets, they have taken 
most of their opportunities and focused it on these late-stage 
opportunities, which is now creating a much larger gap. So 
their rejection of this is not for the merits of the science. 
The science typically in most of those cases is too early, not 
developed, and they would have to invest so much more money 
before they would see a return on their investment the way 
these companies are set up right now.
    Mr.Chabot. Thank you.
    Mr. More, what economies of scale and scope are available 
to venture capital firms that are not available to small 
businesses that do not have venture funding?
    Mr.More. I am not aware of economies of scale. Do you mean 
two companies using the same manufacturing facilities?
    Mr.Chabot. Venture capital firms--in other words, having 
access to a better situation than would individual companies, 
for example.
    Mr.More. I think the venture capital industry, venture 
capitalists themselves, we talk a lot about how we try and help 
our companies. I think, honestly, some of that is true. Some of 
that is rhetoric as in any other industry. I don't think 
grouping venture capital firms together as a class and saying 
just because something is venture-backed, first of all, does 
not mean it is a good idea and it is going to be successful.
    Second of all, there is a spectrum of venture capital out 
there. You have $10 million funds that are venture capitalists 
that are trying to invest in minority areas. A friend of mine, 
Tom Darden, is doing that in Detroit. There are big funds that 
are large international institutional funds that are investing 
hundreds of millions of dollars that may have economies of 
scale that I am unaware of.
    I do not see any of that in the biotech industry. We may 
say that we have used this consultant on occasion and we will 
use them in new companies we are setting up. And if you call 
that an economy of scale it is not like we are getting a better 
deal. The one validation is we have used them before and we 
know they are a good person to work with. So I think the 
networks are important, but I do not think there is any 
economies.
    Mr.Chabot. I yield back.
    ChairwomanVelazquez. Ms. Moore.
    Ms.Moore. Thank you so much, Madam Chair, for recognizing 
me. I want to thank you for this really important hearing on 
SBA's investment in surety bonds programs. I am very, very 
excited to be here today because I do think, I do agree with 
our distinguished panelists that this is really the appropriate 
role for government to leverage our few little dollars with the 
needs of the business community, because you indeed do create 
opportunities and jobs.
    Just a little commercial to those in the biotech venture 
capital business. Wisconsin has the most important line--or 
the--of stem cells. So make sure that the geographic 
distribution of those funds recalls our industry in Wisconsin. 
So I'm done with the commercial.
    I just want to ask a few questions. I do not know who the 
appropriate person is. Perhaps Mr. Phillips. I am particularly 
interested in Title II of this bill, the new market venture 
capital program. As the Chairwoman knows, ever since I have 
been on this Committee and been a Member of Congress, I have 
tried to get the new market venture capital program up and 
going, and hopefully with--I am so happy this is part of this 
package, as I have introduced this bill both sessions that I 
have been here.
    Mr. Phillips, I wanted you to clarify your comment about 
getting this in sync with the new market tax credit program, 
because I thought we had done that. If you could specifically--
this is a technical question.
    Mr.Phillips. It is technical. In my comments I gave the 
technical language to describe the technical ways in which this 
needs to happen. It has to do with a couple of things. The new 
market tax credit and the new markets venture capital programs 
came into being in the Clinton administration, and they 
disconnected in the wee hours of some morning in terms of their 
consistency and compatibility. So that is all that is being 
talked about, just for the record, is to make the programs 
consistent in terms of geographic areas that qualify in terms 
of census track eligibility. So it gets down to census track, 
and the new markets venture capital does not quite overlap with 
the new markets tax credit, so we are trying to get it to just 
qualify, at least on that census track basis.
    The second thing we are trying to do is make some 
exceptions to geographic eligibility by allowing for investment 
in projects outside the eligible census track so you are now 
looking at targeted population. The CDFI has a ruling on this 
it has published on how that all works. So we are trying to do 
that.
    Now, why is that? Particularly for rural areas, but also 
urban areas, you can have a project that just is outside the 
census track, as a distressed census track right across the 
street, and literally you cannot do that project. A 
manufacturing facility could be across the street in Madison 
where it does not qualify. Under targeted populations, you 
could do that. I could go on and on.
    Ms.Moore. Well, that does lead to my next question. Senator 
Kerry, we were working with him on the reauthorization of this 
bill, and he did raise these points. Our concern then was that 
the language would be tight enough so that it could not be 
construed as some amorphous doing good things for low-income 
communities, like having some indirect impact on low-income 
communities; i.e., you have hired all the greeters for Wal-Mart 
out of a certain census track and you have invested in an 
entity that was not there. So I hope that the chairperson and 
others will work with you on this, because that was my concern 
is that it would be just too flexible.
    As it relates to the statutory purpose of providing 
economic development in low-income areas, I would hope that 
these changes would not take this off of this initial mission.
    Mr.Phillips. I do not think they do. I think the targeted 
population is very difficult to apply in the real world, I give 
you that. I am a practitioner--representing that right now, a 
national organization. It is hard to apply target populations, 
actually, due to the fact that it is not flexible. It is really 
right on in terms of making sure low-income people benefit. It 
is very hard to do.
    I do have one thing to say about the new markets tax 
credit, if I could offer this.
    Ms.Moore. Yes, yes.
    Mr.Phillips. This Committee--I put this on the table. You 
asked the question, so what is the best way to deliver equity 
capital? You know the new markets tax credit has been a 
phenomenal success as a model in using the tax code to spur 
private capital investments and large investments into places 
it has not traditionally gone--in rural communities this has 
been exceptionally important-- tens of millions, and now in the 
billions of dollars flowing into projects, very interesting 
projects, to revitalize a communities that have never seen this 
kind of capital before as a result of the Tax Code and tax 
credit.
    If we were to find a way to really make the tax credit work 
for the venture capital industry--and there are some technical 
barriers to that, which I could take a week going through with 
you--then you have really opened up a whole new world of 
getting the experts of venture investors, who are really good 
at analyzing and understanding the future. At least they know 
how to make bets.
    So I offer this, and there is some good work that needs to 
be done--we have talked to Administrator Preston about this--
the CDFI fund and the U.S. Treasury need to get involved. There 
are some financial models, but you need the will to make this 
happen.It is not that easy.
    Mr.Atkinson. I wonder if I could beg the Committee's 
forgiveness and ask to be excused. I have a speech I committed 
to give.
    ChairwomanVelazquez. Sure. I am about to adjourn. I want to 
thank all of you. You have been a very good hearing today on 
this important subject. We will continue to work together to 
clarify some of the concerns that have been raised. And the 
gentleman has a unanimous consent request?
    Mr.Chabot. I do. I just ask unanimous consent that a 
statement from Mr. Graves be admitted into the record.
    ChairwomanVelazquez. Without objection.
    ChairwomanVelazquez. I would like to say that I ask 
unanimous consent that any statements submitted for the record 
be accepted for 5 legislative days. This hearing is adjourned.
    [Whereupon, at 12:43 p.m., the Committee was adjourned.]

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