[Congressional Record Volume 145, Number 19 (Wednesday, February 3, 1999)]
[Senate]
[Pages S1177-S1178]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. BOND (for himself, Mr. Kerry, and Mr. Lieberman):
  S. 364. A bill to improve certain loan programs of the Small Business 
Administration, and for other purposes; to the Committee on Small 
Business.


           small business investment improvement act of 1999

  Mr. BOND. Mr. President, I rise today to introduce the Small Business 
Investment Improvement Act of 1999. I am pleased to announce that two 
of my colleagues from the Committee on Small Business, Senator Kerry 
and Senator Lieberman, have joined as principal cosponsors. This is an 
important bill for one simple reason: it makes more investment capital 
available to small businesses that are seeking to grow and hire new 
employees.
  In 1958, Congress created the SBIC Program to assist small business 
owners obtain investment capital. Forty years later, small businesses 
continue to experience difficulty in obtaining investment capital from 
banks and traditional investment sources. Although investment capital 
is readily available to large businesses from traditional Wall Street 
investment firms, small businesses seeking investments in the range of 
$500,000-$2.5 million have to look elsewhere. SBICs are frequently the 
only sources of investment capital for growing small businesses.
  In 1992 and 1996, the Committee on Small Business worked closely with 
the Small Business Administration to correct earlier deficiencies in 
the law in order to ensure the future of the program. Today, the SBIC 
Program is expanding rapidly in an effort to meet the growing demands 
of small business owners for debt and equity investment capital.
  Last year, the Committee on Small Business approved a bill similar to 
the bill being introduced today. Today's bill includes two technical 
changes in the SBIC program. The first change removes a requirement 
that at least 50 percent of the annual program level of the approved 
participating securities under the SBIC Program be reserved for funding 
with SBICs having private capital of not more than $20 million. The 
requirement has become obsolete following SBA's imposition of its 
leverage commitment process and Congressional approval for SBA to issue 
five year commitments for SBIC leverage.
  The second technical change requires SBA to issue SBIC guarantees and 
trust certificates at periodic intervals of not less than 12 months. 
The current requirement is six months. This change will give maximum 
flexibility for SBA and the SBIC industry to negotiate the placement of 
certificates that fund leverage and obtain the lowest possible interest 
rate.
  The Small Business Investment Improvement Act of 1999 clarifies the 
rules for the determination of an eligible small business or small 
enterprise that is not required to pay Federal income tax at the 
corporate level, but that is required to pass income through to its 
shareholders or partners by using a specified formula to compute its 
after-tax income. This provision is intended to permit ``pass through'' 
enterprises to be treated the same as enterprises that pay Federal 
taxes for purposes of SBA size standard determinations.
  The bill would also make a relatively small change in the operation 
of the program. This change, however, would help smaller, small 
businesses to be more attractive to investors. SBICs would be permitted 
to accept royalty payments contingent on future performance from 
companies in which they invest as a form of equity return for their 
investment.
  SBA already permits SBICs to receive warrants from small businesses, 
which give the investing SBIC the right to acquire a portion of the 
equity of the small business. By pledging royalties or warrants, the 
small business is able to reduce the interest that would otherwise be 
payable by the small business to the SBIC. Importantly, the royalty 
feature provides the smaller, small business with an incentive to 
attract SBIC investments when the return may otherwise be insufficient 
to attract venture capital.
  Lastly, the bill increases the program authorization levels to fund 
Participating Securities. In Fiscal Year 1999, the authorization level 
would increase from $800 million to $1.2 billion; in Fiscal Year 2000, 
it would increase from $900 million to $1.5 billion. The two increases 
have become necessary as the demand in the SBIC program was growing at 
a rapid rate. Higher authorization levels are necessary if the SBIC 
Program is going to meet the demand for investment capital from the 
small business community.
  Mr. President, this is a sound legislative proposal, which has the 
support of many of my colleagues on the Committee on Small Business. It 
is my hope we will be able to conduct a committee markup of this bill 
in the near future.
  I ask unanimous consent that the full text of the bill be printed in 
the Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                 S. 364

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

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Small Business Investment 
     Improvement Act of 1999''.

     SEC. 2. SBIC PROGRAM.

       (a) In General.--Section 308(i)(2) of the Small Business 
     Investment Act of 1958 (15 U.S.C. 687(i)(2)) is amended by 
     adding at the end the following: ``In this paragraph, the 
     term `interest' includes only the maximum mandatory sum, 
     expressed in dollars or as a percentage rate, that is payable 
     with respect to the business loan amount received by the 
     small business concern, and does not include the value, if 
     any, of contingent obligations, including warrants, royalty, 
     or conversion rights, granting the small business investment 
     company an ownership interest in the equity or increased 
     future revenue of the small business concern receiving the 
     business loan.''.
       (b) Funding Levels.--Section 20 of the Small Business Act 
     (15 U.S.C. 631 note) is amended--
       (1) in subsection (d)(1)(C)(i), by striking 
     ``$800,000,000'' and inserting ``$1,200,000,000''; and
       (2) in subsection (e)(1)(C)(i), by striking 
     ``$900,000,000'' and inserting ``$1,500,000,000''.
       (c) Definitions.--
       (1) Small business concern.--Section 103(5) of the Small 
     Business Investment Act of 1958 (15 U.S.C. 662(5)) is 
     amended--
       (A) by redesignating subparagraphs (A) through (C) as 
     clauses (i) through (iii), and indenting appropriately;
       (B) in clause (iii), as redesignated, by adding ``and'' at 
     the end;
       (C) by striking ``purposes of this Act, an investment'' and 
     inserting the following: ``purposes of this Act--
       ``(A) an investment''; and
       (D) by adding at the end the following:
       ``(B) in determining whether a business concern satisfies 
     net income standards established pursuant to section 3(a)(2) 
     of the Small Business Act, if the business concern is not 
     required by law to pay Federal income taxes at the enterprise 
     level, but is required to pass income through to the 
     shareholders, partners, beneficiaries, or other equitable 
     owners of the business concern, the net income of the 
     business concern shall be determined by allowing a deduction 
     in an amount equal to the sum of--
       ``(i) if the business concern is not required by law to pay 
     State (and local, if any) income taxes at the enterprise 
     level, the net income (determined without regard to this 
     subparagraph), multiplied by the marginal State income tax 
     rate (or by the combined State and local income tax rates, as 
     applicable) that would have applied if the business concern 
     were a corporation; and
       ``(ii) the net income (so determined) less any deduction 
     for State (and local) income taxes calculated under clause 
     (i), multiplied by the marginal Federal income tax rate that 
     would have applied if the business concern were a 
     corporation;''.
       (2) Smaller enterprise.--Section 103(12)(A)(ii) of the 
     Small Business Investment Act of 1958 (15 U.S.C. 
     662(12)(A)(ii)) is amended by inserting before the semicolon 
     at the end the following: ``except that, for purposes of this 
     clause, if the business concern is not required by law to pay 
     Federal income taxes at the enterprise level, but is required 
     to pass income through to the shareholders, partners, 
     beneficiaries, or other equitable owners of the business 
     concern, the net income of the business concern shall be 
     determined by allowing a deduction in an amount equal to the 
     sum of--

       ``(I) if the business concern is not required by law to pay 
     State (and local, if any) income taxes at the enterprise 
     level, the net income (determined without regard to this 
     clause), multiplied by the marginal State income tax rate (or 
     by the combined State and local income tax rates, as 
     applicable) that would have applied if the business concern 
     were a corporation; and
       ``(II) the net income (so determined) less any deduction 
     for State (and local) income taxes calculated under subclause 
     (I), multiplied by the marginal Federal income tax rate that 
     would have applied if the business concern were a 
     corporation''.

       (d) Technical Corrections.--
       (1) Repeal.--Section 303(g) of the Small Business 
     Investment Act of 1958 (15 U.S.C. 683(g)) is amended by 
     striking paragraph (13).
       (2) Issuance of guarantees and trust certificates.--Section 
     320 of the Small Business Investment Act of 1958 (15 U.S.C. 
     687m) is amended by striking ``6'' and inserting ``12''.

[[Page S1178]]

       (3) Elimination of table of contents.--Section 101 of the 
     Small Business Investment Act of 1958 (15 U.S.C. 661 note) is 
     amended to read as follows:

     ``SEC. 101. SHORT TITLE.

       ``This Act may be cited as the `Small Business Investment 
     Act of 1958'.''.

  Mr. KERRY. Mr. President, today I join Chairman Bond in support of 
the Small Business Investment Company Technical Corrections Act.
  The Small Business Investment Company (SBIC) program is vital to our 
fastest growing small companies that have capital needs exceeding the 
caps on SBA's loan programs, but are not large enough to be attractive 
to traditional venture capital investors. The demand is clear: Last 
year, participating securities in the SBIC program invested $360 
million in 495 financings. In Massachusetts, where there is an 
impressive community of fast-growing companies, particularly in the hi-
tech industry, there were 140 SBIC financings, worth $145.4 million.
  This legislation sets out to make five technical changes. They range 
from improving the incentive for SBIC's to loan money to small 
companies to structuring a fairer formula for determining whether 
companies of the same revenue size can quality for SBIC financing. One 
of the most important changes will increase the authorized levels for 
participating securities.
  The Participating Securities component of the SBIC program invests 
principally in the equities of new or expanding businesses. To leverage 
the private capital of participating securities and better serve these 
fast-growing businesses, I supported Senator Lieberman's amendment to 
H.R. 3412 during the last Congress, which would have raised the 
authorization level for participating securities from $800 million to 
$1 billion in fiscal year 1999 and from $900 million to $1.2 billion in 
fiscal year 2000. This bill passed the Senate Small Business Committee 
and the full Senate by unanimous consent, but unfortunately, the House 
was unable to act on it before the 105th Congress ended.
  Since that amendment was introduced, we have seen that the need is 
even greater than those levels. The Administration anticipates faster 
growth in the SBIC program because of both its increasing popularity 
and the increase in additional personnel at the Small Business 
Administration to its SBIC licensing unit. In fiscal years 1997 and 
1998, SBA licensed approximately 30 new SBIC's per year. With more 
staff devoted to the licensing unit, SBA projects that it will license 
more than double that amount in fiscal year 1999. Accordingly, Senator 
Bond's Act would increase the authorization level to $1.2 billion in 
FY99 and to $1.5 billion in FY2000.
  Mr. President, I am pleased to cosponsor this legislation and I 
applaud the work of my colleagues on the Senate Small Business 
Committee, Chairman Bond and Senator Lieberman.
                                 ______