[Congressional Record Volume 148, Number 30 (Friday, March 15, 2002)]
[Senate]
[Pages S1978-S1979]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. BOND (for himself and Mr. Grassley):
  S. 2022. A bill to amend the Internal Revenue Code of 1986 to modify 
the unrelated business income limitation on investment in certain debt-
financed properties; to the Committee on Finance.
  Mr. BOND. Mr. President, I rise today to introduce the Small Business 
Investment Company Capital Access Act of 2002, whose purpose is to 
increase the amount of venture capital available to small businesses. I 
am pleased that my good friend from Iowa, Senator Grassley, the ranking 
member on the Senate Finance Committee, has agreed to be the principal 
cosponsor of this important bill.
  During the past 18 months, there has been a significant contraction 
of the private-equity market. During this same period, the Small 
Business Administration's Small Business Investment Company program has 
taken on a significant role in providing venture capital to small 
businesses seeking investments in the range of $500,000 to $3 million.
  Small Business Investment Companies, SBICs are government-licensed, 
government-regulated, privately managed venture capital firms created 
to invest only in original issue debt or equity securities of U.S. 
small businesses that meet size standards set by law. In the current 
economic environment, the SBIC program represents an increasingly 
important source of capital for small enterprises.
  While Debenture SBICs qualify for SBA-guaranteed borrowed capital, 
the government guarantee forces a number of potential investors, namely 
pension funds and university endowment funds, to avoid investing in 
SBICs because they would be subject to tax liability for unrelated 
business taxable income, UBTI. More often than not, tax-exempt 
investors generally opt to invest in venture capital funds that do not 
create UBTI. As a result, 60 percent of the private-capital potentially 
available to these SBICs is effectively ``off limits.''
  The Small Business Investment Company Capital Access Act of 2002 
would correct this problem by excluding government-guaranteed capital 
borrowed by Debenture SBICs from debt for purposes of the UBTI rules. 
This change would permit tax-exempt organizations to invest in SBICs 
without the burdens of UBTI record keeping or tax liability.
  In 1958, Congress created the SBIC program to assist small business 
owners in obtaining 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-$3 million have to look elsewhere. 
SBICs are frequently the only sources of investment capital for growing 
small businesses.
  Often we are reminded that the SBIC program has helped some of our 
Nations best known companies. It has provided a financial boost at 
critical points in the early growth period for many companies that are 
familiar to all of us. For example, when Federal Express needed help 
from reluctant credit markets, it received a needed infusion of capital 
from two SBA-licensed SBICs at a critical juncture in its development 
stage. The SBIC program also helped other well-known companies, when 
they were not so well-known, such as Intel, Outback Steakhouse, America 
Online, and Callaway Golf.
  What is not well known is the extraordinary help the SBIC program 
provides to Main Street America small businesses. These are companies 
we know from home towns all over the United States. Main Street 
companies provide both stability and growth in our local business 
communities. A good example of a Main Street company is Steelweld 
Equipment Company, founded in 1932, which designs and manufacturers 
utility truck bodies in St. Clair, Missouri. The truck bodies are 
mounted on chassis made by Chrysler, Ford, and General Motors. 
Steelweld provides truck bodies for Southwestern Bell Telephone Co., 
Texas Utilities, Paragon Cable, GTE, and GE Capital Fleet.
  Steelweld is a privately held, woman-owned corporation. The owner, 
Elaine Hunter, went to work for Steelweld in 1966 as a billing clerk 
right out of high school. She rose through the ranks of

[[Page S1979]]

the company and was selected to serve on the board of directors. In 
December 1995, following the death of Steelweld's founder and owner, 
Ms. Hunter received financing from a Missouri-based SBIC, Capital for 
Business, CFB, Venture Fund II, to help her complete the acquisition of 
Steelweld. CFB provided $500,000 in subordinated debt. Senior bank debt 
and seller debt were also used in the acquisition.
  Since Ms. Hunter acquired Steelweld, its manufacturing process was 
redesigned to make the company run more efficiently. By 1997, 
Steelweld's profitability had doubled, with annual sales of $10 million 
and 115 employees. SBIC program success stories like Ms. Hunter's 
experience at Steelweld occur regularly throughout the United States.
  In 1991, the SBIC program was experiencing major losses, and the 
future of the program was in doubt. Consequently, in 1992 and 1996, the 
Committee on Small Business worked closely with the Small Business 
Administration to correct 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. And it is important to focus on the significant role that is 
played by the SBIC program in support of growing small businesses. When 
Fortune Small Business compiled its list of 100 fastest growing small 
companies in 2000, 6 of the top 12 businesses on the list received SBIC 
financing during their critical growth year.
  The Small Business Investment Company Capital Access Act of 2002 is 
important for one simple reason: once enacted it paves the way for more 
investment capital to be available for more small businesses that are 
seeking to grow and hire new employees. According to the National 
Association of Small Business Investment Companies, NASBIC, a 
conservative estimate of the effect of this amendment would be to 
increase investments in Debenture SBICs by $200 million from tax-exempt 
investors in the first year and $400 million in the second year. 
Government-guaranteed SBIC leverage commitments equal to $400 million 
in year one and $800 million in year two would be added to the private 
capital. Thus, total year one capital available for investment would 
equal $600 million and total year two capital would equal $1.2 billion.
  Data developed by Venture Economics for the period 1970-1999 
indicates that one job is created for every $22,600 investment in a 
small company. At that rate, this bill could be responsible for the 
creation or support of as many as 62,000 jobs within the next two 
years, whether within companies receiving investments directly or 
within those firms benefiting indirectly through increased sales of 
goods and services to the former companies.
  And the cost? Industry experts estimate that if the change were 
effective now, there would be less than a $1 million in lost tax 
revenues. About $1.5 billion in private capital is invested in 
Debenture SBICs. A NASBIC poll of Debenture SBICs indicates $30.3 
million of that amount is from tax-exempt investors. For the previous 
10 years, Debenture SBIC returns have averaged 7.78 percent. Applied to 
the $30.3 million, that would result in lost taxable income of $2.36 
million per year. If all of that were taxed at the top 39 percent rate, 
the tax revenue loss would be $922,000 per year.
  The cost is low and the potential for economic gain is great. Passage 
of the bill will make the Government's existing SBIC program more 
effective in providing growth capital for America's small business 
entrepreneurs.
  And most importantly, it will provide sorely needed capital for the 
sector of our economy that provides about 75 percent of the net new 
jobs, small businesses. That is a real stimulus that would cause new 
investments to be made and the creation of critically needed new jobs. 
Our economy is primed for this kind of support, and I urge my 
colleagues to support this important bill.
  I ask unanimous consent that the 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. 2022

       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 
     Company Capital Access Act of 2002''.

     SEC. 2. MODIFICATION OF UNRELATED BUSINESS INCOME LIMITATION 
                   ON INVESTMENT IN CERTAIN DEBT-FINANCED 
                   PROPERTIES.

       (a) In General.--Section 514(c)(6) of the Internal Revenue 
     Code of 1986 (relating to acquisition indebtedness) is 
     amended--
       (1) by striking ``include an obligation'' and inserting 
     ``include--
       ``(A) an obligation'',
       (2) by striking the period at the end and inserting ``, 
     or'', and
       (3) by adding at the end the following:
       ``(B) indebtedness incurred by a small business investment 
     company licensed under the Small Business Investment Act of 
     1958 which is evidenced by a debenture--
       ``(i) issued by such company under section 303(a) of such 
     Act, or
       ``(ii) held or guaranteed by the Small Business 
     Administration.''.
       (b) Effective Date.--The amendments made by subsection (a) 
     shall apply to acquisitions made on or after the date of the 
     enactment of this Act.
                                 ______