[Congressional Record Volume 151, Number 138 (Wednesday, October 26, 2005)]
[Senate]
[Pages S11919-S11921]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Ms. SNOWE (for herself, Mr. Talent, and Mr. Bond):
  S. 1923. A bill to address small business investment companies 
licensed to issue participating debentures, and for other purposes; to 
the Committee on Small Business and Entrepreneurship.
  Ms. SNOWE. Mr. President, I rise to support the ``Small Business 
Investment and Growth Act of 2005,'' which I have introduced today to 
facilitate increased investments in small businesses throughout this 
country. I am pleased to be joined by my esteemed colleagues from 
Missouri, Senator Jim Talent and Senator Kit Bond, in sponsoring this 
bill.
  As Chair of the Senate Committee on Small Business and 
Entrepreneurship, I am committed to supporting our Nation's small 
businesses by increasing their access to capital. Small businesses 
comprise 99.7 percent of all businesses in the United States. Moreover, 
small businesses employ more than half, 57 percent, of the total 
private-sector workforce, and are responsible for the creation of more 
than two-thirds of all new jobs. Clearly, increasing investments in 
small businesses is crucial to our on-going economic success.
  This bill will reform and enhance the Small Business Administration's 
SBIC program, a program that is vital to fostering innovation, growth, 
and job creation in small businesses throughout our country. Small 
Business Investment Companies (SBICs) are privately-owned and managed 
venture capital investment companies that are licensed and regulated by 
the SBA. SBICs use their own capital, combined with funds borrowed from 
other private investors and supported by an SBA guarantee, to make 
equity and debt investments in qualifying small businesses. The SBA 
shares in the profits of SBICs. The structure of the program is unique 
and has been a model for similar public-private partnerships around the 
world.

[[Page S11920]]

  The program has been successful in mobilizing private venture capital 
investment, and leveraging that private investment with additional 
funds supported by SBA guarantees. According to the SBA's annual 
reports to Congress, the SBIC program has provided over $17.2 billion 
in financing to small businesses since the beginning of Fiscal Year 
1999. Each year, this financing allows small businesses to create or 
retain tens of thousands of jobs. For instance, according to the SBA's 
Office of Advocacy, in 2004 alone SBIC investments helped small 
businesses create or retain approximately 81,042 jobs.
  There are currently two types of SBIC Programs, the Participating 
Securities Program and the Debenture Program. Unfortunately, the 
Participating Securities Program stopped issuing new financing to SBICs 
at the beginning of FY 2005 because the program had ceased to be a 
zero-subsidy program, and there were no Federal appropriations to 
support the program. The Debenture Program has not suffered similar 
losses, and is unaffected by this bill.
  This bill would create a third type of SBIC program, the 
``Participating Debenture'' SBIC Program, that would replace the 
Participating Securities program. This new program would be a ``zero-
subsidy'' program, with no Federal appropriations necessary, that would 
provide financing with equity characteristics to small businesses. In 
response to two major problems suffered by the Participating Securities 
Program, the new Participating Debenture program would seek to a, 
ensure that a participating debenture is considered a debt instrument 
for Federal budgetary purposes, and b, prevent financial losses by the 
SBA by increasing the SBA's share of SBICs' profits.
  Together with Senator Talent and Senator Bond, I plan to foster a 
debate in the Small Business Committee about this bill and move toward 
a successful rejuvenation of the equity portion of the SBIC program. I 
believe that a full discussion about the proposal by the SBA, the 
SBICs, and experts in the venture capital industry will be necessary to 
achieve this progress.
  In July 2005 a bill, H.R. 3429, was introduced in the House that 
would also create a new program to replace the Participating Securities 
program. The bill we are introducing has some elements in common with 
that House bill, but goes further to clarify the manner in which the 
SBIC program would operate, and to bring the program into greater 
compliance with budgetary guidelines.
  This bill will allow the SBA to guarantee the repayment of the 
redemption price, principal, and interest for a new type of security, a 
``participating debenture,'' issued by a SBIC. This type of guarantee 
(of principal and interest for a security issued by an SBIC) existed in 
the two other SBIC programs, and for those other two programs it was 
explicitly authorized in the Small Business Investment Act of 1958 (the 
SBIA). This bill will also authorize the SBA to guarantee the repayment 
to an ``interim funding provider'' (an IFP) of any funds lost by the 
IFP because of the default of an SBIC during the period after the IFP 
has advanced monies to the SBIC, and before the IFP has been repaid for 
those funds. This type of guarantee existed in practice in the two 
other SBIC programs, but was not authorized by the SBIA Thus, this 
provision rectifies that problem and brings the new program into 
compliance with the Federal Credit Reform Act of 1990 (the FCRA).
  Another section of the bill authorizes the SBA to guarantee the 
payment of the redemption price and interest for a trust certificate 
issued by a trustee of a pool of PDs. This type of guarantee existed in 
the two prior SBIC programs, but was not authorized by the SBIA. 
Similar to the current Participating Securities and Debenture SBIC 
programs, the Participating Debenture (PD) program will raise funds by 
pooling the securities issued by SBICs into a pool and selling trust 
certificates that represent interests in that pool. Thus, this 
provision rectifies that problem and brings the new program more into 
compliance with the FCRA.
  Our bill includes all of the provisions of H.R. 3429 that address 
redemption and interest, and also includes several additional 
provisions. First, the bill includes repayment in default. It 
authorizes the SBA to guarantee repayment to IFPs for funds lost due to 
the default of an SBIC. The bill also authorizes the SBA to guarantee 
the payment of the redemption price and interest for trust certificates 
issued by a trustee of a pool of PDs. For each of the guarantees 
authorized here, the SBA is empowered to charge a fee.
  The fee authorized above will be sufficient to reduce to zero the net 
cost to the SBA of each guarantee. For the other two SBIC programs, the 
SBIA only explicitly authorized such a fee for the first guarantee, 
mentioned above, and did not authorize such a fee for the other two 
types of guarantees. Thus, this provision rectifies that problem and 
brings the new program into compliance with the FCRA. This section is 
not found in H.R. 3429.
  The obligations that each SBIC hold to repay the SBA will be 
identical, or ``matched'', in both size and timing to the obligations 
that the SBA holds to repay to the trust certificate holders that have 
purchased trust certificates in the pool that holds that particular 
SBICs' PDs. For advancing funds to an SBIC in accordance with the 
SBIC's license agreement with the SBA, an IFP shall have the right to 
receive interest from the SBIC. The manner of calculating and 
collecting this interest is specified. These sections is not found in 
H.R. 3429. The aggregate unpaid principal balance of the PDs issued by 
a SBIC must not exceed 200 percent of that company's private capital. 
In other words, the maximum ratio of the SBA's outstanding investment 
in the SBIC, when compared to the private investors' investment, is 
2:1. This method would be identical to the two current SBIC programs.
  The bill permits the SBA may authorize a trust or pool acting on 
behalf of the SBA to purchase PDs from an SBIC. This practice occurs in 
the other two SBIC programs, but is not explicitly authorized by the 
SBIA. The principal balance of each PD will be payable in full not 
later than the tenth anniversary of the date of issuance of that PD. If 
a SBIC fails to make this payment they default immediately and are 
liquidated. This was not the case in the other two SBIC programs. Thus, 
both of these provisions bring this new program more into compliance 
with the FCRA.
  Our bill, unlike the House bill, adds that if an SBIC fails to repay 
the required principle and interest by a date no later than the tenth 
anniversary of the original issuance, the SBIC defaults immediately and 
must be liquidated. Beginning on the date of issuance, interest on the 
principal balance outstanding of a PD shall accrue on a daily basis, 
and unpaid accrued interest shall compound every six months. There are 
no interest payments during the first five years of a PD. All unpaid 
interest on a PD accruing during the first five years will be due and 
payable in full out of gross receipts on the fifth anniversary. 
Interest accruing on a PD after the fifth anniversary will be due and 
payable semi-annually. Interest payments used to be contingent on a 
SBIC's profitability. In this proposal, the payments are due regardless 
of a SBIC's financial situation and if a payment is missed the SBA has 
the right to liquidate the SBIC. Thus, this provision brings this new 
program more into compliance with the FCRA.
  In addition, the SBA is authorized to charge an additional fee, as 
necessary to reduce the cost of the program to zero, as that term is 
defined in the FCRA, but the fee is capped at 1.5 percent, this may 
need to be adjusted. This type of fee existed in the other two SBIC 
programs. If a SBIC fails to pay any principal or interest on a PD when 
due, the Administration, in addition to any other remedies that it may 
have, can demand immediate repayment of the principal balance and all 
accrued interest on all outstanding PDs of that SBIC. This was not the 
case in the other two programs; thus, this provision brings the new 
program more into compliance with the FCRA. If a default occurs, the 
SBA has the right to charge a default rate of interest. Again, this is 
an improvement on the existing program. Finally, if a default occurs, 
the SBA may apply the SBIC's private collateral, its private 
investments, to pay any interest or principal that the SBIC owes the 
SBA. Again, this is an improvement (a crucial improvement) on the 
existing program.

[[Page S11921]]

  The bill offers several additions, in this regard, to the House bill. 
If default occurs, the SBA can charge a default rate of interest. The 
SBA can also make use of private investments to pay any interest or 
principle owed to the SBA by the SBIC. In the event of a SBIC's 
liquidation, a PD will be senior in priority for all purposes to any 
equity interests, in other words, the SBA will have first priority to 
reimbursement. Also, the SBIC's private collateral may, at the option 
of the SBA, be applied to pay accrued interest and principal of 
outstanding PDs.
  In the event of a default by an SBIC, a PD will be senior in priority 
for all purposes to any equity interests, in other words, the SBA will 
have first priority to reimbursement. Also, the SBIC's private 
collateral may, at the option of the SBA, be applied to pay accrued 
interest and principal of outstanding PDs. The bill has an additional 
section for the defaults of the SBIC. The section creates rights for 
the SBA, in case of default, that are the same as the SBA's rights in 
liquidation. An SBIC also commits to invest private equity in small 
businesses, to match the capital raised by its PDs. An SBIC in this 
program shall have no other debt other than financing obtained pursuant 
to this program.
  Unless otherwise allowed by the SBA, an SBIC may used the proceeds of 
a PD issued by the company to pay the principal and interest due on 
outstanding Pds issued by that company, if the SBIC has outstanding 
private equity capital invested in an amount equal to that being 
refinanced. This section of the Senate bill adds that an SBIC may use 
proceeds of a PD if it has outstanding private equity capital invested 
in an amount equal to that be refinanced.
  Unless otherwise provided, an SBIC's gross receipts shall be used 
first for the payment of accrued interest on PDs, and then for 
repayment of PD principal and private investments into the SBIC, and 
then for profit distributions. Gross Receipts means all cash received 
by a SBIC, including proceeds of the sale of securities, management or 
other fees, and cash representing return of invested capital, other 
than capital contributed by partners, the proceeds of the issuance of 
PDs, and money borrowed from other sources, if any. Marketable 
Securities that the company distributes in kind will be distributed as 
if they were Gross Receipts.
  When an SBIC misses a payment, the SBA may choose not to liquidate 
the SBIC and the SBIC may continue to operate. In such a case, a SBIC 
must use Gross Receipts within 10 days after receipt to repay any 
outstanding past due interest and past due principal. If a SBIC has no 
outstanding past due interest or principal, it must use Gross Receipts 
to prepay accrued interest. Such prepayment will be due not later than 
the end of the calendar quarter during which such Gross Receipts were 
received. Failure to prepay accrued interest will be deemed a Payment 
Default. At such time as there is no unpaid, accrued interest or past 
due principal outstanding on a SBIC's PDs, the SBIC may use Gross 
Receipts to prepay PD principal that is not past due. If any Gross 
Receipts remain, they may be paid to private investors to repay their 
investments. As long as there are any outstanding PDs, a SBIC may 
distribute Gross Receipts to its limited partners but only if they 
distribute at least a pro-rata share simultaneously to the 
administration.
  If Gross Receipts remain after the payment of all required payments, 
remaining funds can be used for profit distributions. When all PD 
principal and all private capital has been repaid in full, post-
amortization payments may made be made to the administration. The 
payments are 25 precent of their pro-rata share until private investors 
have received 100 percent of their principal; and thereafter, 50 
percent of their pro-rata share. The order of payments are: interest 
payments, principal payments, pre-payments, pre-amortization payments, 
and post-amortization payments. This provision provides for tax 
distributions that are required by law, as necessary. No distribution 
may violate liquidity requirements or other restrictions imposed by the 
SBA's regulations or any State's law.
  At any time a SBIC is in restricted operation or liquidation by 
reason of capital impairment or regulatory violation, the maturity date 
of the SBIC's PDs, including principal and accrued interest, is subject 
to acceleration at the option of the administration, and whether or not 
there has been such an acceleration, up to 100 percent of all Gross 
Receipts and unfunded private investor commitments may, at the option 
of the administration, be required to be distributed to the 
administration until all accrued interest and principal on the SBIC's 
PDs have been paid in full. No distributions will be made to limited 
partners when a SBIC is in restricted operations or liquidation due to 
capital impairment or regulatory violation. This section of the bill 
details the procedures and requirements that would apply if an SBIC 
provided a partial repayment to the SBA in the form of securities, 
rather than cash.
  Another section details the schedule under which payments will be 
made to the SBA by an SBIC. Subject to SBA regulations and the 
permission of private investors, an SBIC may reinvest Gross Receipts 
back into small businesses. In addition, the bill provides that after 
re-payments have occurred in this program, the SBA's share of such re-
payments shall not be reduced or recalculated. This section does not 
create any ownership interest for the SBA in any SBICs. Rather, the 
relationship is one of lender-borrower.
  I urge my colleagues to support this bill. Too much is at stake for 
small businesses, and the economy as a whole, to allow this critical 
legislation to languish. Congress must find essential agreement and 
fulfill its obligation to America's small businesses. Failing to 
advance this bill would diminish our chances for innovation, and stifle 
the entrepreneurial opportunities this program will produce. Instead, 
we have an opportunity to support these key attributes of American 
small businesses.
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