[Senate Report 106-383]
[From the U.S. Government Publishing Office]



                                                       Calendar No. 759
106th Congress                                                   Report
                                 SENATE
 2d Session                                                     106-383

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



 
         COMMUNITY DEVELOPMENT AND VENTURE CAPITAL ACT OF 1999

                                _______
                                

                August 25, 2000.--Ordered to be printed

   Filed under authority of the order of the Senate of July 26, 2000

                                _______
                                

Mr. Bond, from the Committee on Small Business, submitted the following

                              R E P O R T

                         [To accompany S. 1594]

    On July 26, 2000, the Committee on Small Business 
considered S. 1594, the Community Development and Venture 
Capital Act of 1999. The Committee adopted by unanimous voice 
votes a substitute amendment offered by the Ranking Democrat, 
Senator John F. Kerry, the sponsor of the bill, and two 
amendments offered by the Chairman, Senator Christopher S. 
Bond, with respect to investments in low-income urban areas and 
the percentage of investments to be made in HUBZone areas. As 
amended, S. 1594 would authorize the establishment of a 
comprehensive economic development program that seeks to 
stimulate venture capital investment and intensive management 
assistance in small businesses located in the country's most 
distressed and under-invested communities. Having considered S. 
1594, as amended, the Committee reports favorably thereon and 
recommends that the bill do pass.

                            i. introduction

    Community development venture capital is a growing practice 
that ties venture capital investment to economic development 
and community revitalization. Unlike traditional venture 
capital funds that are solely profit-driven, community 
development venture capital funds (CDVCs) are both mission-
driven and profit-driven. The industry refers to this as a 
``double bottomline''--investments that show promise not only 
of a financial return, but also of a social return. Social 
returns range from creating sustainable local jobs with 
liveable wages to providing a much-needed service to the 
community.
    CDVC investments are much smaller than traditional venture 
capital funds, typically ranging between $50,000 and $500,000, 
and go to small businesses located in distressed urban and 
rural areas. However, while many of the existing active CDVCs 
seek out and make investments based on location, some CDVCs, 
such as Coastal Enterprises in Maine, make the majority of 
their investments based on job creation potential. Another 
important distinction between traditional funds and mission-
driven funds is that CDVCs provide on-going, intensive business 
counseling and assistance.
    It is generally accepted among economists and business 
experts that venture capital has significantly contributed to 
the success of the U.S. economy over the last 20 to 30 years. 
Accordingly, CDVC funds have set out to demonstrate that the 
same model of business development that has driven economic 
expansion in California's Silicon Valley and Route 128 in 
Massachusetts can also make a powerful difference in areas like 
the inner-city areas of Boston's Roxbury and New York's East 
Harlem, or the rural desolation of Kentucky's Appalachia and 
Mississippi's Delta region.
    The Committee has reviewed S. 1594 and the field of 
community development venture capital on three occasions: On 
March 16, 1999 as part of the SBA's FY2000 Budget Hearing; on 
May 12, 1999 as part of the roundtable entitled ``SBA's SBIC 
and Microloan Programs''; and on February 24, 2000 as part the 
SBA's FY2001 Budget Hearing. The testimony and statements from 
those hearings and roundtables demonstrate a real need for this 
legislation. For example, while there is a growing industry of 
community development venture capital companies, there are 
virtually no institutional sources of equity capital in 
distressed communities. Specifically, there are currently 26 
active CDVCs. They manage approximately $157 million combined, 
and only 14 of those funds are capitalized at $5 million or 
more, which is the absolute minimum for economic viability of a 
fund.
    Mr. Kerwin Tesdell,1 one of the roundtable 
participants and president of the Community Development Venture 
Capital Alliance in New York, explained why Congress should 
implement a community development venture capital program: 
``Why is Federal support needed for this program? * * * right 
now we depend on social capital, from foundations and others 
with a social interest as well as an economic interest in 
investment. That is a very small pool of capital. Therefore, 
our funds are often undercapitalized, operate at an inefficient 
level, and are unable to meet the needs of their communities.''
---------------------------------------------------------------------------
    \1\ Kerwin Tesdell is the president of the Community Development 
Venture Capital Alliance and an adjunct professor at New York 
University School of Law. He holds an economics degree from Harvard 
College, law and business degrees from New York University, and a 
certificate from the Venture Capital Institute.
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    This legislation creates a community development venture 
capital program that is modeled on the Small Business 
Administration's existing venture capital program, called the 
Small Business Investment Company (SBIC) program. Congress 
created the SBIC program in 1958 to fill the gap between the 
scarcity of venture capital available to small businesses and 
the needs of start-up and growing small businesses.
    The SBIC program has proven to be an extremely successful 
public-private sector partnership with the government. Since 
the program was started, it has provided more than $22 billion 
of investments in more than 86,000 small U.S. companies. In the 
last five years, it has returned $238 million in profit 
participation to the U.S. Department of Treasury. As successful 
as the SBIC program is, it does not sufficiently reach areas of 
our country that need economic development the most. According 
to Don Christensen, the Associate Administrator of the SBA's 
Investment Division, who participated in the Committee's 
roundtable in 1999: ``* * * Although the SBIC Program is 
extremely effective in addressing the needs of small business 
in general, it comes up short in terms of the needs of small 
businesses located in distressed urban and rural areas * * * In 
the HUBZones, for example. A number of investments are being 
made by SBICs in those areas, but they are the larger ones. 
What we need is a new program to address the specific needs * * 
*''
    For example, in 1999, SBICs invested $771 million in low-
and moderate-income areas. However, ``the vast majority of 
those investments were very large and not at all comparable to 
the type of investments [NMVC] funds would make.'' 2 
Based on SBA data, in 1998, only 1.8 percent, or $59 million, 
went to investments of $1 million or less in low- and moderate-
income areas. In 1999, the percentage shrunk. Out of the total 
$4.2 billion that SBICs invested in 1999, only 1.6 percent, or 
$66 million, went to such investments. It is estimated that $60 
million will be invested in low-income areas through the NMVC 
program in FY2001, with the remaining $140 million to be 
invested over the subsequent four-year period.
---------------------------------------------------------------------------
    \2\ Quote from the statement of Julia S. Rubin, a community 
development venture capital expert described in footnote no. 3, 
submitted for the record as part of the SBA's FY2000 Budget Hearing on 
March 16, 1999.
---------------------------------------------------------------------------
    In approving this legislation, it is not the Committee's 
intention to criticize the SBIC program or the investment 
pattern of currently licensed SBICs. On the contrary, the 
Committee encourages the SBICs to continue making investments 
in low- and moderate-income (LMI) areas and provides an 
incentive through a recently implemented debenture, called an 
LMI debenture, which has favorable terms. The Committee 
recognizes the vital role that SBIC investments play in the 
economy and the financing gap they fill by making investments 
of $300,000 to $5 million in small businesses, which 
traditional venture capitalists do not typically make. 
Traditional venture capitalists make average investments of $9 
million.3
---------------------------------------------------------------------------
    \3\ Price Waterhouse Venture Capital Survey 1999/2000.
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    The Committee is approving S. 1594 to expand the number of 
smaller investments being made to small businesses in the 
poorest areas, low-income geographic areas, and to fill another 
gap in access to capital that small businesses face. 
Investments for NMVC funds typically will range from $50,000 to 
$300,000 versus the $300,000 to $5 million range found in the 
Agency's SBIC program.
    According to Julia Sass Rubin,4 a community 
development venture capital expert at Harvard University who 
participated in the 1999 roundtable and submitted a statement 
for the hearing record on SBA's FY2001 budget, the situation is 
compounded by the fact that ``these [SBIC] investments were 
narrowly distributed. Only five states received 59 percent of 
these dollars in 1999, and only four states accounted for 55 
percent of these dollars in 1998. In 1999, California alone 
accounted for 30 percent of all SBIC LMI investments of $1 
million or less. [Similarly], in 1998, California accounted for 
28 percent of all investments. Meanwhile, 21 states in 1999, 
and 20 states in 1998, received no [SBIC] capital at all. 
[Finally], in 1998, only two SBIC investments went to rural LMI 
areas.''
---------------------------------------------------------------------------
    \4\ Julia S. Rubin is a doctoral candidate at Harvard University 
examining the field of community development venture capital (CDVC). 
She advises the Small Business Administration on the President's New 
Markets Venture Capital Initiatives, which is modeled after the CDVC 
industry. She also advises community development venture capital funds 
on how to attract more venture capital. Formerly a consultant for 
McKinsey & Co., she received her M.B.A., M.A. and B.A. degrees from 
Harvard University.
---------------------------------------------------------------------------
    The need for targeted venture capital investment is not 
only clear from these statistics, but from investment experts 
and economists who recognize the vital role of venture capital 
in oureconomy. At the Federal Reserve System Research 
Conference on Business Access to Capital and Credit held in March of 
1999, Federal Reserve Board Chairman Alan Greenspan said: ``* * * 
Credit alone is not the answer. Businesses must have equity capital 
before they are considered viable candidates for debt financing. * * * 
Continued efforts to develop markets for private equity investments 
will be rewarded by an innovative and productive business community. 
This is especially true in lower-income communities, where the weight 
of expansive debt obligations on small firms can severely impede growth 
prospects, or more readily lead to business failures.''
    We can make a difference in the country's poor, under-
invested and under-served areas by investing in a new industry 
of community development venture capital funds that target 
investment capital and business expertise into low- and 
moderate-income areas to develop and expand local businesses 
that create jobs and alleviate economic distress.

                      II. DESCRIPTION OF THE BILL

    The ``Community Development Venture Capital Act of 2000'' 
addresses the venture capital financing needs of small 
businesses located in low-income urban areas and low- and 
moderate-income rural areas, referred to by the Administration 
as ``new markets.'' The SBA defines new markets as rural and 
inner city communities, including HUBZones and Rural and Urban 
Empowerment Zones. New markets are areas of the country where 
entrepreneurs have experienced barriers to the marketplace and 
there is little to attract investors. At the same time, these 
areas need so much, there are significant opportunities. 
According to Michael Porter,5 a respected professor 
at Harvard University and business analyst who has written 
extensively on competitiveness, ``* * * inner cities are the 
largest underserved market in America, with many tens of 
billions of dollars of unmet consumer and business demand.'' 
The Committee believes comparable opportunities exist in poor 
rural areas.
---------------------------------------------------------------------------
    \5\ Michael E. Porter is the C. Roland Christensen Professor of 
Business Administration at Harvard Business School. He is the author of 
many best-selling books on strategy, including ``The Competitive 
Advantage of Nations, Competitive Advantage: Creating and Sustaining 
Superior Performance,'' and ``Competitive Strategy: Techniques for 
Analyzing Industries and Competitors.'' The quote is taken from ``The 
Competitive Advantage of the Inner City'' of the Harvard Business 
Review.
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    This legislation has three parts: the New Markets Venture 
Capital Program, a venture capital program to funnel investment 
money into distressed communities; the Community Development 
Venture Capital Assistance Program, a capacity building program 
to expand the number of venture capital firms and professionals 
who are devoted to investing in such communities; and 
BusinessLINC, a mentoring program to link established, 
successful businesses with small business owners in stagnant or 
deteriorating communities in order to facilitate the learning 
curve to develop and grow their small businesses.

Title I--New Markets Venture Capital Program

    The center piece of S. 1594 is the New Markets Venture 
Capital Program. Its purpose is to stimulate economic 
development through public-private partnerships called New 
Markets Venture Capital Companies (NMVCs) that invest venture 
capital in and provide technical assistance to smaller 
businesses located in distressed rural and urban areas, 
including HUBZones and Urban and Rural Empowerment Zones.
    Through this legislation, the SBA will create a separate 
venture capital program that will fund up to 20 venture capital 
companies dedicated to new markets. Unlike the SBIC program 
which focuses on small businesses with high-growth potential 
and claims successes such as Staples and Calaway Golf, the NMVC 
program will focus on smaller businesses that show promise of a 
double bottomline. While these smaller businesses can be higher 
risk, need patient capital and technical assistance, and have 
modest growth prospects, they can also provide quality jobs and 
create productive wealth in and among our neediest communities.
    During the Committee's roundtable, Ms. Elyse Cherry, 
president of the Boston Community Venture Fund in 
Massachusetts, one of the country's premier community 
development venture capital funds, gave an example of an 
investment with a double bottomline: City Fresh Foods. Run by 
two young African-American brothers, the company provides 
African-American, Hispanic and Caribbean food to the Meals-on-
Wheels program in the Roxbury/Dorchester area of Boston, a low- 
and moderate-income area in the inner-city ``that had no 
investment in the last 20 years.'' 6 The ethnic 
meals were in demand and needed because the typical menus were 
too bland, and the elderly and disabled who relied on Meals-on-
Wheels were not eating their food. In spite of the market 
demand, the company had lost money in every one of its three 
years of existence. It was faced with shutting down or getting 
more financing. After Boston Community Venture Fund invested in 
City Fresh and started providing the owners with management 
assistance, the company developed a positive cash flow in about 
six months and was a year ahead of schedule at the time of the 
Committee's Roundtable. In addition to providing a needed 
service, City Fresh Foods has created more than 20 jobs. It 
also hires from the community, pays its employees from $8 to 
$16 per hour, and offers training and opportunity for employees 
to move from entry-level jobs to supervisory positions.
---------------------------------------------------------------------------
    \6\ Ms. Elyse Cherry, transcript of the May 12, 1999, Roundtable, 
``SBA's SBIC and Microloan Programs.'' Page 18, line 6.
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    S. 1594 as reported authorizes the SBA to make matching 
grants to new markets venture capital companies (NMVCs) and 
specialized small business investment companies (SSBICs), 
licensed under Section 301(d) of the Small Business Investment 
Act, so that they can provide technical assistance to 
prospective and financed portfolio companies. Though the 
legislation does allow SSBICs to use these funds to provide 
technical assistance to small businesses at the pre- and post-
investment stages, priority should be given for LMI investments 
that are already financed (post-investment). The Committee 
wants to stress that SSBICs cannot use these matching TA grants 
for any investments they have made prior to implementation of 
this legislation.
    S. 1594 also authorizes the SBA to guarantee debentures 
issued by the NMVCs. The debentures leverage the private 
capital that NMVCs raise and enable NMVCs to make venture 
capital investments in small businesses located in low-income 
urban areas and low- andmoderate-income rural areas.
    In order to participate in the program, a New Markets 
Venture Capital Company must be a newly formed, for-profit 
entity. It must have demonstrated management expertise in 
community development venture capital. It must have raised a 
minimum of $5 million in private capital. Generally, it must 
have obtained matching fund commitments for each dollar of 
technical assistance (TA) to be used over a five- to ten-year 
period. TA matching grants will be provided to an NMVC in an 
amount equal to 30 percent ($1.5 million) of the $5 million it 
raised in private funds. If an NMVC cannot raise the TA 
matching contribution up front, the legislation permits the SBA 
to issue a TA grant if an NMVC has a plan for (1) how it will 
match the TA grant money, and (2) the NMVC has already raised 
20 percent of the required match. Lastly, an NMVC applicant 
must have developed a plan and operational structure that 
focuses investments in low-income areas, illustrating that it 
is mission-driven. This last provision is important because it 
is a safeguard against NMVC companies that might take advantage 
of the program.
    This bill authorizes the SBA to match up to 1\1/2\ times an 
NMVC company's private capital through guarantees of 
debentures, called Low-Income Debentures (LIDs). An NMVC 
company will not be required to make interest payments on an 
LID for five years. This deferred interest feature, similar to 
the LMI debenture available under the SBIC program, is designed 
to encourage the NMVC companies to make patient investments in 
smaller enterprises located in low-income geographic areas. 
This type of patient funding, sometimes referred to as an 
``equity-type'' investment, will allow an NMVC company to 
nurture the development of a smaller enterprise for long-term 
success and help the NMVC company to obtain a reasonable return 
on its investment.
    While an NMVC will not be required to make interest 
payments on an LID for five years, it will be charged interest. 
The accumulating interest is built into the LID, which 
discounts (reduces) the face value of the LID from a 1\1/2\ 
match ($7.5 million) to a net cash value of a one-to-one match 
($5 million). For example, under S. 1594, an NMVC company is 
required to raise a minimum of $5 million in private capital. 
The SBA will match that private capital through the guarantee 
of a LID, up to 1\1/2\ times, or $7.5 million. However, 
assuming an 8 percent interest rate on that $7.5 million for 
five years, the net proceeds (cash value) of that LID then 
would be approximately $5 million, same as the amount of 
private capital raised by the NMVC company. That one-to-one 
match gives the NMVC a total portfolio of $10 million to 
invest.
    While the Administrator is authorized to issue and 
guarantee trust certificates of these LID debentures, Federal 
securities laws still apply. The Committee wants to make clear 
that nothing in this legislation is intended to undermine the 
authority of the Securities and Exchange Commission.
    The reported legislation provides many protections to 
maximize the chances of NMVC funds succeeding financially and 
having a significant impact on their communities. The structure 
of NMVC companies comes from the experience of existing CDVCs 
and current research. It also draws upon the lessons learned by 
the SBA from administering the SBIC and SSBIC programs. 
Accordingly, this bill sets a minimum fund size of $5 million 
in order for an organization to qualify for SBA leverage. It 
requires NMVC companies to have qualified and experienced 
management. It reduces the potential leverage that NMVC funds 
can draw upon, to a 1 to 1\1/2\ ratio. And, like the SBIC 
program, NMVC funds lose all of their capital before any 
government guaranteed funds are placed at risk. As reported, S. 
1594 also prevents an NMVC company from filing for bankruptcy 
to guarantee that NMVC companies repay any federal financial 
assistance it receives under the new markets venture capital 
program.
            Restricting investments in urban communities to low-income 
                    areas
    At the markup, the Committee Chairman Bond expressed 
concern that the program benefit only businesses located in 
low-income (LI) areas, rather than low- and moderate-income 
(LMI) areas. By unanimous consent, the Committee adopted the 
Chairman's amendment to change the geographic investment areas 
for urban areas from low- and moderate-income areas to only 
low-income areas. The amendment did not change the criteria for 
defining rural areas in which NMVC companies may invest.
            Targeting twenty-five percent of the debentures to HUBZone 
                    areas
    The Chairman offered an amendment at the markup requiring 
new markets venture capital companies to invest 25 percent of 
the money raised through SBA-backed debentures in small 
companies that are located in Historically Underutilized 
Business Zones (HUBZones). The Committee created the HUBZone 
program as part of the SBA Reauthorization of 1997 (PL 105-
135). The Committee unanimously adopted the amendment.

Title II--The Community Development Venture Capital Assistance Program

    S. 1594 authorizes the SBA to establish the Community 
Development Venture Capital Assistance Program. The purpose is 
to promote the growth of the field of community development 
venture capital through training, technical assistance, 
knowledge sharing and the expansion of best practices among 
venture funds. Existing community development venture capital 
companies have emphasized to the Committee that capacity-
building is especially important in areas not currently served 
by the active CDVCs. There are many states and communities 
where there is an urgent need for equity investments that will 
result in the creation of jobs, wealth and opportunities for 
low-income people, but where there may not yet be a venture 
fund with the capacity to become a New Markets Venture Capital 
company. Initially, this title has the potential to help the 
venture capital program for low-income areas.
    The need is clear. The Community Development Venture 
Capital funds across the country have a proven track record in 
making smart, responsible investments in small businesses in 
their communities, but the capital needs of firms in 
economically distressed areas far outweigh the existing 
capacity of these organizations. Compared to the more than 
1,143 traditional and SBIC venture capital firms in the U.S., 
only 26 funds nationwide currently concentrate oninvesting in 
companies that show promise of financial and social returns. The 
industry needs more community development venture capital funds to 
reach more of these underserved communities. The bill authorizes $20 
million total in program level over four years (FY2000-2003).
    First, the Community Development Venture Capital Assistance 
program would authorize at least $15 million for SBA grants to 
private, nonprofit organizations with expertise in making 
venture capital investments in poor communities. These 
organizations would use these grants to provide hands-on 
technical assistance to spawn and develop new and emerging CDVC 
or NMVC companies. The intermediary organizations would match 
the grants dollar for dollar with non-Federal sources.
    Second, this program would provide up to $5 million in SBA 
grants to colleges, universities, and other firms or 
organizations--public or private--to create and operate 
training and intern programs, organize a national conference, 
and fund academic research and studies dealing with community 
development venture capital.
    Senator Wellstone originally introduced this legislation 
during the 105th Congress as an amendment to H.R. 3412, the 
Small Business Investment Company Technical Corrections Act of 
1998. It passed both the Senate Committee on Small Business and 
the full Senate, but the House did not get to act on the bill 
before the Congress adjourned so it was not enacted. Senator 
Wellstone reintroduced this legislation this Congress as S. 619 
on March 15, 1999. His bill has been incorporated as Title II 
of S. 1594.

Title III--BusinessLINC

    This legislation amends the Small Business Act to authorize 
matching grants for BusinessLINC, a program which links large 
businesses with small business owners. The Administrator of the 
Small Business Administration is authorized to make grants to 
and enter into participation agreements with coalitions of 
public and private-sector participants to promote, expand and 
facilitate mentor-protege relationships in low-income areas and 
provide the additional money needed to identify existing and 
potential small businesses for linkage to appropriate larger 
businesses.
    BusinessLINC builds upon an already successful public-
private partnership that began June 5, 1998 between the U.S. 
Small Business Administration (SBA), the U.S. Department of the 
Treasury, and the private business sector. The Business 
Learning, Investment, Networking, and Collaboration (LINC) 
initiative was formed to encourage the linkage of large 
businesses to small businesses, enhancing the economic vitality 
and competitive capacity of small businesses located in 
economically distressed urban and rural areas.
    The Committee authorizes $6.6 million per year for 
BusinessLINC grants for six years, from FY2000-2005.
            Authorization levels
    For the New Markets Venture Capital Program, this amended 
legislation authorizes a total of program level of $150 million 
for debentures and a total of $30 million for technical 
assistance matching grants for fiscal years 2000 though 2005. 
For the Community Development Venture Capital Assistance 
Program, this bill authorizes a total of $20 million for fiscal 
years 2000 though 2003. For BusinessLINC, this bill authorizes 
$6.6 million annually for fiscal years 2000 though 2005. The 
amounts for all three programs shall remain available until 
expended.

                          III. COMMITTEE VOTE

    In compliance with rule XXVI(7)(b) of the Standing Rules of 
the Senate, the following votes were recorded on July 26, 2000. 
A motion by Senator Kerry to adopt the substitute amendment by 
Senator Kerry passed by unanimous voice vote. A motion by 
Senator Kerry to adopt two amendments by Senator Bond 
concerning investments in low-income urban areas and the 
percentage of investments to be made in HUBZone areas passed by 
unanimous voice vote. A motion by Senator Bond to adopt the 
``Community Development Venture Capital Act of 1999,'' as 
amended, was approved by a 16-1 recorded vote, with the 
following Senators voting in the affirmative: Bond, Kerry, 
Burns, Bennett, Snowe, Enzi, Fitzgerald, Crapo, Abraham, Levin, 
Harkin, Lieberman, Wellstone, Cleland, Landrieu and Edwards. 
Voting in the negative: Senator Voinovich.

                  IV. Evaluation of Regulatory Impact

    In compliance with rule XXVI(11)(b) of the Standing Rules 
of the Senate, it is the opinion of the Committee that no 
significant additional regulatory impact will be incurred in 
carrying out the provisions of this legislation. There will be 
no additional impact on the personal privacy of companies or 
individuals who utilize the services provided.

                            V. Cost Estimate

    In compliance with rule XXVI(11)(a)(1) of the Standing 
Rules of the Senate, the Committee estimates the cost of the 
legislation will be less than the amounts indicated by the 
Congressional Budget Office (CBO) in the following letter. CBO 
estimates a subsidy rate of 20 percent for the New Markets 
Venture Capital program. However, as part of its 
responsibilities under the Credit Reform Act of 1990, the 
Office of Management and Budget (OMB) estimates a subsidy rate 
of 14.44 percent for the program for FY2001.

               Congressional Budget Office Cost Estimate

S. 1594--Community Development and Venture Capital Act of 2000

    Summary: S. 1594 would authorize appropriations for fiscal 
years 2000 through 2005 for the New Markets Venture Capital 
(NMVC) program within the Small Business Administration (SBA). 
This program would provide federal loan guarantees to venture 
capital corporations that invest in small businesses located in 
low-income communities. The bill also would establish a 
program--the community Development Venture Capital program--to 
provide training and assistance to venture capital companies 
that promote community development. Finally, S. 1594 would 
authorize appropriations for the BusinessLINC program, also 
within SBA. This program would promote relationships between 
large and small businesses.
    CBO estimates that implementing S. 1594 would cost a total 
of $104 million over the 2001-2005 period, assuming 
appropriation of the necessary amounts. Because S. 1594 would 
not affect direct spending or receipts, pay-as-you-go 
procedures would not apply.
    S. 1594 contains an intergovernmental mandate as defined in 
the Unfunded Mandates Reform Act (UMRA), but CBO estimates that 
the cost of the mandate would not be significant. The bill 
contains no new private-sector mandates.
    Estimated cost to the Federal Government: For this 
estimate, CBO assumes that S. 1594 will be enacted near the 
start of fiscal year 2001 and that funds will be provided for 
its implementation each year. The estimated budgetary impact of 
S. 1594 is shown in the following table. The costs of this 
legislation fall within budget function 370 (commerce and 
housing credit).

----------------------------------------------------------------------------------------------------------------
                                                                By fiscal year, in millions of dollars
                                                     -----------------------------------------------------------
                                                        2000      2001      2002      2003      2004      2005
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                                        SPENDING SUBJECT TO APPROPRIATION

 Spending for NMVC and business LINC:
     Under current law:
         Budget authority \1\.......................        11         0         0         0         0         0
         Estimated outlays..........................         4         5         2       \2\         0         0
     Proposed Changes:
         Estimated authorization level..............         0        35        34        18        12        12
         Estimated outlays..........................         0        20        31        24        16        13
     Spending under S. 1594:
         Estimated authorization level \1\..........        11        35        34        18        12        12
         Estimated outlays..........................         4        25        33        24        16        13
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\1\ The 2000 level is the amount appropriated for that year. It includes $9 million for NMVC technical
  assistance and $2 million for Business LINC assistance. In addition, Public Law 106-113 had earmarked $6
  million for the subsidy cost of NMVC loan guarantees; but Public Law 106-259 (enacted August 9, 2000) repealed
  that earmark.
\2\ Less than $500,000.

Basis of estimate

    S. 1594 would authorize appropriations for three programs 
within SBA. Based on historical spending patterns of similar 
programs, CBO estimates implementing the New Markets Venture 
Capital program would cost $54 million, the Community 
Development Venture Capital program would cost $20 million, and 
the BusinessLINC program would cost $30 million.
            New markets venture capital
    S. 1594 would authorize the NMVC programs for six years 
(fiscal years 2000 through 2005), with appropriations limited 
to $30 million for technical assistance grants and such sums as 
necessary to subsidize and administer up to $150 million in 
NMVC loan guarantees. For this estimate, CBO assumes SBA would 
guarantee 100 percent of any loans under this program.
    CBO estimates that S. 1594 would authorize the 
appropriation of an additional $56 million over the 2001-2005 
period for the NMVC program. This cost reflects the difference 
between the total amounts authorized in the bill and the $9 
million appropriated for the current year.
    Specifically, S. 1594 would authorize the appropriation of 
up to $30 million over the 2000-2005 period for technical 
assistance, which is $21 million more than has been 
appropriated for fiscal year 2000. In addition, CBO estimates 
that it would cost about $30 million to subsidize $150 million 
in NMVC loan guarantees. Finally, experience with other SBA 
programs suggests that it would cost an average of about $1 
million a year to administer the program, net of any 
examination fees paid by borrowers.
    CBO estimates that the subsidy cost of the NMVC program 
would be about 20 percent of the amount guaranteed. This 
estimate is based on trends in defaults and recoveries for 
similar SBA programs and on information regarding the likely 
terms and conditions of the guarantees. Experience with other 
programs suggests that NMVC borrowers would default on about 45 
percent of guaranteed loans. In the event of a default, CBO 
expects that the agency would liquidate the NMVC investments 
and that recoveries would average about 50 percent of the loan 
balance three years after default. Based on information from 
the Office of Management and Budget, we assume that SBA would 
allow borrowers a grace period of five years during which they 
would not pay interest; instead, such interest would be added 
to the outstanding debt. Because S. 1594 would authorize SBA to 
guarantee up to $150 million of loans, we estimate that this 
program would require the appropriation of about $30 million 
for credit subsidies.
            Community development venture capital
    S. 1594 would authorize the Community Development Venture 
Capital program for four years (fiscal years 2000 through 
2003), with appropriations limited to $20 million for grants 
and contracts to provide technical assistance. Based on the 
spending patterns of similar programs, CBO estimates that 
outlays for this program would total about $20 million over the 
2001-2005 period.
            BusinessLINC
    S. 1594 would authorize appropriations of $6.6 million each 
year over the 2001-2005 period to promote relationships between 
large and small businesses. Based on the spending patterns of 
SBA's other grant and assistance programs. CBO estimates that 
outlays for this program would be $30 million over the 2001-
2005.
    Pay-as-you-go considerations: None.
    Impact on state, local, and tribal governments: Title I 
would preempt state laws by prohibiting them from limiting the 
Administration's ability to exercise its ownership rights in 
certain debentures issue by a new markets venture capital 
company. Such a preemption of state law is an intergovernmental 
mandate as defined by UMRA, but CBO estimates that the mandate 
would impose no significant costs on state, local, or tribal 
governments.
    Impact on the private sector: S. 1594 contains no new 
private-sector mandates as defined by UMRA.
    Previous CBO estimates: This estimate differs from previous 
estimates of related legislation because of a change in the 
amounts being spent under current law. CBO's previous estimates 
included $6 million that was appropriated in 2000 for the 
subsidy cost of NMVC loans. The Department of Defense 
Appropriations Act, 2001 (Public Law 106-259, enacted on August 
9, 2000) allows SBA to spend such funds on other loan programs. 
CBO transmitted three related estimates prior to this change in 
law.
    On August 4, 2000, CBO transmitted a cost estimate for S. 
1594, the Community Development and Venture Capital Act of 
2000, as ordered reported by the Senate Committee on Small 
Business on July 26, 2000. That version of the bill would 
authorize the BusinessLINC program only through fiscal year 
2003. CBO estimated that implementing S. 1594, as ordered 
reported, would cost total of $87 million over the 2001-2005 
period.
    On June 26, 2000, CBO transmitted a cost estimate for H.R. 
2848, the New Markets Initiative Act of 1999, as ordered 
reported by the House Committee on Banking and Financial 
Services on April 13, 2000. H.R. 2848 would authorize loan 
guarantees under the NMVC program of up to $100 million and 
technical assistance to borrowers. CBO estimated those 
provisions would cost $40 million over the 2001-2005 period.
    On July 16, 2000, CBO transmitted a cost estimate for H.R. 
4530, the New Markets Venture Capital Program Act of 2000, as 
ordered reported by the House Committee on Small Business on 
May 25, 2000. S. 1594 would authorize loan guarantees under the 
NMVC program of up to $150 million and technical assistance to 
borrowers. CBO estimated that implementing H.R. 4530 would cost 
$47 million over the 2001-2005 period.
    Estimated prepared by: Federal Costs: Mark Hadley; Impact 
on State, Local, and Tribal Governments: Victoria Heid Hall; 
and Impact on the Private Sector: Lauren Marks.
    Estimate approved by: Peter H. Fontaine, Deputy Assistant 
Director for Budget Analysis.

                         VI. Section-by-Section

Section 1. Short title

    The title of the bill is ``The Community Development and 
Venture Capital Act of 2000.''

              Title I--New Markets Venture Capital Program


Sec. 101. New Markets Venture Capital Program

    This section amends Title III of the Small Business 
Investment Act of 1958 to establish the New Markets Venture 
Capital Program, a mission-driven venture capital program 
designed to attract investment capital and business expertise 
to smaller businesses in new markets. New markets are low-
income urban and rural areas of the country where entrepreneurs 
have experienced barriers to the marketplace and there is 
little to attract investors. At the same time, these areas need 
so much, there are significant opportunities.
            Subsection 351. Definitions
    This subsection sets forth the definitions for the terms 
used in the legislation.
            Subsection 352. Purposes
    The purpose of the New Markets Venture Capital program is 
to encourage venture capital investment in smaller businesses 
located in urban and rural areas; to promote the creation of 
wealth, economic development, and job opportunities in low-
income areas; and to establish a venture capital program at the 
Small Business Administration, separate from its Small Business 
Investment Company (SBIC) venture capital program, that focuses 
on economic development.
            Subsection 353. Establishment
    This subsection establishes the new markets venture capital 
program, which authorizes the SBA to (1) make grants to new 
markets venture capital (NMVC) companies and Specialized Small 
Business Investment Companies (SSBICs) so that they can provide 
technical assistance to prospective and financed portfolio 
companies, and (2) to guarantee the debentures issued by NMVCs 
to enable such companies to make venture capital investments in 
low-income areas.
            Subsection 354. Selection of NMVC companies
    This subsection sets forth the criteria the SBA must follow 
in selecting NMVC companies. The criteria is designed to ensure 
that selected NMVC companies are fiscally sound, well-managed, 
and experienced to identify and make responsible, successful 
community development venture capital investments that will 
benefit low-income communities and the investors. The Committee 
expects the SBA to select NMVC companies that have a primary 
objective of economic development of low-income geographic 
areas, particularly in regard to quality job creation for the 
people who live in the area.
    In order to participate in the program, NMVC companies must 
satisfy the following requirements:
    (1) Each NMVC company must be a newly formed, for-profit 
entity.
    (2) Each NMVC company's management team must have 
demonstrated experience in making venture capital investments 
in smaller companies that result in creating jobs and promoting 
economic development in the community.
    (3) Each NMVC company must provide a plan that concentrates 
its activities on serving the eligible investment areas, and 
submit a proposal that will expand economic opportunities and 
address the unmet capital needs within the eligible areas.
    (4) Each applicant must submit a proposal describing how it 
will provide marketing, management and technical assistance to 
smaller companies expected to be financed by the NMVC.
    (5) Each NMVC company must raise at least $5 million of 
contributed capital or binding capital commitments from non-
Federal investors, which SBA will match with guarantees.
    (6) Each NMVC company must obtain matching fund 
commitments, cash or in-kind, from non-SBA sources, for 
marketing, management and technical assistance equal to 30 
percent of the $5 million ($1.5 million) in funds it raises. 
SBA matches the money dollar-for-dollar.
    There is an exception for the technical assistance matching 
requirements. The Committee understands that it may be 
difficult for some NMVC companies to raise their entire 30-
percent match during the application stage. In those 
circumstances, the Administrator may approve an NMVC company if 
it has a viable plan to raise the $1.5 million in cash or in-
kind and has binding commitments for at least 20 percent of 
that $1.5 million on hand.
    (7) Each NMVC must make at least 80 percent of its 
investments in low-income geographic areas. In order for an 
investment to be counted toward the 80% goal under this 
legislation, the investment must be made in a small business 
concern located in a low-income area. This ensures that the New 
Markets Venture Capital Company Program will focus investment 
capital where it is most needed, rather than duplicating SBA's 
existing venture capital program, the Small Business Investment 
Company program.
    It is also the Committee's view that by investing the 
majority of funds in low-income communities, we will not only 
provide the benefit of increased job opportunities for people 
who live in the area, but also provide the benefit of improving 
the physical community. This double benefit ensures that the 
resources spent under S. 1594 will provide the maximum economic 
impact on the low-income communities to which this bill is 
targeted.
    In addition to the criteria outlined above, this 
legislation requires the SBA to consider geographic 
distribution of applicants when selecting NMVC companies. The 
Committee expects the SBA to select qualified NMVC companies 
that are located in different areas around the country, to the 
extent possible, so that the program is not concentrated in one 
or two regions.
            Subsection 355. Technical assistance grants
    Under the New Markets Venture Capital Program, the SBA is 
authorized to make technical assistance (TA) grants to NMVC 
companies established under this legislation and to certain 
Specialized Small Business Investment Companies (SSBICs). 
However, the conditions are different.
    NMVC companies are eligible for one or more grants equal up 
to 30 percent of the $5 million in capital and commitments that 
they must raise for investment capital. They must match their 
grant funds dollar for dollar, and they can use the funds to 
provide marketing, management and technical assistance to small 
businesses pre- and post-investment, meaning small businesses 
that have already been financed or are expected to be financed 
through this program. The grantfunds will be made available to 
NMVCs over a multi-year period not to exceed 10 years.
    SSBICs are also eligible for TA grant funds. They are 
eligible without entering into a participation agreement with 
SBA to act as an NMVC company, but they must submit a plan to 
SBA explaining how the funds will be used. The participation of 
the SSBICs is limited only to investments they make in low-
income areas after the date of enactment, and the grant amount 
is limited to 30 percent of those investments. Like NMVC 
companies, SSBICs must match the grant funds dollar for dollar, 
the grant funds will be made available over a multi-year period 
not to exceed 10 years, and they can use the funds to provide 
marketing, management and technical assistance to small 
businesses pre- and post-investment.
    Though the legislation does allow SSBICs to use these funds 
to provide technical assistance to small businesses pre- and 
post-investment, priority will be given for low-income 
investments that are ultimately financed. The Committee wants 
to emphasize that SSBICs cannot use matching TA grant funds for 
any investments they have made prior to implementation of this 
legislation.
    This legislation also authorizes SBA to make supplemental 
grants. They are for NMVC companies and SSBICs to provide extra 
technical assistance to the smaller enterprises that they 
finance. These grants must also be matched one for one. The 
purpose of supplemental grants is to provide an extra incentive 
for NMVC companies and SSBICs to invest in small companies that 
have potential but are more time-consuming and thus more 
expensive to manage.
    The Program limits the use of grant funds to marketing, 
management and technical assistance to smaller enterprises 
financed by NMVC companies and SSBICs. The purpose of this 
limitation is to ensure that NMVC companies and SSBICs do not 
use the funds to support other business costs and projects.
            Subsection 356. Debentures
    S. 1594 authorizes the SBA to guarantee debentures that 
NMVCs issue to raise capital for equity and equity-type 
investments. The term cannot exceed 15 years, and the 
debentures are subject to the interest rate and terms approved 
by the Administrator. Interest payments will be deferred on 
these debentures for the first five years of their term. To 
protect taxpayer investment in NMVCs, the total face value of 
debentures cannot exceed 150 percent of the NMVC's private 
capital.
    This legislation also requires that 25 percent of the 
proceeds from debentures be invested in smaller enterprises 
located in HUBZones (Historically Underutilized Business 
Zones). The Committee created the HUBZone program as part of 
the SBA Reauthorization of 1997 (PL 105-135). The Committee 
notes that the HUBZone definition for eligible inner city 
census tracts and non-metropolitan counties is a comprehensive 
definition that includes more than 7,000 metropolitan census 
tracts, more than 900 non-metropolitan counties, 527 Native 
American reservations and Native Alaskan villages.
            Subsection 357. Issuance and guarantee of trust 
                    certificates
    This subsection authorizes the SBA to issue and guarantee 
trust certificates representing ownership of all or part of the 
debentures issued by an NMVC company and guaranteed by the 
Administration. Each guarantee issued under this section is 
limited to the amount of the principal and interest on the 
guaranteed debentures that compose the trust or pool of 
certificates. This section grants SBA subrogation and ownership 
rights over the trust certificates guaranteed under this 
section, but the SBA is prohibited from collecting a fee for 
any guarantee of a trust certificate issued under this section. 
Finally, this section allows SBA to contract with an agent to 
carry out the pooling and central registration functions for 
the trust certificates issued.
    While the Administrator is authorized to issue and 
guarantee trust certificates of these debentures, Federal 
securities laws still apply. The Committee wants to make clear 
that nothing in this legislation is intended to undermine the 
authority of the Securities and Exchange Commission.
            Subsection 358. Fees
    This subsection authorizes SBA to charge such fees as it 
deems appropriate with respect to any guarantee or grant issued 
to an NMVC company. This authorization is subject to the 
prohibition contained in Subsection 357 that prohibits SBA from 
collecting a fee for any guarantee of a trust certificate 
issued under that section.
            Subsection 359. Bank participation
    This subsection allows any national bank, and any member 
bank of the Federal Reserve System, to invest in an NMVC 
company formed under this legislation so long as the investment 
does not exceed 5 percent of the capital and surplus of the 
bank.
    Banks that are not members of the federal Reserve system 
are allowed to invest in an NMVC company formed under this 
legislation so long as such investment is allowed under 
applicable State law, and so long as the investment would not 
exceed 5 percent of the capital and surplus of the bank.
            Subsection 360. Federal financing bank
    This subsection establishes that Section 318 of the Small 
Business Investment Act does not apply to any NMVC company 
created under this legislation.
            Subsection 361. Reporting requirements
    Under this legislation, NMVC companies are required to 
provide to SBA such information as the Administration requires, 
including: information related to the measurement criteria that 
the NMVC company proposed in its program application; and, for 
each case in which an NMVC company makes an investment or a 
grant to a business located outside of a low-income area, a 
report on the number and percentage of employees of the 
business who reside in an low-income area.
            Subsection 362. Examinations
    This subsection requires that each NMVC company shall be 
subject to examinations made at the direction of the Investment 
Division of SBA. This section allows for examinations to be 
conducted with the assistance of a private sector entity that 
has both the necessary qualifications and expertise. It is the 
intent of the Committee that the oversight of the NMVC program 
be modeled after that developed for the SBIC program and 
administered by the SBA's Investment Division. Oversight should 
include a close working relationship between the SBA analysts 
and NMVC management teams, detailed reporting requirements, 
frequent on-siteexaminations to evaluate performance and 
conformance with the operating plan, and careful analysis of the firm's 
economic impact.
            Subsection 363. Injunctions and Other Orders
    This subsection grants SBA the power of injunction over 
NMVC companies and the authority to act as a trustee or 
receiver of a company if appointed by a court. This section of 
the legislation closely tracks the existing injunction 
provision (Section 311) of the Small Business Investment Act of 
1958. It is the Committee's intent that oversight of the NMVC 
program be modeled after that developed for the SBIC program 
and administered by SBA's Investment Division.
            Subsection 364. Unlawful Acts and Omissions; Breach of 
                    Fiduciary Duty
    This subsection defines what is to be considered as a 
violation of this legislation, who is considered to have a 
fiduciary duty, and who is ineligible to serve as an officer, 
director, or employee of any NMVC company because of unlawful 
acts. It closely tracks the unlawful acts provision (Section 
314) of the Small Business Investment Act of 1958. It is the 
Committee's intent to grant SBA the same authority over NMVC 
companies that it has over Small Business Investment Companies 
with respect to unlawful acts and the breach of fiduciary 
responsibility. This subsection also grants the SBA the 
authority to use the procedures set forth in Section 313 of the 
Small Business Investment Act of 1958 to remove or suspend any 
director or officer of an NMVC. company.
            Subsection 365. Regulations
    This subsection authorizes the SBA to issue such 
regulations as it deems necessary to carry out the provisions 
of this legislation.
            Subsection 366. Authorizations
    This subsection authorizes a program level of $150 million 
for SBA-guaranteed debentures and $30 million for matching 
technical assistance grants.

Sec. 102. Bankruptcy exemption for NMVC companies

    This section prohibits NMVC companies from filing for 
protection under bankruptcy laws. The purpose of this section 
is to guarantee that NMVC companies repay any federal financial 
assistance it receives under the new markets venture capital 
program.

Sec. 103. Federal savings associations

    This section amends the Home Owners' Loan Act to allow a 
federal savings association to invest directly in new markets 
venture capital companies instead of forming a service 
subsidiary to make the investments. It also limits investment 
to five percent of a thrift's capital and surplus. The purpose 
of this section is to put thrifts on even footing with national 
banks in making these types of investments.

       Title II--Community Development Venture Capital Assistance


Sec. 201. Findings

    This section sets forth Congressional findings on the value 
of community development venture capital and the need to expand 
the number of professionals and organizations experienced to do 
this type of specialized investing.

Sec. 202. Community development venture capital activites

    This section amends the Small Business Act to establish a 
one-to-one matching grant program to increase the number and 
expertise of community development venture capital funds 
(CDVCs) around the country, such as new markets venture capital 
companies. It also provides grant money to colleges, 
universities, and other firms or organizations--public or 
private--to increase training and research.
    Subsection (a) sets forth the definitions of a Community 
Development Venture Capital Organization, a Developmental 
Organization, and an Intermediary Organization.
    Subsection (b) sets forth the authority given to the 
Administrator of the Small Business Administration to carry out 
this program. (1) It gives the Administrator the authority to 
enter into contracts with one or more organizations that either 
research community development venture capital or develop 
specialized venture capital professionals and organizations. 
(2) It gives the Administrator the authority to make grants to 
developmental organizations to carry out training and research 
activities related to community development venture capital, 
and grants to intermediary organizations to provide marketing, 
management and technical assistance to community develoment 
venture capital organizations.
    Subsection (c) sets forth the four training and research 
activities for which a developmental organization can use a 
grant. (1) It can be used to strengthen the professional skills 
of individuals in or operating a CDVC by creating training 
programs. (2) It can be used to increase interest in community 
development venture capital by creating a program to place 
students and graduates as interns in CDVCs or internmediary 
organizations for one year with a stipend. (3) It can be used 
to promote best practices by organizing and funding a national 
conference for CDVCs to share information regarding starting 
and operating CDVCs. And (4), it can be used for mobilizing 
academic resources by encouraging graduate schools to form 
centers that study community development venture capital; 
providing funding for the development of related materials for 
courses; and providing funding for research on community 
development venture capital.
    Subsection (c) limits to 25 percent the amount of grant 
money that can be used for the aforementioned training and 
research activities.
    Subsection (d) clarifies that an intermediary organization 
that receives a grant under this section must use that money to 
provide intensive marketing, management and technical 
assistance and training to promote the development of community 
development venture capital organizations. It further clarifies 
that the grant money can be used for the start-up and operating 
costs of new CDVCs.
    Subsection (e) sets forth the conditions of receiving a 
grant. An intermediary organization must provide a one-to-one 
match of non-federal money in order to receive a grant.
    Subsection (f) authorizes a total of $20 million for fiscal 
years 2000 through 2003 to carry out the provisions of the 
Community Development Venture Capital Capacity Building and 
Professional Development Act.

                        Title III--BusinessLINC


Sec. 301. Grants authorized

    This section amends the Small Business Act to authorize 
matching grants for BusinessLINC, a program which links large 
businesses with small business owners. The Administrator of the 
Small Business Administration is authorized to make grants to 
and enter into participation agreements with a coalition of 
public and private-sector participants that will expand 
business-to-business relationships between large and small 
businesses and provide businesses with information about 
companies that are interested in mentor-protege programs. 
Grants require a one-to-one match in cash or in-kind, unless 
the Administrator waives the requirement.
    This section authorizes $6.6 million per year for 
BusinessLINC grants for six years, from FY2000-2005.

Sec. 302. Regulations

    This section requires the Administrator to issue program 
regulations.

                      vii. changes in existing law

    In the opinion of the Committee, it is necessary to 
dispense with the requirement of rule XXVI(12) of the Standing 
Rules of the Senate in order to expedite the business of the 
Senate.

                                  
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