[Senate Report 106-6]
[From the U.S. Government Publishing Office]





                                                        Calendar No. 22

106th Congress                                                   Report
  1st Session                    SENATE                           106-6

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



 
           SMALL BUSINESS INVESTMENT IMPROVEMENT ACT OF 1999

                                _______
                                

                 March 2, 1999.--Ordered to be printed

                                _______


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

                              R E P O R T

                         [To accompany S. 364]

    The Committee on Small Business reported S. 364 to improve 
certain loan programs of the Small Business Administration, and 
for other purposes, having considered the same, reports 
favorably thereon and recommends that the bill do pass.

                            I. Introduction

    Last year, the Committee on Small Business approved by an 
18-0 vote the ``Year 2000 Readiness and Small Business Programs 
Restructuring and Reform Act of 1998'' (H.R. 3412), which was 
subsequently approved under unanimous consent by the Senate. 
This omnibus bill included a section on the Small Business 
Investment Company (SBIC) program that is similar to S. 364. 
Unfortunately, the House of Representatives was not able to act 
on the bill prior to the adjournment of Congress in 1998. On 
February 5, 1999, the Committee voted by unanimous consent to 
report S. 364 favorably.
    In 1958, Congress created the SBIC program to assist small 
business owners obtain investment capital. Forty-one 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 
frequently are 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 (SBA) to correct 
earlier deficiencies in the Small Business Investment Act of 
1958 in order to ensure the future of the program. In 1992, and 
again in 1996, Congress enacted major changes to strengthen and 
reform the SBIC 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. More 
qualified investment teams are seeking license approval from 
SBA than ever before. At the same time the SBIC program is 
experiencing significant growth, the investment groups that are 
receiving guaranteed funds for investing in small businesses 
are performing at an exceptionally high level. The credit 
subsidy rates for both the Debenture and Participating 
Securities programs have dropped dramatically, with the subsidy 
rate for the Debenture program reaching ``0'' for the first 
time in the program's history, effective FY 2000.

                        II. Description Of Bill

    In response to the exceptional growth of the SBIC program 
fostered by the ever-increasing demand from growing small 
businesses for investment capital, S. 364 would increase the 
program authorization level for the Participating Securities 
program. This part of the SBIC program provides SBA-guaranteed 
capital that is matched with private capital raised by SBICs to 
make patient investments in small businesses. SBA permits an 
SBIC to defer payment of interest on Participating Securities 
until its investment portfolio begins to generate a return on 
investment sufficient to make the SBIC profitable. In return, 
SBA receives not only the repayment of principal and interest, 
but it also can receive up to 12% of the profits earned by the 
SBIC on each of its portfolio investments.
    For Fiscal Year 1999, S. 364 would increase the 
authorization level of the Participating Securities program 
from $800 million to $1.2 billion. In FY 2000, the 
authorization level would increase from $900 million to $1.5 
billion. These higher authorization levels are critical if the 
SBIC program is going to meet the demand for investment capital 
from the small business community.
    The bill would permit a seemingly small change in the 
program that will actually have a much more significant impact 
on the smaller, small businesses that are seeking investment 
capital. S. 364 would allow an SBIC to accept royalty payments 
contingent on future performance from a company in which it 
invests as a form of equity return for its investment. The 
royalty payments generally would be based on the increase in 
revenues that accrue after the investment is made by the SBIC.
    S. 364 would clarify the rules for determining eligibility 
of a small business or smaller 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. 
In order for a small business to qualify for a debt or equity 
investment under the SBIC program, a determination is made as 
to the entity's net income after Federal taxes are paid. To 
qualify under the SBIC program, an entity's net yearly income 
after Federal taxes cannot exceed $6 million.
    The provision in S. 364 would permit these tax ``pass 
through'' enterprises to be treated the same as enterprises 
that pay Federal taxes for purposes of SBA size standard 
determinations. A ``pass through'' enterprise would be able to 
estimate its net income after Federal taxes as if it paid 
Federal taxes directly to the IRS in order to determine if it 
falls under the SBA net income threshold.
    The ``Small Business Investment Improvement Act of 1999'' 
would make two technical changes to the SBIC program. The first 
technical change would remove a requirement that at least 50% 
of the annual authorized and funded program level under the 
Participating Securities program be reserved for funding SBICs 
that have private capital of not more than $20 million. This 
requirement had been imposed to insure that smaller SBICs had 
ample opportunity each year to obtain SBA-guaranteed leverage 
without facing the threat that larger SBICs would 
obtaincommitments for all the leverage for the year.
    The 50% reserve requirement has become obsolete for three 
reasons. First, the reserve is not needed because virtually all 
SBICs have less than $20 million in private capital. Second, 
SBA now provides commitments to any SBIC, regardless of size, 
so long as it is in good standing under the rules of the SBIC 
program, and it has sufficient available private capital to 
match with the SBA-guaranteed capital. Third, in 1996 Congress 
approved a new law that gave the SBA Administrator new 
authority to make five year leverage commitments for SBICs 
(Section 211, Public Law 105-135).
    As the result of the last two actions, any SBIC may apply 
for a commitment up to five years which is matched with its 
private capital, thus negating the need for the 50% reserve 
rule.
    The second technical change in S. 364 requires SBA to issue 
SBIC guarantees and trust certificates at periodic intervals of 
not less than twelve months. The current requirement is not 
less than every six months. This change will give maximum 
flexibility for SBA and the SBIC industry to negotiate the 
placement of certificates that fund leverage for the SBICs and 
obtain the lowest possible interest rates.
    This change will not hinder the availability of SBA-
guaranteed leverage for SBICs with five-year commitments from 
SBA to invest in small businesses because the SBIC industry has 
arranged a bridge funding arrangement with the Federal Home 
Loan Bank of Chicago. This funding arrangement allows SBICs 
with commitments from SBA to borrow funds against the SBA 
commitments. The borrowed funds are repaid to the Federal Home 
Loan Bank by the SBIC after the SBA-guaranteed leverage funds 
are distributed

                          III. Committee Vote

    In compliance with rule XXVI(7)(b) of the Standing Rules of 
the Senate, the following vote was recorded on February 5, 
1999.
    After a quorum was established pursuant to Committee rules, 
a motion by Senator Bond to adopt the ``Small Business 
Investment Improvement Act of 1999'' was approved by unanimous 
consent.

                  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. Changes In Existing Law

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

                           VI. 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 equal to the amounts indicated by the 
Congressional Budget Office in the following letter.

                                     U.S. Congress,
                               Congressional Budget Office,
                                  Washington, DC, February 9, 1999.
Hon. Christorpher S. Bond,
Chairman, Committee on Small Business,
U.S. Senate, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for S. 364, the Small 
Business Investment Improvement Act of 1999.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Mark Hadley.
            Sincerely,
                                          Dan L. Crippen, Director.
    Enclosure.

S. 364--Small Business Investment Improvement Act of 1999

    Summary: S. 364 would make a number of technical 
corrections to the Small Business Investment Act of 1958. It 
would eliminate a provision in current law that reserves funds 
for smaller Small Business Investment Companies (SBICs) until 
the last quarter of the fiscal year. The bill also would allow 
a more accurate determination of eligibility of small 
businesses for SBIC programs by requiring the Small Business 
Administration (SBA) to measure a firm's revenues assuming that 
it has paid all required income taxes. (Certain corporate 
structures, such as ``S'' corporations, pass all income through 
to the stockholders. Other firms do not pass through income, 
but instead pay taxes at the corporate level). Finally, S. 364 
would give SBA more flexibility in issuing certificates that 
help finance SBIC activities by increasing the minimum 
placement period for public offerings from 6 months to 12 
months.
    The bill would increase the authorized level of loans 
guaranteed by the SBIC participating securities program in 1999 
and 2000. CBO estimates that the subsidy costs of loan 
guarantees would increase by about $20 million over the 1999-
2004 period.
    S. 364 would not affect direct spending or receipts; 
therefore, pay-as-you-go procedures do not apply. S 364 
contains no intergovernmental or private-sector mandates as 
defined in the Unfunded Mandates Reform Act (UMRA) and would 
not affect the budgets of state, local, or tribal governments.
    Estimated cost to the Federal Government: For purposes of 
this estimate, CBO assumes that the bill will be enacted by 
March 31, 1999. CBO further assumes appropriation of the 
amounts necessary to fund the authorized program levels, 
including a supplemental appropriation for increases of 
authorized guarantees amounts in fiscal year 1999. The 
estimated budgetary impact of S. 364 is shown in the following 
table. The costs of this legislation fall within budget 
function 370 (commerce and housing credit).

----------------------------------------------------------------------------------------------------------------
                                                            By fiscal years, in millions of dollars--
                                               -----------------------------------------------------------------
                                                   1999       2000       2001       2002       2003       2004
----------------------------------------------------------------------------------------------------------------
                                  CHANGES IN SPENDING SUBJECT TO APPROPRIATIONS

SBIC Participating Securities Loans \1\:
    Estimated authorization level.............          9         11          0          0          0          0
    Estimated outlays.........................          3         13          3      (\2\)          0          0
----------------------------------------------------------------------------------------------------------------
\1\ Implementing S. 364 also would increase SBA's costs for administering guarantees of SBIC securities, but CBO
  estimates that the changes in administrative expenses would be less than $500,000 a year.
\2\ Less than $500,000.

    The Federal Credit Reform Act of 1990 requires 
appropriation of the subsidy costs and administrative costs for 
credit programs. The subsidy cost is the estimated long-term 
cost to the government of a direct loan or loan guarantee, 
calculated on a net present-value basis and excluding 
administrative costs.
    S. 364 would increase the authorized level of loans 
guaranteed by the SBIC participating securities program from 
$800 million to $1.2 billion in 1999 and from $900 million to 
$1.5 billion in 2000. Based on information from the SBA and on 
historical data for this program, CBO estimates that the 
subsidy costs of loan guarantees would increase by $20 million 
over the 1999-2004 period. CBO estimates that this provision 
would not significantly increase the administrative costs of 
the agency.
    Pay-as-you-go considerations: None.
    Intergovernmental and private-sector impact: S. 364 
contains no intergovernmental or private-sector mandates as 
defined in UMRA and would not affect the budgets of state, 
local, or tribal governments.-
    Previous CBO estimate: On January 13, 1999, CBO transmitted 
an estimate of H.R. 68, the Small Business Investment Company 
Technical Corrections Act of 1999, a similar bill that was 
ordered reported by the House Committee on Small Business on 
January 7, 1999. H.R. 68 would increase the authorized level of 
loans guaranteed by the SBIC participating securities program 
from $800 million to $1 billion in 1999 and from $900 million 
to $1.2 billion in 2000. The higher costs estimated for S. 364 
reflect the higher loan levels that it would authorize: $1.2 
billion in 1999 and $1.5 billion in 2000.
    Estimate prepared by: Mark Hadley.
    Estimate approved by: Paul N. Van de Water, Assistant 
Director for Budget Analysis.

                    VII. Section-By-Section Analysis

Section 1. Short title

    This section entitles the legislation the ``Small Business 
Investment Improvement Act of 1999.''

Section 2. SBIC Program

    This section consists of five changes to the Small Business 
Investment Act of 1958 and the Small Business Act.
    Subsection (a) would permit a Small Business Investment 
Company (SBIC) to receive royalty payments contingent on the 
future performance from small businesses in which it invests as 
a form of equity return for its investment.
    Subsection (b) would increase the program authorization 
levels for the Participating Securities program. In Fiscal Year 
1999, the authorization level would increase from $800 million 
to $1.2 billion. In FY 2000, it would increase from $900 
million to $1.5 billion.
    Subsection (c) clarifies the rules for determining whether 
a small business or smaller enterprise qualifies for a debt or 
equity investment under the SBIC program. This change targets a 
small business 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. 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.
    Subsection (d) includes three technical corrections to the 
Small Business Investment Act of 1958.
    The first change removes the requirement that a least 50% 
of the annual program level of the Participating Securities 
program be reserved for funding SBICs having private capital of 
not more than $20 million.
    The second technical correction would require SBA to issue 
SBIC guarantees and trust certificates at periodic intervals of 
not less than twelve months.
    The third technical change would strike the table of 
contents from Section 101 of the Act.

                                
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