[House Report 110-347]
[From the U.S. Government Publishing Office]



110th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 1st Session                                                    110-347

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



 
            SMALL BUSINESS INVESTMENT EXPANSION ACT OF 2007

                                _______
                                

 September 25, 2007.--Committed to the Committee of the Whole House on 
            the State of the Union and ordered to be printed

                                _______
                                

  Ms. Velazquez, from the Committee on Small Business, submitted the 
                               following

                              R E P O R T

                        [To accompany H.R. 3567]

      [Including cost estimate of the Congressional Budget Office]

  The Committee on Small Business, to whom was referred the 
bill (H.R. 3567) to amend the Small Business Investment Act of 
1958 to expand opportunities for investments in small 
businesses, and for other purposes, having considered the same, 
report favorably thereon without amendment and recommend that 
the bill do pass.

                                CONTENTS

                                                                   Page
  I. Purpose and Summary..............................................1
 II. Background and Need for Legislation..............................3
III. Hearings........................................................10
 IV. Committee Consideration.........................................10
  V. Committee Votes.................................................11
 VI. Section-by-Section Analysis of H.R. 3567........................11
VII. Congressional Budget Office Cost Estimate.......................20
VIII.Committee Estimate of Costs.....................................23

 IX. Oversight Findings..............................................23
  X. Statement of Constitutional Authority...........................24
 XI. Compliance With Public Law 104-4................................24
XII. Congressional Accountability Act................................24
XIII.Federal Advisory Committee Statement............................24

XIV. Statement of No Earmarks........................................24
 XV. Performance Goals and Objectives................................24
XVI. Changes in Existing Law Made by the Bill, as Reported...........24

                         I. Purpose and Summary

    The Small Business Investment Expansion Act of 2007 is 
aimed at three broad goals. First, the bill will update and 
streamline three programs in the Small Business Investment Act 
of 1958, the Small Business Investment Company (SBIC), New 
Markets Venture Capital (NMVC) and Surety Bond programs. 
Second, the bill will leverage a new investment strategy, angel 
investing, to direct more venture capital toward early stage 
and startup businesses. Finally, the bill will revise SBA rules 
that inhibit the free flow of venture capital investment to 
small businesses.
    To streamline the SBIC program, this legislation will 
simplify the current method of calculating maximum leverage 
caps in favor of a straightforward maximum leverage cap that 
will remain workable for years to come. The bill will also 
revise limitations on aggregate investments to establish 
limitations that are more consistent with industry accepted 
portfolio risk management practices. Additional provisions of 
the bill will increase overall investment in smaller 
enterprises and will also establish incentives to form SBIC 
funds focused on investment in minority and women owned 
businesses. The New Markets Venture Capital program will also 
be updated with provisions that emphasize expanding the program 
and provide additional incentives for investment in small 
manufacturing companies in low-income areas. The final approval 
process for conditionally approved NMVC companies will be 
streamlined by establishing simplified application documents 
and permitting conditionally approved NMVC companies to receive 
funding for operational assistance. The operational assistance 
aspect will also be improved by eliminating the requirement 
that NMVC companies raise matching commitments prior to final 
approval and by simplifying the process for operational grant 
assistance. Finally, appropriations for the NMVC program will 
be authorized in a total amount of $35 million ($30 million to 
support debentures and $5 million for operational assistance 
grants), of which not less than one quarter must be used to 
support NMVC companies that invest primarily in small 
manufacturers.
    The bill will also establish a new Office of Angel 
Investment within the SBA's Investment Division. This office 
will be headed by a Director of Angel Investment and will focus 
on three initiatives to increase equity investment in small 
businesses.
    First, an Angel Investment Program will be established to 
provide eligible angel groups that have ten or more angel 
investors with matching financing leverage. This leverage will 
be used to finance early stage small businesses, with priority 
in financing going to angel groups that invest in small 
businesses controlled by veterans, women, or socially and 
economically disadvantaged small businesses. This leverage will 
be repaid to the SBA with a pro rata share of returns from the 
investment. Appropriations for the purpose of providing 
leverage to angel groups will be authorized in a total amount 
of $50 million.
    Second, a directive will be established within the Office 
of Angel Investment to create a Federal Angel Network. This 
network will be a searchable directory of angel groups 
available on through the SBA's internet website. Additionally, 
the directory could be distributed or used by other networks to 
increase its exposure. The directory will include the names and 
contact information for angel groups and angel investors and 
will provide information about the types of investments each 
group or investor has made. One million dollars will be 
authorized to be appropriated for the establishment of the 
angel network.
    The Angel Investment Program will also include, a grant 
initiative to provide eligible state, federal, and nonprofit 
entities with resources to increase awareness and education 
about angel investing. As a condition of receiving grant 
assistance, however, eligible entities must provide 50 percent 
matching contributions, thus amplifying the benefits of grant 
assistance. This provision will bring more attention to the 
benefits of angel investing and attract more angel investors to 
participate in the program. A total of $4.5 million will be 
authorized for appropriations to carry out this initiative.
    The bill will also address deficiencies in the Surety Bond 
program. The maximum permissible bond amount will be increased 
by half to $3 million. The bill will also strengthen surety 
companies' confidence in the Plan A program by barring the SBA 
from denying indemnity on Plan A guaranties based upon 
information that was provided as part of the guaranty 
application. The SBA will also be required to conduct a study 
on the program's current funding structure and report its 
findings to Congress within 180 days of the bill's enactment. 
The bill will make the Surety Bond program more affordable to 
small businesses and surety companies by providing the SBA with 
authority to contribute funds for the purpose of reducing the 
burden associated with surety and contractor fees on bond 
guarantees.
    Finally, the bill modifies the Small Business Act to 
exclude venture capital investment in SBA's consideration of 
whether a firm is small for the purposes of the Act. The 
provision provides that when calculating the number of 
employees of a small business concern that has venture capital 
investment, the SBA will exclude those employees who work for 
companies affiliated with the venture capital company. The bill 
requires that the venture capital company comply, as 
appropriate, with federal registration requirements for 
investment companies. In addition, the bill prevents a venture 
capital that is controlled by a large business or a venture 
capital company with more than 500 employees from being 
recognized as a venture capital company under this provision.

                II. Background and Need for Legislation

    The Small Business Investment Company (SBIC) program is the 
SBA's primary capital investment program. It is the agency's 
largest and most important in terms of number of investments 
made and program level supported. The SBA does not make direct 
investments in small business concerns through the SBIC 
program, but instead licenses Small Business Investment 
Companies (SBICs) to administer the program.
    SBICs are state-chartered entities organized solely for the 
purpose of providing a source of equity capital for small 
business concerns. The SBA provides funding to qualified SBICs 
with expertise in certain sectors or industries, which then use 
their own funds, plusresources borrowed with an SBA guaranty or 
``leverage,'' to invest in small businesses. Although subject to SBA 
regulation, SBICs remain privately owned and managed and make their own 
decisions about which small businesses investments to make.
    The SBA provides leverage to SBICs in two forms, 
``debentures'' and ``participating securities.'' To obtain 
leverage, SBICs issue debentures or participating securities, 
which are guaranteed by the SBA. Separate pools of either SBA-
guaranteed debentures or participating securities are formed 
and sold to investors through periodic securities offerings. An 
SBIC's business plan and investment strategy are the primary 
factors in determining the type of leverage used by the SBIC.
    Both debentures and participating securities operate on a 
zero-subsidy basis, being funded by fixed commitment and 
drawdown fees as well as by annual fees based on a subsidy rate 
determined at the time of the commitment. The primary 
difference between debentures and participating securities, 
however, is the timing in repayment of leverage. Unlike 
debentures, which have a fixed time for repayment, 
participating securities leverage is repaid only out of profits 
of the SBIC fund, enabling the SBA to share in the profits of a 
participating securities SBIC.
    Debenture SBICs have defined interest obligations to the 
SBA. Thus, they tend to focus on investing in companies that 
are mature enough to make current interest payments on the 
investment. Because interest can accrue on participating 
securities obligations, however, the participating securities 
program is better suited for investment in seed and early stage 
businesses or businesses that either do not have established 
cash flow or that need to use available cash for other 
purposes.
    Legislation is required to address several problems in the 
SBIC program. In 2004, the participating securities program 
ceased issuing new leverage commitments. This was largely the 
result of the Administration's decision to move the program to 
zero-subsidy in 2001, which was fundamentally unsuited to a 
program that functioned on patient equity investment in long-
term assets. As a result, the program was essentially rendered 
insolvent by 2005 when the administration requested no program 
funding for the participating securities portion of the SBIC 
program in its annual budget request. The Administration 
continued to pursue these policies in the FY 2008 budget.
    By eliminating the participating securities program, 
however, the SBA has become completely reliant on debt-based 
programs, which are more suited to providing later stage, 
expansion capital to cash-flow-positive businesses. This has 
particularly hampered investment in early-stage and capital-
intensive small businesses, which lack the resources to service 
heavy debt investment. In 2002 the SBA licensed 41 new SBIC 
funds, more than half of which were for early stage investment. 
By contrast, in 2006 the SBA licensed only 10 new SBIC funds, 
none of which were for investment in early stage businesses. 
These statistics demonstrate the need for some legislative 
initiative to fill the gap for equitable investment in early 
stage businesses.
    Eliminating participating securities has also had a 
negative impact on the SBA's ability to provide capital 
investment for to specific segments of the entrepreneurial 
community. In FY 2005 only 3.40 percent of all financings in 
the SBIC program went to small businesses that were majority 
black owned. Only 1.39 percent of all SBIC investments went to 
small businesses that were Hispanic owned and only 2.37 percent 
of SBIC investments went to women owned businesses. Veteran-
Owned small businesses fared the worst, receiving only 0.52 
percent of all SBIC financings. While these numbers are better 
than the 2 percent of equity capital that minority-owned firms 
receive in the private sector, it still represents a troubling 
performance for a program that was intended to focus on 
providing these groups with investment capital.
    Additionally, the SBIC program's current leverage limits 
have proven difficult to apply, particularly when two SBIC 
funds are under common control. This maximum leverage amount 
varies depending on the amount of the SBIC's private capital, 
but generally will not exceed 300 percent of the SBIC's private 
capital up to $15 million, 200 percent of the amount of private 
capital between $15 and $30 million, and 100 percent of the 
amount of private capital between $30 and $75 million. All of 
these figures are linked to an inflation index and adjust 
annually. If this program is to have continued success, 
legislation will be necessary to simplify the leverage cap 
rules and relax restrictions on the amount of leverage 
available to SBICs that are under common control.
    The New Markets Venture Capital (NMVC) program was 
established in December of 2000 to address the unmet equity 
needs of low-income communities. The NMVC program was 
administered under the purview of the SBA and was modeled after 
the SBA's Small Business Investment Company (SBIC) program. A 
crucial difference between NMVC and SBIC, however, was that the 
NMVC program was established with the specific purpose of 
providing economic development in low-income (LI) areas.
    Like the SBIC program, the NMVC program operates as a 
public-private partnership between the SBA and licensed New 
Markets Venture Capital Companies (NMVCCs). The SBA provides 
funding to NMVCCs, which then use their own funds, plus 
leverage borrowed with an SBA guaranty, to make investments in 
smaller enterprises defined by SBA regulations that are located 
in LI geographic areas. NMVCCs remain privately owned and 
managed and make their own decisions about which small 
businesses investments to make.
    One crucial advantage that NMVCCs enjoy over SBICs is the 
addition of SBA administered operational assistance grants 
(OA). The SBA provides matching grant assistance for the 
resources that NMVCCs raise to provide marketing, management 
and other operational assistance to the businesses in which it 
invests.
    In principle, the program was intended to permit NMVC 
companies to use capital raised with New Markets Tax Credit 
allocations to meet the NMVC private capital match. In 
practice, however, this was not possible because the first NMTC 
allocations were made after NMVC private capital matches were 
due (e.g. after September 14, 2001) and because the definitions 
of ``low income geographic areas'' for the two programs 
weredifferent. This disparity between the two definitions prevented 
NMVC companies from using NMTC allocations as matching funds, thus 
requiring these companies to rely entirely upon privately raised funds 
for this purpose. Given the economic conditions under which they 
operate, however, these companies could not find sources of funding. 
For the program to function as originally intended, the definitions for 
low income geographic areas must be aligned between the NMTC and NMVC 
program.
    Legislation is also required to achieve the program's 
initial purpose of providing equity capital to small businesses 
in LI areas. In 2001 Congress appropriated $150 million of 
debenture guaranty authority and $30 million for Operational 
Assistance (OA) grants. Beginning in 2003, however, the 
administration eliminated funding for the NMVC program. In FY 
2008, and consistent with its previous budget request, the 
administration has not requested any funding for this program. 
As a result, the SBA has been unable to bring new NMVC 
companies into the program, limiting access to the program for 
small businesses in several areas throughout the country.
    To date, only six NMVC companies are participating in the 
program and the FY 2008 budget allocates no resources to bring 
more companies into the program. If the NMVC program is to meet 
its full potential to improve economic development in low 
income communities, legislation must authorize additional 
appropriations for the program and new initiatives must be 
established within the program to ensure that the SBA resumes 
licensing new NMVC companies throughout the nation.
    Legislation is also necessary to address the 
Administration's failure to leverage the program's inherent 
ability to provide investment capital to industries that have 
particular difficulty in acquiring equity capital. 
Historically, no particular style or type of business has 
attracted NMVC investment. Among existing NMVC Companies, there 
are multiple fund types and investment styles. These factors 
reflect a primary benefit of the NMVC program. The additional 
investment capital provided by the SBA facilitates smaller 
transactions that are more suitable to investments in smaller 
businesses and has the added benefit of making NMVC companies 
less reliant on public market sentiment compared to the 
investments made by traditional venture capital firms. This is 
particularly important to facilitating investment in small 
businesses located in LI areas. As a result, NMVC investments 
often occur in industries and geographic areas that have 
historically had difficulty attracting private venture capital. 
This could provide a particular benefit to LI communities that 
have experienced a loss of their small manufacturing and 
industrial economic base.
    Despite the success of the SBIC and NMVC programs, the need 
for early-stage startup capital for small businesses has 
largely gone unmet by the SBA's existing investment programs, 
particularly with the elimination of funding for the SBIC 
Participating Securities program. Additionally, every 
investment program currently administered by the SBA provides 
small businesses with debt-based financing, which is more 
appropriate for investment in later-stage businesses that have 
the ability to service debt. As a result, legislation is needed 
to not only fill the gap for early stage business investment, 
but also provide small businesses with some sort of equity type 
financing.
    Angel investment is a rapidly growing investment strategy 
that focuses specifically on providing early-stage small 
business with equity financing. This investment strategy refers 
to high net worth individuals who invest in and support start-
up companies in their early stages of growth. Angels typically 
invest their own funds, unlike venture capitalists, who manage 
the pooled money of others in a professionally-managed fund.
    Angel investors are often retired business owners or 
executives, and thus often provide valuable management advice 
and important contacts to the businesses in which they invest. 
This commitment of time to mentor and coach entrepreneurs and 
serve on the boards of portfolio companies is naturally suited 
to investment in small businesses and mirrors the type of 
operational assistance often found in SBA programs.
    Angel investments typically range from $100,000 to over $1 
million dollars. In this respect, angel investors fill the gap 
that small business start-ups often experience in meeting their 
needs for equity capital, which are often met with equity 
raised by friends and family (under $100,000) and funds created 
by conventional venture capital (VC) firms ($1 million and 
above). Angel investors will often invest in formal or informal 
groups, each investor thus contributing about $100,000, thereby 
limiting their individual risk exposure.
    Angels continue to be the largest source of seed and start-
up capital, with 46% of 2006 angel investments in the seed and 
start-up stage. While angels continue to represent the largest 
source of seed and start-up capital, market conditions and the 
capital gap in the post seed investing stage are requiring 
angels to engage in more later-stage investments. New, first 
sequence, investments represent 63% of 2006 angel activity, 
indicating that some of this post seed investing is in new 
deals.
    Angel investment has also contributed to a rise of women 
angel investors and women entrepreneurs. In 2006 women angels 
represented over 13 percent of the angel market. Women-owned 
ventures accounted for nearly 13 percent of the entrepreneurs 
that are seeking angel capital and over 21 percent of these 
women entrepreneurs received angel investment in 2006. 
Additionally, minority angels accounted for over three percent 
of the angel population and minority-owned firms represented 
nearly 7 percent of the entrepreneurs that presented their 
business concept to angels.
    According to SBA studies, the total unmet need for early-
stage equity financing for small businesses is about $60 
billion annually. Additionally, partly on the basis of the 
results of several focus groups that it conducted, the SBA 
identified that the greatest equity capital financing need of 
small businesses is financing in the amounts of $250,000 to $5 
million. Because of their focus on early stage investing in 
amounts between $100 thousand to $1 million, angel investing 
has the potential to make a significant impact on the unmet 
capital needs of small businesses. These investors, however, 
are currently poorly organized and may be unaware of the 
benefits of co-investing with angel groups or angel networks. 
As a result, legislation is needed to increase public awareness 
of angel investing, help angel investors to organize into angel 
groups, and help these groups maintain their focus on 
investment in startup small businesses. The Committee 
believesthat these goals can be achieved with an Angel Investment 
Program that focuses on the three traditional strengths of angel 
investing: providing small business with equity type investment, 
establishing networks of angel groups and angel investors, and 
increasing awareness of angel investing.
    The SBA has also been limited by the rules that it applies 
to venture capital companies that invest in small businesses. 
Venture capital refers to money provided by professionals who 
invest alongside management in young, rapidly growing companies 
that have the potential to develop into significant economic 
contributors. Venture capital is an important source of equity 
for start-up companies. Unlike traditional debt-based lenders 
that secure the amount they lend with collateral, venture 
firms' investments are backed solely by the strength of the 
ideas they invest in. A venture capital firm only earns a 
return on its investment if its investment is highly 
profitable.
    Seeking high-risk investment opportunities because they 
yield the highest reward, investment firms expect to be able to 
sell their equity in the business in which they invest within 
five to ten years. Venture capitalists know that not all their 
investments will pay-off. The failure rate of investments can 
be high--anywhere from 20 to 90 percent of the enterprises 
funded may fail to return the invested capital. As a result, 
venture capitalists must invest in dozens of small enterprises 
in the hope that a handful will prove successful.
    Under the SBA's current rules, however, all investments 
made by a single venture capital company are considered 
affiliated with each other, irrespective of the size of the 
small business that receives the investment or the size of the 
venture capital company itself. When added together, the total 
number of employees often exceeds 500, making each business 
unable to be defined as a small business concern by SBA. 
Meeting the requirements of this definition can be the 
difference for small firms' participation in a wide-variety of 
government programs, including those involved in cutting-edge 
defense and health research. The result of this rule is that 
investment by all but the smallest of venture capital companies 
is deterred. The common ownership affiliation limitation put 
forth by the SBA represents a lack of understanding about the 
venture capital industry practices. The SBA's rule is also 
inconsistent with industry practices, other SBA programs, and 
SBA's own statute. For instance, this standard exists even 
though Small Business Investment Companies, which are 
themselves venture capital companies, are exempt from such 
affiliation standards.\1\
---------------------------------------------------------------------------
    \1\13 CFR 121,103(b)(1).
---------------------------------------------------------------------------
    In addition, SBA's size standard definition specifies that 
affiliation occurs when one entity controls or has the power to 
control another entity.\2\ 13 CFR 121.103(c) states that ``[a] 
person that owns, or has power to control, 50 percent more of a 
concern's voting stock, or block of voting stock which is large 
compared to other outstanding blocks of voting stock, controls 
or has the power to control the concern.'' For most instances, 
this provision has the effect of deeming venture capital 
companies to control or have the power to control the concern 
that they are invested in. This in turn results in the SBA 
determining that portfolio companies are affiliated with each 
other through the common affiliation of the venture capital 
company.
---------------------------------------------------------------------------
    \2\13 CFR 121,103(a).
---------------------------------------------------------------------------
    Consequently, legislation is necessary to revise the SBA's 
application of affiliation rules to small venture capital 
companies. While venture capital companies invest in multiple 
business concerns, the affiliation that exists among these 
portfolio companies is non-existent. Portfolio companies, while 
receiving investment from the same venture capital company, do 
not have any common organizational, management, or ownership 
structures. Portfolio companies are separate entities and 
cannot and do not exercise control over each other. With regard 
to the venture capital company, portfolio companies receive 
investment and management assistance, often in the form of 
director appointments. However, venture capital companies do 
control portfolio companies that they invest in, rather, they 
rely on existing management to guide and build the business 
concerns' profitability. Venture capital companies' ultimate 
goal is to sell their in the business concern, typically within 
five to ten years of initial investment.
    As a result, the legislation provides that when both the 
venture capital company and the business receiving investment 
are small and have less than 500 employees, and when the 
venture capital company is neither controlled by a large 
company nor under foreign control, the SBA should not aggregate 
the whole of the venture capital company's investments for 
purposes of defining affiliation. In order to allay unfounded 
fears about the intent of venture capital companies, safeguards 
have been included to ensure that large companies cannot 
control venture capital companies, that the venture capital 
company has less than 500 employees, and is located in the 
United States.
    Legislation is also necessary to strengthen the SBA's 
Surety Bond Guaranty (SBG) program. The SBG program was 
established to assist small businesses that would otherwise be 
able to compete for construction contracts because they failed 
to meet the criteria necessary to obtain a surety bond. To 
resolve this problem, the SBG program provides the SBA with 
authority to guarantee bid, performance, and payment bonds for 
individual contracts of $2 million or less. In this manner, the 
SBA provides sureties an incentive to provide bonding for 
eligible contractors, thereby strengthening contractors' 
ability to obtain bonding and greater access to contracting 
opportunities.
    The SBA Office of Surety Guarantees (OSG) administers the 
SBG Program as a public-private partnership between the federal 
government and the surety industry. The SBG program consists of 
the Prior Approval program (Plan A) and the Preferred Surety 
Bond (PSB or Plan B) program.
    Under the Plan A, an independent bonding agent reviews the 
contractor's application package and recommends it to the 
surety company for approval. If the surety company agrees to 
issue a bond with the SBA guarantee, the package is forwarded 
to the appropriate SBA/SBG Area Office and evaluated by SBG 
personnel. The SBA must approve each bond guarantee 
individually, based on information submitted by contractor and 
the surety. If the SBA determines that the applicant is 
eligible, the SBA issues a bond guarantee to the surety 
company. The surety then issues the bond to the contractor.The 
SBA's guarantee agreement is with the surety company, not with the 
small business contractor. Any surety company certified by the U.S. 
Treasury to issue bonds may apply for participation in the Prior 
Approval program.
    When Plan A was established, however, many traditional 
surety companies chose not to participate, often because their 
business focus was on lower risk, larger contractors, or 
because the administrative costs of submitting each bond for 
prior approval of a guaranty were significant. To encourage 
more sureties to participate, the SBA promulgated the Preferred 
Surety Bond Program (Plan B).
    Plan B addressed the concerns of the non-SBA sureties in a 
number of ways. First, the program provided that if a surety 
was approved by the SBA for Plan B, it would be granted a 
dollar value of guaranties from the SBA that would be 
automatically valid, without prior approval of each bond. In 
exchange for this reduction of paperwork, however, the sureties 
would receive only a 70 percent guaranty of loss on each bond 
rather than the 80 or 90 percent guaranty associated with the 
Plan A program.
    From the perspective of surety companies, the burden 
associated with the Plan A program has always been justified by 
the fact that Plan A bonds were reviewed and approved by the 
SBA prior to the surety issuing the bond. Because of this, Plan 
A bonds carried the benefits of a speedier guaranty payment in 
the event that the contract was breached and the bond was 
executed. Recently, however, many surety companies have 
complained of the SBA engaging in additional reviews of Plan A 
bonds to unravel its guaranty after the bond was approved and 
issued by the surety. This presents a serious problem for 
sureties because their bond cannot be canceled after having 
been issued and once the SBA has refused indemnification, 
sureties bear the entire cost of default.
    At the same time that the SBA has faced increasing 
unpopularity for participation in the Plan A program, Plan B 
has also become less attractive to surety companies. The 
primary disincentive for this program has largely been 
attributed to limitations on the rates that surety companies 
have been permitted to charge and to the steadily rising cost 
of fees to participate in the program. With fewer surety 
companies participating in the SBG program, small businesses 
have had increasing difficulty finding sources of surety bonds.
    As a result, legislation is needed to resolve the 
disincentives that have steadily driven surety companies from 
the Plan A and Plan B portions of the program. The SBA's 
ability to refuse indemnification based upon information that 
was provided as part of the guaranty application for a Plan A 
bond should be limited. Additionally, the SBA must have 
statutory authority to raise premium rates under the Plan B 
program and reduce the cost of participation fees as necessary.

                             III. Hearings

    In the 110th Congress, the Committee on Small Business held 
a hearing to examine the SBA's investment programs and the role 
of venture capital in small business investment on June 21, 
2007. The Committee subsequently held a hearing on legislative 
proposals to address issues raised in the June 21, 2007 hearing 
and expand small business investment on September 6, 2007.

                      IV. Committee Consideration

    The Committee on Small Business met in open session on 
September 20, 2007, and ordered H.R. 3567 reported to the House 
by a voice vote.

                           V. Committee Votes

    Clause 3(b) of rule XIII of the Rules of the House of 
Representatives requires the Committee to list the record votes 
on the motion to report legislation and amendments thereto. A 
motion by Ms. Velazquez to report the bill, without amendment, 
to the House with a favorable recommendation was AGREED to by 
voice vote.

              VI. Section-by-Section Analysis of H.R. 3567


                         TITLE I. SBIC PROGRAM

Section 1. Simplified maximum leverage limits

    Currently, the leverage caps for SBIC companies vary 
depending on the amount of the SBIC's private capital, but 
effectively will not exceed 300 percent of the SBIC's private 
capital up to $15 million, 200 percent of the amount of private 
capital between $15 and $30 million, and 100 percent of the 
amount of private capital between $30 and $75 million. All of 
these figures are linked to an inflation index and adjust 
annually.
    It is common for SBICs with good records to secure a second 
or even third SBIC license (supported by new private capital) 
so that they can continue to operate with uninterrupted 
investment before winding up all affairs of previous funds and 
repaying all leverage. The fact that the leverage cap applies 
to the whole family of funds, however, often makes it 
impossible for a successful SBIC to operate a second or third 
fund due to lack of available leverage because of the leverage 
cap, not because of any increased risk to SBA based on poor 
financial performance.
    This provision is intended to simplify the leverage cap 
rules to a single formula, regardless of the amount of private 
capital that the SBIC has, with a maximum leverage cap of $150 
million. Additionally, this provision will make ``transition'' 
leverage available for SBIC companies under common control so 
that successful SBICs may operate a second or third fund while 
still maintaining safeguards against increased risk to the SBA 
and a maximum leverage cap for SBICs under common control.
    These changes are not intended to have retroactive effect. 
These would be prospective changes only, intended only for SBIC 
firms licensed in the fiscal year following enactment of this 
provision. Additionally, these changes are not intended to 
serve as anentitlement for SBIC firms to receive the maximum 
leverage limit or to receive multiple licenses. The Committee fully 
intends for the SBA's to exercise the same discretion as it currently 
has in deciding the amount of leverage any SBIC firm may receive.

Section 2. Increased investments in women-owned and socially 
        disadvantaged small businesses

    Currently, there are no special incentives to encourage 
SBICs to invest in women-owned and minority-owned small 
businesses. Additionally, the incentives for investments in 
low-income areas are confusing and difficult to administer. 
This section will establish a simple incentive to form funds 
focused on investment in minority, veteran, and women owned 
businesses by permitting such funds to operate with increased 
maximum leverage limits. This section is not intended to 
displace existing low-and-moderate income debentures or other 
initiatives aimed at encouraging investment in low income 
areas, but should be a compliment to these efforts at 
increasing investment in women, veteran, and minority owned 
small businesses.

Section 3. Increased investments in smaller enterprises

    Currently, SBICs that use of leverage up to $90 million 
must make no less than 20 percent of its investments in a 
subset of qualified small businesses defined as ``smaller 
enterprises.'' SBICs that use more than $90 million in leverage 
must make 100 percent of its investments with leverage above 
$90 million in ``smaller enterprises.'' As the leverage cap 
continues to grow this provision creates record keeping 
problems and imposes additional ``tracking'' workloads on the 
SBA and the affected SBICs.
    This provision will simplify the requirements for 
investment in smaller enterprises and is intended to increase 
overall investment in smaller enterprises through the SBIC 
program. This section will establish a flat 25 percent 
``smaller enterprises'' requirement for all SBICs, regardless 
of whether they have more than $90 million in leverage. This is 
intended to simplify the administration and increase the 
percentage of all investments that must be in smaller 
enterprises.

Section 4. Simplified aggregate investment limitations

    The term ``Aggregate Limitations'' refers to the maximum 
amount of capital any leveraged SBIC may invest in a single 
small business or smaller enterprise. The purpose of the 
limitation is to ensure that leveraged SBICs have diversified 
portfolios, thus mitigating investment risk for both private 
investors and the government. Section 306(a) of the Small 
Business Investment Act of 1958 provides that no leveraged SBIC 
may make an investment in a small business or smaller 
enterprise that exceeds an amount equal to 20% of the SBIC's 
private capital.
    This aggregate limitation creates a problem because 
different leveraged SBICs plan for different ratios of leverage 
to private capital in their formation process. The projected 
ratios most often approved in the licensing process are between 
1:1 and 2:1 even though the SBIA provides for as much as 3:1 in 
some cases. The application of a maximum investment amount 
based on a percentage of private capital versus a percentage of 
total capital to be managed produces inconsistent results 
unrelated to risk and prevents many SBICs from supporting small 
businesses, particularly larger and more well-established small 
businesses.
    This section is intended to revise the current limit on the 
amount that can be invested in any one portfolio company to 
standards that are more consistent with industry accepted 
portfolio risk management practices. This change would apply 
the portfolio management rule (``no more than 10% should be 
invested in any one company'') that is the accepted norm in the 
non-SBIC venture capital world and would ensure that SBIC 
management teams had both the financial and time resources 
required to help their portfolio companies achieve their growth 
goals.
    It is the Committee's understanding that very few SBIC 
firms are licensed with business plans to operate with a third 
tier of leverage, and virtually no firms set forth plans to 
operate a third tier in the business plan approved by the 
Administration at the time the company's license was granted. 
Consequently, these changes are not intended to have 
retroactive effect. These would be prospective changes only, 
intended only for SBIC firms licensed in the fiscal year 
following enactment of this provision.

             TITLE II. NEW MARKETS VENTURE CAPITAL PROGRAM

Section 1. Expansion of new markets venture capital program

    To date, only six NMVC companies are participating in the 
New Markets program and the SBA's FY 2008 budget allocates no 
resources to bring more companies into the program.
    This section is intended to establish mandatory language in 
the Small Business Investment Act of 1958 directing the SBA 
Administrator to actively engage in affirmative actions to 
expand the number of NMVC companies and increase the number of 
investments made by current and new NMVC companies.
    This section would also require the Administrator to 
perform a study on their success in expanding the NMVC program 
and report his progress in expanding the program no later than 
one year after the enactment of this provision.

Section 2. Improved nationwide distribution

    Currently, small business investment is concentrated in 
only a handful of geographic areas, which are primarily located 
along the East and West coasts of the U.S. This section is 
intended to direct the SBA Administrator to ensure that there 
is a uniform distribution of NMVC companies nationwide to the 
maximum extent possible. In licensing new NMVC companies, this 
section intends the Administrator to avoid allocating his 
limited program resources to license newNMVC companies where 
existing NMVC companies already exist and can meet the demand for small 
business investment in low income areas.

Section 3. Increased investment in small manufacturers

    Many low income communities throughout the nation have 
suffered as a result of a loss of their small manufacturing and 
industrial economic base. The NMVC company has an inherent 
ability to provide investment capital to these communities 
because the additional investment capital provided by the SBA 
facilitates smaller transactions that are more suitable to 
investments in low income communities and makes NMVC companies 
less reliant on public market sentiment compared to the 
investments made by traditional venture capital firms. 
Consequently, NMVC investments can flow to industries like 
small manufacturing, which has recently suffered particular 
difficulty in attracting private venture capital.
    This section will reduce the capital requirements required 
for NMVC companies primarily engaged in investment in small 
manufacturers, making it easier for these companies to secure 
final approval from the SBA. It is expected that the SBA will 
facilitate the licensing of these NMVC companies, particularly 
in low income communities that have lost a significant portion 
of their small manufacturing industry.

Section 4. Updating definition of low-income geographic area

    This section would amend the current definition of ``low-
income geographic area'' by simply referring the definition 
directly to the definition of a ``low-income community'' in the 
Internal Revenue Code.
    The Committee believes that the NMVC program's current 
definition of ``low income geographic area'' creates a 
significant barrier to the program's success. As long as the 
definitions between the NMVC program and the NMTC program are 
different, NMVC companies will have difficulty in operating in 
low income communities. This result is inconsistent with the 
program's original intent.
    This section is intended to establish parity between the 
definitions of the eligible NMVC investments and NMTC 
allocations, thereby bringing these two programs into 
alignment. This change will help the program operate as it was 
originally intended and will permit investment firms to use 
capital raised with New Markets Tax Credit allocations to meet 
the program's requirements for matching private capital. 
Additionally, this approach ensures that the two definitions 
will remain aligned even in the event that eligibility 
conditions for tax credit allocations are changed at a future 
date.

Section 5. Study on availability of equity capital

    This Section also requires the Chief Counsel for Advocacy 
of the SBA to conduct a study on the availability of equity 
capital in low-income urban and rural areas and report its 
findings to Congress within 90 days of the study's completion.

Section 6. Expanding operational assistance to conditionally approved 
        companies

    This section will permit New Markets Venture Capital 
Companies that have received conditional approval from the SBA 
under section 354 to receive early grant assistance up to 
$50,000 at the point of initial designation. In the event that 
a conditionally approved NMVC company fails to win final 
approval, however, the grant must be repaid to the SBA. If the 
company wins final approval, however, amount of early grant 
assistance will be deducted from the total amount of 
operational grant assistance the company receives. 
Additionally, this section provides NMVC companies with two 
full years to raise private capital and matching funds for 
operational assistance. Currently, these companies have up to 
two years under current law.
    These changes are intended to remedy two longstanding 
problems in the NMVC program. Under existing statutes, NMVC 
companies could not receive operational assistance grants until 
after they received final approval. This restriction severely 
limited the ability of NMVC companies to provide this 
assistance to their investment concerns, which is often vital 
to ensuring the success of these businesses and the security of 
their investment. This change is intended to provide very 
limited OA grants prior to final approval.
    These changes are also intended to remedy the problem that 
many NMVC companies experienced in reaching final approval. For 
many NMVC companies, raising the private capital and matching 
OA funds was the greatest barrier to winning final approval. By 
extending the timeframe for matching funds to two full years, 
these companies should have adequate time to raise private 
capital that is integral to the NMVC program.

Section 7. Streamlined application for new markets venture capital 
        program

    This section will require the SBA to develop a set of 
documents that reduce the cost and burden for New Markets 
Venture Capital companies applying for final approval under the 
program. These documents must be created within 60 days after 
the enactment of the bill.
    This section is intended to simplify the application 
process for new NMVC companies, enabling the SBA to license 
more companies and expand the program. This section is also 
intended to operate in conjunction with the expansion and 
nationwide distribution initiatives established by this 
legislation.

Section 8. Elimination of matching requirement

    This section will eliminate the minimum amount of matching 
commitments for operational assistance that an NMVC company 
must raise before receiving final approval. Currently, this 
minimum is set at not less than 30 percent of the total amount 
of private capital or binding capital commitments the NMVC 
company has raised.
    The requirement for matching OA commitments proved to be 
the greatest barrier to licensing new NMVC companies. The 
required matching commitments were simply too high for many 
NMVC companies to meet, particularly given the economic 
conditions in the communities in which they operate. By 
eliminating this requirement, this section is intended to 
enable many more NMVC companies to participate in the program 
and should streamline the process to winning final approval 
from the SBA.

Section 9. Simplified formula for operational assistance grants

    This section will revise the amount of operational 
assistance grants a NMVC company may receive. The new amounts 
will be equal to either 10 percent of the private resources the 
company has raised for operational assistance, or $1 million, 
whichever is less.
    This section is intended to significantly simplify the 
formula for determining the amount of OA grants a NMVC company 
may receive, enabling companies to receive their OA allocations 
more quickly than they currently do and providing these 
companies with greater certainty as to the amount of OA 
resources that they will have.

Section 10. Authorization of appropriations and dedication to small 
        manufacturing

    This section reauthorizes appropriations in a total amount 
of $30 million to fund debenture guarantees and $5 million for 
operational assistance grants for fiscal years 2008, 2009, and 
2010. Additionally, this section requires that at least a 
quarter of these authorized funds be used for the purpose of 
entering into participation agreements and providing 
operational assistance to NMVC companies that invest primarily 
in small manufacturing business concerns.
    This section is intended to reestablish funding for the 
NMVC companies and, in conjunction with the program expansion 
and licensing initiatives of this legislation would require the 
SBA to resume licensing new NMVC companies and providing 
additional leverage commitments to existing NMVC companies. The 
initiative for small manufacturing is specifically intended to 
increase the number of NMVC companies that primarily invest in 
small manufacturers. This section should not, however, present 
an additional barrier for NMVC companies that wish to invest in 
low income areas or that do not wish to invest in small 
manufacturers.

                  TITLE III. ANGEL INVESTMENT PROGRAM

Establishment of Angel Investment Program

    This legislation will establish an Office of Angel 
Investment within the Investment Division of the SBA. This 
office will be headed by a Director of Angel Investment, who 
will be responsible for administering the Angel Finance Program 
and Federal Angel Network established by the bill.
    As with other SBA programs, the Angel Finance Program will 
function as a public-private partnership between the SBA and 
privately organized ``angel groups.'' Angel groups will consist 
of ten or more accredited investors (as that term is defined 
under Rule 501 of Regulation D of the Securities and Exchange 
Act of 1933, 17 C.F.R. Part 230 et seq.). Alternately, an 
individual may qualify as an angel investor on the basis of 
such factors as financial sophistication, income, net worth, 
knowledge, and experience in financial matters, or amount of 
assets under management. Angel groups should have demonstrated 
experience in making investments in local small business 
concerns and must have established protocols for performing due 
diligence in its investments prior to making investments. 
Additionally, these angel groups should have an established 
code of ethics and policies and procedures to avoid conflicts 
of interest between members of the group and the companies in 
which they invest.
    These angel groups will be licensed by the SBA specifically 
for the purpose of making investments early stage domestic 
small business concerns located in the same community as the 
angel group. In exchange for complying with the program's 
licensing and investment requirements, angel groups will 
receive up to $2 million in leverage financing from the SBA 
that will be co-invested with the angel group's own funds. SBA 
leverage should only be used to invest in small business 
concerns that have been in existence for less than 5 years and 
that have fewer than 75 employees. Additionally, angel groups 
should not invest SBA leverage abroad, but should use this 
leverage to invest in local small business concerns that are 
located within their own community. Finally in selecting angel 
groups to receive leverage, the SBA should, to the maximum 
extent possible, avoid licensing new angel groups where a 
strong angel network already exists and should give priority 
consideration to angel groups that invest in small businesses 
owned by veterans, minorities, and women.
    Leverage financing that angel groups receive must be 
invested in a local small business concern with an equal or 
greater amount of private investment capital raised by the 
angel group. SBA leverage should function as a true sidecar 
investment, and should mirror the private matching investment 
vehicle. Leverage will be repaid from the pro rata share of any 
returns on the private matching investment, whether positive or 
negative, but relative to the amount of leverage that the angel 
group receives on their investments. Repayment is not premised 
upon a timeframe, but is instead dependent upon the 
distribution of any return, whether positive or negative. 
Additionally, SBA leverage should maintain any preemptive 
rights in the event that additional ownership interests in the 
investment enterprise are issued.
    As leverage is repaid, amounts collected by the SBA will be 
deposited in an Angel Investment Fund at the U.S. Treasury. The 
Angel Investment Fund will serve as a revolving source of 
leverage financing for the Angel Finance Program to operate 
without regard to fiscal year limitations.
    The legislation will also create Federal Angel Network 
within the Office of Angel Investment that will collect and 
maintain information on local and regional angelinvestors and 
angel groups. This information will include a list of names and 
addresses of angel groups and angel investors, information about the 
types of investments each angel investor or angel group has made, and 
information on other public and private resources on angel investors 
and angel groups. This information will be maintained in a regularly 
updated searchable database available through the SBA's database. 
Additionally, information contained within the database will be readily 
available for use and distribution by other angel networks and groups, 
thereby augmenting the exposure of the Federal Angel Network. Angel 
investors and angel groups will have the option of excluding their 
information from the network.
    Finally, the Administrator will also carry out a grant 
program to make grants to entities that develop new or existing 
angel groups or to increase awareness and education about angel 
investing. Grant recipients could include units of state or 
local governments, nonprofit organizations, or Small Business 
Development Centers or Women Business Centers established under 
the Small Business Act. To receive grant assistance, however, 
eligible entities must raise matching funds equal to half of 
the grant amount, thus strengthening their commitment and 
amplifying the grant assistance itself. As with SBA leverage, 
the grants administered under this section are intended to go 
to entities located in areas where a strong network of angel 
groups currently does not exist, but where there are sufficient 
numbers of potential angel investors.

                     TITLE IV. SURETY BOND PROGRAM

Section 1. Study and report

    This section requires that within 180 days of enactment, 
the Administrator must conduct a study of the program's current 
funding structure and report its results to Congress. This 
study should include:
          (1) An assessment of whether the program's current 
        funding framework and program fees are retarding the 
        program's growth;
          (2) An assessment of whether surety companies and 
        small business concerns could benefit from an 
        alternative funding structure;
          (3) An assessment of whether permissible premium 
        rates fore surety companies participating in the 
        program should be placed on parity with the rates 
        authorized by appropriate state insurance regulators 
        and how such a change would affect the program under 
        the current funding framework.
    This section is intended to examine the Surety Bond 
programs current funding structure as a revolving fund program. 
The findings in this study would serve as the basis for 
additional legislative action that could reform the funding 
structure for the program.

Section 2. Preferred surety bond program

    This provision will establish explicit statutory authority 
for a preferred surety bond program that would essentially 
mirror the preferred lender program under section 7(a) of the 
Small Business Act. Under the PSB program, the Administrator 
shall carry out a program under which a written agreement 
between the surety and the Administration delegates to the 
surety complete authority to issue, monitor, and service bonds 
subject to guaranty from the Administration without obtaining 
the prior specific approval of the Administration. The 
Administration may recertify PSB sureties for an additional 
term not to exceed two years. Prior to recertification, the 
Administration shall review a surety's bonds, policies, and 
procedures for compliance with relevant rules and regulations. 
Bonds made under this program shall carry a 70% guaranty.
    This section should not make any substantive changes to the 
existing preferred surety bond program, but is intended to 
establish more discrete statutory authority for the program 
that will simplify the process for future revisions or changes 
to the program.

Section 3. Denial of liability

    For bonds made or executed with the Administration's prior 
approval, the Administration shall not deny liability to a 
surety based upon information that was provided as part of the 
guaranty application.
    This section is intended to prevent the problem of the SBA 
denying indemnification for guarantees issued with prior 
approval from the SBA if the SBA's basis for denying 
indemnification could have been resolved with a proper review 
of information contained in the guaranty application.

Section 4. Increasing the bond threshold

    This section will increase the maximum permissible bond 
amount from $2 million to $3 million. This is intended to 
permit bond companies to issue larger bonds with SBA 
guarantees, which should encourage greater participation in the 
program by both small businesses and bond companies.

Section 5. Fees

    This section will permit the Administrator to make 
contributions for the purpose of reducing fees, if and when an 
appropriation is made available for that purpose. The Committee 
intends for this provision to make the surety bond program more 
affordable to small businesses and surety companies that 
participate in the program by providing the SBA with authority 
to contribute funds for the purpose of reducing the burden 
associated with bonding fees. The Committee does not believe 
that the stability that the program currently enjoys will be 
disturbed by this change. The administration will continue to 
asses and collect the fees necessary to operate the program 
without and will continue to calculate the budget estimates and 
assumptions for the fiscal year just as it currently does to 
operate the program. The Committee foresees no circumstance in 
which the program would cease operation or be short of 
necessary program level to operate at full capacity.
    This section simply provides the administration with the 
authority to contribute funds to reduce the fee burden 
associated bond guarantees if and when an appropriation is made 
available for that purpose. In years when no appropriation is 
made available, the Committee expects the program to function 
with the stability that currently exists. In years when a 
subsidy is made available, small businesses and surety 
companies will enjoy the benefits of reduced fee burdens.

                  TITLE V. VENTURE CAPITAL INVESTMENT

Section 1. Determining whether business concern is independently owned 
        and operated

    This section specifies that the SBA shall not consider 
venture capital investment in determining whether or not a 
company is defined as a small business. The provision provides 
that when calculating the number of employees of a small 
business concern that has venture capital investment, the SBA 
will exclude those employees who work for companies affiliated 
with the venture capital company. The bill requires that the 
venture capital company comply, as appropriate, with federal 
registration requirements for investment companies. In 
addition, the bill prevents a venture capital that is 
controlled by a large business or a venture capital company 
with more than 500 employees from being recognized as a venture 
capital company under this provision. The legislation also 
prevents concerns not located in the United States that control 
small business concerns to be able to take advantage of this 
definition.
    This section is intended to remove the current disincentive 
that exists for small businesses to seek and accept venture 
capital financing. Under the SBA's current rules, all 
investments made by a single venture capital company are 
considered affiliated with each other, irrespective of the size 
of the small business that receives the investment or the size 
of the venture capital company itself. When added together, the 
total number of employees often exceeds 500, making each 
business unable to qualify as a small business concern under 
the SBA's size standards. Because several federal programs are 
tied to this qualification, small businesses that receive 
venture capital financing are frequently disqualified from 
participating in a wide-variety of government programs that 
provide substantial benefits to small benefits.
    The Committee does not intend for this section to provide a 
mechanism for large businesses to benefit from small business 
opportunities, as both the venture capital company and the 
small business must themselves qualify as small businesses in 
their own capacity and cannot be controlled by a large 
business.

                         TITLE VI. REGULATIONS

    This section requires the SBA to promulgate revisions 
implementing necessary regulatory changes within 90 days.

             VII. Congressional Budget Office Cost Estimate

                                                September 25, 2007.
Hon. Nydia M. Velazquez,
Chairwoman, Committee on Small Business,
House of Representatives, Washington, DC.
    Dear Madam Chairwoman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 3567, the Small 
Business Investment Expansion Act of 2007.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Susan Willie.
            Sincerely,
                                                   Peter R. Orszag.
    Enclosure.

H.R. 3567--Small Business Expansion Act of 2007

    Summary: H.R. 3567 would reauthorize the Small Business 
Administration's (SBA's) New Markets Venture Capital Program 
(NMVC), amend its surety guarantee program, and change certain 
investment limits imposed on SBA's small business investment 
program. The bill also would establish the Angel Investment 
Program to provide venture capital to certain groups working 
with small businesses in their communities. Finally, the SBA 
would be required to produce a number of reports for the 
Congress about the effectiveness of the program changes 
authorized by the bill.
    Based on information from SBA, CBO estimates that 
implementing H.R. 3567 would cost $8 million in 2008 and $102 
million over the 2008-2012 period, assuming appropriation of 
the necessary and specified amounts. Enacting H.R. 3567 would 
not affect direct spending or revenues.
    H.R. 3567 contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act (UMRA).
    Estimated cost to the Federal Government: The estimated 
budgetary impact of H.R. 3567 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--
                                 ---------------------------------------
                                   2008    2009    2010    2011    2012
------------------------------------------------------------------------
              CHANGES IN SPENDING SUBJECT TO APPROPRIATION

New Markets Venture Capital
 Program:
    Loan Guarantees:
        Estimated Authorization        2       2       2       0       0
         Level..................
        Estimated Outlays.......       1       2       2       1       0
    Grants:
        Authorization Level.....       2       2       1       0       0
        Estimated Outlays.......       0       1       2       1       1
Angel Investment Program:
    Equity Investments:
        Authorization Level.....      10      20      20       0       0
        Estimated Outlays.......       2      26      20       2       0
    Grants:
        Authorization Level.....       2       2       2       0       0
        Estimated Outlays.......       0       1       1       1       1
    Administrative Cost:
        Authorization Level.....       1       0       0       0       0
        Estimated Outlays.......       1       0       0       0       0
Surety Bond Fees:
    Estimated Authorization            8       8       8       8       8
     Level......................
    Estimated Outlays...........       4       8       8       8       8
        Total Changes:
            Estimated                 25      34      33       8       8
             Authorization Level
            Estimated Outlays...       8      38      33      13      10
------------------------------------------------------------------------

    Basis of estimate: For this estimate, CBO assumes that the 
bill will be enacted near the start of fiscal year 2008, that 
the necessary amounts will be appropriated for each fiscal 
year, and that spending for programs authorized by the bill 
will follow historical spending patterns for similar SBA 
programs.
    The budgetary accounting for SBA's direct loan and loan 
guarantee programs is governed by the Federal Credit Reform Act 
(FCRA) of 1990, which requires an appropriation of subsidy and 
administrative costs associated with loan guaranteesand loan 
operations. The subsidy cost is the estimated long-term cost to the 
government of a loan or loan guarantee, calculated on a net-present-
value basis, excluding administrative costs. Administrative costs, 
recorded on a cash basis, include activities related to making, 
servicing, and liquidating loans as well as overseeing the performance 
of lenders.
    The effect of the changes that H.R. 3567 would make to 
SBA's small business investment programs is measured in terms 
of projected subsidy costs. The bill does not specify an 
authorization level for either the subsidy or administrative 
costs, if any, that could be incurred as a result of 
implementing the amendments in the bill. CBO has estimated 
those amounts based on information from SBA regarding the 
historical demand for credit assistance and costs of the 
agency's small business investment programs. CBO assumes that 
administrative activities related to those loans would need to 
continue beyond the 2008-2010 authorization period addressed in 
this bill.

New Markets Venture Capital Program (NMVC)

    The bill would reauthorize the NMVC for three years, 
through 2010, by authorizing the appropriation of funds 
sufficient to offer $30 million in loan guarantees and $5 
million in technical assistance grants over the three-year 
period. The bill would direct SBA to approve at least one 
company from each of SBA's geographic regions to participate in 
the program, if practicable. H.R. 3567 also would authorize SBA 
to award technical assistance grants to companies that have 
received conditional, but not yet final, approval to 
participate in the program.
    Based on information from SBA, CBO expects that the subsidy 
rate for the NMVC program would be about 17 percent. CBO 
estimates that reauthorizing the NMVC program would cost $1 
million in 2008 and $11 million over the 2008-2012 period, 
assuming appropriation of the necessary and specified amounts. 
Of the five-year total, $6 million would be for costs 
associated with extending loan guarantees; the remaining $5 
million would be for costs associated with awarding technical 
assistance grants.

Angel Investment Program

    The bill would authorize a new program to provide equity 
investments in ``angel groups'' to provide capital to small 
businesses located in their communities. As a condition of 
participation in the program, such groups would be required to 
repay SBA for any investments that earn a profit. Any amount to 
be repaid would be prorated based on the share of capital 
provided by SBA. Repayments would be held by SBA for the 
purpose of providing new financing to angel groups, subject to 
provisions in annual appropriation acts. Based on information 
from SBA, CBO expects that equity investments in angel groups 
would take several years to generate profits; therefore, a 
negligible amount of repayments would be collected from such 
groups over the 2008-2012 period. Moreover, no direct spending 
savings from such profit-sharing receipts could be credited to 
this legislation because subsequent appropriation acts would 
determine the amount and timing of any federal funds made 
available for the Angel Investment Program.
    The bill would establish the Office of Angel Investments 
within SBA to oversee the Angel Investment Program, to develop 
a database of information related to angel groups and angel 
investors, and to award grants to eligible entities to develop 
new angel groups.
    The bill would authorize the appropriation of $13 million 
in 2008 and $57 million over the 2008-2012 period to carry out 
the investment, grant, and administrative activities of the 
program. Based on information from SBA, CBO estimates that 
implementing the Angel Investment Program would cost $3 million 
in 2008 and $55 million over the 2008-2012 period, assuming 
appropriation of the specified amounts.

Surety bond program

    The bill would authorize SBA to delegate its authority to 
issue, monitor, and service surety bonds to entities approved 
by SBA for such activities. The bill also would eliminate fees 
that are currently charged to contractors and sureties under 
the program and authorize the appropriation of sufficient funds 
to offset the loss of income from fees.
    Under current law, SBA's surety bond program provides 
guarantees to eligible contractors that SBA will reimburse the 
surety (an entity issuing an assurance that a contractor will 
perform according to the terms of a signed contract) for a 
portion of the loss should the contractor breach the terms of 
the contract. To cover the costs of those guarantees, fees are 
paid to SBA by both the contractor receiving the guarantee, and 
the surety that issues the bond for the contractor's 
performance. In 2006, SBA provided guarantees under the surety 
bond program for about 5,000 bonded contracts and collected 
about $7 million in fees. (Those collections are recorded as an 
offset to discretionary appropriations.) Based on information 
from SBA, CBO expects that eliminating the fees paid by 
participants would lead to a small increase in participation in 
the program.
    Guarantees provided under the surety bond program are 
recorded as cash expenditures rather than net-present-value 
costs under FCRA. This is because under the surety bond 
program, SBA is not guaranteeing repayment under a contract for 
a loan; rather, it is guaranteeing actual performance under a 
contract for services, which does not qualify as a loan or loan 
guarantee under FCRA. CBO estimates that implementing this 
provision of H.R. 3567 would cost $4 million in 2008 and $36 
million over the 2008-2012 period, assuming appropriation of 
the necessary amounts.

Other provisions

    H.R. 3567 would amend provisions of current law that limit 
the amount of capital SBA can provide to participating small 
business investment companies (SBICs). Among other things, the 
bill would change the method for calculating the maximum amount 
of capital that can be provided to SBICs and raise those limits 
for SBICs that agree to invest specific amounts in companies 
owned by individuals from socially or economically 
disadvantaged or low-income areas, veterans, or members of the 
National Guard or Reserves. Based on information from SBA, CBO 
estimates that those changes to the operations of the small 
business investment program would have an insignificant effect 
on the federal budget.
    The bill also would require SBA to produce four reports for 
the Congress that assess either the current practices of 
programs authorized by the bill or the effectiveness of new 
programs. CBO estimates that the cost of producing those 
reports would be less than $500,000 per year over the 2008-2012 
period.
    Intergovernmental and private-sector impact: H.R. 3567 
contains no intergovernmental or private-sector mandates as 
defined in UMRA. The bill would benefit state and local 
governments by authorizing grants to develop an investment 
program for small business.
    Estimate prepared by: Federal Costs: Susan Willie; Impact 
on State, Local, and Tribal Governments: Elizabeth Cove; Impact 
on the Private Sector: Jacob Kuipers.
    Estimate approved by: Peter H. Fontaine, Assistant Director 
for Budget Analysis.

                   VIII. Committee Estimate of Costs

    Clause 3(d)(2) of rule XIII of the Rules of the House of 
Representatives requires an estimate and a comparison by the 
Committee of the costs that would be incurred in carrying out 
H.R. 3567. However, clause 3(d)(3)(B) of that rule provides 
that this requirement does not apply when the Committee has 
included in its report a timely submitted cost estimate of the 
bill prepared by the Director of the Congressional Budget 
Office under section 402 of the Congressional Budget Act.

                         IX. Oversight Findings

    In accordance with clause (2)(b)(1) of rule X of the Rules 
of the House of Representatives, the oversight findings and 
recommendations of the Committee on Small Business with respect 
to the subject matter contained in H.R. 3567 are incorporated 
into the descriptive portions of this report.

                X. Statement of Constitutional Authority

    Pursuant to clause 3(d)(1) of rule XIII of the Rules of the 
House of Representatives, the Committee finds the authority for 
this legislation in Article I, Section 8, clause 18, of the 
Constitution of the United States.

                  XI. Compliance With Public Law 104-4

    H.R. 3567 contains no unfunded mandates.

                 XII. Congressional Accountability Act

    H.R. 3567 does not relate to the terms and conditions of 
employment or access to public services or accommodations with 
the meaning of section 102(b)(3) of P.L. 104-1.

               XIII. Federal Advisory Committee Statement

    This legislation does not establish or authorize the 
establishment of any new advisory committees.

                     XIV. Statement of No Earmarks

    Pursuant to clause 9 of rule XXI, H.R. 3567 does not 
contain any congressional earmarks, limited tax benefits, or 
limited tariff benefits as defined in clause 9(d), 9(e), or 
9(f) of rule XXI.

                  XV. Performance Goals and Objectives

    Pursuant to clause 3(c)(4) of rule XIII of the Rules of the 
House of Representatives, the Committee establishes the 
following performance related goals and objectives for this 
legislation:
    H.R. 3567 includes a number of provisions designed to 
update and improve the Small Business Administration's SBIC, 
NMVC, and Surety Bond programs, establish a new Angel 
Investment Program under the purview of the Small Business 
Administration, and revise existing SBA rules that inhibit 
venture capital investment in small businesses.

         Changes in Existing Law Made by the Bill, as Reported

  In compliance with clause 3(e) of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italic, existing law in which no change is 
proposed is shown in roman):

SMALL BUSINESS INVESTMENT ACT OF 1958

           *       *       *       *       *       *       *



                TITLE III--INVESTMENT DIVISION PROGRAMS


Part A--Small Business Investment Companies

           *       *       *       *       *       *       *



                            BORROWING POWER

  Sec. 303. (a) * * *
  (b) To encourage the formation and growth of small business 
investment companies the Administration is authorized when 
authorized in appropriation Acts, to purchase, or to guarantee 
the timely payment of all principal and interest as scheduled 
on, debentures or participating securities issued by such 
companies. Such purchases or guarantees may be made by the 
Administration on such terms and conditions as it deems 
appropriate, pursuant to regulations issued by the 
Administration. The full faith and credit of the United States 
is pledged to the payment of all amounts which may be required 
to be paid under any guarantee under this subsection. 
Debentures purchased or guaranteed by the Administration under 
this subsection shall be subordinate to any other debenture 
bonds, promissory notes, or other debts and obligations of such 
companies, unless the Administration in its exercise of 
reasonable investment prudence and in considering the financial 
soundness of such company determines otherwise. Such debentures 
may be issued for a term of not to exceed fifteen years and 
shall bear interest at a rate not less than a rate determined 
by the Secretary of the Treasury taking into consideration the 
current average market yield on outstanding marketable 
obligations of the United States with remaining periods to 
maturity comparable to the average maturities on such 
debentures, adjusted to the nearest one-eighth of 1 per centum, 
plus, for debentures obligated after September 30, 2001, an 
additional charge, in an amount established annually by the 
Administration, as necessary to reduce to zero the cost (as 
defined in section 502 of the Federal Credit Reform Act of 1990 
(2 U.S.C. 661a)) to the Administration of purchasing and 
guaranteeing debentures under this Act, which amount may not 
exceed 1.38 percent per year, and which shall be paid to and 
retained by the Administration. The debentures or participating 
securities shall also contain such other terms as the 
Administration may fix, and shall be subject to the following 
restrictions and limitations:
          (1) * * *
          [(2) Maximum leverage.--
                  [(A) In general.--After March 31, 1993, the 
                maximum amount of outstanding leverage made 
                available to a company licensed under section 
                301(c) of this Act shall be determined by the 
                amount of such company's private capital--
                          [(i) if the company has private 
                        capital of not more than $15,000,000, 
                        the total amount of leverage shall not 
                        exceed 300 percent of private capital;
                          [(ii) if the company has private 
                        capital of more than $15,000,000 but 
                        not more than $30,000,000, the total 
                        amount of leverage shall not exceed 
                        $45,000,000 plus 200 percent of the 
                        amount of private capital over 
                        $15,000,000; and
                          [(iii) if the company has private 
                        capital of more than $30,000,000, the 
                        total amount of leverage shall not 
                        exceed $75,000,000 plus 100 percent of 
                        the amount of private capital over 
                        $30,000,000 but not to exceed an 
                        additional $15,000,000.
                  [(B) Adjustments.--
                          [(i) In general.--The dollar amounts 
                        in clauses (i), (ii), and (iii) of 
                        subparagraph (A) shall be adjusted 
                        annually to reflect increases in the 
                        Consumer Price Index established by the 
                        Bureau of Labor Statistics of the 
                        Department of Labor.
                          [(ii) Initial adjustments.--The 
                        initial adjustments made under this 
                        subparagraph after the date of the 
                        enactment of the Small Business 
                        Reauthorization Act of 1937 shall 
                        reflect only increases from March 31, 
                        1993.
                  [(C) Investments in low-income geographic 
                areas.--In calculating the outstanding leverage 
                of a company for the purposes of subparagraph 
                (A), the Administrator shall not include the 
                amount of the cost basis of any equity 
                investment made by the company in a smaller 
                enterprise located in a low-income geographic 
                area (as defined in section 351), to the extent 
                that the total of such amounts does not exceed 
                50 percent of the company's private capital.]
          (2) Maximum leverage.--
                  (A) In general.--The maximum amount of 
                outstanding leverage made available to any one 
                company licensed under section 301(c) of this 
                Act may not exceed the lesser of--
                          (i) 300 percent of such company's 
                        private capital; or
                          (ii) $150,000,000.
                  (B) Multiple licenses under common control.--
                The maximum amount of outstanding leverage made 
                available to two or more companies licensed 
                under section 301(c) of this Act that are 
                commonly controlled (as determined by the 
                Administrator) and not under capital impairment 
                may not exceed $225,000,000.
                  (C) Increased investments in women-owned and 
                socially disadvantaged small businesses.--The 
                limits provided in subparagraphs (A)(ii) and 
                (B) shall be $175,000,000 and $250,000,000, 
                respectively, for any company that certifies in 
                writing that not less than 50 percent of the 
                company's aggregate dollar amount of 
                investments will be made in small businesses 
                that prior to the investment are--
                          (i) majority owned by one or more--
                                  (I) socially or economically 
                                disadvantaged individuals (as 
                                defined by Administrator);
                                  (II) veterans of the Armed 
                                Forces; or
                                  (III) current or former 
                                members of the National Guard 
                                or Reserve; or
                          (ii) located in a low-income 
                        geographic area (as defined in section 
                        351).

           *       *       *       *       *       *       *

          [(4) Maximum aggregate amount of leverage.--
                  [(A) In general.--Except as provided in 
                subparagraph (B), the aggregate amount of 
                outstanding leverage issued to any company or 
                companies that are commonly controlled (as 
                determined by the Administrator) may not exceed 
                $90,000,000, as adjusted annually for increases 
                in the Consumer Price Index.
                  [(B) Exceptions.--The Administrator may, on a 
                case-by-case basis--
                          [(i) approve an amount of leverage 
                        that exceeds the amount described in 
                        subparagraph (A) for companies under 
                        common control; and
                          [(ii) impose such additional terms 
                        and conditions as the Administrator 
                        determines to be appropriate to 
                        minimize the risk of loss to the 
                        Administration in the event of default.
                  [(C) Applicability of other provisions.--Any 
                leverage that is issued to a company or 
                companies commonly controlled in an amount that 
                exceeds $90,000,000, whether as a result of an 
                increase in the Consumer Price Index or a 
                decision of the Administrator, is subject to 
                subsection (d).
                  [(D) Investments in low-income geographic 
                areas.--In calculating the aggregate 
                outstanding leverage of a company for the 
                purposes of subparagraph (A), the Administrator 
                shall not include the amount of the cost basis 
                of any equity investment made by the company in 
                a smaller enterprise located in a low-income 
                geographic area (as defined in section 351), to 
                the extent that the total of such amounts does 
                not exceed 50 percent of the company's private 
                capital.]

           *       *       *       *       *       *       *

  [(d) Required Certifications.--
          [(1) In general.--The Administrator shall require 
        each licensee, as a condition of approval of an 
        application for leverage, to certify in writing--
                  [(A) for licensees with leverage less than or 
                equal to $90,000,000, that not less than 20 
                percent of the licensee's aggregate dollar 
                amount of financings will be provided to 
                smaller enterprises; and
                  [(B) for licensees with leverage in excess of 
                $90,000,000, that, in addition to satisfying 
                the requirements of subparagraph (A), 100 
                percent of the licensee's aggregate dollar 
                amount of financings made in whole or in part 
                with leverage in excess of $90,000,000 will be 
                provided to smaller enterprises (as defined in 
                section 103(12)).
          [(2) Multiple licensees.--Multiple licensees under 
        common control (as determined by the Administrator) 
        shall be considered to be a single licensee for 
        purposes of determining both the applicability of and 
        compliance with the investment percentage requirements 
        of this subsection.]
  (d) Increased Investments in Smaller Enterprises.--The 
Administrator shall require each licensee, as a condition of an 
application for leverage, to certify in writing that not less 
than 25 percent of the licensee's aggregate dollar amount of 
financings will be provided to smaller enterprises (as defined 
in section 103(12)).

           *       *       *       *       *       *       *


                         AGGREGATE LIMITATIONS

  Sec. 306. [(a) If any small business investment company has 
obtained financing from the Administration and such financing 
remains outstanding, the aggregate amount of obligations and 
securities acquired and for which commitments may be issued by 
such company under the provisions of this title for any single 
enterprise shall not exceed 20 per centum of the private 
capital of such company, without the approval of the 
Administration.]
  (a) If any small business investment company has obtained 
financing from the Administration and such financing remains 
outstanding, the aggregate amount of securities acquired and 
for which commitments may be issued by such company under the 
provisions of this title for any single enterprise shall not, 
without the approval of the Administration, exceed 10 percent 
of the sum of--
          (1) the private capital of such company; and
          (2) the total amount of leverage projected by the 
        company in the company's business plan that was 
        approved by the Administration at the time of the grant 
        of the company's license.

           *       *       *       *       *       *       *


              Part B--New Markets Venture Capital Program

SEC. 351. DEFINITIONS.

  In this part, the following definitions apply:
          (1) * * *
          [(2) Low-income individual.--The term ``low-income 
        individual'' means an individual whose income (adjusted 
        for family size) does not exceed--
                  [(A) for metropolitan areas, 80 percent of 
                the area median income; and
                  [(B) for nonmetropolitan areas, the greater 
                of--
                          [(i) 80 percent of the area median 
                        income; or
                          [(ii) 80 percent of the statewide 
                        nonmetropolitan area median income.
          [(3) Low-income geographic area.--the term ``low-
        income geographic area'' means--
                  [(A) any population census tract (or in the 
                case of an area that is not tracted for 
                population census tracts, the equivalent county 
                division, as defined by the Bureau of the 
                Census of the Department of Commerce for 
                purposes of defining poverty areas), if--
                          [(i) the poverty rate for that census 
                        tract is not less than 20 percent;
                          [(ii) in the case of a tract--
                                  [(I) that is located within a 
                                metropolitan area, 50 percent 
                                or more of the households in 
                                that census tract have an 
                                income equal to less than 60 
                                percent of the area median 
                                gross income; or
                                  [(II) that is not located 
                                within a metropolitan area, the 
                                median household income for 
                                such tract does not exceed 80 
                                percent of the statewide median 
                                household income; or
                          [(iii) as determined by the 
                        Administrator based on objective 
                        criteria, a substantial population of 
                        low-income individuals reside, an 
                        inadequate access to investment capital 
                        exists, or other indications of 
                        economic distress exist in that census 
                        tract; or
                  [(B) any area located within--
                          [(i) a HUBZone (as defined in section 
                        3(p) of the Small Business Act and the 
                        implementing regulations issued under 
                        that section);
                          [(ii) an urban empowerment zone or 
                        urban enterprise community (as 
                        designated by the Secretary of Housing 
                        and Urban Development); or
                          [(iii) a rural empowerment zone or 
                        rural enterprise community (as 
                        designated by the Secretary of 
                        Agriculture).]
          (2) Low-income geographic area.--The term ``low-
        income geographic area'' has the same meaning given the 
        term ``low-income community'' in section 45D(e) of the 
        Internal Revenue Code of 1986 (26 U.S.C. 45D(e)).
          [(4)] (3) New markets venture capital company.--The 
        term ``New Markets Venture Capital company'' means a 
        company that--
                  (A)  * * *

           *       *       *       *       *       *       *

          [(5)] (4) Operational assistance.--The term 
        ``operational assistance'' means management, marketing, 
        and other technical assistance that assists a small 
        business concern with business development.
          [(6)] (5) Participation agreement.--The term 
        ``participation agreement'' means an agreement, between 
        the Administrator and a company granted final approval 
        under section 354(e), that--
                  (A) * * *

           *       *       *       *       *       *       *

          [(7)] (6) Specialized small business investment 
        company.--The term ``specialized small business 
        investment company'' means any small business 
        investment company that--
                  (A)  * * *

           *       *       *       *       *       *       *

          [(8)] (7) State.--The term ``State'' means such of 
        the several States, the District of Columbia, the 
        Commonwealth of Puerto Rico, the Virgin Islands, Guam, 
        American Samoa, the Commonwealth of the Northern 
        Mariana Islands, and any other commonwealth, territory, 
        or possession of the United States.

           *       *       *       *       *       *       *


SEC. 353. ESTABLISHMENT.

  In accordance with this part, the Administrator shall 
establish a New Markets Venture Capital Program, under which 
the Administrator [may] shall--
          (1) * * *

           *       *       *       *       *       *       *


SEC. 354. SELECTION OF NEW MARKETS VENTURE CAPITAL COMPANIES.

  (a) * * *

           *       *       *       *       *       *       *

  (d) Requirements To Be Met for Final Approval.--The 
Administrator shall grant each conditionally approved company 
[a period of time, not to exceed 2 years,] 2 years to satisfy 
the following requirements:
          (1) Capital requirement.--[Each]
                  (A) In general.--Except as provided in 
                subparagraph (B), each conditionally approved 
                company shall raise not less than $5,000,000 of 
                private capital or binding capital commitments 
                from one or more investors (other than agencies 
                or departments of the Federal Government) who 
                met criteria established by the Administrator.
                  (B) Small manufacturer investment capital 
                requirements.--Each conditionally approved 
                company engaged primarily in development of and 
                investment in small manufacturers shall raise 
                not less than $3,000,000 of private capital or 
                binding capital commitments from one or more 
                investors (other than agencies or departments 
                of the Federal Government) who meet criteria 
                established by the Administrator.
          (2) Nonadministration resources for operational 
        assistance.--
                  (A) In general.--In order to provide 
                operational assistance to smaller enterprises 
                expected to be financed by the company, each 
                conditionally approved company--
                          (i) shall have binding commitments 
                        (for contribution in cash or in kind)--
                                  (I) from any sources other 
                                than the Small Business 
                                Administration that meet 
                                criteria established by the 
                                Administrator; and
                                  (II) payable or available 
                                over a multiyear period 
                                acceptable to the Administrator 
                                (not to exceed 10 years); [and]
                                  [(III) in an amount not less 
                                than 30 percent of the total 
                                amount of capital and 
                                commitments raised under 
                                paragraph (1);]

           *       *       *       *       *       *       *

  (f) Geographic Expansion.--From among companies submitting 
applications under subsection (b), the Administrator shall 
consider the selection criteria and nationwide distribution 
under subsection (c) and shall, to the maximum extent 
practicable, approve at least one company from each geographic 
region of the Small Business Administration.

           *       *       *       *       *       *       *


SEC. 358. OPERATIONAL ASSISTANCE GRANTS.

  (a) In General.--
          (1) * * *

           *       *       *       *       *       *       *

          (4) Grant amount.--
                  (A) New markets venture capital companies.--
                The amount of a grant made under this 
                subsection to a New Markets Venture Capital 
                company [shall be equal to the resources (in 
                cash or in kind) raised by the company under 
                section 354(d)(2).] shall be equal to the 
                lesser of--
                          (i) 10 percent of the resources (in 
                        cash or in kind) raised by the company 
                        under section 354(d)(2); or
                          (ii) $1,000,000.

           *       *       *       *       *       *       *

          (6) Grants to conditionally approved companies.--
                  (A) In general.--Subject to subparagraphs (A) 
                and (B), upon the request of a company 
                conditionally-approved under section 354(c), 
                the Administrator shall make a grant to the 
                company under this subsection.
                  (B) Repayment by companies not approved.--If 
                a company receives a grant under paragraph (6) 
                and does not enter into a participation 
                agreement for final approval, the company shall 
                repay the amount of the grant to the 
                Administrator.
                  (C) Deduction from grant to approved 
                company.--If a company receives a grant under 
                paragraph (6) and receives final approval under 
                section 354(e), the Administrator shall deduct 
                the amount of the grant under that paragraph 
                from the total grant amount that the company 
                receives for operational assistance.
                  (D) Amount of grant.--No company may receive 
                a grant of more than $50,000 under this 
                paragraph.

           *       *       *       *       *       *       *


SEC. 368. AUTHORIZATIONS OF APPROPRIATIONS.

  (a) In General.--There are authorized to be appropriated for 
[fiscal years 2001 through 2006] fiscal years 2008 through 
2010, to remain available until expended, the following sums:
          (1) Such subsidy budget authority as may be necessary 
        to guarantee [$150,000,000] $30,000,000 of debentures 
        under this part, of which not less than one-quarter 
        shall be used to guarantee debentures of companies 
        engaged primarily in development of and investment in 
        small manufacturers.
          (2) [$30,000,000] $5,000,000 to make grants under 
        this part, of which not less than one-quarter shall be 
        used to make grants to companies engaged primarily in 
        development of and investment in small manufacturers.

                    PART C--ANGEL INVESTMENT PROGRAM

SEC. 380. OFFICE OF ANGEL INVESTMENT.

  (a) Establishment.--There is established, in the Investment 
Division of the Small Business Administration, the Office of 
Angel Investment.
  (b) Director.--The head of the Office of Angel Investment is 
the Director of Angel Investment.
  (c) Duties.--Subject to the direction of the Secretary, the 
Director shall perform the following functions:
          (1) Provide support for the development of angel 
        investment opportunities for small business concerns.
          (2) Administer the Angel Investment Program under 
        section 382 of this Act.
          (3) Administer the Federal Angel Network under 
        section 383 of this Act.
          (4) Administer the grant program for the development 
        of angel groups under section 384 of this Act.
          (5) Perform such other duties consistent with this 
        section as the Administrator shall prescribe.

SEC. 381. DEFINITIONS.

  In this part:
          (1) The term ``angel group'' means 10 or more angel 
        investors organized for the purpose of making 
        investments in local or regional small business 
        concerns that--
                  (A) consists primarily of angel investors;
                  (B) requires angel investors to be accredited 
                investors; and
                  (C) actively involves the angel investors in 
                evaluating and making decisions about making 
                investments.
          (2) The term ``angel investor'' means an individual 
        who--
                  (A) qualifies as an accredited investor (as 
                that term is defined under Rule 501 of 
                Regulation D of the Securities and Exchange 
                Commission (17 C.F.R. 230.501));
                  (B) provides capital to or makes investments 
                in a small business concern.
          (3) The term ``small business concern owned and 
        controlled by veterans'' has the meaning given that 
        term under section 3(q)(3) of the Small Business Act 
        (15 U.S.C. 632(q)(3)).
          (4) The term ``small business concern owned and 
        controlled by women'' has the meaning given that term 
        under section 8(d)(3)(D) of such Act (15 U.S.C. 
        637(d)(3)(D)).
          (5) The term ``socially and economically 
        disadvantaged small business concern'' has the meaning 
        given that term under section 8(a)(4)(A) of such Act 
        (15 U.S.C. 637(a)(4)(A)).

SEC. 382. ANGEL INVESTMENT PROGRAM.

  (a) In General.--The Director of Angel Investment shall 
establish and carry out a program, to be known as the Angel 
Investment Program, to provide financing to approved angel 
groups for the purpose of providing venture capital investment 
in small businesses in their communities.
  (b) Eligibility.--To be eligible to receive financing under 
this section, an angel group shall--
          (1) have demonstrated experience making investments 
        in local or regional small business concerns;
          (2) have established protocols and a due diligence 
        process for determining its investment strategy;
          (3) have an established code of ethics; and
          (4) submit an application to the Director of Angel 
        Investment at such time and containing such information 
        and assurances as the Director may require.
  (c) Use of Funds.--An angel group that receives financing 
under this section shall use the amounts received to make 
investments in small business concerns--
          (1) that have been in existence for less than 5 years 
        as of the date on which the investment is made;
          (2) that have fewer than 75 employees as of the date 
        on which the investment is made;
          (3) more than 50 percent of the employees of which 
        perform substantially all of their services in the 
        United States as of the date on which the investment is 
        made; and
          (4) within the geographic area determined by the 
        Director under subsection (e).
  (d) Limitation on Amount.--No angel group receiving financing 
under this section shall receive more than $2,000,000.
  (e) Limitation on Geographic Area.--For each angel group 
receiving financing under this section, the Director shall 
determine the geographic area in which a small business concern 
must be located to receive an investment from that angel group.
  (f) Priority in Providing Financing.--In providing financing 
under this section, the Director shall give priority to angel 
groups that invest in small business concerns owned and 
controlled by veterans, small business concerns owned and 
controlled by women, and socially and economically 
disadvantaged small business concerns.
  (g) Nationwide Distribution of Financing.--In providing 
financing under this section, the Director shall, to the extent 
practicable, provide financing to angel groups that are located 
in a variety of geographic areas.
  (h) Matching Requirement.--As a condition of receiving 
financing under this section, the Director shall require that 
for each small business concern in which the angel group 
receiving such financing invests, the angel group shall invest 
an amount that is equal to or greater than the amount of 
financing received under this section from a source other than 
the Federal Government that is equal to the amount of the 
financing provided under this section that the angel group 
invests in that small business concern.
  (i) Repayment of Financing.--As a condition of receiving 
financing under this section, the Director shall require an 
angel group to repay the Director for any investment on which 
the angel group makes a profit an amount equal to the 
percentage of the returns that is equal to the percentage of 
the total amount invested by the angel group that consisted of 
financing received under this section.
  (j) Angel Investment Fund.--
          (1) Establishment.--There is in the Treasury a fund 
        to be known as the Angel Investment Fund.
          (2) Deposit of certain amounts.--Amounts collected 
        under subsection (i) shall be deposited in the fund.
          (3) Use of deposits.--Deposits in the fund shall be 
        available for the purpose of providing financing under 
        this section in the amounts specified in annual 
        appropriation laws without regard to fiscal year 
        limitations.
  (k) Authorization of Appropriations.--There is authorized to 
be appropriated to carry out this section--
          (1) $10,000,000 for fiscal year 2008;
          (2) $20,000,000 for fiscal year 2009; and
          (3) $20,000,000 for fiscal year 2010.

SEC. 383. FEDERAL ANGEL NETWORK.

  (a) In General.--Subject to the succeeding provisions of this 
subsection, the Director of the Office of Angel Investment 
shall establish and maintain a searchable database, to be known 
as the Federal Angel Network, to assist small business concerns 
in identifying angel investors.
  (b) Network Contents.--The Federal Angel Network shall 
include--
          (1) a list of the names and addresses of angel groups 
        and angel investors;
          (2) information about the types of investments each 
        angel group or angel investor has made; and
          (3) information about other public and private 
        resources and registries that provide information about 
        angel groups or angel investors.
  (c) Collection of Information.--
          (1) In general.--The Director shall collect the 
        information to be contained in the Federal Angel 
        Network and shall ensure that such information is 
        updated regularly.
          (2) Request for exclusion of information.--The 
        Director shall not include such information concerning 
        an angel investor if that investor contacts the 
        Director to request that such information be excluded 
        from the Network.
  (d) Availability.--The Director shall make the Federal Angel 
Network available on the Internet website of the Administration 
and shall do so in a manner that permits others to download, 
distribute, and use the information contained in the Federal 
Angel Network.
  (e) Authorization of Appropriations.--There is authorized to 
be appropriated to carry out this section $1,000,000, to remain 
available until expended.

SEC. 384. GRANT PROGRAM FOR DEVELOPMENT OF ANGEL GROUPS.

  (a) In General.--The Director of the Office of Angel 
Investment shall establish and carry out a grant program to 
make grants to eligible entities for the development of new or 
existing angel groups and to increase awareness and education 
about angel investing.
  (b) Eligible Entities.--In this section, the term ``eligible 
entity'' means--
          (1) a State or unit of local government;
          (2) a nonprofit organization;
          (3) a state mutual benefit corporation;
          (4) a Small Business Development Center established 
        pursuant to section 21 of the Small Business Act (15 
        U.S.C. 648); or
          (5) a women's business center established pursuant to 
        section 29 of the Small Business Act (15 U.S.C. 656).
  (c) Matching Requirement.--The Administrator shall require, 
as a condition of any grant made under this section, that the 
eligible entity receiving the grant provide from resources (in 
cash or in kind), other than those provided by the 
Administrator or any other Federal source, a matching 
contribution equal to 50 percent of the amount of the grant.
  (d) Application.--To receive a grant under this section, an 
eligible entity shall submit an application that contains--
          (1) a proposal describing how the grant would be 
        used; and
          (2) any other information or assurances as the 
        Director may require.
  (e) Report.--Not later than 3 years after the date on which 
an eligible entity receives a grant under this section, such 
eligible entity shall submit a report to the Administrator 
describing the use of grant funds and evaluating the success of 
the angel group developed using the grant funds.
  (f) Authorization of Appropriations.--There is authorized to 
be appropriated to carry out this section $1,500,000, for each 
of fiscal years 2008 through 2010.

TITLE IV--GUARANTEES

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Part B--Surety Bond Guarantees

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                    AUTHORITY OF THE ADMINISTRATION

  Sec. 411. (a)(1) The Administration may, upon such terms and 
conditions as it may prescribe, guarantee and enter into 
commitments to guarantee any surety against loss resulting from 
a breach of the terms of a bid bond, payment bond, performance 
bond, or bonds ancillary thereto, by a principal on any total 
work order or contract amount at the time of bond execution 
that does not exceed [$2,000,000] $3,000,000.

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  [(3) The Administration may authorize any surety, without 
further administration approval, to issue, monitor, and service 
such bonds subject to the Administration's guarantee.
  [(4) No such guarantee may be issued, unless--
          [(A) the person who would be principal under the bond 
        is a small business concern;
          [(B) the bond is required in order for such person to 
        bid on a contract, or to serve as a prime contractor or 
        subcontractor thereon;
          [(C) such person is not able to obtain such bond on 
        reasonable terms and conditions without a guarantee 
        under this section; and
          [(D) there is a reasonable expectation that such 
        principal will perform the covenants and conditions of 
        the contract with respect to which such bond is 
        required, and the terms and conditions of such bond are 
        reasonable in the light of the risks involved and the 
        extent of the surety's participation.
  [(5)(A) The Administration shall promptly act upon an 
application from a surety to participate in the Preferred 
Surety Bond Guarantee Program, authorized by paragraph (3), in 
accordance with criteria and procedures established in 
regulations pursuant to subsection (d).
  [(B) The Administration is authorized to reduce the allotment 
of bond guarantee authority or terminate the participation of a 
surety in the Preferred Surety Program Guarantee Program based 
on the rate of participation of such surety during the 4 most 
recent fiscal year quarters compared to the median rate of 
participation by the other sureties in the program.]
  (b) Subject to the provisions of this section, in connection 
with the issuance by the Administration of a guarantee to a 
surety as provided by subsection (a), the Administration may 
agree to indemnify such surety against a loss sustained by such 
surety in avoiding or attempting to avoid a breach of the terms 
of a bond guaranteed by the Administration pursuant to 
subsection (a): Provided, however 
          (1) * * *
          (2) a surety must obtain approval from the 
        Administration prior to making any payments pursuant to 
        this subsection unless the surety is participating 
        under [the authority of subsection (a)(3)] the 
        authority of section 413; and

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  (c) Any guarantee or agreement to indemnify under this 
section shall obligate the Administration to pay to the surety 
a sum--
          [(1) not to exceed 70 per centum of the loss incurred 
        and paid by a surety authorized to issue bonds subject 
        to the Administration's guarantee under subsection 
        (a)(3);]
          [(2)] (1) not to exceed 90 per centum of the loss 
        incurred and paid in the case of a surety requiring the 
        Administration's specific approval for the issuance of 
        such bond, but in no event may the Administration make 
        any duplicate payment pursuant to subsection (b) or any 
        other subsection;
          [(3)] (2) equal to 90 per centum of the loss incurred 
        and paid in the case of a surety requiring the 
        administration's specific approval for the issuance of 
        a bond, if--
                  (A)  * * *

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          [(4)] (3) determined pursuant to subsection (b), if 
        applicable.

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  (g)(1) * * *

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  (3) Each surety participating under [the authority of 
paragraph (3) of subsection (a)] the authority of section 413 
shall be audited at least once every three years by examiners 
selected and approved by the Administration.

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  (k) For bonds made or executed with the prior approval of the 
Administration, the Administration shall not deny liability to 
a surety based upon information that was provided as part of 
the guaranty application.
  (l) To the extent that amounts are made available to the 
Administrator for the purpose of fee contributions, the 
Administrator shall use such funds to offset fees established 
and assessed under this section. Each fee contribution shall be 
effective for one fiscal quarter and shall be adjusted as 
necessary to ensure that amounts made available are fully used.

SEC. 413. PREFERRED SURETY BOND PROGRAM.

  (a) Program Required.--The Administrator shall carry out a 
program, to be known as the Preferred Surety Bond Program, 
under which the Administration, by a written agreement between 
the surety and the Administration, delegates to the surety 
complete authority to issue, monitor, and service bonds subject 
to guaranty from the Administration without obtaining the 
specific approval of the Administration. Bonds made under the 
program shall carry a 70 percent guaranty.
  (b) Term.--The term of a delegation of authority under such 
an agreement shall not exceed 2 years.
  (c) Renewal.--Such an agreement may be renewed one or more 
times, each such renewal providing one additional term. Before 
each renewal, the Administrator shall review the surety's 
bonds, policies, and procedures for compliance with relevant 
rules and regulations.
  (d) Application.--The Administrator shall promptly act upon 
an application from a surety to participate in the program, in 
accordance with criteria and procedures established in 
regulations pursuant to section 411(d).
  (e) Reduction or Termination of Participation.--The 
Administrator is authorized to reduce the allotment of bond 
guarantee authority or terminate the participation of a surety 
in the program based on the rate of participation of such 
surety during the 4 most recent fiscal year quarters compared 
to the median rate of participation by the other sureties in 
the program.

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                              ----------                              


SMALL BUSINESS ACT

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  Sec. 3. (a)(1) * * *

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    (5) Non-affiliation of Venture Capital From Consideration 
of Small Business Concern.--For purposes of determining whether 
a small business concern is independently owned and operated 
under paragraph (1) or meets the small business size standards 
instituted under paragraph (2), the Administrator shall not 
consider a concern that has received financing from a venture 
capital operating company to be affiliated with either the 
venture capital operating company or any other business which 
the venture capital operating company has financed.
    (6) Definition of ``Independently Owned and Operated''.--
For purposes of this section, a business concern shall be 
deemed to be ``independently owned and operated'' if it is 
owned in majority part by one or more natural persons or 
venture capital operating companies meeting the definition in 
paragraph (7).
    (7) Definition of ``Venture Capital Operating Company''.--
For purposes of this section, the term ``venture capital 
operating company'' means a business concern--
          (A) that--
                  (i) is a Venture Capital Operating Company, 
                as that term is defined in regulations 
                promulgated by the Secretary of Labor; or
                  (ii) is an entity that--
                          (I) is registered under the 
                        Investment Company Act of 1940 (15 
                        U.S.C. 80a-51 et seq.);
                          (II) is an investment company, as 
                        defined in section 3(c)(14) of such Act 
                        (15 U.S.C. 80a-3(c)(14)), which is not 
                        registered under such Act because it is 
                        beneficially owned by less than 100 
                        persons; or
                          (III) is a nonprofit organization 
                        affiliated with, or serving as a patent 
                        and licensing organization for, a 
                        university or other institution of 
                        higher education and that invests 
                        primarily in small business concerns; 
                        and
          (B) that is not controlled by any business concern 
        that is not a small business concern within the meaning 
        of section 3; and
          (C) that has fewer than 500 employees; and
          (D) that is itself a business concern incorporated 
        and domiciled in the United States, or is controlled by 
        a business concern that is incorporated and domiciled 
        in the United States.

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