[Senate Report 110-199]
[From the U.S. Government Publishing Office]



                                                       Calendar No. 422
110th Congress                                                   Report
                                 SENATE
 1st Session                                                    110-199
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               SMALL BUSINESS VENTURE CAPITAL ACT OF 2007

                                _______
                                

                October 16, 2007.--Ordered to be printed

                                _______
                                

 Mr. Kerry, from the Committee on Small Business and Entrepreneurship, 
                        submitted the following

                              R E P O R T

                         [To accompany S. 1662]

    The Committee on Small Business and Entrepreneurship, to 
which was referred the bill (S. 1662) to amend the Small 
Business Investment Act of 1958 to reauthorize the venture 
capital program, and for other purposes, having considered the 
same, reports favorably thereon with an amendment in the nature 
of a substitute and recommends that the bill do pass.

                  I. PURPOSE AND NEED FOR LEGISLATION

    The purpose of the ``Small Business Venture Capital Act of 
2007'' is to reauthorize and improve the Small Business 
Administration's (SBA) Small Business Investment Company (SBIC) 
program and the New Markets Venture Capital (NMVC) program so 
that more small businesses, in number and diversity, have 
access to venture capital. This type of financing is important 
because it provides patient capital to firms that show 
significant growth potential but need time for the business to 
mature without the burden of monthly debt payments. As Dr. 
Jeffrey E. Sohl, Director of the Center for Venture research at 
the University of New Hampshire's Whittemore School of Business 
and Economics, pointed out to the Committee during a June 21, 
2007, roundtable, ``debt servicing is money that is going out 
the door.'' Ideally, he says, ``the angels and equity dealers 
at the early stage are in there for a good five to seven 
years,'' because small businesses need ``all the money to stay 
with the company and to fuel the growth for the company.'' \1\ 
Moreover, as explained by former Federal Reserve Board Chairman 
Alan Greenspan: ``Credit alone is not the answer. Businesses 
must have equity capital before they are considered viable 
candidates for debt financing * * *. Continued efforts to 
develop markets for private equity investments will be rewarded 
by an innovative and productive business community. This is 
especially true in lower-income communities, where the weight 
of expansive debt obligations on small firms can severely 
impede growth prospects, or more readily lead to business 
failures.'' \2\
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    \1\ Roundtable on ``SBA Reauthorization: Small Business Venture 
Capital Program'' Before S. Comm. on Small Business & Entrepreneurship, 
110th Cong. Page 10 (2007) (Transcript of Proceedings).
    \2\ Federal Reserve System Research Conference on Business Access 
to Capital and Credit, March 1999.
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    Venture capital is a critical driver of our economy and job 
creation, as well as an essential component in the continuum of 
small business financing; it is, therefore, a necessary 
function of the SBA. While there is sufficient capital in the 
market available for investment, small businesses may have 
difficulty accessing these funds, as venture capitalists only 
act on one out of every 300 or 400 deals they see.\3\ 
Traditional venture capitalists focus primarily on high-
technology segments and larger, later-stage deals, concentrated 
heavily in just five states (California, Massachusetts, New 
York, Texas, and Colorado), and they are looking for faster and 
larger returns on their investments.\4\ More specifically, 
traditional venture capitalists typically make investments of 
$7 million with exits within three to four years, instead of 
deals of less than $3 million in which investors are willing to 
stay for five to seven years. According to Dr. Sohl and Dr. 
Julia Rubin, who also participated in the Committee's 
roundtable on June 21, 2007, there is a dramatic need for deals 
that range from $50,000 to $1 million, even for deals from $1 
million to $3 million, as well as for deals in low-and 
moderate-income rural and urban areas and equity for seed money 
and startups. Finally, data from the SBA and the National Black 
Chamber of Commerce and the U.S. Hispanic Chamber of Commerce 
make clear that there is also a need for venture capital 
managed by and invested in firms owned by minorities.
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    \3\ Roundtable on ``SBA Reauthorization: Small Business Venture 
Capital Programs'' Before S. Comm. on Small Business & 
Entrepreneurship, 110th Cong. Page 13 (2007) (Statement of Dr. Julia 
Rubin, Professor, Edward J. Bloustein School of Planning and Public 
Policy, Rutgers University, Transcript of Proceedings).
    \4\ Community Development Venture Capital Alliance, The New Markets 
Venture Capital Program, Providing Equity Capital and Expertise to 
Entrepreneurs in Low-Income Urban and Rural Communities, 4 (January 
2007).
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    The SBA's programs help to fill many of the gaps identified 
above and, therefore, need to be continued. The Agency's SBIC 
program targets investments between $250,000 and $5 million. In 
FY2006, 40 percent of their investments were in low- and 
moderate-income areas and 30 percent of their dollars went to 
firms that had been in business only two years or less. Whereas 
traditional venture capitalists concentrate their investments 
in companies in communications, computers and life sciences, 
approximately 50 percent of SBIC funds go to a more diverse 
segment of businesses, including manufacturing and consumer-
related businesses. Moreover, SBIC investments impact more 
parts of the country. While traditional venture capitalists 
make most of their investments in California and Massachusetts, 
SBICs have made as much as 71 percent of their investments 
outside of those two states. Since the program was created in 
1958, SBICs have provided approximately $48 billion of long-
term debt and equity capital to more than 100,000 small firms, 
with $2.9 billion invested in more than 2,000 companies in 
FY2006 alone. Many of the companies have gone on to become 
household names, including Intel, Callaway Golf, Jenny Craig, 
Outback Steakhouse, and Federal Express.
    SBA's NMVC program addresses the market gap in venture 
capital for companies located in low- and moderate-income rural 
and urban areas, as well as the need for smaller deals that 
neither traditional venture funds nor the SBIC program will 
make. By law, NMVC funds are obligated to make 80 percent of 
their investments in such areas, but, in FY2006, they surpassed 
that target by making 92 percent of their investments in those 
areas. Their investments are longer term, ranging from three to 
seven years, and their deals range from $500,000 to $1 million. 
As Mr. Ray Moncrief, the Executive Vice President and Chief 
Operating Officer of Kentucky Highlands Investment Corp. in 
London, Kentucky, and a manager of both an SBIC fund and an 
NMVC fund, explained at the Committee roundtable on June 21, 
2007, most traditional venture capitalists will not do deals of 
$750,000 or less because of prohibitive transaction costs. 
However, such deals can be done through the NMVC program 
because it is structured with an SBA-backed debenture and an 
operational assistance grant to offset the expensive cost of 
intensive technical assistance to a portfolio company. Those 
incentives allow the industry to attract experienced venture 
capitalists who could potentially make many millionsof dollars 
elsewhere. Attracting that level of expertise, in turn, helps to 
attract investors to a field that does not yet have a track record for 
investments in these areas. Six NMVC companies were formed and began 
investing in 2003 and 2004, and, as of June 2007, the Community 
Development Venture Capital Alliance reported that NMVC companies have 
invested more than $48 million in 75 companies, all based in poor, 
under-invested areas. They have leveraged $136 million in investments 
from other sources, provided more than $6 million in operational 
assistance to 163 companies, created 368 quality jobs with health care 
and benefits, and created or maintained more than 1,600 jobs.

                              II. SUMMARY

    S. 1662, the ``Small Business Venture Capital Act of 
2007,'' incorporates S. 1663, the ``Securing Equity for the 
Economic Development of Low Income Areas Act of 2005,'' or 
``SEED Act,'' and reauthorizes through 2010 the Small Business 
Investment Company Debenture and Participating Securities 
programs and the New Markets Venture Capital program. There are 
four objectives of S. 1662: (1) to simplify the SBIC Debenture 
program so that it is more attractive and beneficial to 
investors; (2) to tweak the SBIC Participating Securities 
program so that the last operating funds have the flexibility 
to maximize follow-on investments as the program is phased out; 
(3) to encourage investment in firms owned by minorities and 
women; and (4) to use the changes to restore the reputation of 
and confidence in the SBIC program. S. 1663, as incorporated 
into the Small Business Venture Capital Act, modifies the NMVC 
program's targeted investment area (the definition of low-
income community) to mirror the New Markets Tax Credit program; 
eliminates the matching requirement for the operational 
assistance grants to mirror the U.S. Department of 
Agriculture's community development venture capital program for 
rural areas; and, clarifies that conditionally approved NMVC 
companies have a full two years to raise the required private 
capital.

           III. HISTORY OF LEGISLATION AND VOTES IN COMMITTEE

    The SBIC program was originally created almost 50 years 
ago, with the enactment of the Small Business Investment Act of 
1958, P.L. 85-699 (Aug. 21, 1958). Passage of the Act addressed 
concerns raised in a Federal Reserve Board report to Congress 
that there was a major gap in the capital markets for long-term 
funding for growth-oriented small businesses. Facilitating the 
flow of capital through the economy to pioneering small 
concerns in order to stimulate the U.S. economy was and remains 
today the main goal of the SBIC program. Congress needs to 
reauthorize the program because the Small Business Investment 
Act, which governs the program, has outdated authorizing 
language (from 2006), leaving the program to operate under 
appropriations bills and a temporary SBA authorization that 
expires on December 15, 2007.
    The NMVC program was introduced in 1999 by Senator Kerry 
and enacted as part of the 2001 Consolidated Appropriations Act 
(S. 1594/P.L. 106-554). The NMVC program addressed concerns 
that, while most of the country was prospering, there were 
still areas which suffered from chronic unemployment and high 
poverty rates. The purpose was to take the power of venture 
capital that had transformed the economies of Silicon Valley in 
California and Route 128 in Massachusetts and use it to 
transform local economies in low-income rural and urban 
communities. Based on the SBA's successful SBIC program, the 
legislation's goal was to create a separate program that 
delivered a double bottom line: economic and social returns. 
The program needs to be reauthorized because it has a sunset 
date of September 30, 2006, and is currently operating under a 
temporary SBA authorization that expires on December 15, 2007.
    The ``Small Business Venture Capital Act of 2007'' (S. 
1662) was introduced by Senator Kerry, for himself and Senator 
Snowe, on June 19, 2007. As introduced, the bill reauthorizes 
the SBA's venture capital programs under the Small Business 
Investment Company (SBIC) program. During the markup of the 
bill, the Committee unanimously adopted by voice vote a 
bipartisan managers' substitute amendment offered by Chairman 
Kerry for himself and Ranking Member Snowe. The substitute 
amendment incorporated S. 1663, the ``Securing Equity for the 
Economic Development of Low Income Areas Act of 2007,'' or 
``SEED Act,'' a bill to reauthorize the New Markets Venture 
Capital (NMVC) program. It also made clarifications and changes 
to the bills as originally introduced based on feedback from 
participants of the small business venture capital roundtable 
held on June 21, 2007. The bill was subsequently adopted as 
amended by a roll call vote of 19-0.
    S. 1662 incorporated some of the SBIC provisions adopted by 
the Committee in the 109th Congress as part of S. 3778, the 
``Small Business Reauthorization and Improvements Act of 
2006,'' which Senator Snowe, then chair of the Committee, 
introduced on August 2, 2006. That bill was reported out of the 
Committee unanimously, by a vote of 18-0, but was never 
considered by the full Senate before the adjournment of the 
109th Congress.
    S. 1663 incorporated NMVC provisions that originated in the 
108th Congress, as Senator Kerry proposed them for inclusion in 
S. 1375, the ``Small Business Administration 50th Anniversary 
Reauthorization Act of 2003.'' They were adopted by the 
Committee and passed by the full Senate but were not included 
in the provisions that were attached to the 2005 Omnibus 
Appropriations Act because of objections by the SBA. Many of 
the measures were then reintroduced by Senator Kerry in the 
109th Congress as the ``Securing Equity for the Economic 
Development of Low-Income Areas Act of 2006,'' or ``SEED Act'' 
(S. 3680), which was cosponsored by Senators Bayh, Landrieu, 
and Lieberman. Some of the provisions in S. 3680 were included 
in the Committee's comprehensive reauthorization bill, S. 3778, 
which, as noted in the preceding paragraph, was reported out of 
the Committee unanimously but was never considered by the full 
Senate before the adjournment of the 109th Congress. The SEED 
Acts in both Congresses were companion bills to H.R. 4303 and 
H.R. 1719, respectively, introduced by Congresswoman Gwen Moore 
of Wisconsin and Congressman Harold Rogers of Kentucky.
    SBA's venture capital programs and the provisions in S. 
1662 and S. 1663 were deliberated in a series of hearings and 
roundtables in the 109th and 110th Congresses.
    On March 9, 2006, during the hearing to examine the SBA's 
Fiscal Year 2007 budget and the SBA's proposed legislative 
package for reauthorization, the Committee questioned the 
rationale for the Administration's proposal to impose 
administrative fees on the small business participants of the 
7(a) Loan Guaranty program, the 504 Loan Guaranty program, and 
the Small Business Investment Company program. These proposals 
were controversial and were not adopted by the Committee.
    On February 28, 2007, the Committee held a hearing to 
review the SBA's Fiscal Year 2008 budget. In addition to 
concerns about frozen program levels for the credit programs, 
including SBICs, some members were opposed to zero funding for 
the NMVC program for the seventhconsecutive year, particularly 
considering that the Administration at the same time proposed a new, 
separate New Markets program, described as the ``New Markets Tax Credit 
Pilot Loan program.'' Senators Kerry and Snowe were successful in 
passing an amendment to the FY2008 Budget Resolution (S. Con. Res 21) 
that provided funding for the New Markets Venture Capital program. 
There was concern about the lack of a proposal or funding for an 
initiative to reform the Participating Securities program. Members were 
glad to see that the Administration did not recycle the previous year's 
proposal to impose an administrative fee on the SBICs, and they were 
cautious about the budget's proposed fee reductions for SBIC debenture 
deals because there was concern about how the Agency would implement 
the reduction while keeping the program at zero subsidy.
    On April 26, 2006, the Committee held a hearing on the 
``Reauthorization of SBA Financing and Economic Development 
Programs.'' The Committee heard from lenders, small business 
stakeholders, and SBA representatives on the benefits of SBA's 
loan and venture capital programs and evaluated legislative 
proposals that were incorporated in S. 3778, the ``Small 
Business Reauthorization and Improvements Act of 2006.''
    On June 21, 2007, to complement the reauthorization hearing 
held on April 26, 2006, the Committee held a roundtable, ``SBA 
Reauthorization: Small Business Venture Capital.'' The purpose 
was to discuss the state of venture capital for small 
businesses, the venture capital needs of small businesses, the 
strengths and weaknesses of the SBIC and NMVC programs, and the 
provisions in S. 1662, the ``Small Business Venture Capital Act 
of 2007,'' and S. 1663, the ``SEED Act.'' The participants 
included small businesses that had received venture capital 
through the SBIC or NMVC programs, managers who run SBIC or 
NMVC funds, experts in the field of developmental venture 
capital and equity for small businesses, and representatives 
from the Small Business Administration, the National Black 
Chamber of Commerce, and the U.S. Hispanic Chamber of Commerce.
    Finally, on May 22, 2007, the Committee held a hearing 
entitled ``Minority Entrepreneurship: Assessing the 
Effectiveness of SBA's Programs for the Minority Business 
Community.'' As part of reauthorization, the Committee has 
tried to address complaints from minority business owners and 
organizations representing minorities that SBA's programs do 
not effectively meet the needs of these entrepreneurs and that 
the SBA needs to use its economic development tools to help 
close the wealth gap between whites and minorities. The 
Committee discussed the need to increase the share of loans to 
minorities, which has remained largely stagnant since 2001, to 
increase the SBIC investments in firms owned by minorities, and 
to increase the licensing of SBIC funds to minorities because, 
according to the SBA's data, they have been declining since 
1998.

                        IV. DESCRIPTION OF BILL

    The ``Small Business Venture Capital Act of 2007'' 
reauthorizes the SBIC Debenture program, the SBIC Participating 
Securities program, and the New Markets Venture Capital program 
through 2010. The SBIC Debenture program is reauthorized to 
back leverage commitments of $2 billion in FY2007, $2.25 
billion in FY2008, $2.5 billion in FY2009, and $2.75 billion in 
FY2010. Based on estimates from the National Association of 
Small Business Investment Companies (NASBIC), this should keep 
pace with current investment levels of SBIC Debenture funds and 
leave room for growth. The New Markets Venture Capital program 
is reauthorized to back $150 million in debentures, the same 
level that is currently authorized by law. In addition, the 
legislation reduces from $30 million to $20 million the 
authorization level for operational assistance grants. The 
Committee estimates that $150 million in debentures would allow 
the SBA to license up to 20 new NMVC companies and that the $20 
million in operational assistance grants would allow the SBA to 
provide each of those companies with up to $1 million in 
operation assistance funding. The bill authorizes the SBA to 
back up to $500 million in SBIC participating securities in 
each of fiscal years 2007, 2008, 2009, and 2010. The Committee 
debated whether to provide new authority for the SBIC 
Participating Securities program because it is being phased out 
and is all but certain not to need the authority. Not only will 
the SBA not license new funds, but it is too expensive to fund 
any new activity (OMB has concluded that the program no longer 
meets the Federal Credit Reform Act standards and therefore 
requires a dollar of appropriations for each dollar of 
Participating Securities leveraged). Nevertheless, many on the 
Committee believe that there remains a need in the market for 
smaller equity investments to small businesses and want to see 
the program reformed, rather than eliminated. Some of those 
proponents thought it was important to signal to the investment 
community that there was still support in Congress for the SBIC 
program.
    Instilling confidence in investors and potential investors 
in SBA's SBIC programs was a priority for the Committee, and, 
therefore, partial justification for all of the SBIC program 
changes in this bill. The Committee agrees that the SBIC 
Participating Securities program has flaws in its current 
structure, leading to what the SBA estimates will be $2.8 
billion in losses by the time all the funds have expired. 
However, many on the Committee do not agree that the program, 
or other iterations of the program, as adopted by the Committee 
in the 109th Congress or proposed by industry, does not meet 
Federal Credit Reform Act Standards. The lack of cooperation 
and lack of transparency in assessing losses and determining 
what meets the test of Federal Credit Reform led the private 
sector to conclude that SBIC commitments with the SBA were 
unreliable and one-sided, in favor of the government.
    In addition to restoring the confidence of the private 
sector in the SBIC program, the bill seeks to make the program 
more attractive in several ways. It simplifies the rules 
regarding the maximum amount of outstanding leverage allowed 
for funds. Currently, the maximum amount of leverage available 
to a management team from the SBA is determined by a complex 
formula that is adjusted annually based on the Consumer Price 
Index (CPI). The amount is the same whether the team has one 
fund or multiple funds. For FY2007, the maximum amount of 
leverage for one fund is $127.2 million. Adjusting the level 
each year to the CPI has proven to be tedious for the SBA and 
for the fund managers. To simplify the limitation and return 
some oversight to the Congress, the bill eliminates the CPI 
adjustment and assigns a fixed-dollar amount of $150 million 
for one fund and a separate $225 million limit for multiple 
funds under common control. Currently, SBA allows multiple SBIC 
funds commonly controlled to exceed the maximum leverage amount 
on a case-by-case basis. According to the SBA, the requests are 
approved the majority of the time. Raising the amount would 
streamline the process, saving time and money for the SBA and 
the funds. Furthermore, it would accomplish this without 
increasing the risk of taxpayer money, since the SBA retains 
the right to reject any request to draw leverage if the fund is 
not in good standing. Because the approval process for a 
license is so rigorous, a fund that is approved for an 
additional license is assumed to be astute enough to make 
investments over the maximum amount. This change could also 
encourage successful fund managers to apply for a second fund 
because they would have access to what the industry refersto as 
``uninterrupted capital'' for new investments as they are winding down 
the previous funds and repaying that leverage.
    In a combined effort to simplify the program and to 
encourage investments in small businesses that are owned by 
minorities or women or that are located in a low-income area, 
S. 1662 increases the maximum leverage amount for a single fund 
from $150 million to $175 million and, for multiple funds under 
common control, from $225 million to $250 million. This change 
is important to address concerns among Committee members that, 
since 1998, the share of investments in firms owned by 
minorities and women has gone down. For example, in 1998, the 
share of financings that went to firms owned by minorities was 
26 percent. In 2004, the most recent data available, the share 
dropped to 10.58 percent. For that same time frame, the share 
of financings to women dropped from 6 percent to 2.96 percent. 
At the roundtable, both the National Black Chamber of Commerce 
and the U.S. Hispanic Chamber of Commerce spoke out against or 
submitted comments against the absence of SBIC companies 
managed by African Americans or Hispanics.
    In order to simplify the administration of the SBIC program 
while increasing the percentage of investments in smaller 
enterprises (net worth of $6 million or less and average net 
profit over two years of $2 million or less), the Small 
Business Venture Capital Act eliminates the current law's two-
tiered formula for a flat rate. Currently, firms that leverage 
$90 million or less must invest a minimum of 20 percent in 
smaller enterprises. Firms that leverage more than $90 million 
must invest 100 percent of every dollar over the $90 million 
threshold in smaller enterprises. According to the industry, 
this system has made it hard to keep records, therefore 
creating an unnecessary workload for the SBA and the funds. To 
correct this inefficiency, the bill establishes a flat 25 
percent requirement that funds must invest in smaller 
enterprises. Because SBA estimates that the majority of funds 
are $90 million or less, the Committee believes that, on 
balance, this change will result in a greater share of 
investments in smaller enterprises.
    To make the SBIC and NMVC programs more attractive to 
investors, more helpful to small businesses, and to bring them 
more in line with private-sector practices, S. 1662 increases 
the maximum percentage of private capital that an SBIC or NMVC 
company may invest in one company from 20 percent to 30 
percent. Typically, private investors place 20 to 25 percent of 
their entire capital in one company. However, because SBIC 
companies have three different leverage ratios available to 
them--1:1, 2:1, and 3:1--(NMVC companies typically use a 1.5:1 
leverage ratio) the 20 percent limit in practice equates to a 
much smaller percentage. For example, a 1:1 fund would end up 
with only 10 percent of its total capital available for one 
investment and a 2:1 fund would end up with a maximum 6.67 
percent of its total capital available for one company. While 
the Committee acknowledges that the purpose of aggregate 
investment limitations is to mitigate risk for taxpayers and 
private investors by forcing SBIC companies to diversify their 
portfolios, the Committee is concerned that present law has 
resulted in less money for a small business receiving SBIC or 
NMVC financing and also less management counseling because the 
SBIC or NMVC company is spread too thin with additional 
investments. Notably, the management counseling a small 
business receives is often as important as SBIC or NMVC 
financing dollars, as was attested to in the Committee 
roundtable on June 21, 2007, by Mr. Greg Harmeyer, the founder 
of Tier One Performance Solutions based in Covington, Kentucky, 
a company that received NMVC funding. Companies that qualify 
for NMVC financing by their very nature must be located in a 
distressed or under-invested area, which means areas that 
typically do not have networks and experts to counsel a 
business. Consequently, these firms do not want an NMVC 
company's money or expertise diluted among too many firms 
because it is already hard to come by and they spend a lot of 
time and money to find a firm that is a good fit. In fact, the 
small businesses argued as strongly in favor of the change as 
the investors. ``From the company's perspective,'' said 
Harmeyer, ``when you are looking at investors, it is an 
enormous effort to manage an investor, to find an investor, and 
to find a relationship that works * * * if you are limited by 
follow-on investment to say, you are going to have to find 
somebody else, that is a big drain on the company's resources 
to be able to manage multiple investors who may have different 
interests, who have different, competing thoughts of where they 
want to go with the company. And so I think it is a detriment 
to the company if the investor is limited. I also would 
completely agree that the more an investment company is diluted 
and has too many companies, the less attention they are going 
to give you in helping you grow your business.'' \5\
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    \5\ Roundtable on ``SBA Reauthorization: Small Business Venture 
Capital Programs'' Before S. Comm. on Small Business & 
Entrepreneurship, 110th Cong. 40, 66 (2007).
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    Last, among the SBIC provisions, the bill allows SBIC 
Participating Securities funds to draw leverage based on SBA-
approved commitments rather than paid-in capital. The SBA is 
phasing out the Participating Securities program, and the last 
of the funds were licensed in 2004 and will operate through 
2014, at a minimum. However, the authority to draw down their 
leverage expires next year, at the latest by September 30, 
2008, and, according to the industry, at the current investment 
rate, most funds will not be able to use all their leverage. 
Without access to that capital, many funds will not be able to 
support the small businesses in their portfolios that require 
follow-on investments. Allowing the funds to draw the leverage 
and save their private capital for follow-on investments could 
mitigate the unintended adverse consequences of shutting down 
this program abruptly, which would harm small businesses and 
their investors. The program was authorized in FY2004 to back 
$4 billion in SBIC Participating Securities, and the 
Participating Securities funds paid the fees for the 
commitments. Because the program participants have already paid 
for these funds through user fees and the government treats the 
$4 billion that was committed in 2004 to be spent, the 
Committee considers this provision to be a technical change 
rather than a modification that would have significant cost. 
The Committee considers this modification low risk because the 
SBA could call the private commitments to cover potential 
losses if they felt the fund was in trouble and the SBA would 
retain the authority to approve or deny the request to draw 
leverage from a fund. Furthermore, the exposure for the SBA was 
low because there are only 29 funds that would even be eligible 
to exercise this option, and not all of those would exercise it 
because they can only do so based on need and if they are in 
good standing. They could not draw the commitment merely to 
hold it.
    The Small Business Venture Capital Act also makes changes 
to the New Markets Venture Capital program. In order to expand 
access to community development venture capital across the 
country, the bill adds a geographic requirement to the criteria 
for selecting NMVC applicants. Building on the current 
provision to seek ``nationwide distribution,'' it directs the 
SBA, to the extent practicable, to license NMVC companies in 
one of each of the SBA's 10 regions. The current six funds 
cover parts of five regions. The program is missing a presence 
in the Great Lakes, the South Central United States, the 
Midwest, the Rocky Mountain Region, the Southwest, and the 
Pacific Northwest. This section strengthens and harmonizes the 
current statute so that the Administration is not only required 
to establish the program but also toimplement the program. This 
clarification was necessary because the program was not implemented in 
a timely or reasonable way, which created hardships for applicant 
investment groups and unnecessary oversight by the committee. To help 
stem the disappearance of U.S. manufacturers, this portion of the 
legislation also makes it a goal for the SBA to license one fund that 
will focus on investing in small manufacturing firms. At the request of 
the SBA at the roundtable, the Managers' substitute amendment changed 
the geographic distribution and small manufacturer requirements to 
goals.
    To address concerns that the SBA does not devote sufficient 
resources to the oversight and management of the NMVC program, 
S. 1662 establishes an Office of New Markets Venture Capital. 
The office would be dedicated to the management of the New 
Markets Venture Capital program, and the legislation stipulates 
that the director will be career staff, rather than a political 
appointee.
    One of the most significant legislative modifications to 
the program addresses a concern, going back to the original 
enactment of the NMVC program, when many community development 
venture capitalists and community development venture 
capitalist experts, such as Dr. Rubin, argued for the program 
to target not only specific geographies but also populations. 
They pointed out that, to have the intended impact, it was 
important to allow New Markets Venture Capital companies to 
invest in small businesses that are either located in a 
specific geographical region or employ people who live in the 
targeted areas and are very poor. While there was some support 
in Congress for that combination, others were opposed to it and 
contended that, if the investments were not place-based, the 
program would not be effective in attracting venture capital to 
the neighborhoods that need anchors to generate economic 
development.
    However, those concerns have proven unfounded because: (1) 
there is a requirement in the current NMVC law that requires 80 
percent of an NMVC company's investments to be ``located'' in a 
low-income area, which provides a protection against abuses; 
and (2) one of the companion New Markets programs, the 
successful New Markets Tax Credit program, was enacted with a 
definition of geographic area that included target populations. 
As was pointed out in the Committee roundtable by Dr. Rubin, 
the country's leading scholar in this field who was in the 
final stages of assessing the progress of the NMVC companies 
for the Agency and who helped craft the original program, 
targeting by geography alone is too limiting to meet the 
objectives of the program: ``The restrictions that currently 
exist around investing in census tracts are very, very 
challenging because census tracts are such a blunt instrument. 
They change dramatically over the course of the years in 
between censuses, and areas that used to be better off might 
become poorer, and yet the census tract doesn't reflect that. 
Census tracts are large, so you can have pockets of 
concentrated poverty that are not reflected in the overall 
designation of that tract * * * . So some kind of modification 
on the targeting is really quite necessary. And I heard this 
very loudly from all the funds.'' \6\
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    \6\ Roundtable on ``SBA Reauthorization: Small Business Venture 
Capital Programs'' Before S. Comm. on Small Business & 
Entrepreneurship, 110th Cong. 14, 77 (2007) (Transcript of 
Proceedings).
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    Furthermore, if the program is to reach small 
manufacturers, the definition must be changed, because even 
most small manufacturers are too big to re-locate. Dr. Rubin 
pointed out that, as a consequence of current law, the six NMVC 
companies have made most of their investments in non-
manufacturing companies. Last, for practical purposes, there 
was a need to harmonize the two programs' definitions of ``low-
income community'' so that the programs complemented each other 
and were easier for investors to use, thereby attracting more 
investors and leveraging more investment in small businesses in 
under-invested areas. For these reasons, S. 1662 changes the 
definition of low-income geographic area in the NMVC program to 
match the definition of the NMTC program. It is important to 
note that, while the Committee modified the definition of low-
income geographic area, it preserved HUBZones, Empowerment 
Zones, and Enterprise Communities as eligible investment areas 
for NMVC funds. There was a drafting error in the bill, as 
introduced, that inadvertently eliminated HUBZones, Empowerment 
Zones, and Enterprise Communities as eligible investment areas 
for NMVC funds. The managers' substitute amendment fixed that 
error and also clarified that the entire definition in the New 
Markets Tax Credit, including ``targeted populations,'' 
applies.
    Finally, the bill includes a provision to eliminate the 
requirement for NMVC companies to raise matching funds from the 
private sector to access operational assistance grant money 
from the SBA. Specifically, NMVC companies were required to 
raise an amount equal to 30 percent of the private capital they 
had already raised for the NMVC fund, which amounted to a 
minimum of $1.5 million. This proved virtually impossible, 
wasting precious time and dollars flying around the country 
fundraising. Consequently, when Congress adopted a bill by 
Senator Harkin that established an NMVC program for rural areas 
at the Department of Agriculture, it eliminated that 
requirement. This brings the programs in line with each other. 
This section of the bill also clarifies current law to provide 
that NMVC companies have two years to raise the matching 
private capital. Current statute says that they have ``up to'' 
two years. In the past, the SBA has interpreted this to mean 
that it has the discretion to allow NMVC companies up to two 
years and has set the time limit for raising the private 
capital at shorter lengths, which the companies found 
unreasonable and unrealistic.

                           V. COMMITTEE VOTE

    In compliance with rule XXVI(7)(b) of the Standing Rules of 
the Senate, the following votes were recorded on June 26, 2007.
    A motion by Senator Kerry to adopt the managers' substitute 
amendment, offered by Senator Kerry for himself and Senator 
Snowe, to S. 1662 was passed by voice vote. The amendment 
included S. 1663, a bill to reauthorize the New Markets Venture 
Capital program.
    A motion by the Chair to adopt the ``Small Business Venture 
Capital Act of 2007'' as amended, to reauthorize the venture 
capital programs of the Small Business Administration and for 
other purposes, was approved by a unanimous 19-0 recorded vote 
with the following Senators voting in the affirmative: Kerry, 
Levin, Harkin, Lieberman, Landrieu, Cantwell, Bayh, Pryor, 
Cardin, Tester, Snowe, Bond, Coleman, Vitter, Dole, Thune, 
Corker, Enzi, and Isakson.

                           VI. COST ESTIMATE

    In compliance with rule XXVI(11)(a)(1) of the Standing 
Rules of the Senate, the Committee estimates the cost of the 
legislation will be equal to the amounts discussed in the 
following letter from the Congressional Budget Office:

                                                   October 2, 2007.
Hon. John F. Kerry,
Chairman, Committee on Small Business and Entrepreneurship,
U.S. Senate, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for S. 1662, the Small 
Business Venture Capital 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.

S. 1662--Small Business Venture Capital Act of 2007

    Summary: S. 1662 would authorize funding over the 2008-2010 
period for the small business investment company (SBIC) 
programs operated by the Small Business Administration (SBA). 
The bill also would amend requirements for disbursing funds 
under commitments made through the participating securities 
program.
    Assuming appropriation of the necessary amounts, CBO 
estimates that implementing S. 1662 would result in 
discretionary outlays of $245 million in 2008 and $1.6 billion 
over the 2008-2012 period. Further, by modifying the 
participating securities program, CBO estimates that enacting 
S. 1662 would increase direct spending by $50 million in 2008. 
CBO estimates that enacting the bill would have no significant 
effect on revenues.
    S. 1662 contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act (UMRA) 
and would impose no costs on state, local, or tribal 
governments.
    Estimated cost to the Federal Government: The estimated 
budgetary impact of S. 1662 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

Participating Securities:
    Authorization Level............................................      500      500      500        0        0
    Estimated Outlays..............................................      225      500      500      275        0
New Markets Venture Capital Program:
    Subsidy Cost:
        Estimated Authorization Level..............................        9        9        9        0        0
        Estimated Outlays..........................................        4        8        8        4        0
    Operational Assistance Grants:
        Authorization Level........................................        6        7        7        0        0
        Estimated Outlays..........................................        1        2        5        6        3
Administrative Costs:
    Estimated Authorization Level..................................       19       19       19       20       20
    Estimated Outlays..............................................       15       18       18       19       19
    Total Changes:
        Estimated Authorization Level..............................      534      535      535       20       20
        Estimated Outlays..........................................      245      528      531      304       22

                                           CHANGES IN DIRECT SPENDING

Estimated Budget Authority.........................................       50        0        0        0        0
Estimated Outlays..................................................       50        0        0        0        0
----------------------------------------------------------------------------------------------------------------

    Basis of estimate: S. 1662 would authorize funding over 
fiscal years 2008 through 2010 for several SBA programs 
authorized by the Small Business Investment Act. The SBA 
programs that the bill would reauthorize include the 
participating securities program, the New Markets Venture 
Capital (NMVC) program, and the debenture program. Each program 
provides funding to small business investment companies that 
make venture capital available to small businesses.
    The budgetary accounting for SBA's 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 guarantees and loan operations. The 
subsidy cost is the estimated long-term cost to the government 
of a 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 budgetary impact of the changes S. 1662 would make to 
small business investment programs is measured in terms of 
projected subsidy costs. The bill would not specify an 
authorization level for either the subsidy or administrative 
costs, if any, that could be incurred as a result of 
implementing the changes proposed in the bill. CBO has 
estimated those amounts based on information from SBA regarding 
the historical demand for and costs of the agency's small 
business investment programs.
    S. 1662 would change the terms that control disbursement of 
funds previously committed under the participating securities 
program. The bill would allow SBICs to request funds from SBA 
without providing a funded commitment from private investors as 
required under current law. This change in the conditions of 
existing agreements with SBICs would be treated as a loan 
modification; under FCRA procedures, the cost of the 
modification is estimated on a net-present-value basis and 
recorded as a change in direct spending in the year the 
legislation is enacted.

Spending subject to appropriation

    For this estimate, CBO assumes that the bill will be 
enacted in calendar year 2007 and that the necessary amounts 
will be appropriated for each year.
    Participating Securities. The bill would authorize SBA to 
purchase up to $500 million in participating securities in each 
of fiscal years 2008 through 2010. Under the participating 
securities program, SBA would provide funding to privately 
owned and operated SBICs to make venture capital investments in 
qualified small businesses. SBICs would be required to share 
any profits earned on those investments with SBA.
    Prior to March 2005, SBA treated the participating 
securities program as a credit program under FCRA, so costs for 
the loan guarantees were recorded on a net-present-value basis. 
SBA no longer treats the participating securities program as a 
credit program, however, and now considers the program to be an 
equity investment in the operation of an SBIC. Therefore, 
rather than calculating the net present value of the cost of 
the guarantees, the full cost of the authorized loan level 
would be recognized in the year it is authorized.
    Based on historical demand for guarantees under the program 
and the gap in availability over the past few years, CBO 
expects that demand for participating securities would be high. 
Assuming appropriation of the authorized amounts, CBO estimates 
that implementing this provision would cost $225 million in 
2008 and $1.5 billion over the 2008-2012 period.
    New Markets Venture Capital Program. S. 1662 would 
authorize amounts sufficient to cover the subsidy costs for 
$150 million in debenture guarantees under the NMVC program 
over fiscal years 2008 through 2010. Under the program, SBA 
would guarantee debentures issued by companies authorized to 
invest in small businesses located in low-income areas. Based 
on information from SBA, CBO expects that the subsidy cost for 
the NMVC program would be about 17 percent and that demand for 
guarantees would fall slightly short of the authorized levels. 
We estimate that this provision would cost $4 million in 2008 
and $24 million over the 2008-2012 period, assuming 
appropriation of the necessary amounts.
    NMVC Operational Assistance Grants. The bill also would 
authorize the appropriation of funds for grants to companies 
participating in the NMVC program to provide assistance to 
small businesses that have received venture capital funding. S. 
1662 would authorize the appropriation of $20 million over the 
2008-2010 period for technical assistance grants. Assuming 
appropriation of the authorized amount, CBO estimates that 
those grants would cost $1 million in 2008 and $17 million over 
the 2008-2012 period.
    Debentures. S. 1662 would authorize SBA to guarantee 
debentures issued by SBICs in the following amounts: $2.25 
billion in fiscal year 2008, $2.5 billion in fiscal year 2009, 
and $2.75 billion in fiscal year 2010. The debenture program 
currently operates at a zero-subsidy rate; that is, the costs 
incurred by SBA to provide the guarantees are offset by fees 
charged to the borrowers. CBO estimates that reauthorizing the 
debenture program through 2010 would not have a significant 
effect on spending subject to appropriation.
    Administrative Costs. As specified in FCRA, subsidy rates 
do not reflect the administrative cost to service loan 
guarantees. Based on the current administrative costs for SBA's 
loan programs and accounting for the increase in the purchase 
of participating securities authorized by the bill, CBO 
estimates that the administrative costs related to the small 
business investment programs authorized by S. 1662 would be $15 
million in 2008 and $89 million over the 2008-2012 period, 
assuming appropriation of the necessary amounts.

Direct spending

    CBO estimates that enacting section 104 would modify the 
terms of existing loan guarantees that would result in an 
additional $250 million in SBIC loan guarantees and would 
increase direct spending by about $50 million in 2008. Under 
credit reform procedures, the costs of such loan modifications 
are estimated on a net-present-value basis and recorded as 
direct spending in the year in which the legislation is 
enacted.
    S. 1662 would authorize SBA to disburse certain funds 
previously committed to SBICs through the participating 
securities program under new terms and conditions. The bill 
would authorize SBICs to request funds from SBA without 
providing funded commitments of capital from private sources at 
the time of the request.
    Under the participating securities program in 2004, SBA 
issued $4 billion in commitments to provide venture capital to 
SBICs. The commitments are limited to a term of five years; at 
the end of that period, the funds committed under the program 
expire, and any unused amounts cease to be available to the 
SBICs. During that initial period, however, an SBIC could draw 
against the commitment after demonstrating an appropriate 
business need that has been approved by SBA and commitments of 
private funding equal to as much as half of the amount to be 
used. The new terms under which funds may be requested would 
apply only to commitments made in 2004--the last year SBA 
offered guarantees under the participating securities program. 
CBO expects that commitments made in prior years will expire 
before S. 1662 is enacted.
    S. 1662 would allow SBICs to request payment of committed 
funds without obtaining a paid commitment from private sources. 
Based on information from SBA, we estimate that an additional 
$250 million in committed funds would be requested by SBICs and 
disbursed under this provision.
    While SBA began treating the participating securities 
program as an equity investment in 2005, this budgetary 
treatment has not been applied retroactively to commitments 
already in place; therefore, credit reform rules would apply to 
this transaction. Because enacting this provision would change 
the cash flows associated with the participating securities 
program, the funds requested by an SBIC under new terms would 
be the result of a modification of the terms under which 
existing participating securities commitments were made.
    Based on information provided by SBA, CBO estimates that 
the subsidy rate for the participating securities program prior 
to the modification is about 16 percent; we expect that this 
subsidy rate would change as a result of the modification. 
First, the loan guarantees would become riskier because SBA 
would be guaranteeing the full amount of the SBIC's request. 
However, this risk would be somewhat mitigated by a higher 
chance for profits to be realized because private funding would 
remain available to SBICs for a longer period of time. We 
assume the higher risk would slightly outweigh the prospect of 
shared profits returned to SBA and estimate that the subsidy 
rate for the additional disbursements would be about 20 
percent, resulting in an estimated subsidy cost of $50 million 
for the $250 million guarantee commitment.
    Intergovernmental and private-sector impact: S. 1662 
contains no intergovernmental or private-sector mandates as 
defined in UMRA and would impose no costs on state, local, or 
tribal governments.
    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: Theresa A. Gullo, Deputy Assistant 
Director for Budget Analysis.

                  VII. EVALUATION OF REGULATORY IMPACT

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

                   VIII. SECTION-BY-SECTION ANALYSIS

Section 1. Short title

    This section specifies the short title of the legislation 
as the ``Small Business Venture Capital Act of 2007.''

Section 2. Definitions

    This section provides definitions for the legislation.

Section 3. Table of contents

    This section provides the table of contents for the 
legislation.

         Title 1. The Small Business Investment Company Program


Section 101. Reauthorization

    This section reauthorizes the SBIC programs through 2010 
and establishes the program levels for each SBIC program. The 
SBIC Debenture program is reauthorized, allowing SBA to back 
SBIC debenture guarantees at the following levels: $2 billion 
in FY 2007; $2.25 billion in FY 2008; $2.5 billion in FY 2009; 
and $2.75 billion in FY 2010. This section reauthorizes the 
SBIC Participating Securities program for $500 million a year 
for each of FY 2007 through FY 2010.

Section 102. Leverage

    The section simplifies the rules regarding the maximum 
outstanding leverage allowed for funds: (1) the maximum amount 
of outstanding leverage made available to any one SBIC may not 
exceed $150 million; (2) the maximum amount of outstanding 
leverage made available to two or more SBICs that are commonly 
controlled may not exceed $225 million; (3) the $150 million 
and $225 million are increased to $175 million and $250 
million, respectively, for any SBIC that certifies that not 
less than 50 percent of its investments are made in companies 
that prior to the investment are owned by either women or 
minorities, as defined by the SBA Administrator, or are located 
in a low-income geographic area; and, (4) the Annual CPI 
adjustments are eliminated.

Section 103. Investments in smaller enterprises

    The section requires each SBIC, as a condition of an 
application for leverage, to certify that not less than 25 
percent of the fund's aggregate dollar amount of financings 
will be provided to ``smaller enterprises.''

Section 104. Private capital

    The section allows Participating Securities SBICs to draw 
leverage based on SBA-approved commitments rather than paid-in 
capital. The section clarifies that the provision applies only 
to Participating Securities SBICs licensed prior to October 1, 
2004, not debenture funds.

Section 105. Maximum investment in a company

    The section increases from 20 percent to 30 percent the 
maximum investment allowed in a company, and it applies to the 
SBIC and the NMVC programs.

             Title II. New Markets Venture Capital Program


Section 201. Diversification of New Markets Venture Capital program

    This section adds a geographic goal to the criteria for 
selecting applicants to the New Markets Venture Capital program 
in order to expand access to community development venture 
capital across the country. This section strengthens and 
harmonizes the current statute so that the Administration is 
not only required to establish the program but to implement the 
program. To help stem the disappearance of U.S. manufacturers, 
the section establishes a goal for the SBA, to the extent 
practicable, to license one fund that will focus on investing 
in small manufacturing firms.

Section 202. Establishment of Office of New Markets Venture Capital

    This section establishes an office dedicated to the 
management of the New Markets Venture Capital program. It 
stipulates that the director will be career staff, rather than 
a political appointee.

Section 203. Low-income geographic areas

    This section harmonizes the definition of low-income 
geographic area of the New Markets Venture Capital program with 
the definition of low-income community used for the New Markets 
Tax Credit, which includes targeted populations. And it 
preserves HUBZones, Empowerment Zones, and Enterprise 
Communities as eligible investment areas for NMVC funds.

Section 204. Applications for New Markets Venture Capital program

     This section requires the SBA within one year to establish 
a standard documents required from applicants for final 
approval.

Section 205. Operational assistance grants

    This section changes the law so that firms no longer need 
to raise $1.5 million in matching funds to access operational 
grant funding. Instead, they will be able to receive a grant of 
the lesser of either 10 percent of the private capital they 
must raise or $1 million. Also under this section, it clarifies 
that conditionally approved NMVC funds will have a full two 
years to raise the minimum $5 million in private capital.

Section 206. Authorization

    This section reauthorizes the NMVC program for three years, 
through 2010. The legislation freezes the debenture 
authorization, allowing the SBA to back $150 million in 
debentures, and reduces from $30 million to $20 million the 
authorization for operational assistance grants, assuming a 
maximum $1 million for each operational assistance grant for a 
possible high of 20 new funds.

                                  
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