[House Report 114-189]
[From the U.S. Government Publishing Office]
114th Congress } { Report
HOUSE OF REPRESENTATIVES
1st Session } { 114-189
======================================================================
SMALL BUSINESS INVESTMENT COMPANY CAPITAL ACT OF 2015
_______
June 25, 2015.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Chabot, from the Committee on Small Business, submitted the
following
R E P O R T
together with
ADDITIONAL VIEWS
[To accompany H.R. 1023]
[Including cost estimate of the Congressional Budget Office]
The Committee on Small Business, to whom was referred the
bill (H.R. 1023) to amend the Small Business Investment Act of
1958 to provide for increased limitations on leverage for
multiple licenses under common control, having considered the
same, report favorably thereon without amendment and recommend
that the bill do pass.
CONTENTS
I. Bill Text.......................................................2
II. Purpose of the Bill and Summary.................................2
III. Background and the Need for Legislation........................2
IV. Hearings........................................................3
V. Committee Consideration.........................................3
VI. Committee Votes................................................3
VII. Section-by-Section Analysis of H.R. 1023........................3
VIII. Congressional Budget Cost Estimate.............................4
IX. Unfunded Mandates...............................................4
X. New Budget Authority, Entitlement Authority and Tax Expenditures5
XI. Oversight Findings.............................................5
XII. Statement of Constitutional Authority...........................5
XIII. Congressional Accountability Act...............................5
XIV. Federal Advisory Committee Statement............................5
XV. Statement of No Earmarks........................................5
XVI. Statement of Duplication of Federal Programs...................5
XVII. Disclosure of Directed Rule Makings.............................5
XVIII. Performance Goals and Objectives...............................6
XIX. Changes in Existing Law Made by the Bill, as Reported...........6
XX. Additional Views...............................................15
I. Bill Text
The bill text is as follows:
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Small Business Investment Company
Capital Act of 2015''.
SEC. 2. INCREASED LIMITATIONS ON LEVERAGE FOR MULTIPLE LICENSES UNDER
COMMON CONTROL.
Section 303(b)(2)(B) of the Small Business Investment Act of 1958 (15
U.S.C. 683(b)(2)(B)) is amended by striking ``$225,000,000'' and
inserting ``$350,000,000''.
II. Purpose and Bill Summary
The purpose of H.R. 1023, the ``Small Business Investment
Company Capital Act of 2015,'' is to amend the Small Business
Investment Act of 1958 to increase the amount of leverage that
is available for investment companies licensed by the
Administrator of the Small Business Administration (SBA) under
common control and ownership from $225 million to $350 million.
The increase in leverage available to certain licensed entities
will have no effect on the overall authorization of the program
established in appropriations bills.
III. Background and Need for Legislation
Small business investment companies (SBICs) were created to
fill a gap in the provision of equity capital to small
businesses. SBICs receive a license to operate according to a
business plan submitted to the SBA. The SBA then authorizes the
licensee to draw leverage (essentially a loan from the
government) of up to three times the amount of private capital
raised by the SBIC.
SBICs are limited in the total amount of leverage they can
obtain from the government--$150 million. 15 U.S.C.
683(b)(2)(A)(ii). If a SBIC reaches that limit (as a result of
successful private fundraising), the managers of the SBIC are
forbidden from participating in the program unless they start a
second SBIC, conduct fundraising, and obtain a license from the
SBA. In such cases, the statutory limit for the combined funds
is $225 million (meaning that the second SBIC under common
management only can raise $25 million and obtain leverage of
$75 million). Id. at 683(b)(2)(B). These commonly managed funds
are colloquially referred to as a family of funds.
The family of funds limit was raised in 2009 from $150
million to $225 million. In the interim, significant changes
have occurred in the economic landscape--particularly
historically low-interest rates for debt capital. Investors
looking for higher returns have gravitated to equity
investments, including those provided by managers of SBICs.
Given this change, it makes abundant sense to raise the family
of fund limits so that successful managers of SBICs can
maintain their presence in the program and continue to attract
private investor dollars that can be leveraged for investment
in small businesses.
IV. Hearings
In the 114th Congress, issues related to SBICs were
addressed at a hearing by the Subcommittee on Economic Growth,
Tax and Capital Access of the Committee on Small Business
entitled ``Improving Capital Access Programs within the SBA''
on May 19, 2015. At the hearing, witnesses testified that
successful family of funds are constrained by the existing
statutory cap and will have no choice but to leave the SBIC
program without a modification of the limitation.
V. Committee Consideration
The Committee on Small Business met in open session, with a
quorum being present, on June 10, 2015, and ordered H.R. 1023
be favorably reported to the House by a voice vote at 12:03 pm.
No amendments were offered during consideration of H.R. 1023.
VI. Committee Votes
Clause 3(b) of rule XIII of the Rules of the House of
Representatives requires the Committee to list the recorded
votes on the motion to report the legislation and amendments
thereto. There were no amendments offered and no recorded votes
were taken in the Committee's consideration of H.R. 1023.
VII. Section-by-Section Analysis of H.R. 1023
Section 1. Short title
This section designates the bill as the ``Small Business
Investment Company Capital Act of 2015.''
Section 2. Increased limitations on leverage for multiple licensees
under common control
This section amends 303(b)(2)(B) of the Small Business
Investment Act of 1958, 15 U.S.C. 683(b)(2)(B) to increase the
amount of leverage available to SBIC licensees under common
control and management from $225 million to $350 million. As
already explained, the Committee needed to take this action to
ensure that successful SBIC licensees could maintain their
presence in the program and raise more funds to invest in small
businesses.
The Committee expects that the SBA will continue to use its
existing standards when licensing a second fund under common
management and control. Further, the Committee fully expects
that the modification made in H.R. 1023 will not subject family
of funds to any greater scrutiny in obtaining additional
leverage with the new cap then under the existing statutory
cap.
The Committee also does not expect that this modification
will have any cost to the taxpayer. The increase in the family
of funds limit made by this section does not change the amounts
set out in appropriations bills for authorized levels of
leverage available to SBICs in any fiscal year. Since the
overall program operates without any appropriated funds (and
has operated without such appropriated funds for many years,
including during the Great Recession), this sensible change can
be made without any risk to the taxpayer.
VIII. Congressional Budget Justification
U.S. Congress,
Congressional Budget Office,
Washington, DC, June 24, 2015.
Hon. Steve Chabot,
Chairman, Committee on Small Business,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 1023, the Small
Business Investment Company Capital Act of 2015.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contacts are Susan
Willie and Ben Christopher.
Sincerely,
Keith Hall,
Director.
Enclosure.
H.R. 1023--Small Business Investment Company Capital Act of 2015
H.R. 1023 would raise the maximum amount of debt, from $225
million to $350 million, that the Small Business Administration
(SBA) can guarantee for a group of companies participating in
the Small Business Investment Company (SBIC) program that are
operated together (defined as ``a family of funds''').
Under current law, businesses participating in the SBIC
program are required to pay various fees that are sufficient to
offset the program's estimated subsidy cost, that is, the
estimated long-term cost to the government of a loan guarantee,
calculated on a net-present-value basis. Based on information
from the SBA, CBO expects that increasing the maximum loan
guarantee level for a family of funds would not affect the
estimated net subsidy cost, nor would the changes increase the
SBA's cost to administer the program, which is recorded in the
budget on a cash basis. Therefore, CBO estimates that
implementing H.R. 1023 would not affect discretionary spending.
Enacting H.R. 1023 also would not affect direct spending or
revenues; therefore, pay-as-you-go procedures do not apply.
H.R. 1023 contains no intergovernmental or private-sector
mandates as defined in the Unfunded Mandates Reform Act and
would not affect the budgets of state, local, or tribal
governments.
On May 28, 2015, CBO transmitted a cost estimate for S.
552, the Small Business Investment Capital Company Act of 2015,
as ordered reported by the Senate Committee on Small Business
and Entrepreneurship. The two bills are identical and the CBO
cost estimate is the same.
The CBO staff contacts for this estimate are Susan Willie
and Ben Christopher. The estimate was approved by Theresa
Gullo, Assistant Director for Budget Analysis.
IX. Unfunded Mandates
H.R. 1023 contains no intergovernmental or private-sector
mandates as defined in the Unfunded Mandates Reform Act, Pub.
L. No. 104-4, and would impose no costs on state, local or
tribal governments.
X. New Budget Authority, Entitlement Authority and Tax Expenditures
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House, the Committee opines that H.R. 1023 will not
establish any new budget or entitlement authority or create any
tax expenditures.
XI. Oversight Findings
In accordance with clause 2(b)(1) of rule X of the Rules of
the House, the oversight findings and recommendations of the
Committee on Small Business with respect to the subject matter
contained in H.R. 1023 are incorporated into the descriptive
portions of this report.
XII. Statement of Constitutional Authority
Pursuant to clause 3(d)(1) of rule XIII of the Rules of the
House of Representatives, the Committee finds that the
authority for this legislation in Art. I, Sec. 8, cl. 3 of the
Constitution of the United States.
XIII. Congressional Accountability Act
H.R. 1023 does not relate to the terms and conditions of
employment or access to public services or accommodations
within the meaning of Sec. 102(b)(3) of Pub. L. No. 104-1.
XIV. Federal Advisory Committee Act Statement
H.R. 1023 does not establish or authorize the establishment
of any new advisory committees as that term is defined in the
Federal Advisory Committee Act, 5 U.S.C. App. 2.
XV. Statement of No Earmarks
Pursuant to clause 9 of rule XXI, H.R. 1023 does not
contain any congressional earmarks, limited tax benefits or
limited tariff benefits as defined in subsections (d), (e) or
(f) of clause 9 of rule XXI of the Rules of the House.
XVI. Statement of Duplication of Federal Programs
Pursuant to clause 3(c) of the rule XIII of the Rules of
the House, no provision of H.R. 1023 establishes or
reauthorizes a program of the federal government known to be
duplicative of another federal program, a program that was
included in any report from the United States Government
Accountability Office pursuant to Sec. 21 of Pub. L. No. 111-
139, or a program related to a program identified in the most
recent catalog of federal domestic assistance.
XVII. Disclosure of Directed Rule Makings
Pursuant to clause 3(c) of rule XIII of the Rules of the
House, H.R. 1023 does not direct any rulemaking.
XVIII. Performance Goals and Objectives
Pursuant to clause 3(c)(4) of rule XIII of the Rules of the
House, the Committee establishes the following performance-
related goals and objectives this legislation:
H.R. 1023 amends the Small Business Investment Act of 1958
to provide for increased limitations on leverage for multiple
licensees under common control.
XIX. 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, and 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) Each small business investment company shall
have authority to borrow money and to issue its securities,
promissory notes, or other obligations under such general
conditions and subject to such limitations and regulations as
the Administration may prescribe.
(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) The total amount of debentures and participating
securities that may be guaranteed by the Administration
and outstanding from a company licensed under section
301(c) of this Act shall not exceed 300 per centum of
the private capital of such company: Provided, That
nothing in this paragraph shall require any such
company that on March 31, 1993, has outstanding
debentures in excess of 300 per centum of its private
capital to prepay such excess: And provided further,
That any such company may apply for an additional
debenture guarantee or participating security guarantee
with the proceeds to be used solely to pay the amount
due on such maturing debenture, but the maturity of the
new debenture or security shall be not later than
September 30, 2002.
(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] $350,000,000.
(C) Investments in low-income geographic
areas.--(i) 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.
(ii) The maximum amount of
outstanding leverage made available
to--
(I) any 1 company described
in clause (iii) may not exceed
the lesser of 300 percent of
private capital of the company,
or $175,000,000; and
(II) 2 or more companies
described in clause (iii) that
are under common control (as
determined by the
Administrator) may not exceed
$250,000,000.
(iii) A company described in this
clause is a company licensed under
section 301(c) in the first fiscal year
after the date of enactment of this
clause or any fiscal year thereafter
that certifies in writing that not less
than 50 percent of the dollar amount of
investments of that company shall be
made in companies that are located in a
low-income geographic area (as that
term is defined in section 351).
(D) Investments in energy saving small
businesses.--
(i) In general.--Subject to clause
(ii), in calculating the outstanding
leverage of a company for purposes of
subparagraph (A), the Administrator
shall exclude the amount of the cost
basis of any Energy Saving qualified
investment in a smaller enterprise made
in the first fiscal year after the date
of enactment of this subparagraph or
any fiscal year thereafter by a company
licensed in the applicable fiscal year.
(ii) Limitations.--
(I) Amount of exclusion.--The
amount excluded under clause
(i) for a company shall not
exceed 33 percent of the
private capital of that
company.
(II) Maximum investment.--A
company shall not make an
Energy Saving qualified
investment in any one entity in
an amount equal to more than 20
percent of the private capital
of that company.
(III) Other terms.--The
exclusion of amounts under
clause (i) shall be subject to
such terms as the Administrator
may impose to ensure that there
is no cost (as that term is
defined in section 502 of the
Federal Credit Reform Act of
1990 (2 U.S.C. 661a)) with
respect to purchasing or
guaranteeing any debenture
involved.
(3) Subject to the foregoing dollar and percentage
limits, a company licensed under section 301(c) of this
Act may issue and have outstanding both guaranteed
debentures and participating securities: Provided, That
the total amount of participating securities
outstanding shall not exceed 200 per centum of private
capital.
For purposes of this subsection, the term ``venture capital''
includes such common stock, preferred stock, or other financing
with subordination or nonamortization characteristics as the
Administration determines to be substantially similar to equity
financing.
(c) Third Party Debt.--The Administrator--
(1) shall not permit a licensee having outstanding
leverage to incur third party debt that would create or
contribute to an unreasonable risk of default or loss
to the Federal Government;
(2) shall permit such licensees to incur third party
debt only on such terms and subject to such conditions
as may be established by the Administrator, by
regulation or otherwise.
(d) Investments in Smaller Enterprises.--The Administrator
shall require each licensee, as a condition of approval of an
application for leverage, to certify in writing that not less
than 25 percent of the aggregate dollar amount of financings of
that licensee shall be provided to smaller enterprises.
(e) Capital Impairment.--Before approving any application for
leverage submitted by a licensee under this Act, the
Administrator--
(1) shall determine that the private capital of the
licensee meets the requirements of section 302(a); and
(2) shall determine, taking into account the nature
of the assets of the licensee, the amount and terms of
any third party debt owed by such licensee, and any
other factors determined to be relevant by the
Administrator, that the private capital of the licensee
has not been impaired to such an extent that the
issuance of additional leverage would create or
otherwise contribute to an unreasonable risk of default
or loss to the Federal Government.
(f) Redemption or Repurchase of Preferred Stock.--
Notwithstanding any other provision of law--
(1) the Administrator may allow the issuer of any
preferred stock sold to the Administration before
November 1, 1989 to redeem or repurchase such stock,
upon the payment to the Administration of an amount
less than the par value of such stock, for a repurchase
price determined by the Administrator after
consideration of all relevant factors, including--
(A) the market value of the stock;
(B) the value of benefits provided and
anticipated to accrue to the issuer;
(C) the amount of dividends paid, accrued,
and anticipated; and
(D) the estimate of the Administrator of any
anticipated redemption; and
(2) any moneys received by the Administration from
the repurchase of preferred stock shall be available
solely to provide debenture leverage to licensees
having 50 percent or more in aggregate dollar amount of
their financings invested in smaller enterprises.
(g) In order to encourage small business investment companies
to provide equity capital to small businesses, the
Administration is authorized to guarantee the payment of the
redemption price and prioritized payments on participating
securities issued by such companies which are licensed pursuant
to section 301(c) of this Act, and a trust or a pool acting on
behalf of the Administration is authorized to purchase such
securities. Such guarantees and purchases shall be made on such
terms and conditions as the Administration shall establish by
regulation. For purposes of this section, (A) the term
``participating securities'' includes preferred stock, a
preferred limited partnership interest or a similar instrument,
including debentures under the terms of which interest is
payable only to the extent of earnings and (B) the term
``prioritized payments'' includes dividends on stock, interest
on qualifying debentures, or priority returns on preferred
limited partnership interests which are paid only to the extent
of earnings. Participating securities guaranteed under this
subsection shall be subject to the following restrictions and
limitations, in addition to such other restrictions and
limitations as the Administration may determine:
(1) Participating securities shall be redeemed not
later than 15 years after their date of issuance for an
amount equal to 100 per centum of the original issue
price plus the amount of any accrued prioritized
payment: Provided, That if, at the time the securities
are redeemed, whether as scheduled or in advance, the
issuing company (A) has not paid all accrued
prioritized payments in full as provided in paragraph
(2) below and (B) has not sold or otherwise disposed of
all investments subject to profit distributions
pursuant to paragraph (11), the company's obligation to
pay accrued and unpaid prioritized payments shall
continue and payment shall be made from the realized
gain, if any, on the disposition of such investments,
but if on disposition there is no realized gain, the
obligation to pay accrued and unpaid prioritized
payments shall be extinguished: Provided further, That
in the interim, the company shall not make any in-kind
distributions of such investments unless it pays to the
Administration such sums, up to the amount of the
unrealized appreciation on such investments, as may be
necessary to pay in full the accrued prioritized
payments.
(2) Prioritized payments on participating securities
shall be preferred and cumulative and payable out of
the retained earnings available for distribution, as
defined by the Administration, of the issuing company
at 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
securities, adjusted to the nearest one-eighth of 1
percent, plus, for participating securities 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 participating securities under this Act,
which amount may not exceed 1.46 percent per year, and
which shall be paid to and retained by the
Administration.
(3) In the event of liquidation of the company,
participating securities shall be senior in priority
for all purposes to all other equity interests in the
issuing company, whenever created.
(4) Any company issuing a participating security
under this Act shall commit to invest or shall invest
an amount equal to the outstanding face value of such
security solely in equity capital. As used in this
subsection, ``equity capital'' means common or
preferred stock or a similar instrument, including
subordinated debt with equity features which is not
amortized and which provides for interest payments from
appropriate sources, as determined by the
Administration.
(5) The only debt (other than leverage obtained in
accordance with this title) which any company issuing a
participating security under this subsection may have
outstanding shall be temporary debt in amounts limited
to not more than 50 per centum of private capital.
(6) The Administration may permit the proceeds of a
participating security to be used to pay the principal
amount due on outstanding debentures guaranteed by the
Administration, if (A) the company has outstanding
equity capital invested in an amount equal to the
amount of the debentures being refinanced and (B) the
Administration receives profit participation on such
terms and conditions as it may determine, but not to
exceed the per centums specified in paragraph (11).
(7) For purposes of computing profit participation
under paragraph (11), except as otherwise determined by
the Administration, the management expenses of any
company which issues participating securities shall not
be greater than 2.5 per centum per annum of the
combined capital of the company, plus $125,000 if the
company's combined capital is less than $20,000,000.
For purposes of this paragraph, (A) the term ``combined
capital'' means the aggregate amount of private capital
and outstanding leverage and (B) the term ``management
expenses'' includes salaries, office expenses, travel,
business development, office and equipment rental,
bookkeeping and the development, investigation and
monitoring of investments, but does not include the
cost of services provided by specialized outside
consultants, outside lawyers and outside auditors, who
perform services not generally expected of a venture
capital company nor does such term include the cost of
services provided by any affiliate of the company which
are not part of the normal process of making and
monitoring venture capital investments.
(8) Notwithstanding paragraph (9), if a company is
operating as a limited partnership or as a subchapter S
corporation or an equivalent pass-through entity for
tax purposes and if there are no accumulated and unpaid
prioritized payments, the company may make annual
distributions to the partners, shareholders, or members
in amounts not greater than each partner's,
shareholder's, or member's maximum tax liability. For
purposes of this paragraph, the term ``maximum tax
liability'' means the amount of income allocated to
each partner, shareholder, or member (including an
allocation to the Administration as if it were a
taxpayer) for Federal income tax purposes in the income
tax return filed or to be filed by the company with
respect to the fiscal year of the company immediately
preceding such distribution, multiplied by the highest
combined marginal Federal and State income tax rates
for corporations or individuals, whichever is higher,
on each type of income included in such return. For
purposes of this paragraph, the term ``State income
tax'' means the income tax of the State where the
company's principal place of business is located. A
company may also elect to make a distribution under
this paragraph at any time during any calendar quarter
based on an estimate of the maximum tax liability. If a
company makes 1 or more interim distributions for a
calendar year, and the aggregate amount of those
distributions exceeds the maximum amount that the
company could have distributed based on a single annual
computation, any subsequent distribution by the company
under this paragraph shall be reduced by an amount
equal to the excess amount distributed.
(9) After making any distributions as provided in
paragraph (8), a company with participating securities
outstanding may distribute the balance of income to its
investors, specifically including the Administration,
in the per centums specified in paragraph (11), if
there are no accumulated and unpaid prioritized
payments and if all amounts due the Administration
pursuant to paragraph (11) have been paid in full,
subject to the following conditions:
(A) As of the date of the proposed
distribution, if the amount of leverage
outstanding is more than 200 per centum of the
amount of private capital, any amounts
distributed shall be made to private investors
and to the Administration in the ratio of
leverage to private capital.
(B) As of the date of the proposed
distribution, if the amount of leverage
outstanding is more than 100 per centum but not
more than 200 per centum of the amount of
private capital, 50 per centum of any amounts
distributed shall be made to the Administration
and 50 per centum shall be made to the private
investors.
(C) If the amount of leverage outstanding is
100 per centum, or less, of the amount of
private capital, the ratio shall be that for
distribution of profits as provided in
paragraph (11).
(D) Any amounts received by the
Administration under subparagraph (A) or (B)
shall be applied first as profit participation
as provided in paragraph (11) and any remainder
shall be applied as a prepayment of the
principal amount of the participating
securities or debentures.
(10) After making any distributions pursuant to
paragraph (8), a company with participating securities
outstanding may return capital to its investors,
specifically including the Administration, if there are
no accumulated and unpaid prioritized payments and if
all amounts due the Administration pursuant to
paragraph (11) have been paid in full. Any
distributions under this paragraph shall be made to
private investors and to the Administration in the
ratio of private capital to leverage as of the date of
the proposed distribution: Provided, That if the amount
of leverage outstanding is less than 50 per centum of
the amount of private capital or $10,000,000, whichever
is less, no distribution shall be required to be made
to the Administration unless the Administration
determines, on a case by case basis, to require
distributions to the Administration to reduce the
amount of outstanding leverage to an amount less than
$10,000,000.
(11)(A) A company which issues participating
securities shall agree to allocate to the
Administration a share of its profits determined by the
relationship of its private capital to the amount of
participating securities guaranteed by the
Administration in accordance with the following:
(i) If the total amount of participating
securities is 100 per centum of private capital
or less, the company shall allocate to the
Administration a per centum share computed as
follows: the amount of participating securities
divided by private capital times 9 per centum.
(ii) If the total amount of participating
securities is more than 100 per centum but not
greater than 200 per centum of private capital,
the company shall allocate to the
Administration a per centum share computed as
follows:
(I) 9 per centum, plus
(II) 3 per centum of the amount of
participating securities minus private
capital divided by private capital.
(B) Notwithstanding any other provision of this
paragraph--
(i) in no event shall the total per centum
required by this paragraph exceed 12 per
centum, unless required pursuant to the
provisions of (ii) below,
(ii) if, on the date the participating
securities are marketed, the interest rate on
Treasury bonds with a maturity of 10 years is a
rate other than 8 per centum, the
Administration shall adjust the rate specified
in paragraph (A) above, either higher or lower,
by the same per centum by which the Treasury
bond rate is higher or lower than 8 per centum,
and
(iii) this paragraph shall not be construed
to create any ownership interest of the
Administration in the company.
(12) A company may elect to make an in-kind
distribution of securities only if such securities are
publicly traded and marketable. The company shall
deposit the Administration's share of such securities
for disposition with a trustee designated by the
Administration or, at its option and with the agreement
of the company, the Administration may direct the
company to retain the Administration's share. If the
company retains the Administration's share, it shall
sell the Administration's share and promptly remit the
proceeds to the Administration. As used in this
paragraph, the term ``trustee'' means a person who is
knowledgeable about and proficient in the marketing of
thinly traded securities.
(h) The computation of amounts due the Administration under
participating securities shall be subject to the following
terms and conditions:
(1) The formula in subsection (g)(11) shall be
computed annually and the Administration shall receive
distributions of its profit participation at the same
time as other investors in the company.
(2) The formula shall not be modified due to an
increase in the private capital unless the increase is
provided for in a proposed business plan submitted to
and approved by the Administration.
(3) After distributions have been made, the
Administration's share of such distributions shall not
be recomputed or reduced.
(4) If the company prepays or repays the
participating securities, the Administration shall
receive the requisite participation upon the
distribution of profits due to any investments held by
the company on the date of the repayment or prepayment.
(5) If a company is licensed on or before March 31,
1993, it may elect to exclude from profit participation
all investments held on that date and in such case the
Administration shall determine the amount of the future
expenses attributable to such prior investment:
Provided, That if the company issues participating
securities to refinance debentures as authorized in
subsection (g)(6), it may not elect to exclude profits
on existing investments under this paragraph.
(i) Leverage Fee.--With respect to leverage granted by the
Administration to a licensee, the Administration shall collect
from the licensee a nonrefundable fee in an amount equal to 3
percent of the face amount of leverage granted to the licensee
in the following manner: 1 percent upon the date on which the
Administration enters into any commitment for such leverage
with the licensee, and the balance of 2 percent (or 3 percent
if no commitment has been entered into by the Administration)
on the date on which the leverage is drawn by the licensee.
(j) Calculation of Subsidy Rate.--All fees, interest, and
profits received and retained by the Administration under this
section shall be included in the calculations made by the
Director of the Office of Management and Budget to offset the
cost (as that term is defined in section 502 of the Federal
Credit Reform Act of 1990) to the Administration of purchasing
and guaranteeing debentures and participating securities under
this Act.
(k) Energy Saving Debentures.--In addition to any other
authority under this Act, a small business investment company
licensed in the first fiscal year after the date of enactment
of this subsection or any fiscal year thereafter may issue
Energy Saving debentures.
* * * * * * *
XX. Additional Views
----------
ADDITIONAL VIEW
BACKGROUND
Like many of the SBA's financing programs, the SBIC program
operates as a public-private partnership. 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, plus resources 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 business
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. Debenture leverage has a term
of ten years, with semi-annual interest payments and a lump sum
payment of principal at maturity. Debenture leverage operates
on a zero-subsidy basis. Participating securities function
similar to debentures, but the SBA advances interest to the
pool investors and is repaid only out of profits of the fund.
This makes participating securities unique among the SBA's
programs. Due to rising costs, the SBA stopped issuing
participating securities in 2004 and today, only 50 remain in
operation.
By their nature, debenture SBICs focus on companies that
are mature enough to make current interest payments on the
investment so that, in turn, the SBIC can meet its interest
obligations to SBA. Thus, debenture financing will generally be
best suited for SBICs investing in portfolio companies with the
ability to service debt. By contrast, participating securities
SBICs are able to invest equity capital in earlier stage
businesses because interest is accrued on their obligation to
the SBA. Thus, participating securities are generally best
suited for SBICs investing in seed and early stage businesses
or businesses that either do not have established cash flow or
need to use available cash for other purposes.
Over the past 5 years, the number of SBIC licenses has
remained fairly constant, averaging 300 each year. However,
financing has grown considerably in that period. For
comparison, in 2010, SBICs reported financings of $2 billion,
by 2014 that figure grew to $5.4 billion, a 170 percent
increase. Also, as the number of participating securities SBIC
licensees has decreased (with commensurate increases in
debenture SBICs), debt financing has grown at a much faster
pace than equity-only investments. Straight debt has grown 4-
fold, while all-equity investments have only doubled since FY
2010.
For the larger and more active SBICs, the Small Business
Investment Act permits fund managers to hold multiple licenses,
known as a ``family-of-funds.'' The main benefit of a family-
of-funds is the ability to draw additional SBA leverage. The
majority of SBIC licenses are held in families. The current
leverage caps, implemented in 2010, allow single licensees to
draw $175 million and ``family-of-fund'' licensees to draw $225
million. Today, some of the largest SBICs have reached the cap.
LEGISLATION
Introduced by Chairman Chabot, H.R. 1023, the ``Small
Business Investment Company Capital Act of 2015'' would
permanently increase the family-of-funds leverage cap from $225
million to $350 million, a 55 percent increase. While the goal
of expanding access to capital for small businesses is
laudable, the increase in leverage raises a number of concerns.
Very few SBICs will be able to take advantage of the
increase, limiting the actual amount of capital that will reach
the small business community. According to SBA data, out of the
total 299 funds in the SBIC program, 20 of them (6% of total
funds) belong to 10 families that are either at or within 10
percent of the limit: 7 families are at the max and three
families have between $200 million and $225 million. The rest
of the funds are either single funds (121) or managed by
families that have less than $200 million outstanding from SBA
(158).
The seven firms that have maxed out their SBIC leverage
(``Tier-1 SBICs'') have made 732 investments totaling $3
billion over the past 5 years. However, women- and minority-
owned firms were significantly underrepresented. Tier-1 SBICs
made only twelve investments to women-owned firms and four to
minority-owned firms. These figures equate to just 1.6 and 0.5
percent of all investments made by the group. Veteran-owned
firms were also shunned by the seven largest SBICs, receiving
just two investments during the same period.
This bill also concentrates risk in just a handful of SBIC
asset managers without increasing safeguards on safety and
soundness. If the top 10 SBIC fund families drew the leverage
authorized by H.R. 1023, taxpayers would be exposed to an
additional $1.25 billion in outlays. It should be noted that,
according to the federal credit supplement, the lifetime
default rate in the SBIC debenture program is over 24 percent.
Finally, increasing leverage in the SBIC program could be
seen as fostering a duplicative federal program. As noted
above, the majority of SBICs operate under the debenture
program, which favors businesses that can service debt. As
such, SBA data shows about 66 percent of SBIC investments are
in the form of straight debt, with the average being about $3
million. The 7(a) program offers a competing loan product and
made nearly 2,000 loans of $2 million or more last year.
Nydia M. Velazquez.
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