February 19, 2013
On Feb. 12, 2013, the Investment Division of the U.S. Small Business Administration (SBA) released its SBIC TechNote 17 providing insight on the criteria the SBA considers in determining whether a Person has “Common Control” over two or more SBIC Funds. Common Control affects maximum leverage eligibility, since two or more funds under Common Control are limited to a maximum aggregate outstanding leverage of $225 million, while a single fund is allowed up to $150 million of outstanding leverage.
Common Control is defined as “a condition where two or more Persons, either through ownership, management, contract, or otherwise, are under the Control of one group or Person.” Control is defined as “the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Licensee or other concern, whether through the ownership of voting securities, by contract, or otherwise.”
Control may be triggered by ownership, ability to impact fund management or investment decisions, or other factors. The SBA will determine whether the Person has Control in each SBIC Fund based on the totality of the circumstances, although the SBA will generally consider a Person to have Control if any of the following circumstances exist:
- The Person has significant direct or indirect ownership in the SBIC Fund or General Partner as follows:
- The Person owns or controls 33 percent or more of an SBIC Fund; or
- The Person owns or controls 10 percent or more of an SBIC Fund and participates in the investment decision; or
- The Person owns or controls any portion of the General Partner, except as a non-managing member solely for the purpose of receiving carried interest no greater than 25 percent.
- The Person’s participation in carried interest is greater than 25 percent.
- The Person is part of the General Partner’s management team.
- The Person participates in the investment decision, unless it can be clearly demonstrated to the SBA’s satisfaction that the Person does not have significant influence in those decisions. Such considerations may include:
- Whether the remainder of the Investment Committee would qualify for a license without the Person.
- Whether the Person has veto power or a significant voice in the Committee’s decision making.
In determining whether a Person has Control, the SBA will also consider other relevant factors, including but not limited to:
- Whether the Person’s ownership interest in the SBIC Fund, its General Partner or its management company is large when compared to other ownership interests.
- Whether the Person qualifies as an Associate of the SBIC Fund or its General Partner.
- Any indications that the Person may have significant influence over members of the management team.
The private equity practice group at McGuireWoods LLP is dedicated to keeping clients advised of new legislative and business developments as they occur. If you have any questions regarding these issues, please feel free to contact Mark A. Kromkowski (312.849.8170), Bryan P. Bylica (312.750.3617), your primary attorney at McGuireWoods LLP, or any of the authors.