The U.S. Small Business Administration (SBA) proposed a new rule that would define a new class of Small Business Investment Companies (SBIC). These SBICs are called “Impact SBICs” and are designed to generate positive financial returns along with measurable social impact. The SBA seeks to expand the pool of investment capital into segments of the U.S. economy where capital formation gaps exist, such as in low-to-moderate income (LMI) and underserved communities. In addition, the Impact SBIC will support capital investment in innovative sectors of the economy. The SBA also intends to support the development of the impact investing industry. Comments on the proposed rule must be received on or before March 4, 2016.
Goals of Impact Investing
Impact investing is an investment approach that combines the pursuit of financial return with the goal of generating measurable social, environmental or economic impact. Impact investors intend to generate positive social impact, generate a return on capital investment and share a commitment to measure the effect of their investments on the employees, customers and communities of the companies in which they invest.
Proposed Rule Requirements of Impact SBICs
- Impact SBICs must be organized as limited partnerships.
- Impact SBICs must invest at least 50 percent of their financing dollars in small businesses that meet SBA’s criteria.
- Impact SBICs can choose to invest in areas that have been designated by the SBA as geographic areas and sectors of national priority (SBA-Identified Impact Investment), or Impact SBICs can choose Fund-Identified Impact Investments that allow the SBIC to select investments that align with their own definition of impact.
- Impact SBICs must identify themselves as impact investment funds when marketing their funds to prospective investors.
SBA Anticipates that Funds Will Target the Following Types of Businesses:
- Healthcare companies that offer affordable, high-quality services to low-income consumers
- Education companies that provide evidence-based, supplemental learning services designed to enhance student achievement
- Energy efficiency and sustainability consulting firms
- Agricultural businesses that employ humane and environmentally sustainable farming practices
- Businesses that collect and reprocess industrial waste for alternative use
- Alternative credit scoring firms that enhance access to financial services for low-income consumers
Proposed Rule Requires Third-Party Measurement of Results
Impact SBICs would be required to measure their impact using one of several preapproved measurement standards so a common language can be developed. The measurement must be completed by independent third parties using transparent assessment systems. The SBA has preapproved three measurement standards:
- Impact Reporting and Investment Standards created by the Global Impact Investing Network (GIIN)
- G4 Sustainability Reporting Standards produced by the Global Reporting Initiative (GRI)
- Standards produced by the Sustainability Accounting Standards Board (SASB)
The private equity practice group at McGuireWoods 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), your primary attorney at McGuireWoods, or any of the authors.
For more SBIC Insights, see our alert “SBIC Report: GAO Issues 2015 Investment Report on SBIC Funds.”