House Small Business Committee Proposes New SBIC Equity Program

October 30, 2009

The House of Representatives Small Business Committee has proposed H.R. 3854, the “Small Business Financing and Investment Act of 2009.” H.R. 3854 was sponsored by Representatives Schrader (D-OR), Velazquez (D-NY), Halvorson (D-IL), and Kirkpatrick (D-AZ) and creates, modifies and/or enhances more than a dozen programs and initiatives designed to stimulate the growth of U.S. small businesses.

Title VII of HR 3854 (Small Business Early-Stage Investment Program) would amend the Small Business Investment Act of 1958 to establish the small business early-stage investment program (the “SBES Program”). The goal of the SBES Program is “to provide equity investment financing to support early-stage small businesses in targeted industries.” Any type of entity, including SBIC Funds, may apply to become a participating investment company or “SBES Fund.” Within 90 days of submission, the SBA Administrator will determine whether to approve the applicant.[1]

After approval, the SBA Administrator may make one or more grants to the participating investment company. The grant amount under the SBES Program may not exceed 100 percent of the private capital raised by the SBES Fund. The aggregate amount of all grants under the program made to participating investment companies may not exceed $100 million. The grant amount shall remain available to draw upon by the company for five years for new investments and 10 years for follow-on investments and management fees. A participating investment company that receives grant money must make all of its investments in small businesses, of which at least 50 percent must be early-stage small businesses in targeted industries and convey a grant interest to the Administrator.[2]

An early-stage small business in a targeted industry refers to a small business that is domiciled in a state, has not generated gross annual revenues of $15 million in any of the three previous years, and is primarily engaged in researching, developing, manufacturing, producing, or bringing to market goods, products, or services with respect to any of the following business sectors:

  1. Agriculture Technology,
  2. Energy Technology,
  3. Environmental Technology,
  4. Life Science,
  5. Information Technology,
  6. Digital Media,
  7. Clean Technology, and
  8. Defense Technology.

Additionally, the manager’s profits interest, payable to the managers of a participating investment company, can not exceed 20 percent of profits, exclusive of any profits that may accrue as a result of the capital contributions of any manager with respect to the company for those receiving grant monies.[3] Furthermore, a participating investment company must make all distributions to all investors in cash and “within reasonable time after exiting investments, including following a public offering or market sale of underlying investments.”

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NOTES: 1. In making the determination, the Administrator will consider: (1) the likelihood that the applicant will meet its goals specified in the business plan, (2) the likelihood that the investments will create or preserve jobs, (3) the character and fitness of the applicant’s management, (4) the experience and background of the applicant’s management, (5) the extent that the applicant will concentrate its investment activities on early-stage small businesses in targeted industries, (6) the likelihood that the applicant will be profitable, and (7) the experience of the management of the applicant with respect to establishing a profitable investment track record. 2. The conveyed grant interest shall contain all the rights and attributes of other investors attributable to their interest in the participating investment company, but shall not give control or voting rights to the Administrator. This interest entitles the Administrator to a pro rata portion of any distributions made by the participating investment company equal to the percentage of capital in the company that the grant comprises. Additionally, the Administrator shall receive the distributions at the same times and amounts as any other investor in the company with similar interest. And the investment company shall make allocations of income, gain, loss, deductions, and credit to the Administrator with respect to the grant of interest as if the Administrator was an investor. 3. Managers must pay back any excess amount paid to the managers less taxes paid to the investors and the Administrator. “No manager profit interest shall be paid prior to the repayment to the investors and the Administrator of all contributed capital grants made.”