Proposed Rule Permits SBIC Funds to Utilize Two Passive Small Businesses as Pass-Through Entities for Investments

December 23, 2013

On December 23, 2013, the Small Business Administration (SBA) proposed rules to modify existing regulations to the Small Business Investment Company (SBIC) program. Currently, both the Small Business Investment Company Act of 1958 and SBIC regulations generally prohibit SBIC Funds from investing in passive businesses. One exception exists, however, to this general rule. This exception allows SBIC Funds to invest in a passive small business, provided that the investment passes through to one of its non-passive subsidiaries.

One of the SBA’s proposed rules would allow SBIC Funds to utilize two passive small businesses as pass-through entities. Non-SBIC Funds in the private equity and venture capital sectors commonly utilize this investment structure now. The proposed rule would eliminate this advantage.

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 any of the authors, or your primary attorney at McGuireWoods LLP.