The U.S. Small Business Administration (SBA) invited early-stage fund managers to submit materials to become approved as Early Stage Small Business Investment Companies (SBIC). The Early Stage SBIC is a new subcategory of SBIC. A licensed Early Stage SBIC may receive SBA-guaranteed debenture leverage of up to 100 percent of its Regulatory Capital, up to $50 million.
Goals of Early-Stage Investing
The SBA seeks to expand entrepreneurs’ access to capital and encourage innovation as part of President Obama’s Startup America Initiative. The initiative promotes American innovation and job creation by encouraging private sector investment in startups and small firms. The initiative also intends to accelerate research and address barriers to success for small businesses and entrepreneurs.
Early Stage SBIC Requirements
- The fund must raise at least $20 million in Regulatory Capital.
- Commitments must be conditioned upon receipt of an Early Stage SBIC license.
- The fund must be organized as a limited partnership, generally conforming organizing documents to the Early Stage SBA Model Limited Partnership Agreement.
- The fund’s principals must hold at least 75 percent of carried interest.
- The fund must invest at least 50 percent of investment dollars in “early stage small businesses,” defined as those never having achieved positive cash flow from operations in any fiscal year before the year of investment.
Four Stages to Licensing
- Call period. The SBA’s notice starts the FY 2016 Early Stage SBIC call period.
- Initial review.
- Submit a Management Assessment Questionnaire (MAQ) between April 1, 2016, and September 30, 2016.
- SBA conducts due diligence.
- SBA interviews the fund team.
- Green Light Letter. If the applicant meets the criteria, the Green Light Letter will formally invite the applicant to submit an application for an SBIC license. An applicant has one year from the date of the Green Light Letter to submit its license application.
- Fundraising and document preparation.
- Raise the regulatory minimum capital of $20 million.
- SBIC education. All principals are required to attend a one-day SBIC education class in Washington, D.C.
- Finalize documents and perform the checklist.
- SBA receipt of license application.
- Background and document review.
- Divisional Licensing Committee.
- Agency Licensing Committee and Administrator approval.
- Leverage commitments.
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 alerts “SBIC Report: GAO Issues 2015 Investment Report on SBIC Funds” and “SBIC Report: SBA Announces Proposed Rule Creating the Impact SBIC.”