House Small Business Committee Proposes New SBIC Equity Program

Author:Mr Mark Kromkowski, H. Ramsey White III, Terry Haines, Geoffrey C. Cockrell, Michael P. Lusk and Charles A. Cavallo III
Profession:McGuireWoods LLP

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:

Agriculture Technology, Energy Technology, Environmental Technology, Life Science, Information Technology, Digital Media, Clean Technology, and 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...

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