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114th Congress   }                                      {       Report
                        HOUSE OF REPRESENTATIVES
 1st Session     }                                      {      114-189

======================================================================



 
         SMALL BUSINESS INVESTMENT COMPANY CAPITAL ACT OF 2015

                                _______
                                

 June 25, 2015.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

    Mr. Chabot, from the Committee on Small Business, submitted the 
                               following

                              R E P O R T

                             together with

                            ADDITIONAL VIEWS

                        [To accompany H.R. 1023]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Small Business, to whom was referred the 
bill (H.R. 1023) to amend the Small Business Investment Act of 
1958 to provide for increased limitations on leverage for 
multiple licenses under common control, having considered the 
same, report favorably thereon without amendment and recommend 
that the bill do pass.

                                CONTENTS

   I. Bill Text.......................................................2
  II. Purpose of the Bill and Summary.................................2
 III.  Background and the Need for Legislation........................2
  IV. Hearings........................................................3
   V. Committee Consideration.........................................3
  VI.  Committee Votes................................................3
 VII. Section-by-Section Analysis of H.R. 1023........................3
VIII.  Congressional Budget Cost Estimate.............................4
  IX. Unfunded Mandates...............................................4
   X. New Budget Authority, Entitlement Authority and Tax Expenditures5
  XI.  Oversight Findings.............................................5
 XII. Statement of Constitutional Authority...........................5
XIII.  Congressional Accountability Act...............................5
 XIV. Federal Advisory Committee Statement............................5
  XV. Statement of No Earmarks........................................5
 XVI.  Statement of Duplication of Federal Programs...................5
XVII. Disclosure of Directed Rule Makings.............................5
XVIII. Performance Goals and Objectives...............................6

 XIX. Changes in Existing Law Made by the Bill, as Reported...........6
  XX. Additional Views...............................................15

                              I. Bill Text

    The bill text is as follows:

  Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

  This Act may be cited as the ``Small Business Investment Company 
Capital Act of 2015''.

SEC. 2. INCREASED LIMITATIONS ON LEVERAGE FOR MULTIPLE LICENSES UNDER 
                    COMMON CONTROL.

  Section 303(b)(2)(B) of the Small Business Investment Act of 1958 (15 
U.S.C. 683(b)(2)(B)) is amended by striking ``$225,000,000'' and 
inserting ``$350,000,000''.

                      II. Purpose and Bill Summary

    The purpose of H.R. 1023, the ``Small Business Investment 
Company Capital Act of 2015,'' is to amend the Small Business 
Investment Act of 1958 to increase the amount of leverage that 
is available for investment companies licensed by the 
Administrator of the Small Business Administration (SBA) under 
common control and ownership from $225 million to $350 million. 
The increase in leverage available to certain licensed entities 
will have no effect on the overall authorization of the program 
established in appropriations bills.

                III. Background and Need for Legislation

    Small business investment companies (SBICs) were created to 
fill a gap in the provision of equity capital to small 
businesses. SBICs receive a license to operate according to a 
business plan submitted to the SBA. The SBA then authorizes the 
licensee to draw leverage (essentially a loan from the 
government) of up to three times the amount of private capital 
raised by the SBIC.
    SBICs are limited in the total amount of leverage they can 
obtain from the government--$150 million. 15 U.S.C. 
683(b)(2)(A)(ii). If a SBIC reaches that limit (as a result of 
successful private fundraising), the managers of the SBIC are 
forbidden from participating in the program unless they start a 
second SBIC, conduct fundraising, and obtain a license from the 
SBA. In such cases, the statutory limit for the combined funds 
is $225 million (meaning that the second SBIC under common 
management only can raise $25 million and obtain leverage of 
$75 million). Id. at 683(b)(2)(B). These commonly managed funds 
are colloquially referred to as a family of funds.
    The family of funds limit was raised in 2009 from $150 
million to $225 million. In the interim, significant changes 
have occurred in the economic landscape--particularly 
historically low-interest rates for debt capital. Investors 
looking for higher returns have gravitated to equity 
investments, including those provided by managers of SBICs. 
Given this change, it makes abundant sense to raise the family 
of fund limits so that successful managers of SBICs can 
maintain their presence in the program and continue to attract 
private investor dollars that can be leveraged for investment 
in small businesses.

                              IV. Hearings

    In the 114th Congress, issues related to SBICs were 
addressed at a hearing by the Subcommittee on Economic Growth, 
Tax and Capital Access of the Committee on Small Business 
entitled ``Improving Capital Access Programs within the SBA'' 
on May 19, 2015. At the hearing, witnesses testified that 
successful family of funds are constrained by the existing 
statutory cap and will have no choice but to leave the SBIC 
program without a modification of the limitation.

                       V. Committee Consideration

    The Committee on Small Business met in open session, with a 
quorum being present, on June 10, 2015, and ordered H.R. 1023 
be favorably reported to the House by a voice vote at 12:03 pm. 
No amendments were offered during consideration of H.R. 1023.

                          VI. Committee Votes

    Clause 3(b) of rule XIII of the Rules of the House of 
Representatives requires the Committee to list the recorded 
votes on the motion to report the legislation and amendments 
thereto. There were no amendments offered and no recorded votes 
were taken in the Committee's consideration of H.R. 1023.

             VII. Section-by-Section Analysis of H.R. 1023


Section 1. Short title

    This section designates the bill as the ``Small Business 
Investment Company Capital Act of 2015.''

Section 2. Increased limitations on leverage for multiple licensees 
        under common control

    This section amends 303(b)(2)(B) of the Small Business 
Investment Act of 1958, 15 U.S.C. 683(b)(2)(B) to increase the 
amount of leverage available to SBIC licensees under common 
control and management from $225 million to $350 million. As 
already explained, the Committee needed to take this action to 
ensure that successful SBIC licensees could maintain their 
presence in the program and raise more funds to invest in small 
businesses.
    The Committee expects that the SBA will continue to use its 
existing standards when licensing a second fund under common 
management and control. Further, the Committee fully expects 
that the modification made in H.R. 1023 will not subject family 
of funds to any greater scrutiny in obtaining additional 
leverage with the new cap then under the existing statutory 
cap.
    The Committee also does not expect that this modification 
will have any cost to the taxpayer. The increase in the family 
of funds limit made by this section does not change the amounts 
set out in appropriations bills for authorized levels of 
leverage available to SBICs in any fiscal year. Since the 
overall program operates without any appropriated funds (and 
has operated without such appropriated funds for many years, 
including during the Great Recession), this sensible change can 
be made without any risk to the taxpayer.

                VIII. Congressional Budget Justification

                                     U.S. Congress,
                               Congressional Budget Office,
                                     Washington, DC, June 24, 2015.
Hon. Steve Chabot,
Chairman, Committee on Small Business,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 1023, the Small 
Business Investment Company Capital Act of 2015.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contacts are Susan 
Willie and Ben Christopher.
            Sincerely,
                                                Keith Hall,
                                                          Director.
    Enclosure.

H.R. 1023--Small Business Investment Company Capital Act of 2015

    H.R. 1023 would raise the maximum amount of debt, from $225 
million to $350 million, that the Small Business Administration 
(SBA) can guarantee for a group of companies participating in 
the Small Business Investment Company (SBIC) program that are 
operated together (defined as ``a family of funds''').
    Under current law, businesses participating in the SBIC 
program are required to pay various fees that are sufficient to 
offset the program's estimated subsidy cost, that is, the 
estimated long-term cost to the government of a loan guarantee, 
calculated on a net-present-value basis. Based on information 
from the SBA, CBO expects that increasing the maximum loan 
guarantee level for a family of funds would not affect the 
estimated net subsidy cost, nor would the changes increase the 
SBA's cost to administer the program, which is recorded in the 
budget on a cash basis. Therefore, CBO estimates that 
implementing H.R. 1023 would not affect discretionary spending. 
Enacting H.R. 1023 also would not affect direct spending or 
revenues; therefore, pay-as-you-go procedures do not apply.
    H.R. 1023 contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act and 
would not affect the budgets of state, local, or tribal 
governments.
    On May 28, 2015, CBO transmitted a cost estimate for S. 
552, the Small Business Investment Capital Company Act of 2015, 
as ordered reported by the Senate Committee on Small Business 
and Entrepreneurship. The two bills are identical and the CBO 
cost estimate is the same.
    The CBO staff contacts for this estimate are Susan Willie 
and Ben Christopher. The estimate was approved by Theresa 
Gullo, Assistant Director for Budget Analysis.

                         IX. Unfunded Mandates

    H.R. 1023 contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act, Pub. 
L. No. 104-4, and would impose no costs on state, local or 
tribal governments.

  X. New Budget Authority, Entitlement Authority and Tax Expenditures

    In compliance with clause 3(c)(2) of rule XIII of the Rules 
of the House, the Committee opines that H.R. 1023 will not 
establish any new budget or entitlement authority or create any 
tax expenditures.

                         XI. Oversight Findings

    In accordance with clause 2(b)(1) of rule X of the Rules of 
the House, the oversight findings and recommendations of the 
Committee on Small Business with respect to the subject matter 
contained in H.R. 1023 are incorporated into the descriptive 
portions of this report.

               XII. Statement of Constitutional Authority

    Pursuant to clause 3(d)(1) of rule XIII of the Rules of the 
House of Representatives, the Committee finds that the 
authority for this legislation in Art. I, Sec. 8, cl. 3 of the 
Constitution of the United States.

                 XIII. Congressional Accountability Act

    H.R. 1023 does not relate to the terms and conditions of 
employment or access to public services or accommodations 
within the meaning of Sec. 102(b)(3) of Pub. L. No. 104-1.

             XIV. Federal Advisory Committee Act Statement

    H.R. 1023 does not establish or authorize the establishment 
of any new advisory committees as that term is defined in the 
Federal Advisory Committee Act, 5 U.S.C. App. 2.

                      XV. Statement of No Earmarks

    Pursuant to clause 9 of rule XXI, H.R. 1023 does not 
contain any congressional earmarks, limited tax benefits or 
limited tariff benefits as defined in subsections (d), (e) or 
(f) of clause 9 of rule XXI of the Rules of the House.

           XVI. Statement of Duplication of Federal Programs

    Pursuant to clause 3(c) of the rule XIII of the Rules of 
the House, no provision of H.R. 1023 establishes or 
reauthorizes a program of the federal government known to be 
duplicative of another federal program, a program that was 
included in any report from the United States Government 
Accountability Office pursuant to Sec. 21 of Pub. L. No. 111-
139, or a program related to a program identified in the most 
recent catalog of federal domestic assistance.

               XVII. Disclosure of Directed Rule Makings

    Pursuant to clause 3(c) of rule XIII of the Rules of the 
House, H.R. 1023 does not direct any rulemaking.

                XVIII. Performance Goals and Objectives

    Pursuant to clause 3(c)(4) of rule XIII of the Rules of the 
House, the Committee establishes the following performance-
related goals and objectives this legislation:
    H.R. 1023 amends the Small Business Investment Act of 1958 
to provide for increased limitations on leverage for multiple 
licensees under common control.

       XIX. Changes in Existing Law Made by the Bill, as Reported

  In compliance with clause 3(e) of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italic, and existing law in which no 
change is proposed is shown in roman):

                 SMALL BUSINESS INVESTMENT ACT OF 1958




           *       *       *       *       *       *       *
                TITLE III--INVESTMENT DIVISION PROGRAMS


Part A--Small Business Investment Companies

           *       *       *       *       *       *       *



                            borrowing power

  Sec. 303. (a) Each small business investment company shall 
have authority to borrow money and to issue its securities, 
promissory notes, or other obligations under such general 
conditions and subject to such limitations and regulations as 
the Administration may prescribe.
  (b) To encourage the formation and growth of small business 
investment companies the Administration is authorized when 
authorized in appropriation Acts, to purchase, or to guarantee 
the timely payment of all principal and interest as scheduled 
on, debentures or participating securities issued by such 
companies. Such purchases or guarantees may be made by the 
Administration on such terms and conditions as it deems 
appropriate, pursuant to regulations issued by the 
Administration. The full faith and credit of the United States 
is pledged to the payment of all amounts which may be required 
to be paid under any guarantee under this subsection. 
Debentures purchased or guaranteed by the Administration under 
this subsection shall be subordinate to any other debenture 
bonds, promissory notes, or other debts and obligations of such 
companies, unless the Administration in its exercise of 
reasonable investment prudence and in considering the financial 
soundness of such company determines otherwise. Such debentures 
may be issued for a term of not to exceed fifteen years and 
shall bear interest at a rate not less than a rate determined 
by the Secretary of the Treasury taking into consideration the 
current average market yield on outstanding marketable 
obligations of the United States with remaining periods to 
maturity comparable to the average maturities on such 
debentures, adjusted to the nearest one-eighth of 1 per centum, 
plus, for debentures obligated after September 30, 2001, an 
additional charge, in an amount established annually by the 
Administration, as necessary to reduce to zero the cost (as 
defined in section 502 of the Federal Credit Reform Act of 1990 
(2 U.S.C. 661a)) to the Administration of purchasing and 
guaranteeing debentures under this Act, which amount may not 
exceed 1.38 percent per year, and which shall be paid to and 
retained by the Administration. The debentures or participating 
securities shall also contain such other terms as the 
Administration may fix, and shall be subject to the following 
restrictions and limitations:
          (1) The total amount of debentures and participating 
        securities that may be guaranteed by the Administration 
        and outstanding from a company licensed under section 
        301(c) of this Act shall not exceed 300 per centum of 
        the private capital of such company: Provided, That 
        nothing in this paragraph shall require any such 
        company that on March 31, 1993, has outstanding 
        debentures in excess of 300 per centum of its private 
        capital to prepay such excess: And provided further, 
        That any such company may apply for an additional 
        debenture guarantee or participating security guarantee 
        with the proceeds to be used solely to pay the amount 
        due on such maturing debenture, but the maturity of the 
        new debenture or security shall be not later than 
        September 30, 2002.
          (2) Maximum leverage.--
                  (A) In general.--The maximum amount of 
                outstanding leverage made available to any one 
                company licensed under section 301(c) of this 
                Act may not exceed the lesser of--
                          (i) 300 percent of such company's 
                        private capital; or
                          (ii) $150,000,000.
                  (B) Multiple licenses under common control.--
                The maximum amount of outstanding leverage made 
                available to two or more companies licensed 
                under section 301(c) of this Act that are 
                commonly controlled (as determined by the 
                Administrator) and not under capital impairment 
                may not exceed [$225,000,000] $350,000,000.
                  (C) Investments in low-income geographic 
                areas.--(i) In calculating the outstanding 
                leverage of a company for the purposes of 
                subparagraph (A), the Administrator shall not 
                include the amount of the cost basis of any 
                equity investment made by the company in a 
                smaller enterprise located in a low-income 
                geographic area (as defined in section 351), to 
                the extent that the total of such amounts does 
                not exceed 50 percent of the company's private 
                capital.
                          (ii) The maximum amount of 
                        outstanding leverage made available 
                        to--
                                  (I) any 1 company described 
                                in clause (iii) may not exceed 
                                the lesser of 300 percent of 
                                private capital of the company, 
                                or $175,000,000; and
                                  (II) 2 or more companies 
                                described in clause (iii) that 
                                are under common control (as 
                                determined by the 
                                Administrator) may not exceed 
                                $250,000,000.
                          (iii) A company described in this 
                        clause is a company licensed under 
                        section 301(c) in the first fiscal year 
                        after the date of enactment of this 
                        clause or any fiscal year thereafter 
                        that certifies in writing that not less 
                        than 50 percent of the dollar amount of 
                        investments of that company shall be 
                        made in companies that are located in a 
                        low-income geographic area (as that 
                        term is defined in section 351).
                  (D) Investments in energy saving small 
                businesses.--
                          (i) In general.--Subject to clause 
                        (ii), in calculating the outstanding 
                        leverage of a company for purposes of 
                        subparagraph (A), the Administrator 
                        shall exclude the amount of the cost 
                        basis of any Energy Saving qualified 
                        investment in a smaller enterprise made 
                        in the first fiscal year after the date 
                        of enactment of this subparagraph or 
                        any fiscal year thereafter by a company 
                        licensed in the applicable fiscal year.
                          (ii) Limitations.--
                                  (I) Amount of exclusion.--The 
                                amount excluded under clause 
                                (i) for a company shall not 
                                exceed 33 percent of the 
                                private capital of that 
                                company.
                                  (II) Maximum investment.--A 
                                company shall not make an 
                                Energy Saving qualified 
                                investment in any one entity in 
                                an amount equal to more than 20 
                                percent of the private capital 
                                of that company.
                                  (III) Other terms.--The 
                                exclusion of amounts under 
                                clause (i) shall be subject to 
                                such terms as the Administrator 
                                may impose to ensure that there 
                                is no cost (as that term is 
                                defined in section 502 of the 
                                Federal Credit Reform Act of 
                                1990 (2 U.S.C. 661a)) with 
                                respect to purchasing or 
                                guaranteeing any debenture 
                                involved.
          (3) Subject to the foregoing dollar and percentage 
        limits, a company licensed under section 301(c) of this 
        Act may issue and have outstanding both guaranteed 
        debentures and participating securities: Provided, That 
        the total amount of participating securities 
        outstanding shall not exceed 200 per centum of private 
        capital.
For purposes of this subsection, the term ``venture capital'' 
includes such common stock, preferred stock, or other financing 
with subordination or nonamortization characteristics as the 
Administration determines to be substantially similar to equity 
financing.
  (c) Third Party Debt.--The Administrator--
          (1) shall not permit a licensee having outstanding 
        leverage to incur third party debt that would create or 
        contribute to an unreasonable risk of default or loss 
        to the Federal Government;
          (2) shall permit such licensees to incur third party 
        debt only on such terms and subject to such conditions 
        as may be established by the Administrator, by 
        regulation or otherwise.
  (d) Investments in Smaller Enterprises.--The Administrator 
shall require each licensee, as a condition of approval of an 
application for leverage, to certify in writing that not less 
than 25 percent of the aggregate dollar amount of financings of 
that licensee shall be provided to smaller enterprises.
  (e) Capital Impairment.--Before approving any application for 
leverage submitted by a licensee under this Act, the 
Administrator--
          (1) shall determine that the private capital of the 
        licensee meets the requirements of section 302(a); and
          (2) shall determine, taking into account the nature 
        of the assets of the licensee, the amount and terms of 
        any third party debt owed by such licensee, and any 
        other factors determined to be relevant by the 
        Administrator, that the private capital of the licensee 
        has not been impaired to such an extent that the 
        issuance of additional leverage would create or 
        otherwise contribute to an unreasonable risk of default 
        or loss to the Federal Government.
  (f) Redemption or Repurchase of Preferred Stock.--
Notwithstanding any other provision of law--
          (1) the Administrator may allow the issuer of any 
        preferred stock sold to the Administration before 
        November 1, 1989 to redeem or repurchase such stock, 
        upon the payment to the Administration of an amount 
        less than the par value of such stock, for a repurchase 
        price determined by the Administrator after 
        consideration of all relevant factors, including--
                  (A) the market value of the stock;
                  (B) the value of benefits provided and 
                anticipated to accrue to the issuer;
                  (C) the amount of dividends paid, accrued, 
                and anticipated; and
                  (D) the estimate of the Administrator of any 
                anticipated redemption; and
          (2) any moneys received by the Administration from 
        the repurchase of preferred stock shall be available 
        solely to provide debenture leverage to licensees 
        having 50 percent or more in aggregate dollar amount of 
        their financings invested in smaller enterprises.
  (g) In order to encourage small business investment companies 
to provide equity capital to small businesses, the 
Administration is authorized to guarantee the payment of the 
redemption price and prioritized payments on participating 
securities issued by such companies which are licensed pursuant 
to section 301(c) of this Act, and a trust or a pool acting on 
behalf of the Administration is authorized to purchase such 
securities. Such guarantees and purchases shall be made on such 
terms and conditions as the Administration shall establish by 
regulation. For purposes of this section, (A) the term 
``participating securities'' includes preferred stock, a 
preferred limited partnership interest or a similar instrument, 
including debentures under the terms of which interest is 
payable only to the extent of earnings and (B) the term 
``prioritized payments'' includes dividends on stock, interest 
on qualifying debentures, or priority returns on preferred 
limited partnership interests which are paid only to the extent 
of earnings. Participating securities guaranteed under this 
subsection shall be subject to the following restrictions and 
limitations, in addition to such other restrictions and 
limitations as the Administration may determine:
          (1) Participating securities shall be redeemed not 
        later than 15 years after their date of issuance for an 
        amount equal to 100 per centum of the original issue 
        price plus the amount of any accrued prioritized 
        payment: Provided, That if, at the time the securities 
        are redeemed, whether as scheduled or in advance, the 
        issuing company (A) has not paid all accrued 
        prioritized payments in full as provided in paragraph 
        (2) below and (B) has not sold or otherwise disposed of 
        all investments subject to profit distributions 
        pursuant to paragraph (11), the company's obligation to 
        pay accrued and unpaid prioritized payments shall 
        continue and payment shall be made from the realized 
        gain, if any, on the disposition of such investments, 
        but if on disposition there is no realized gain, the 
        obligation to pay accrued and unpaid prioritized 
        payments shall be extinguished: Provided further, That 
        in the interim, the company shall not make any in-kind 
        distributions of such investments unless it pays to the 
        Administration such sums, up to the amount of the 
        unrealized appreciation on such investments, as may be 
        necessary to pay in full the accrued prioritized 
        payments.
          (2) Prioritized payments on participating securities 
        shall be preferred and cumulative and payable out of 
        the retained earnings available for distribution, as 
        defined by the Administration, of the issuing company 
        at a rate determined by the Secretary of the Treasury 
        taking into consideration the current average market 
        yield on outstanding marketable obligations of the 
        United States with remaining periods to maturity 
        comparable to the average maturities on such 
        securities, adjusted to the nearest one-eighth of 1 
        percent, plus, for participating securities obligated 
        after September 30, 2001, an additional charge, in an 
        amount established annually by the Administration, as 
        necessary to reduce to zero the cost (as defined in 
        section 502 of the Federal Credit Reform Act of 1990 (2 
        U.S.C. 661a)) to the Administration of purchasing and 
        guaranteeing participating securities under this Act, 
        which amount may not exceed 1.46 percent per year, and 
        which shall be paid to and retained by the 
        Administration.
          (3) In the event of liquidation of the company, 
        participating securities shall be senior in priority 
        for all purposes to all other equity interests in the 
        issuing company, whenever created.
          (4) Any company issuing a participating security 
        under this Act shall commit to invest or shall invest 
        an amount equal to the outstanding face value of such 
        security solely in equity capital. As used in this 
        subsection, ``equity capital'' means common or 
        preferred stock or a similar instrument, including 
        subordinated debt with equity features which is not 
        amortized and which provides for interest payments from 
        appropriate sources, as determined by the 
        Administration.
          (5) The only debt (other than leverage obtained in 
        accordance with this title) which any company issuing a 
        participating security under this subsection may have 
        outstanding shall be temporary debt in amounts limited 
        to not more than 50 per centum of private capital.
          (6) The Administration may permit the proceeds of a 
        participating security to be used to pay the principal 
        amount due on outstanding debentures guaranteed by the 
        Administration, if (A) the company has outstanding 
        equity capital invested in an amount equal to the 
        amount of the debentures being refinanced and (B) the 
        Administration receives profit participation on such 
        terms and conditions as it may determine, but not to 
        exceed the per centums specified in paragraph (11).
          (7) For purposes of computing profit participation 
        under paragraph (11), except as otherwise determined by 
        the Administration, the management expenses of any 
        company which issues participating securities shall not 
        be greater than 2.5 per centum per annum of the 
        combined capital of the company, plus $125,000 if the 
        company's combined capital is less than $20,000,000. 
        For purposes of this paragraph, (A) the term ``combined 
        capital'' means the aggregate amount of private capital 
        and outstanding leverage and (B) the term ``management 
        expenses'' includes salaries, office expenses, travel, 
        business development, office and equipment rental, 
        bookkeeping and the development, investigation and 
        monitoring of investments, but does not include the 
        cost of services provided by specialized outside 
        consultants, outside lawyers and outside auditors, who 
        perform services not generally expected of a venture 
        capital company nor does such term include the cost of 
        services provided by any affiliate of the company which 
        are not part of the normal process of making and 
        monitoring venture capital investments.
          (8) Notwithstanding paragraph (9), if a company is 
        operating as a limited partnership or as a subchapter S 
        corporation or an equivalent pass-through entity for 
        tax purposes and if there are no accumulated and unpaid 
        prioritized payments, the company may make annual 
        distributions to the partners, shareholders, or members 
        in amounts not greater than each partner's, 
        shareholder's, or member's maximum tax liability. For 
        purposes of this paragraph, the term ``maximum tax 
        liability'' means the amount of income allocated to 
        each partner, shareholder, or member (including an 
        allocation to the Administration as if it were a 
        taxpayer) for Federal income tax purposes in the income 
        tax return filed or to be filed by the company with 
        respect to the fiscal year of the company immediately 
        preceding such distribution, multiplied by the highest 
        combined marginal Federal and State income tax rates 
        for corporations or individuals, whichever is higher, 
        on each type of income included in such return. For 
        purposes of this paragraph, the term ``State income 
        tax'' means the income tax of the State where the 
        company's principal place of business is located. A 
        company may also elect to make a distribution under 
        this paragraph at any time during any calendar quarter 
        based on an estimate of the maximum tax liability. If a 
        company makes 1 or more interim distributions for a 
        calendar year, and the aggregate amount of those 
        distributions exceeds the maximum amount that the 
        company could have distributed based on a single annual 
        computation, any subsequent distribution by the company 
        under this paragraph shall be reduced by an amount 
        equal to the excess amount distributed.
          (9) After making any distributions as provided in 
        paragraph (8), a company with participating securities 
        outstanding may distribute the balance of income to its 
        investors, specifically including the Administration, 
        in the per centums specified in paragraph (11), if 
        there are no accumulated and unpaid prioritized 
        payments and if all amounts due the Administration 
        pursuant to paragraph (11) have been paid in full, 
        subject to the following conditions:
                  (A) As of the date of the proposed 
                distribution, if the amount of leverage 
                outstanding is more than 200 per centum of the 
                amount of private capital, any amounts 
                distributed shall be made to private investors 
                and to the Administration in the ratio of 
                leverage to private capital.
                  (B) As of the date of the proposed 
                distribution, if the amount of leverage 
                outstanding is more than 100 per centum but not 
                more than 200 per centum of the amount of 
                private capital, 50 per centum of any amounts 
                distributed shall be made to the Administration 
                and 50 per centum shall be made to the private 
                investors.
                  (C) If the amount of leverage outstanding is 
                100 per centum, or less, of the amount of 
                private capital, the ratio shall be that for 
                distribution of profits as provided in 
                paragraph (11).
                  (D) Any amounts received by the 
                Administration under subparagraph (A) or (B) 
                shall be applied first as profit participation 
                as provided in paragraph (11) and any remainder 
                shall be applied as a prepayment of the 
                principal amount of the participating 
                securities or debentures.
          (10) After making any distributions pursuant to 
        paragraph (8), a company with participating securities 
        outstanding may return capital to its investors, 
        specifically including the Administration, if there are 
        no accumulated and unpaid prioritized payments and if 
        all amounts due the Administration pursuant to 
        paragraph (11) have been paid in full. Any 
        distributions under this paragraph shall be made to 
        private investors and to the Administration in the 
        ratio of private capital to leverage as of the date of 
        the proposed distribution: Provided, That if the amount 
        of leverage outstanding is less than 50 per centum of 
        the amount of private capital or $10,000,000, whichever 
        is less, no distribution shall be required to be made 
        to the Administration unless the Administration 
        determines, on a case by case basis, to require 
        distributions to the Administration to reduce the 
        amount of outstanding leverage to an amount less than 
        $10,000,000.
          (11)(A) A company which issues participating 
        securities shall agree to allocate to the 
        Administration a share of its profits determined by the 
        relationship of its private capital to the amount of 
        participating securities guaranteed by the 
        Administration in accordance with the following:
                  (i) If the total amount of participating 
                securities is 100 per centum of private capital 
                or less, the company shall allocate to the 
                Administration a per centum share computed as 
                follows: the amount of participating securities 
                divided by private capital times 9 per centum.
                  (ii) If the total amount of participating 
                securities is more than 100 per centum but not 
                greater than 200 per centum of private capital, 
                the company shall allocate to the 
                Administration a per centum share computed as 
                follows:
                          (I) 9 per centum, plus
                          (II) 3 per centum of the amount of 
                        participating securities minus private 
                        capital divided by private capital.
          (B) Notwithstanding any other provision of this 
        paragraph--
                  (i) in no event shall the total per centum 
                required by this paragraph exceed 12 per 
                centum, unless required pursuant to the 
                provisions of (ii) below,
                  (ii) if, on the date the participating 
                securities are marketed, the interest rate on 
                Treasury bonds with a maturity of 10 years is a 
                rate other than 8 per centum, the 
                Administration shall adjust the rate specified 
                in paragraph (A) above, either higher or lower, 
                by the same per centum by which the Treasury 
                bond rate is higher or lower than 8 per centum, 
                and
                  (iii) this paragraph shall not be construed 
                to create any ownership interest of the 
                Administration in the company.
          (12) A company may elect to make an in-kind 
        distribution of securities only if such securities are 
        publicly traded and marketable. The company shall 
        deposit the Administration's share of such securities 
        for disposition with a trustee designated by the 
        Administration or, at its option and with the agreement 
        of the company, the Administration may direct the 
        company to retain the Administration's share. If the 
        company retains the Administration's share, it shall 
        sell the Administration's share and promptly remit the 
        proceeds to the Administration. As used in this 
        paragraph, the term ``trustee'' means a person who is 
        knowledgeable about and proficient in the marketing of 
        thinly traded securities.
  (h) The computation of amounts due the Administration under 
participating securities shall be subject to the following 
terms and conditions:
          (1) The formula in subsection (g)(11) shall be 
        computed annually and the Administration shall receive 
        distributions of its profit participation at the same 
        time as other investors in the company.
          (2) The formula shall not be modified due to an 
        increase in the private capital unless the increase is 
        provided for in a proposed business plan submitted to 
        and approved by the Administration.
          (3) After distributions have been made, the 
        Administration's share of such distributions shall not 
        be recomputed or reduced.
          (4) If the company prepays or repays the 
        participating securities, the Administration shall 
        receive the requisite participation upon the 
        distribution of profits due to any investments held by 
        the company on the date of the repayment or prepayment.
          (5) If a company is licensed on or before March 31, 
        1993, it may elect to exclude from profit participation 
        all investments held on that date and in such case the 
        Administration shall determine the amount of the future 
        expenses attributable to such prior investment: 
        Provided, That if the company issues participating 
        securities to refinance debentures as authorized in 
        subsection (g)(6), it may not elect to exclude profits 
        on existing investments under this paragraph.
  (i) Leverage Fee.--With respect to leverage granted by the 
Administration to a licensee, the Administration shall collect 
from the licensee a nonrefundable fee in an amount equal to 3 
percent of the face amount of leverage granted to the licensee 
in the following manner: 1 percent upon the date on which the 
Administration enters into any commitment for such leverage 
with the licensee, and the balance of 2 percent (or 3 percent 
if no commitment has been entered into by the Administration) 
on the date on which the leverage is drawn by the licensee.
  (j) Calculation of Subsidy Rate.--All fees, interest, and 
profits received and retained by the Administration under this 
section shall be included in the calculations made by the 
Director of the Office of Management and Budget to offset the 
cost (as that term is defined in section 502 of the Federal 
Credit Reform Act of 1990) to the Administration of purchasing 
and guaranteeing debentures and participating securities under 
this Act.
  (k) Energy Saving Debentures.--In addition to any other 
authority under this Act, a small business investment company 
licensed in the first fiscal year after the date of enactment 
of this subsection or any fiscal year thereafter may issue 
Energy Saving debentures.

           *       *       *       *       *       *       *


                          XX. Additional Views

                              ----------                              


                            ADDITIONAL VIEW

                               BACKGROUND

    Like many of the SBA's financing programs, the SBIC program 
operates as a public-private partnership. The SBA does not make 
direct investments in small business concerns through the SBIC 
program, but instead licenses Small Business Investment 
Companies (SBICs) to administer the program. SBICs are state-
chartered entities organized solely for the purpose of 
providing a source of equity capital for small business 
concerns. The SBA provides funding to qualified SBICs with 
expertise in certain sectors or industries, which then use 
their own funds, plus resources borrowed with an SBA guaranty 
or ``leverage,'' to invest in small businesses. Although 
subject to SBA regulation, SBICs remain privately owned and 
managed and make their own decisions about which small business 
investments to make.
    The SBA provides leverage to SBICs in two forms, 
``debentures'' and ``participating securities.'' To obtain 
leverage, SBICs issue debentures or participating securities, 
which are guaranteed by the SBA. Debenture leverage has a term 
of ten years, with semi-annual interest payments and a lump sum 
payment of principal at maturity. Debenture leverage operates 
on a zero-subsidy basis. Participating securities function 
similar to debentures, but the SBA advances interest to the 
pool investors and is repaid only out of profits of the fund. 
This makes participating securities unique among the SBA's 
programs. Due to rising costs, the SBA stopped issuing 
participating securities in 2004 and today, only 50 remain in 
operation.
    By their nature, debenture SBICs focus on companies that 
are mature enough to make current interest payments on the 
investment so that, in turn, the SBIC can meet its interest 
obligations to SBA. Thus, debenture financing will generally be 
best suited for SBICs investing in portfolio companies with the 
ability to service debt. By contrast, participating securities 
SBICs are able to invest equity capital in earlier stage 
businesses because interest is accrued on their obligation to 
the SBA. Thus, participating securities are generally best 
suited for SBICs investing in seed and early stage businesses 
or businesses that either do not have established cash flow or 
need to use available cash for other purposes.
    Over the past 5 years, the number of SBIC licenses has 
remained fairly constant, averaging 300 each year. However, 
financing has grown considerably in that period. For 
comparison, in 2010, SBICs reported financings of $2 billion, 
by 2014 that figure grew to $5.4 billion, a 170 percent 
increase. Also, as the number of participating securities SBIC 
licensees has decreased (with commensurate increases in 
debenture SBICs), debt financing has grown at a much faster 
pace than equity-only investments. Straight debt has grown 4-
fold, while all-equity investments have only doubled since FY 
2010.
    For the larger and more active SBICs, the Small Business 
Investment Act permits fund managers to hold multiple licenses, 
known as a ``family-of-funds.'' The main benefit of a family-
of-funds is the ability to draw additional SBA leverage. The 
majority of SBIC licenses are held in families. The current 
leverage caps, implemented in 2010, allow single licensees to 
draw $175 million and ``family-of-fund'' licensees to draw $225 
million. Today, some of the largest SBICs have reached the cap.

                              LEGISLATION

    Introduced by Chairman Chabot, H.R. 1023, the ``Small 
Business Investment Company Capital Act of 2015'' would 
permanently increase the family-of-funds leverage cap from $225 
million to $350 million, a 55 percent increase. While the goal 
of expanding access to capital for small businesses is 
laudable, the increase in leverage raises a number of concerns.
    Very few SBICs will be able to take advantage of the 
increase, limiting the actual amount of capital that will reach 
the small business community. According to SBA data, out of the 
total 299 funds in the SBIC program, 20 of them (6% of total 
funds) belong to 10 families that are either at or within 10 
percent of the limit: 7 families are at the max and three 
families have between $200 million and $225 million. The rest 
of the funds are either single funds (121) or managed by 
families that have less than $200 million outstanding from SBA 
(158).
    The seven firms that have maxed out their SBIC leverage 
(``Tier-1 SBICs'') have made 732 investments totaling $3 
billion over the past 5 years. However, women- and minority-
owned firms were significantly underrepresented. Tier-1 SBICs 
made only twelve investments to women-owned firms and four to 
minority-owned firms. These figures equate to just 1.6 and 0.5 
percent of all investments made by the group. Veteran-owned 
firms were also shunned by the seven largest SBICs, receiving 
just two investments during the same period.
    This bill also concentrates risk in just a handful of SBIC 
asset managers without increasing safeguards on safety and 
soundness. If the top 10 SBIC fund families drew the leverage 
authorized by H.R. 1023, taxpayers would be exposed to an 
additional $1.25 billion in outlays. It should be noted that, 
according to the federal credit supplement, the lifetime 
default rate in the SBIC debenture program is over 24 percent.
    Finally, increasing leverage in the SBIC program could be 
seen as fostering a duplicative federal program. As noted 
above, the majority of SBICs operate under the debenture 
program, which favors businesses that can service debt. As 
such, SBA data shows about 66 percent of SBIC investments are 
in the form of straight debt, with the average being about $3 
million. The 7(a) program offers a competing loan product and 
made nearly 2,000 loans of $2 million or more last year.

                                                Nydia M. Velazquez.

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