Reforms were announced to transform the public-private investment program
The Biden Administration seeks to expand funding for diverse and undercapitalized markets.
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Administrator Isabella Casillas Guzmán recently announced that the U.S. Small Business Administration (SBA) finalized a rule to modernize the Small Business Investment Company (SBIC) Program.
SBIC's Investment Growth and Diversification Rule will increase access and diversify financing for the small business, start-up, and investment management communities.
Casillas Guzmán pointed out in a press release:
SBIC-licensed funds have seeded and scaled some of the most innovative and successful businesses in the world and helped small businesses sustain operations across the country by helping them bridge capital gaps to build innovative and resilient businesses.
About the Rule
SBIC's Investment Growth and Diversification Rule addresses the structural aspects of this program, which have historically limited the flow of capital and growth-oriented debt investments from SBIC-licensed funds to small businesses and start-ups operating in low income communities, capital-intensive industries, and technology areas critical to U.S. national security and economic development.
SBA notes that these communities, industries, and technologies are underfunded by private market investors due to lack of access, duration of investment, risk/return profile, or magnitude of capital required.
“This final rule will unlock unrealized potential and strengthen, diversify, and expand our network of SBIC licensed private funds to address capital deficiencies in underserved small businesses, startups, and critical U.S. industries impacting our nation’s security,” added Casillas Guzmán.
The Biden Administration continues to raise the bar, reaching a record high level of contract spending with small businesses, supporting over one million good-paying jobs in manufacturing, construction, research & development, and other vital industries. https://t.co/WXfU6yT5eb— Isabel Guzman (@SBAIsabel) July 18, 2023
Highlights of the final rule include:
- Addresses need for long-duration and equity funds — Introduces a new debenture instrument to the program portfolio called the “Accrual Debenture” to align with the cash flows of longer duration and/or equity-oriented investment funds.
- Improving program accessibility — Modifies licensing fees to reduce the financial burden for new program applicants. Broadens the fund manager track record and eligibility requirements to enable a more diversified group of investment teams and a wider range of investment strategies to participate in the SBIC program.
- Fund-of-Funds to increase access — Introduces a new type of SBIC called the “Reinvestor SBIC” based on a fund-of-funds model to invest equity in underlying funds with an underserved focus that, in turn, invest directly into small businesses and start-ups.
- Expediting subsequent funds — Introduces a risk-controlled expedited subsequent fund licensing process for eligible applicants to create capacity for SBA to license more new-to-program applicants while maintaining a high degree of customer service for existing program participants. Streamlining paperwork — Reduces points of friction for program participants and their investors in multiple areas.
- Strengthening Controls — To help improve risk management, SBA has also implemented several changes.
- Clarifying Affiliation — Clarifies that a U.S. small business with equity investment by an SBIC Licensee is deemed “unaffiliated,” based on Small Business Act regulations, from the licensed fund and its portfolio companies. As a result, unless affiliation is triggered by another relationship, the portfolio companies of an SBIC Licensee are considered “unaffiliated” under SBA regulations.
“With the modernization of SBIC regulations, SBA will play an enabling role in partnering with return-seeking private investors to fund businesses in corners of the economy critical to our national security and economic success,” said Bailey DeVries, associate administrator for Investment and Innovation and Acting Associate Administrator for Capital Access.
The SBIC Investment Diversification and Growth final rule will become effective on August 17, 2023.