SSTI responds to SBA’s proposed changes to Small Business Investment Company (SBIC) program

SSTI has written a response to the U.S. Small Business Administration’s (SBA) proposed revisions to the Small Business Investment Company (SBIC) program, which aim to increase program participation. The proposed changes include reductions in licensing fees for first- and second-time funds, exceptions to the conflict of interest rules for follow-on financing, increasing access to credit for leveraged funds and a new “accrual debenture” option for SBICs.

The SBIC program provides additional funds, in the form of “debentures,” that privately- and publicly-managed funds can use to provide capital to small businesses. Because the traditional debenture structure requires the SBIC immediately to begin making loan repayments to SBA, much of the financing provided by SBICs has been to relatively later-stage businesses.

SBA’s proposed accrual debenture could make the SBIC program more relevant to early-stage business investment. This debenture would not require payment until the end of a 10-year term, with the possibility of a five-year, “roll-over” extension. This proposed rule change would remove the pressure for SBICs to produce immediate returns, thereby helping new types of investment strategies to participate in the program. Under an accrual debenture, SBICs could make investments in earlier-stage companies that produce returns over the 10-year period, instead of right away.

SBA’s proposed changes may also help newer entities and managers become SBICs. These new rules would include reduced licensure cost for new participants, and that SBA would accept potential SBIC managers who have experience with relevant funds, even if this experience was not within an SBIC structure.

If these rules are implemented, then the end result may be an SBIC program that can provide a consistent source of investment capital relevant to tech-based economic development strategies and organizations. For comparison, the U.S. Department of the Treasury’s State Small Business Credit Initiative (SSBCI), which can also provide federal funding for early-stage investment, has been funded twice over the last 13 years, but the SBIC program receives annual support from Congress.