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1 [1] (December 15, 2023)

handle is hein.crs/govensk0001 and id is 1 raw text is: Con gre sWona R Fesedrch Service hnormino Ahec leasive debate sne 1914 0 December 15, 2023 Accrual and Reinvestor Small Business Investment Companies (SBICs) The Small Business Administration (SBA) administers several programs to increase access to capital for small businesses. Among those is the Small Business Investment Company (SBIC) program. Under the SBIC program, the SBA provides capital at favorable terms to SBA-certified venture capital funds who agree to invest in small businesses. Congress and the SBA have expressed interest in the composition of SBICs and of the portfolio of SBIC investments. In July 2023, the SBA finalized a rule, effective August 17, 2023, that created two new types of SBICs. Accrual and reinvestor SBICs have access to a special SBA funding instrument intended to increase program investment diversification and patient capital financing. SBIC Program Background The SBIC program is a long-standing SBA initiative intended to increase the amount of medium-term and equity-based financing (such as stock or partnership interests) available to small businesses. In the SBIC program, a private venture capital fund submits a detailed application to the SBA, demonstrating that the fund's managers have extensive successful investment experience and a viable strategy of investing in small businesses. If initially approved by the SBA, the SBIC then must raise sufficient private capital to be viable (generally $5 million) before submitting a final application for an SBIC license. If given final approval by the SBA, the SBIC license-holder may draw leverage from SBA funding sources. Currently, most SBICs receive SBA funding through a standard debenture, or debt securities. The SBA guarantees 100% of the debenture principal and interest payments with the full faith and credit of the U.S. government, allowing SBICs to borrow at favorable interest rates. For most standard debentures, SBICs can access $2 in SBA leverage for every $1 in private capital, up to $175 million in leverage. The SBA has the discretion to approve up to $3 in leverage for every $1 in private capital. The SBIC must make interest payments on the debenture every six months. The principal is repaid in its entirety when the debenture matures in 10 years. SBICs have other regulatory advantages. They are exempt from certain Securities and Exchange Commission registration requirements for investment advisors. SBICs are also exempt from the Volcker Rule in Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (P.L. 111-203), which prohibits banks from conducting certain investment activities. SBIC investments are also presumed to be qualified for the Community Reinvestment Act (Title VIII of P.L. 95-128, as amended). These regulatory advantages have led some venture capital funds to seek an SBIC license but not draw on SBA leverage. These nonleveraged SBICs are often affiliated with banks, who are mainly attracted to the program for the regulatory incentives and use their own funds to make investments. In FY2023, SBICs reported financing 1,208 small businesses for a total of $8.1 billion: $5.2 billion (65%) was debt only, $2.0 billion (24%) was equity only, and $0.9 billion was debt with equity features. The SBA's September 2023 SBIC program report identified 318 SBICs, of which 256 (81%) were debenture SBICs and 53 (17%) were bank-owned or nonleveraged SBICs. Of the financed companies, 228 (19%) were located in low- to moderate-income (LMI) areas, and 82 (7%) were woman-, minority-, and/or veteran-owned businesses. For more information about the SBIC program, please see CRS Report R41456, SBA Small Business Investment Company Program. Accrual SBICs The SBA's July 2023 final rule (88 Federal Register 45982) created accrual SBICs. Accrual SBICs are SBICs that receive SBA financing from an accrual debenture. In the final rule, the SBA stated accrual SBICs are intended to increase program investment diversification and patient capital financing. Accrual debentures are debt securities for which the SBA guarantees 100% of the debenture principal and interest payments. Unlike the standard debenture, semiannual interest payments are not required, and thus the entire principal and all accrued interest payments are due at maturity. In the SBA's October 2022 proposed rule (87 Federal Register 63436), the SBA stated the belief that most SBIC financings include a debt component due to a need for an SBIC to quickly generate positive cash flow to make the required semiannual interest payments. The SBA therefore asserted that the flexibilities offered by an accrual debenture align more closely with the cash flows of an investment strategy focused on longer-term equity investments. Accrual SBICs are not required to make any payments before the debenture's maturity date. However, if an accrual SBIC makes any distributions to private investors, it must pay a portion to the SBA. The regulations specify a

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