< Back to H.R. 3720 (104th Congress, 1995–1996)

Text of the Small Business Investment Company Reform Act of 1996

This bill was introduced on June 26, 1996, in a previous session of Congress, but was not enacted. The text of the bill below is as of Jun 26, 1996 (Introduced).

Source: GPO

HR 3720 IH

104th CONGRESS

2d Session

H. R. 3720

To amend the Small Business Investment Act of 1958, and for other purposes.

IN THE HOUSE OF REPRESENTATIVES

June 26, 1996

Mrs. MEYERS of Kansas introduced the following bill; which was referred to the Committee on Small Business


A BILL

To amend the Small Business Investment Act of 1958, and for other purposes.

    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 Reform Act of 1996’.

SEC. 2. DEFINITIONS.

    (a) SMALL BUSINESS CONCERN- Section 103(5) of the Small Business Investment Act of 1958 (15 U.S.C. 662(5)) is amended by inserting before the semicolon the following: ‘, except that, for purposes of this Act, an investment by a venture capital firm, investment company (including a small business investment company) employee welfare benefit plan or pension plan, or trust, foundation, or endowment that is exempt from Federal income taxation--

      ‘(A) shall not cause a business concern to be deemed not independently owned and operated;

      ‘(B) shall be disregarded in determining whether a business concern satisfies size standards established pursuant to section 3(a)(2) of the Small Business Act; and

      ‘(C) shall be disregarded in determining whether a small business concern is a smaller enterprise’.

    (b) PRIVATE CAPITAL- Section 103(9) of the Small Business Investment Act of 1958 (15 U.S.C. 662(9)) is amended to read as follows:

      ‘(9) the term ‘private capital’--

        ‘(A) means the sum of--

          ‘(i) the paid-in capital and paid-in surplus of a corporate licensee, the contributed capital of the partners of a partnership licensee, or the equity investment of the members of a limited liability company licensee; and

          ‘(ii) unfunded binding commitments, from investors that meet criteria established by the Administrator, to contribute capital to the licensee; provided that such unfunded commitments may be counted as private capital for purposes of approval by the Administrator of any request for leverage, but leverage shall not be funded based on such commitments; and

        ‘(B) does not include any--

          ‘(i) funds borrowed by a licensee from any source;

          ‘(ii) funds obtained through the issuance of leverage; or

          ‘(iii) funds obtained directly or indirectly from any Federal, State, or local government, or any government agency or instrumentality, except for--

            ‘(I) funds invested by an employee welfare benefit plan or pension plan; and

            ‘(II) any qualified nonprivate funds (if the investors of the qualified nonprivate funds do not control, directly or indirectly, the management, board of directors, general partners, or members of the licensee);’.

    (c) NEW DEFINITIONS- Section 103 of the Small Business Investment Act of 1958 (15 U.S.C. 662) is amended by striking paragraph (10) and inserting the following:

      ‘(10) the term ‘leverage’ includes--

        ‘(A) debentures purchased or guaranteed by the Administration;

        ‘(B) participating securities purchased or guaranteed by the Administration; and

        ‘(C) preferred securities outstanding as of October 1, 1996;

      ‘(11) the term ‘third party debt’ means any indebtedness for borrowed money, other than indebtedness owed to the Administration;

      ‘(12) the term ‘smaller enterprise’ means any small business concern that, together with its affiliates--

        ‘(A) has--

          ‘(i) a net financial worth of not more than $6,000,000, as of the date on which assistance is provided under this Act to that business concern; and

          ‘(ii) an average net income for the 2-year period preceding the date on which assistance is provided under this Act to that business concern, of not more than $2,000,000, after Federal income taxes (excluding any carryover losses); or

        ‘(B) satisfies the standard industrial classification size standards established by the Administration for the industry in which the small business concern is primarily engaged;

      ‘(13) the term ‘qualified nonprivate funds’ means any--

        ‘(A) funds directly or indirectly invested in any applicant or licensee on or before August 16, 1982, by any Federal agency, other than the Administration, under a provision of law explicitly mandating the inclusion of those funds in the definition of the term ‘private capital’;

        ‘(B) funds directly or indirectly invested in any applicant or licensee by any Federal agency under a provision of law enacted after September 4, 1992, explicitly mandating the inclusion of those funds in the definition of the term ‘private capital’; and

        ‘(C) funds invested in any applicant or licensee by one or more State or local government entities (including any guarantee extended by those entities) in an aggregate amount that does not exceed--

          ‘(i) 33 percent of the private capital of the applicant or licensee, if such funds were committed for investment before the date of enactment of the Small Business Investment Company Improvement Act of 1996; or

          ‘(ii) 20 percent of the private capital of the applicant or licensee, if such funds were committed for investment on or after the date of enactment of the Small Business Investment Company Improvement Act of 1996;

      ‘(14) the terms ‘employee welfare benefit plan’ and ‘pension plan’ have the same meanings as in section 3 of the Employee Retirement Income Security Act of 1974, and are intended to include--

        ‘(A) public and private pension or retirement plans subject to such Act; and

        ‘(B) similar plans not covered by such Act that have been established and that are maintained by the Federal Government or any State or political subdivision, or any agency or instrumentality thereof, for the benefit of employees;

      ‘(15) the term ‘member’ means, with respect to a licensee that is a limited liability company, a holder of an ownership interest or a person otherwise admitted to membership in the limited liability company; and

      ‘(16) the term ‘limited liability company’ means a business entity that is organized and operating in accordance with a State limited liability company statute approved by the Administration.’.

SEC. 3. ORGANIZATION OF SMALL BUSINESS INVESTMENT COMPANIES.

    (a) LIMITED LIABILITY COMPANIES- Section 301(a) of the Small Business Investment Act of 1958 (15 U.S.C. 681(a)) is amended in the first sentence, by striking ‘body or’ and inserting ‘body, a limited liability company, or’.

    (b) ISSUANCE OF LICENSE- Section 301(c) of the Small Business Investment Act of 1958 (15 U.S.C. 681(c)) is amended to read as follows:

    ‘(c) ISSUANCE OF LICENSE-

      ‘(1) SUBMISSION OF APPLICATION- Each new applicant for a license to operate as a small business investment company under this Act shall submit to the Administrator an application, in a form and including such documentation as may be prescribed by the Administrator.

      ‘(2) PROCEDURES-

        ‘(A) STATUS- Not later than 90 days after the initial receipt by the Administrator of an application under this subsection, the Administrator shall provide the applicant with a written report detailing the status of the application and any requirements remaining for completion of the application.

        ‘(B) APPROVAL OR DISAPPROVAL- Within a reasonable time after receiving a completed application submitted in accordance with this subsection and in accordance with such requirements as the Administrator may prescribe by regulation, the Administrator shall--

          ‘(i) approve the application and issue a license for such operation to the applicant if the requirements of this section are satisfied; or

          ‘(ii) disapprove the application and notify the applicant in writing of the disapproval.

      ‘(3) MATTERS CONSIDERED- In reviewing and processing any application under this subsection, the Administrator--

        ‘(A) shall determine whether--

          ‘(i) the applicant meets the requirements of subsections (a) and (c) of section 302; and

          ‘(ii) the management of the applicant is qualified and has the knowledge, experience, and capability necessary to comply with this Act;

        ‘(B) shall take into consideration--

          ‘(i) the need for and availability of financing for small business concerns in the geographic area in which the applicant is to commence business;

          ‘(ii) the general business reputation of the owners and management of the applicant; and

          ‘(iii) the probability of successful operations of the applicant, including adequate profitability and financial soundness; and

        ‘(C) shall not take into consideration any projected shortage or unavailability of leverage.

      ‘(4) EXCEPTION-

        ‘(A) IN GENERAL- Notwithstanding any other provision of this Act, the Administrator may, in the discretion of the Administrator and based on a showing of special circumstances and good cause, approve an application and issue a license under this subsection with respect to any applicant that--

          ‘(i) has private capital of not less than $3,000,000;

          ‘(ii) would otherwise be issued a license under this subsection, except that the applicant does not satisfy the requirements of section 302(a); and

          ‘(iii) has a viable business plan reasonably projecting profitable operations and a reasonable timetable for achieving a level of private capital that satisfies the requirements of section 302(a).

        ‘(B) LEVERAGE- An applicant licensed pursuant to the exception provided in this paragraph shall not be eligible to receive leverage as a licensee until the applicant satisfies the requirements of section 302(a).’.

    (c) SPECIALIZED SMALL BUSINESS INVESTMENT COMPANIES- Section 301(d) of the Small Business Investment Act of 1958 (15 U.S.C. 681(d)) is repealed.

SEC. 4. CAPITAL REQUIREMENTS.

    (a) INCREASED MINIMUM CAPITAL REQUIREMENTS- Section 302(a) of the Small Business Investment Act of 1958 (15 U.S.C. 682(a)) is amended by striking ‘(a)’ and all that follows through ‘The Administration shall also determine the ability of the company,’ and inserting the following:

    ‘(a) AMOUNT-

      ‘(1) IN GENERAL- Except as provided in paragraph (2), the private capital of each licensee shall be not less than--

        ‘(A) $5,000,000; or

        ‘(B) $10,000,000, with respect to each licensee authorized or seeking authority to issue participating securities to be purchased or guaranteed by the Administration under this Act.

      ‘(2) EXCEPTION- The Administrator may, in the discretion of the Administrator and based on a showing of special circumstances and good cause, permit the private capital of a licensee authorized or seeking authorization to issue participating securities to be purchased or guaranteed by the Administration to be less than $10,000,000, but not less than $7,500,000, if the Administrator determines that such action would not create or otherwise contribute to an unreasonable risk of default or loss to the Federal Government.

      ‘(3) ADEQUACY- In addition to the requirements of paragraph (1), the Administrator shall--

        ‘(A) determine whether the private capital of each licensee is adequate to assure a reasonable prospect that the licensee will be operated soundly and profitably, and managed actively and prudently in accordance with its articles; and

        ‘(B) determine that the licensee will be able’.

    (b) EXEMPTION FOR CERTAIN LICENSEES- Section 302(a) of the Small Business Investment Act of 1958 (15 U.S.C. 682(a)) is amended by adding at the end the following new paragraph:

      ‘(4) EXEMPTION FROM CAPITAL REQUIREMENTS- The Administrator may, in the discretion of the Administrator, exempt from the capital requirements in paragraph (1) any licensee licensed under subsection (c) or (d) of section 301 before the

date of enactment of the Small Business Investment Company Improvement Act of 1996, if--

        ‘(A) the licensee certifies in writing that not less than 50 percent of the aggregate dollar amount of its financings after the date of enactment of the Small Business Investment Company Improvement Act of 1996 will be provided to smaller enterprises; and

        ‘(B) the Administrator determines that--

          ‘(i) the licensee has a record of profitable operations;

          ‘(ii) the licensee has not committed any serious or continuing violation of any applicable provision of Federal or State law or regulation; and

          ‘(iii) such action would not create or otherwise contribute to an unreasonable risk of default or loss to the United States Government.

      Provided further, That no licensee with less than $2,500,000 in private capital shall receive additional leverage from the Administration.’.

    (c) DIVERSIFICATION OF OWNERSHIP- Section 302(c) of the Small Business Investment Act of 1958 (15 U.S.C. 682(c)) is amended to read as follows:

    ‘(c) DIVERSIFICATION OF OWNERSHIP- The Administrator shall ensure that the management of each licensee applying for a license after the date of enactment of the Small Business Investment Company Improvement Act of 1996 is sufficiently diversified from and unaffiliated with the ownership of the licensee in a manner that ensures independence and objectivity in the financial management and oversight of the investments and operations of the licensee.’.

SEC. 5. BORROWING.

    (a) DEBENTURES- Section 303(b) of the Small Business Investment Act of 1958 (15 U.S.C. 683(b)) is amended in the first sentence, by striking ‘(but only’ and all that follows through ‘terms)’.

    (b) THIRD PARTY DEBT- Section 303(c) of the Small Business Investment Act of 1958 (15 U.S.C. 683(c)) is amended to read as follows:

    ‘(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; and

      ‘(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.’.

    (c) REQUIREMENT TO FINANCE SMALLER ENTERPRISES- Section 303(d) of the Small Business Investment Act of 1958 (15 U.S.C. 683(d)) is amended to read as follows:

    ‘(d) REQUIREMENT TO FINANCE 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 20 percent of the aggregate dollar amount of the financings of the licensee will be provided to smaller enterprises.’.

    (d) CAPITAL IMPAIRMENT REQUIREMENTS- Section 303(e) of the Small Business Investment Act of 1958 (15 U.S.C. 683(e)) is amended to read as follows:

    ‘(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.’.

    (e) EQUITY INVESTMENT REQUIREMENT- Section 303(g)(4) of the Small Business Investment Act of 1958 (15 U.S.C. 683(g)(4)) is amended by striking ‘and maintain’.

    (f) FEES- Section 303 of the Small Business Investment Act of 1958 (15 U.S.C. 683) is amended--

      (1) in subsection (b), in the fifth sentence, by striking ‘1 per centum,’ and all that follows before the period at the end of the sentence and inserting the following: ‘1 percent, plus an additional charge of 1 percent per annum which shall be paid to and retained by the Administration’;

      (2) in subsection (g)(2), by striking ‘1 per centum,’ and all that follows before the period at the end of the paragraph and inserting the following: ‘1 percent, plus an additional charge of 1 percent per annum which shall be paid to and retained by the Administration’; and

      (3) by adding at the end the following new subsections:

    ‘(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, payable upon the earlier of the date of entry into any commitment for such leverage or 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.’.

SEC. 6. LIABILITY OF THE UNITED STATES.

    Section 308(e) of the Small Business Investment Act of 1958 (15 U.S.C. 687(e)) is amended by striking ‘Nothing’ and inserting ‘Except as expressly provided otherwise in this Act, nothing’.

SEC. 7. EXAMINATIONS; VALUATIONS.

    (a) EXAMINATIONS- Section 310(b) of the Small Business Investment Act of 1958 (15 U.S.C. 687b(b)) is amended in the first sentence by inserting ‘which may be conducted with the assistance of a private sector entity that has both the qualifications to conduct and expertise in conducting such examinations,’ after ‘Investment Division of the Administration,’.

    (b) VALUATIONS- Section 310(d) of the Small Business Investment Act of 1958 (15 U.S.C. 687b(d)) is amended to read as follows:

    ‘(d) VALUATIONS-

      ‘(1) FREQUENCY OF VALUATIONS-

        ‘(A) IN GENERAL- Each licensee shall submit to the Administrator a written valuation of the loans and investments of the licensee not less often than semiannually or otherwise upon the request of the Administrator, except that any licensee with no leverage outstanding shall submit such valuations annually, unless the Administrator determines otherwise.

        ‘(B) MATERIAL ADVERSE CHANGES- Not later than 30 days after the end of a fiscal quarter of a licensee during which a material adverse change in the aggregate valuation of the loans and investments or operations of the licensee occurs, the licensee shall notify the Administrator in writing of the nature and extent of that change.

        ‘(C) INDEPENDENT CERTIFICATION-

          ‘(i) IN GENERAL- Not less than once during each fiscal year, each licensee shall submit to the Administrator the financial statements of the licensee, audited by an independent certified public accountant approved by the Administrator.

          ‘(ii) AUDIT REQUIREMENTS- Each audit conducted under clause (i) shall include--

            ‘(I) a review of the procedures and documentation used by the licensee in preparing the valuations required by this section; and

            ‘(II) a statement by the independent certified public accountant that such valuations were prepared in conformity with the valuation criteria applicable to the licensee established in accordance with paragraph (2).

      ‘(2) VALUATION CRITERIA- Each valuation submitted under this subsection shall be prepared by the licensee in accordance with valuation criteria, which shall--

        ‘(A) be established or approved by the Administrator; and

        ‘(B) include appropriate safeguards to ensure that the noncash assets of a licensee are not overvalued.’.

SEC. 8. TRUSTEE OR RECEIVERSHIP OVER LICENSEES.

    (a) FINDING- It is the finding of the Congress that increased recoveries on assets in liquidation under the Small Business Investment Act of 1958 are in the best interests of the Federal Government.

    (b) DEFINITIONS- For purposes of this section--

      (1) the term ‘Administrator’ means the Administrator of the Small Business Administration;

      (2) the term ‘Administration’ means the Small Business Administration; and

      (3) the term ‘licensee’ has the same meaning as in section 103 of the Small Business Investment Act of 1958.

    (c) LIQUIDATION PLAN-

      (1) IN GENERAL- Not later than October 15, 1996, the Administrator shall submit to the Committees on Small Business of the Senate and the House of Representatives a detailed plan to expedite the orderly liquidation of all licensee assets in liquidation, including assets of licensees in receivership or in trust held by or under the control of the Administration or its agents.

      (2) CONTENTS- The plan submitted under paragraph (1) shall include a timetable for liquidating the liquidation portfolio of small business investment company assets owned by the Administration, and shall contain the Administrator’s findings and recommendations on various options providing for the fair and expeditious liquidation of such assets within a reasonable period of time, giving due consideration to the option of entering into one or more contracts with private sector entities having the capability to carry out the orderly liquidation of similar assets.

      (3) REPORT- Not later than 90 days after the date of enactment of this Act, the Comptroller General of the United States shall submit to the Committees on Small Business of the Senate and the House of Representatives a report on the activities and expenditures of the receiver’s agents employed by or under contract with the Investment Division of the Small Business Administration. The report shall detail the qualifications and experience of the receiver’s agents, their billing practices and procedures, expenses, costs, overhead, and use of outside contractors or attorneys.

SEC. 9. REPEAL. OF PREFERRED STOCK REDEMPTION.

    Section 303(f) of the Small Business Investment Act of 1958 (15 U.S.C. 683(f)) is hereby repealed.

SEC. 10. TECHNICAL AND CONFORMING AMENDMENTS.

    The Small Business Investment Act of 1958 (15 U.S.C. 661 et seq.) is amended in subsection (a) of section 303 by striking ‘debenture bonds’ and inserting ‘securities,’ and by striking subsection (f) and redesignating subsequent subsections accordingly.

SEC. 11. EFFECTIVE DATE.

    This Act and the amendments made by this Act shall become effective on the date of enactment of this Act.