Administrator Isabella Casillas Guzman of the U.S. Small Business Administration (SBA) recently announced a finalized rule to modernize the Small Business Investment Company (SBIC) Program. The SBIC Investment Diversification and Growth Rule, part of President Biden’s Investing in America Agenda, will come into effect on August 17, 2023.
“SBIC-licensed funds have seeded and scaled some of the most innovative and successful businesses in the world,” said Administrator Guzman, underlining the crucial role the program has played in fostering resilience and innovation in American small businesses. Guzman emphasized that the final rule aims to unlock unrealized potential, diversify, and expand the network of SBIC-licensed private funds.
This modernization, expected to tackle capital deficiencies in underserved small businesses, startups, and critical U.S. industries, is immensely relevant to small business owners and the investment management community. The new rule addresses long-standing structural challenges in the SBIC program, which have historically limited the flow of equity and growth-oriented debt investments into the undercapitalized sectors.
Key changes under the final rule are set to have significant impacts on small businesses and potential investors.
First, it introduces a new debenture instrument – the “Accrual Debenture.” This tool is tailored to align with the cash flows of longer duration and/or equity-oriented investment funds, known as “Accrual SBICs.” These funds will enjoy 1.25x tiers of leverage. Significantly, the SBA will not participate in the profits of Accrual SBICs, creating a new risk-return profile for potential investors.
Second, the rule addresses program accessibility by modifying licensing fees and broadening the fund manager’s track record and eligibility requirements. This move aims to diversify the participant base in the SBIC program, opening doors for a wider range of investment strategies.
The rule also introduces the “Reinvestor SBIC,” a new type of SBIC based on a fund-of-funds model. This setup will help direct investment into undercapitalized businesses and startups. Simultaneously, it aims to expedite subsequent fund licensing processes, reducing administrative burdens for participants and accelerating fundraising activities.
Furthermore, the rule strengthens controls to improve risk management and transparency by implementing a formal Watchlist for early risk detection and enhancing reporting requirements.
Lastly, the new rule clarifies affiliation regulations, suggesting that a U.S. small business with an equity investment from an SBIC Licensee will be deemed “unaffiliated” under SBA regulations.
“From semiconductors to personal computers to electronic vehicles, public-private SBIC partnerships have advanced the growth of industries by financing start-ups and small businesses vital to their communities and our broader national supply chain. 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.
The SBIC program, established in 1958, has historically served as a cornerstone for American entrepreneurship. With more than 308 discrete private funds and over $40 billion in public and private assets under management, the program invested $8 billion in over 1,500 companies last year alone, creating and sustaining over 103,000 U.S. jobs.
The SBA’s modernization of the SBIC program signifies a landmark moment for the small business community. With improved accessibility, diversified funding, and strengthened controls, the SBIC Investment Diversification and Growth Rule promises to catalyze the next chapter of American entrepreneurship and innovation.
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