From the July 2000 issue of Entrepreneur

In an effort to keep Small Business Investment Companies (SBICs) focused on small dotcoms and other fledgling businesses in the United States, Congress is making some changes to SBIC ground rules. It hopes to keep commercial banks, which own 104 of the 367 SBICs, in the program. Larger banks have been tempted to drop their SBICs, because the Gramm-Leach-Bliley bank-modernization bill (passed by Congress in 1999) lets banks start venture capital subsidiaries without obtaining SBIC licenses.

Lee Mercer, president of the National Association of SBICs (NASBIC), believes some larger banks will do exactly that: drop their SBICs when they become parts of large financial-services holding companies. Smaller community banks, which probably won't become part of some conglomerate, are therefore more likely to hang on to their SBIC licenses. NASBIC is pushing legislative changes to keep it that way; the SBA supports them.

SBICs have provided venture capital to 78,000 American companies, including Intel and Staples. They also accounted for 53 percent of all institutional venture-capital transactions in the United States in 1999, according to Aida Alvarez of the SBA.

SBIC investments come in three forms: larger loans generally unavailable to entrepreneurs through commercial banks, loans that can be turned into debt securities, and stock purchases (but not publicly traded stock) in new companies.

The SBIC reform bill (H.R. 3845), considered noncontroversial, will likely pass the Senate with ease-probably as an amendment to a larger SBA reauthorization bill-and get President Clinton's signature.

One of the key changes H.R. 3845 makes is to allow SBICs to take a "controlling interest" in the companies they back. The restriction against controlling interests is considered outmoded because the SBA has developed four "exceptions" to the rule that nearly any SBIC can qualify for. However, when an SBIC takes controlling interest via an exception, heavy legal costs and extensive paperwork are required.

A second proposal in H.R. 3845 would drop the minimum term for an SBIC investment from five years to one year. And the bill would also allow the SBA to reduce the 1 percent per year it charges SBICs based on the value of the investments they make. That 1 percent charge was imposed in 1996 as a means of allowing the SBA to recoup its costs for subsidizing both the debentures and participating securities that are sold by SBICs. But the SBA subsidy rate for debentures is zero these days, so the 1 percent interest charge isn't necessary.



Stephen Barlas is a freelance business reporter who covers the Washington beat for 15 magazines.


Contact Sources

  • National Association of SBICs, (202) 628-5055, fax: (202) 628-5080
  • Small Business Administration, (800) U-ASK-SBA, www.sba.gov.