Small Business Investment and Growth Act of 2005 - Amends the Small Business Investment Act of 1958 to authorize the Administrator of the Small Business Administration (SBA) to guarantee the: (1) payment of the redemption price and interest on a participating debenture issued by a small business investment company (SBIC), or a trust certificate issued with respect to such a debenture; and (2) repayment of funds advanced by an interim funding provider in the event of a default by an SBIC. Authorizes the SBA to charge a guarantee fee in each of the above cases. Prohibits the Administrator from guaranteeing such a debenture if the aggregate unpaid principal balance of the participating debentures would exceed 200% of the leverageable capital of the SBIC. Requires participating debentures to be redeemed within ten years after issuance. Outlines requirements of SBIC participants, including after default on debenture payment.
Allows an SBIC which has no unpaid interest and no past due principal outstanding on any issued participating debenture the right of special distribution to private investors without a corresponding distribution to the SBA, under specified conditions.
[Congressional Bills 109th Congress]
[From the U.S. Government Publishing Office]
[S. 1923 Introduced in Senate (IS)]
109th CONGRESS
1st Session
S. 1923
To address small business investment companies licensed to issue
participating debentures, and for other purposes.
_______________________________________________________________________
IN THE SENATE OF THE UNITED STATES
October 26, 2005
Ms. Snowe (for herself, Mr. Talent, and Mr. Bond) introduced the
following bill; which was read twice and referred to the Committee on
Small Business and Entrepreneurship
_______________________________________________________________________
A BILL
To address small business investment companies licensed to issue
participating debentures, 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 and Growth
Act of 2005''.
SEC. 2. PARTICIPATING DEBENTURE COMPANIES.
Part A of title III of the Small Business Investment Act of 1958
(15 U.S.C. 681 et seq.) is amended by adding at the end the following:
``SEC. 321. PARTICIPATING DEBENTURE COMPANIES.
``(a) Definitions.--As used in this section, the following
definitions shall apply:
``(1) General partner.--The term `general partner' means an
investor in a small business investment company that
participates in the daily management of the small business
investment company, and may include a managing partner in a
limited liability company.
``(2) Gross receipts.--The term `gross receipts' means any
cash received by a small business investment company, including
investment proceeds (both return of capital and profit),
interest, dividends, and fees, other than capital contributed
by a partner, the proceeds of the issuance of participating
debentures, and other money (if any) borrowed by the small
business investment company.
``(3) Interim funding provider.--The term `interim funding
provider' means any entity that providers funding guaranteed by
the Administration to a licensed company in between the
periodic pools created by any trustee.
``(4) Licensed company.--The term `licensed company' means
a small business investment company authorized to issue
participating debentures by a license issued under section 301
for that purpose.
``(5) Limited partner.--The term `limited partner' means an
investor in a small business investment company, other than the
Administrator, that does not participate in the daily
management of the small business investment company.
``(6) Participating debenture.--The term `participating
debenture' means a debt security that is--
``(A) in a form prescribed by the Administrator
that obligates the issuing company to pay--
``(i) on the fifth anniversary of the date
of issuance of the debenture, all accrued
interest on that debenture that has not
previously been paid;
``(ii) semiannually thereafter, interest
accruing after the fifth anniversary of the
date of issuance of the debenture; and
``(iii) any other amount required by this
subsection; and
``(B) is subject to the terms and conditions set
forth in this subsection and to any additional terms
and conditions as may be prescribed by the
Administrator that are consistent with this subsection.
``(7) Private collateral.--The term `private collateral'
means any money that any private partner has contractually
committed to invest in a licensed company during the most
recent licensing of the licensed company, but that has not yet
been paid to the licensed company.
``(8) Trustee.--The term `trustee' means an entity that
combines any securities, interests, or obligations from
licensed companies in the participating debenture program under
subsection (b) into pools and issues trust certificates.
``(9) Trust certificate.--The term `trust certificate'
means a certificate issued by the trustee that represents an
interest in a particular pool of any securities, interests, or
obligations from licensed companies in the participating
debenture program.
``(10) Trust certificate holder.--The term `trust
certificate holder' means an investor that purchases a trust
certificate.
``(b) Participating Debentures Program.--
``(1) Guarantee of participating debentures.--
``(A) Redemption price and interest.--The
Administrator is authorized to guarantee the payment of
the redemption price and interest on a participating
debenture issued by a licensed company to the interim
funding provider under such terms and conditions as the
Administrator shall establish by regulation.
``(B) Repayment in default.--The Administration is
authorized to guarantee the repayment to the interim
funding provider in the event of a default by a
licensed company, of the funds advanced by the interim
funding provider to the licensed company pursuant to
the agreement between the Administration and the
licensed company, under such terms and conditions as
the Administrator shall establish by regulation.
``(C) Trust certificates.--The Administrator is
authorized to guarantee the payment of the redemption
price and interest on a trust certificate issued by the
trustee to the trust certificate holders under such
terms and conditions as the Administrator shall
establish by regulation.
``(2) Guarantee fee.--The Administration is authorized to
charge a separate fee--
``(A) under paragraph (1)(A), to the interim
funding provider;
``(B) under paragraph (1)(B), to the licensed
company; and
``(C) under paragraph (1)(C), to the trustee.
``(3) Zero-subsidy.--Each of the fees authorized under
paragraph (2) shall be sufficient to reduce the cost of each
corresponding guarantee in paragraph (1) to zero, as that term
is defined under the Federal Credit Reform Act of 1990.
``(4) Matching payment streams.--With respect to any
participating debenture issued by a licensed company, or with
respect to any security issued representing an interest in a
pool of such securities, the amount and schedule of--
``(A) the interest payment obligations of the
Administration to the trust certificate holders shall
be equal to the amount and schedule of the interest
obligations of the licensed company to the
Administration; and
``(B) the principal redemption obligations of the
Administration to the trust certificate holders shall
be the same as the amount and schedule of the licensed
company's principal redemption obligations to the
Administration.
``(5) Interest to interim funding provider.--
``(A) Right to receive interest.--For the advancing
of monies to a licensed company pursuant to the license
of that company, the interim funding provider shall
have the right to receive interest from the licensed
company.
``(B) Amounts.--The interest authorized under
subparagraph (A) shall be calculated based on the time
period beginning on the date on which the interim
funding provider advances the funding, and ending when
the interim funding provider provides the securities of
the licensed company to a trustee for the purpose of
pooling those securities and selling interests in that
pool.
``(C) Collection of interest.--The interim funding
provider may collect interest referred to in this
paragraph by withholding money from the money advanced
to the licensed company by the interim funding
provider.
``(6) Maximum leverage.--Notwithstanding any other
provision of this subsection, the Administrator may not
guarantee a new participating debenture to be issued by a small
business investment company, and the company shall not make any
distribution to its private investors, if immediately after
such issuance or distribution the aggregate unpaid principal
balance of the participating debentures issued by the company
would exceed 200 percent of the leverageable capital of the
licensed company.
``(7) Purchase of participating debentures.--The
Administrator may authorize a trust or pool acting on behalf of
the Administration to purchase participating debentures issued
by a small business investment company, under such terms and
conditions as the Administrator shall establish by regulation.
``(8) Redemption.--Not later than 10 years after the date
on which it is issued, a participating debenture shall be
redeemed for an amount equal to its outstanding principal
balance plus any accrued but unpaid interest on such
participating debenture as of the date on which it is redeemed.
``(9) Interest.--
``(A) In general.--Interest on a participating
debenture is preferred and cumulative and is prepayable
out of any gross receipts available for distribution
and is in any event payable at the scheduled or
accelerated maturity of the participating debenture.
``(B) Interest on principal balance.--Interest on
the principal balance outstanding of a participating
debenture shall accrue on a daily basis, and unpaid
accrued interest shall compound semiannually from the
date of issuance of the debenture, at a rate determined
by the Secretary of the Treasury, taking into
consideration the current average market yield on
outstanding marketable obligations of the United States
with remaining periods to maturity comparable to the
average maturities on such securities, adjusted to the
nearest \1/8\ of 1 percent, plus an additional charge,
in an amount established annually by the Administrator,
as necessary to reduce to zero the cost (as defined in
section 502 of the Federal Credit Reform Act of 1990 (2
U.S.C. 661a)) to the Administration of purchasing and
guaranteeing participating debentures under this Act,
which rate may not exceed 1.5 percent per annum, and
which shall be paid to and retained by the
Administration.
``(10) Payment defaults.--
``(A) In general.--In the event of a failure of a
small business investment company to pay any principal
or interest on a participating debenture when due
(including any mandatory prepayment out of gross
receipts), the licensed company shall be in default,
and shall be subject to the provisions of subparagraphs
(B) through (D).
``(B) Acceleration.--The Administration, in
addition to any other remedies it may have, may demand
immediate payment of the principal balance and accrued
interest on any or all participating debentures issued
by the defaulting company.
``(C) Default rate of interest.--The interest rate
on the participating debenture with respect to which
the payment default occurred may increase, at the
discretion of the Administrator, by not greater than 50
basis points from the date of the payment default, and
by not greater than an additional 50 basis points on
each 6-month anniversary of that date, up to a maximum
total increase of 300 basis points, until all of the
payment defaults of the defaulting company have been
cured or waived.
``(D) Private collateral.--The Administration may
apply the private collateral of the licensed company to
pay any interest or principal payment that has not been
paid on time according to the payment schedule for the
licensed company.
``(11) Liquidation of licensed company.--In the event of
the liquidation of a licensed company issuing participating
debentures under this subsection, a participating debenture
shall be senior in priority for all purposes to any interest in
the issuing company, whenever created. In liquidation, the
private collateral of the licensed company may, at the option
of the Administrator, be applied to pay accrued interest and
principal of outstanding participating debentures.
``(12) Default of a licensed company.--In the event of the
default of a licensed company issuing participating debentures
under this subsection--
``(A) a participating debenture shall be senior in
priority for all purposes to any interest in the
issuing company, whenever created; and
``(B) at the option of the Administrator, the
private collateral of the licensed company may be
applied to pay accrued interest and principal on
outstanding participating debentures.
``(13) Investment obligation.--
``(A) In general.--Any company issuing a
participating debenture under this Act shall invest or
commit to invest an amount equal to the outstanding
face value of such participating debenture solely in
equity capital.
``(B) Equity capital.--In this subparagraph, the
term `equity capital' means common or preferred stock
or a similar instrument, including subordinated debt
with equity features which is not amortized and which
provides for interest payments from appropriate
sources, as determined by the Administrator.
``(14) Other debt.--A licensed company issuing a
participating debenture under this subsection shall have no
debt other than leverage obtained in accordance with this Act,
and temporary debt in an amount equal to not more than 50
percent of the private capital of the company.
``(15) Use of proceeds.--Unless otherwise determined by the
Administration, a licensed company may use the proceeds of a
participating debenture issued by the company to pay the
principal amount and accrued interest due on outstanding
participating debentures issued by that company, if the company
has outstanding equity capital invested in an amount equal to
the amount being refinanced.
``(16) Distribution of gross receipts.--
``(A) In general.--Except as otherwise provided in
this subsection, gross receipts, from any source or
however categorized for generally accepted accounting
principles or tax accounting purposes, shall be
utilized first for the payment of accrued interest on
participating debentures, then for repayment of
participating debenture principal and contributed
private capital, and finally for profit distributions,
as provided in subparagraphs (B) through (G).
``(B) Past due interest and principal.--Gross
receipts shall first be used, within 10 days of
receipt--
``(i) to pay any past due interest on
participating debentures issued by the licensed
company; and
``(ii) when there is no past due interest
outstanding, to repay any past due principal on
such debentures (whether such interest and
principal are past due by their terms or by
acceleration).
``(C) Mandatory interest prepayment.--If no unpaid
accrued interest or past due principal is outstanding
on any participating debenture issued by a licensed
company, the company shall use its gross receipts, not
later than the end of the calendar quarter in which
they were received (or the following calendar quarter,
if received within 15 days before the end of a calendar
quarter) to prepay accrued interest on the
participating debentures issued by the company, which
prepayments will be applied to such accrued interest in
the order in which such interest would otherwise become
due and payable.
``(D) Amortization distributions.--If no unpaid
accrued interest or past due principal is outstanding
on any participating debenture issued by a licensed
company, the company shall distribute its gross
receipts--
``(i) to the Administration to amortize
outstanding participating debenture leverage;
and
``(ii) to its private investors, pro rata
according to the ratio of outstanding
participating debenture leverage to outstanding
leverageable capital at the time of
distribution.
``(E) Post-amortization distributions.--If no
accrued interest or principal is outstanding on any
participating debenture issued by a licensed company,
and the company has no outstanding leverageable
capital, the gross receipts of the company shall--
``(i) until aggregate distributions to
private investors under this subparagraph equal
aggregate contributions to the capital of the
company previously made by private investors,
be distributed to the Administration, an amount
equal to the initial profit participation
percentage of the total amount being
distributed with the remaining gross receipts
distributed to the private investors;
``(ii) if aggregate distributions to
private investors under this subparagraph equal
or exceed aggregate contributions to the
capital of the company previously made by
private investors, be distributed to the
Administration an amount equal to the final
profit participation percentage of the total
amount being distributed, with the remaining
gross receipts distributed to the private
investors; and
``(iii) in the case of any post-
amortization distributions to the
Administration pursuant to this subparagraph,
be deemed to constitute `additional' interest
(not `accrued' interest).
``(F) Management expenses.--For purposes of
calculating the amount to be distributed to the
Administration pursuant to subparagraph (E), except as
otherwise prescribed by the Administration, the
management expenses of any company which issues
participating debentures under this subsection shall
not be greater than 2.5 percent of the combined capital
of the company per year, plus, in the case of a company
with combined capital of less than $20,000,000, an
additional $125,000.
``(G) Definitions.--In this paragraph--
``(i) the term `combined capital' means the
aggregate amount of private capital and
outstanding leverage;
``(ii) the term `final profit participation
percentage' means 50 percent of the leverage
ratio, reduced by the weighted average interest
rate on the financing commitments issued by the
company;
``(iii) the term `initial profit
participation percentage' means 25 percent of
the leverage ratio, reduced by the weighted
average interest rate on the financing
commitments issued by the company;
``(iv) the term `leverage ratio' means the
ratio of the aggregate amount of financing
commitment leverage previously drawn by the
company (including leverage that has been
repaid, and not solely the maximum amount at
any one time outstanding, if different) to the
aggregate amount of capital previously
contributed to the company by private investors
(not solely the maximum amount at any one time
outstanding, if different);
``(v) the term `management expenses'
includes management fees and any additional
salaries, office expenses, travel, business
development costs, office and equipment rental,
bookkeeping, and the development,
investigation, and monitoring of investments
paid by the licensed company, but does not
include the cost of services provided by
specialized outside consultants, outside
lawyers and outside auditors, who perform
services not generally expected of a venture
capital company nor does such term include the
cost of services provided by any affiliate of
the company which are not part of the normal
process of making and monitoring venture
capital investments; and
``(vi) the term `outstanding leverageable
capital' means any aggregate capital
contributions received by a licensed company
from private investors which exceed aggregate
distributions received by the private investors
from the company.
``(17) Exceptions to order of distributions.--
``(A) In general.--Notwithstanding paragraph
(16)(D), if no unpaid accrued interest (whether or not
past due) and no past due principal is outstanding on
any participating debenture issued by the licensed
company subparagraph (B) through (D) of this paragraph
shall apply.
``(B) Tax distributions.--
``(i) In general.--The company may make a
special distribution of gross receipts or other
cash to its private investors without a
corresponding distribution to the
Administration while principal is outstanding
on participating debentures issued by the
company, if--
``(I) the licensed company has an
investment in a business (referred to
in this subparagraph as the `portfolio
company') organized as a limited
liability company (referred to in this
subparagraph as an `LLC') or as a
partnership;
``(II) the portfolio company has
income which will be taxable to its
members or partners;
``(III) the portfolio company makes
a distribution to its members or
partners in an amount equal to their
assumed tax liability on the portfolio
company's taxable income (referred to
in this subparagraph as a `tax
distribution'); or
``(IV) the small business
investment company is itself a
partnership or an LLC, so that any
portfolio company income allocated to
it is reallocated to the private
investors, and it is they who are
liable for payment of tax on that
income as if it was their own income,
whether or not they receive any cash in
respect of that income.
``(ii) Authority to make distribution.--In
circumstances described in clause (i), the
issuing company may, prior to April 15 of each
calendar year, distribute to its private
investors up to an amount equal to the
difference between--
``(I) the estimated aggregate
maximum tax liability of the private
investors on the income of portfolio
companies organized as LLCs or
partnerships during the preceding
calendar year; and
``(II) the aggregate amount
distributed to the private investors
(other than pursuant to this
subparagraph) since April 15 of the
preceding calendar year, but in no
event more than the aggregate amount of
tax distributions that the issuing
company received from all of its
portfolio companies during the
preceding calendar year.
``(C) Expenses.--A small business investment
company may use its gross receipts to pay previously
incurred expenses (including management fees) and other
liabilities and it may, in addition, retain additional
gross receipts in an expense reserve account in an
amount which, added to any existing expense reserve,
does not exceed such reasonably anticipated expenses
and other liabilities for the following 12-month
period, provided such expenses and other liabilities
are not prohibited under regulations established by the
Administrator or other applicable law.
``(D) Prepayment.--Subject to any applicable State
law requirements, a small business investment company
may use gross receipts or other cash to prepay
outstanding participating debenture leverage and
interest in whole or in part without penalty at any
time.
``(18) Restrictions on distributions.--
``(A) Liquidity and other administrative or state
law restrictions.--A distribution under this subsection
may not violate liquidity requirements or other
applicable restrictions on distributions in regulations
issued by the Administrator or under applicable State
law.
``(B) Capital impairment or regulatory violation.--
If a small business investment company is in restricted
operations or liquidation by reason of capital
impairment or regulatory violation, the maturity date
of the participating debentures issued by that company,
including both principal and accrued interest, is
subject to acceleration at the option of the
Administrator, and, whether or not there has been such
acceleration, up to 100 percent of all gross receipts
and the private collateral of the licensed company may,
at the option of the Administrator, be required to be
distributed to the Administration until accrued
interest and principal on the participating debentures
issued by the company have been paid in full, in
accordance with any terms and conditions that the
Administrator may establish by regulation.
``(19) Distributions in kind.--
``(A) Election of in-kind distribution of
securities.--A small business investment company that
issues participating debentures may elect to make an
in-kind distribution of securities at any time, subject
to applicable securities laws and regulations, if such
securities are publicly traded and marketable (or
`marketable securities'). Marketable securities
distributed in kind shall be deemed to be gross
receipts for purposes of this subsection, and their
distribution shall be subject to the priorities and
restrictions applicable to gross receipts under this
subsection and to applicable regulations issued by the
Administrator.
``(B) Treatment of administration share.--The
licensed company shall either deposit the
Administration share of such securities with a trustee
designated by the Administrator, or retain the
Administration share, if the Administrator so directs
and with the agreement of the company.
``(C) Retention of administration share.--If the
company retains the Administration share, it shall sell
such share and promptly remit the proceeds to the
Administration.
``(D) Value of administration's share.--For
purposes of this paragraph, the value of the
Administration share is--
``(i) the value of the securities, as of
the date of distribution to the Administration
under subparagraph (B), or as of the initial
date of retention under subparagraph (C); and
``(ii) the controlling value for the
purposes of determining the remaining liability
of the company to the Administration, except
that the Administration may receive a greater
or lesser amount upon its ultimate sale of such
share or upon the ultimate sale by the company
of such share on behalf of the Administration.
``(20) Timing of distributions.--
``(A) In general.--Subject to paragraphs (16) and
(18), any gross receipts received by a small business
investment company issuing participating debentures
under this subsection that are not placed in an expense
reserve pursuant to paragraph (18)(C) shall be
distributed by the last day of the fiscal quarter in
which such gross receipts were received by the company,
except that gross receipts received within 15 days
before the end of a fiscal quarter shall be distributed
by the last day of the subsequent fiscal quarter.
``(B) Exceptions to timing of distributions;
marketable securities.--Gross receipts consisting of
marketable securities shall be distributed within 6
months of the date of receipt, unless the small
business investment company has obtained the prior
consent of the Administrator.
``(21) Reinvestment of gross receipts.--Subject to such
regulations and restrictions as may be prescribed by the
Administrator, and by the agreement of the private investors in
a small business investment company, any gross receipts that
exceed the amount needed to make payments required to be made
to the Administration under this subsection, may at the option
of the company be reinvested in qualified small businesses.
``(c) Post-Distribution Computation.--After distributions have been
made pursuant to this section, the Administration share of such
distributions shall not be reduced or recomputed, except as expressly
provided in this section.
``(d) No Ownership Interest to Administration.--This section shall
not be construed as creating in the Administration any ownership
interest in any small business investment company which issues
participating debentures.
``(e) Conflict With Other Provisions.--
``(1) In general.--In the event of a conflict between this
subsection and any other provision of this part A, this
subsection shall apply.
``(2) Specific provisions.--In particular, the provisions
of this section supersede subsections (g) and (h) of section
303 in their entirety with respect to all matters pertaining to
participating debentures issued by a licensed company covered
by this section.''.
<all>
Introduced in Senate
Sponsor introductory remarks on measure. (CR S11919-11921)
Read twice and referred to the Committee on Small Business and Entrepreneurship.
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