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The U.S. Small Business Administration (SBA) has announced a rule finalized to modernize the Small Business Investment Company (SBIC) Program. This move is aimed at increasing access to financing and diversifying opportunities for small businesses, start-ups, and investment management communities. The rule, known as the SBIC’s Investment Growth and Diversification Rule, addresses the structural aspects of the program that have historically limited capital flow and growth-oriented debt investments to these entities operating in low-income communities, capital-intensive industries, and technology areas critical to national security and economic development.
SBA Administrator Isabella Casillas Guzmán emphasized the significance of SBIC-licensed funds in supporting innovative and successful businesses and helping small businesses bridge capital gaps. This rule is expected to unlock unrealized potential, strengthen and diversify the SBIC network, and address capital deficiencies faced by underserved small businesses, startups, and critical U.S. industries.
One of the key highlights of the final rule is the introduction of a new debenture instrument called the “Accrual Debenture.” This instrument aligns with the cash flows of longer duration and/or equity-oriented investment funds, fulfilling the need for long-duration and equity funds. Additionally, the rule modifies licensing fees to reduce the financial burden for new program applicants and broadens the eligibility requirements for fund managers, enabling a more diverse group of investment teams and strategies to participate in the SBIC program.
To increase access further, the final rule introduces a new type of SBIC known as the “Reinvestor SBIC” based on a fund-of-funds model. The Reinvestor SBIC will invest equity in underlying funds with an underserved focus, which will then directly invest in small businesses and start-ups. This initiative aims to expedite subsequent funds through a risk-controlled licensing process for eligible applicants, creating capacity for SBA to license more new-to-program applicants while promoting customer service for existing participants.
The rule also streamlines paperwork to reduce friction for program participants and their investors. It strengthens controls to improve risk management within the SBIC program. Furthermore, it clarifies the definition of “affiliation” to establish that a U.S. small business with equity investment by an SBIC Licensee is considered “unaffiliated” and separate from licensed funds and their portfolio companies, unless affiliation is triggered by another relationship.
Bailey DeVries, the associate administrator for Investment and Innovation and Acting Associate Administrator for Capital Access, commended the modernization of SBIC regulations as an enabling factor for SBA to partner with private investors. This partnership will fund businesses in critical sectors for national security and economic success.
The SBIC Investment Diversification and Growth rule will come into effect on August 17, 2023.
In other news, the Biden administration continues to prioritize small businesses, as evidenced by record-high levels of contract spending with these entities, leading to the support of over one million good-paying jobs in manufacturing, construction, research and development, and other vital industries.
The SBA’s announcement of the final rule comes as a significant development in the effort to promote economic growth and support small businesses and start-ups in underserved communities. The modernization of the SBIC program will help bridge capital gaps and provide access to financing in sectors critical to national security and economic development.
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