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August 02, 2023 | Tom Ballard

SBA to modify a program to make it a better fit for early stage investments

The final rule, effective August 17, will add a category to the Small Business Investment Company program that allows for repayment only upon distribution events or at the end of a 10-year term.

Start-up entrepreneurs: Take note!

In an article in last week’s edition of the SSTI Digest, Jason Rittenberg wrote that the U.S. Small Business Administration (SBA) is implementing a final rule, effective August 17, that adds a category of Small Business Investment Company (SBIC) that will make the program a better fit for early-stage investment strategies.

The most significant change appears to be the creation of an accrual funding mechanism that enables licensed SBICs to receive a loan from SBA that is repaid only upon distribution events or at the end of a 10-year term. Additional changes include allowing fund investment strategies through a reinvestor SBIC license, modifying license fees, clarifying elements of nonprofit participation, and attempting to reduce program paperwork.

The SBIC program both licenses companies and offers loans, called debentures, to eligible licensees—a structure that parallels the Community Development Financial Institution (CDFI) Fund’s model of certifying CDFIs and offering financial assistance awards. For most of the past 20 years, the debentures available from SBA entailed regular interest payments, requiring participating SBICs to have access to consistent cash flow. Some SBICs have made venture capital investments, but either as a small portion of their strategy or through a fund not backed by an SBA debenture.

Under the new rule, SBA will offer an accrual license that recognizes an SBIC’s ability to access an accrual debenture. This debenture will accrue interest over its 10-year term. Recipients are required to pay an annual fee and accrued interest to the SBA any time there is a distribution event or at the end of the term.

The new reinvestor license is designed for fund-of-funds investment strategies. These SBICs will make investments into funds that invest in small, U.S.-based businesses. Reinvestor SBICs may use any debenture type, including the new accrual debenture.

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