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SBA Comment Letters

SBIA Comment Letters to the Small Business Administration


SBIA Comment Letter on SBA Passive Business Rule
 On May 31, 2017, SBIA submitted a comment letter on the SBA Passive Business Rule. The rule, which was scheduled to be implemented on January 27, 2017, has been delayed multiple times for additional comment under the new Trump Administration. According to the Federal Register notice, SBA is "considering removing the provision that would allow SBICs to use a blocker entity...if an investor in an SBIC, typically a business development company (BDC), has elected to be taxed as a regulated investment company (RIC) and a direct investment into the operating company would cause the investor to receive income that would jeopardize its RIC status." SBA opened this most recent comment period to receive feedback regarding the removal of this provision.
Regarding the blocker provision, SBIA commented that, rather than removing the provision altogether, entities who choose that investment structure should be allowed a pre-approval mechanism. If BDCs cannot take advantage of this provision, they are severely limited in their ability to take equity positions, and they pass along millions in profits. As the letter states, "Preventing BDCs from having any equity positions in their portfolio limits some of the most important profit upsides while maintaining downside risk - thus removing a core taxpayer protection..."
SBIA urged the SBA to implement it expeditiously and ease burdens on SBICs.


SBIA Submits Comment Letter on SBA Administrative Fee Rule
 On February 14, 2017, SBIA submitted a comment letter in opposition to the SBA's proposed rule hiking licensing and examination fees for SBICs. SBA issued this proposed rule on December 16, 2016, which almost doubled licensing and examination fees over the next 4 years, and adjusted for inflation after that date. SBA anticipated adding $3-4 million in fee revenue each year by October 2020 under the proposal. SBIA argued in our comment letter that SBA no longer had the authority to issue this regulation due to the recent executive order on regulations issued by President Trump, as well as that the SBA had not adequately made the case for why these dramatic fee increases were necessary, or that resources raised would be dedicated to the SBIC program.
 SBIA Submits Comment Letter on SBA Passive Business Rule Finalization Delay
 On December 28, 2016, the SBA released as a final rule the Passive Business Rule, which provided a number of important regulatory changes to help SBICs when structuring deals, including permitting the use of blocker corporations to prevent adverse tax consequences for foreign investors, and impacts on RIC status for BDCs with SBICs. The rule was scheduled to be implemented on January 27, 2017.


Due to a memorandum released by the new Trump Administration labeled "Regulatory Freeze Pending Review", implementation of the rule will be delayed until March 21, 2017. Therefore, the changes in the final rule cannot be relied upon until the rule is implemented.  SBIA submitted a letter to the SBA on February 15, 2017, noting that while the rule still should be improved, it should be finalized expeditiously to provide relief for our SBIC and BDC members.


SBIA Submits Comment Letter on Proposed Rule Raising Licensing & Examination Fees for SBICs

On December 16, 2016, the SBA released a new administrative fee rule.

On February 14, 2017, SBIA submitted a comment letter in opposition to the SBA’s proposed rule hiking licensing and examination fees for SBICs.  The proposed rule almost doubled licensing and examination fees over the next 4 years, and continually adjusted for inflation upwards after that date.  SBA anticipated adding $3-4 million in fee revenue each year by October 2020 under the proposal.  SBIA argued in our comment letter that SBA no longer had the authority to issue this regulation due to the recent executive order on regulations issued by President Trump, as well as that the SBA had not adequately made the case for why these dramatic fee increases were necessary, or that resources raised would be dedicated to the SBIC program. 


SBA Holds Examiner Workshop & Provides Insight into Exam Priorities

On December 14, 2016, the Small Business Administration held an Examiner’s Workshop to which SBIC accountants, tax professionals, attorneys and other fund administration personnel were invited.  A number of issues were discussed that impact those operating in the SBIC space, including the current priorities for SBIC examinations.  Please see the attached memorandum for more information, as well as this overview on the operations of the Passive Business Rule (which has not yet been finalized).


SBIA Submits Comment Letter on Early-Stage SBIC Proposed Rule

SBA issued a proposed rule on September 19, 2016, updating the Early-Stage SBIC program and incorporating changes suggested in a 2015 request for comments.  SBIA submitted a Comment Letter on May 18, 2015 in response to that request for comment, presenting a series of recommendations directed at improving the Early Stage SBIC Initiative and the broader SBIC program.

SBIA submitted a further comment letter on the new proposed rule on October 19, 2016, applauding some of the changes adopted from our 2015 letter.  Our comment letter also suggested a number of additional improvements to make the program more attractive, including making it clear what standards are required to receive a license under the program, and permitting early-stage SBICs to impose higher prepayment penalties on convertible debt provided to portfolio companies.

The 2016 comment letter is available here.


SBIA Submits Comment Letter on SBIC MAQ & Licensing Application

SBA  issued a notice for public comment on the MAQ and License Application Forms in June 2016. SBA requested comments on (a) Whether the collection of information is necessary for the agency to properly perform its functions; (b) whether the burden estimates are accurate; (c) whether there are ways to minimize the burden, including through the use of automated techniques or other forms of information technology; and (d) whether there are ways to enhance the quality, utility, and clarity of the information. This provided an opportunity for our members to provide feedback on the information requested in the MAQ and License Application.

On August 15, 2016, SBIA submitted a comment letter in response to the request for comment highlighting a number of changes that should be made to the forms.


SBA Released Proposed Rule Creating Permanent License for Impact SBIC

 On February 3, 2016, the SBA released a new proposed rule defining a new class of SBICs called “Impact SBICs”. This formalizes the Impact Investment SBICs that have been licensed since April 2011 when the SBIC launched its Impact Investing Initiative.  The goal of Impact SBICs is to target capital investments into segments of the economy where capital formation gaps exist, such as in LMI areas, economically distressed areas and rural areas, as well as in certain underserved sectors.  SBIA submitted the following comment letter on the Proposed Rule on March 4, 2016.

 The proposed rule does the following:


·         Creates a new definition of Impact Investment (divided between the following)

o   SBA-Identified Impact Investments (SBA designated geographic areas)

o   Fund Identified Impact Investments (SBICs own definition of impact, and that are proposed by the SBIC and approved by SBA during licensing process)


·         Creates a new Impact SBIC designation requiring the following to be licensed as an Impact SBIC:

o   Must be organized as a limited partnership;

o   Impact SBIC designation applies to those licensed under this new proposed rule and those launched since 2011 under the Impact Investing Initiative;

o   Must invest at least 50% of its financing dollars in small business concerns meeting the “impact investment” definition above; (follow-on investments in the same portfolio company would count towards the 50% requirement)


·         Fee Discounts:

o   Licensing Fee Discount (60%)

§  Impact SBICs would receive a 60% licensing fee reduction to incentivize the formation of Impact SBICs.  SBA would devote neither less time nor fewer resources to the licensing process for Impact funds as opposed to traditional SBICs.

§  SBA is able to recoup these discounts if the fund does not end up getting licensed as an Impact SBIC

§  Current SBIC Licensing fees are the following:

·         All Applicants: $10,000

·         Partnership Licensees: $15,000

·         Early-Stage Licensees: $25,000

o   Examination Fee Discount (10%)

§  Impact SBICs would receive a 10% licensing fee reduction in the examination “base fee”.  Current Impact funds would be eligible for this discount on an going forward basis.

§  The Base Fee for all SBICs is determined by the licensee’s total assets (at cost) as of the date of the latest certified financial statement and ranges from a minimum of $3,500 to a maximum of $14,000.


·         Availability to Apply as Dual Early-Stage/Impact SBIC

o   Those applicants who make early stage investments in impact areas would be eligible to apply simultaneously for both licenses and would not be subject to the early-stage call notice periods.  The applicants would still be subject to the regulations applying to both licenses.


·         Licensing Standards:

o   Licensing standards will remain the same as a traditional SBIC, and background in Impact Investing will only be considered in the context of the suitability to be licensed as an Impact SBIC.

o   Applicants will be expected to use SBA Form 2181 to provide definitions of the Fund Identified Impact Investments they intend to make, and will be required to describe in qualitative and quantitative analysis, the expected social, environmental, or economic impact of their Fund Identified Impact Investments.


·         Impact Measurement:

o   Impact SBICs must submit an impact measurement and assessment plan to SBA, which requires the SBIC to obtain an assessment of their impact from:

§  Independent 3rd party assessment provider;

§  Using SBA approved impact measurement standard;

§  Using an transparent and comprehensive assessment process.

o   At the outset the following standards will be approved:

§  Impact Reporting & Investment Standards (IRIS), created by GIIN;

§  G4 Sustainability Reporting Standards, created by Global Reporting Initiative (GRI);

§  Standards produced/maintained by the Sustainability Accounting Standards Board (SASB).


·         Branding:

o   Impact SBIC funds will required to identify themselves as impact investment funds to the public when marketing their funds to investors.


·         Investment Certification of Investments

o   Impact SBICS would have to certify the basis for which each of their investments qualifies as an Impact Investment.  Fund-Identified Impact Investments only require the certification of the Impact SBIC, while SBA-Identified Impacts Investments require certifications from both the Impact SBIC and its portfolio concern.


·         Leverage Certification

o   Impact SBICs would be required to certify when drawing leverage or seeking a leverage commitment, that it will invest at least 50% of the aggregate dollar amount of its financings in Impact Investments.  SBA will monitor Impact SBIC performance to ensure they are making investments meeting this requirement.


·         SBA Default Remedies

o   SBA will create two new sections in the regulations that would apply to only Impact SBICs. 

§  Not Meeting the 50% Investment Requirement: First, an event of default would be considered to have occurred if an Impact SBIC fails to meet the 50% impact investment requirements.  If the Impact SBIC is unable to cure, SBA could invoke remedies including the right to declare outstanding leverage due immediately.

§  Not conducting an Impact Assessment: Second, it would be an event of default  if an Impact SBIC licensed to create Fund Identified Impact Investments fails to obtain an acceptable independent third party assessment to measure its impact.  If the Impact SBIC fails to cure to SBA’s satisfaction, SBA could invoke remedies including the right to declare outstanding leverage due immediately.


·         Impact SBIC non-compliance with regulations:

o   SBA proposes creating a series of action the SBA can take with respect to Impact SBICs that fail to avoid the events of default covered above, including:

§  SBA will have the authority, upon written notice, to take any or all of the following actions:

·         Convert the Impact SBIC license to a standard SBIC license, with at SBA’s discretion, requiring the GP to notify its private investors of the conversion;

·         Require the licensee to return to SBA the full dollar amount of any licensing/examination fee discounts it received prior to receiving the written notice.

§  SBA would only be authorized to do these things after giving the licensee at least 15 days to resolve its non-compliance, with the licensee failing to resolve the non-compliance.

o   These requirements would not apply to:

§  Non-Leveraged Funds

§  Those SBICS prepaying their leverage in full.


SBIA Comments on New SBA Proposed Passive Business Rule:


On October 4, 2015, the Small Business Administration (SBA) released proposed revisions to the Passive Business Rule which expands the use of passive businesses and certain holding company structures. The proposed new rule makes a number of helpful changes that SBIA has advocated for in the previous iterations of the rule. 

On December 4, 2015, SBIA submitted a comment letter to the Small Business Administration in regard to the SBA's proposed revisions to the Passive Business Rule. This SBA rule governs the use of various holding company structures, and limits the use of tax blocker structures by SBICs, including those SBICs that are subsidiaries of BDCs.

SBIA's letter applauded the SBA's efforts to make the current rule more flexible, including by eliminating the prior approval requirement for the use of a tax blocker structure, the permitted use of blockers to prevent effectively connected income (ECI) taxation, and providing clarity that SBICs may form as well as finance passive entities.

SBIA also encouraged the SBA to adopt a number of improvements to the revisions, including the addition of a regulated investment company (RIC) blocker for BDCs to protect BDCs from bad income caused by equity investments being made in their SBIC subsidiaries.  In addition, SBIA encouraged the SBA to eliminate or reduce some of the ownership requirements in the rule that required SBICs using holding company structures to be the majority owner of the voting securities of the underlying active subsidiary. SBIA also advanced a number of changes that will make this rule less limiting for SBICs.

The comment letter as submitted can be found here.

A diagram of the holding company structures that SBIA's suggested language would permit if adopted can be found here. 

Current Rule:
The Small Business Investment Company (SBIC) regulations currently provide two ways in which an SBIC can structure an investment using a holding company structure.  

§107.720(b)(2): SBIC can finance an investment with two levels of a holding company to make the financing to the active subsidiary. This is subject to certain ownership requirements of the uppermost tier holding company (50%) and the active subsidiary (50%). The ownership requirements of the holding companies and active subsidiaries are currently problematic due to the lack of majority equity ownership in SBIC-related deals. (This doesn’t change in the new rule);

§107.720(b)(3): SBIC can provide financing to a small business through a passive blocker corporation, provided the SBIC’s investors would incur unrelated business taxable income (UBTI) if the blocker were not formed. The SBIC has authority to form the blocker as well as finance it.

New Rule/Changes:
The new rule proposes the following elements and comments are due on December 4. Unfortunately, the new rule does not help on the Regulated Investment Company/Business Development Company (RIC/BDC) blocker issue – this is something SBIA will address in the comment letter. SBIA welcomes thoughts and input. Please send your comments here:

1. Form & Finance: Clears up the uncertainty in the previous final rule in October 2014 that an SBIC may “form” in addition to financing a passive business under section (b)(2).

2. No Prior Approval Needed for ECI/UBTI Blocker: Eliminates the requirement that SBA provide prior approval to form a blocker corporation when forming a blocker corporation for UBTI purposes; it is replaced by a certification requirement.

3. Blocker Permitted for ECI Purposes: Permits an SBIC to form a blocker corporation to avoid effectively connected income (ECI) for foreign investors.

4. New “Substantially All” Definition: Creates a definition of “substantially all,” in reference to the SBIC funding passive businesses with “substantially all” of the proceeds being passed down to the active subsidiary. The new definition will define “substantially all” as 99% of financing proceeds after deduction of actual application fees; closing fees and expense reimbursements – not to exceed those permitted under §107.860. (The SBA wants to ensure all the financing goes to the small business.)

5. Limitation on Fees for Creating Passive Entities: Creates a new provision to clarify that fees collected by SBICs and their associates under §107.860 and §107.900 may not exceed the fees that would be permitted under the same two sections if the SBIC directly financed a non-passive small business. In addition, these fees must be remitted to the SBIC within 30 days of receipt. (Basically, the SBA doesn’t want financing with the creation of passive entities to cost more than a traditional financing.)

6. New Information Rights on Passive Entities: Clarifies that both passive and non-passive businesses included in a financing are “portfolio concerns” which gives the SBA certain information rights under §107.50, with the goal of giving SBA access to the books and records of the passive business (which has apparently been a concern in the past). This would be created through a new provision in §107.720(b)(4).

7. Certification Requirement to Replace Prior Approval for ECI or UBTI Blocker: Creates a new certification requirement for loans and investments under §107.610 that would require SBICs that finance businesses under 107.720(b)(3) – (ECI or UBTI blocker) to certify as to the basis of the qualification of the financing.  This would replace the prior approval element;

8. Proposed Changes to Form 1031 & New Reporting Requirements: The new rule would create a new Part D and Part E, while designating current Part D on the Form as Part F. Part D will involve Impact Funds and Part E will involve passive entities. The following changes would occur to Form 1031:

a. Clarification to Report Non-passive Small Business Concern on Form 1031: SBICs have sometimes incorrectly reported data on the passive entity rather than the active subsidiary on the form. SBA is clarifying that the data should be reported on the non-passive entity on Parts A, B, and C of Form 1031 (with exception of financing dollars in Question 29 – which should be the total dollar amount financed for both passive entity and active subsidiary);

b. Adding a Question to Form 1031 to ID Passive Financings: SBA will add a question as to whether the financing utilizes one or more passive businesses as part of the financing – to allow SBA to identify when multiple holdco structures are utilized;

c. Adding Information on Passive Business Financing Structure: SBA will require SBICs to upload a PDF to assess whether the financing meets regulatory compliance, including (1) which exception the financing is being made under – the general exception in (b)(2) or the UBTI/ECI Blocker in (b)(3); if being made under (b)(3), identify whether it’s for ECI or UBTI; (2) must identify the name and employer ID for each passive business entity; and (3) SBIC must describe the financing structure – such as with a flowchart – including the flow of money between the SBIC and the passive entities/active subsidiary to make sure “substantially all” of the funds go to the subsidiary;

d. New Part D for Impact Funds: SBA created this new section to permit Impact SBICs to identify whether they are reporting on an SBA-identified impact investment or a Fund-identified Impact investment. This will be the addition of two questions on this topic; and

e. Time Estimate on Form 1031: SBA estimates it will take an additional 30 minutes to complete the Form with the passive entity information – on top of 12 minutes currently. There will be additional compliance costs as a result.

In addition to these changes, the following technical change would be made to the SBIC regulations:

Modifies paragraph (a) of §107.210 to allow both leverageable capital and regulatory capital to fall below the stated minimums, if the reductions are performed in accordance with an SBA approved wind-up plan under §107.590(c). Paragraph (a) currently states:

§ 107.210 Minimum capital requirements for Licensees.
(a) Companies licensed on or after October 1, 1996. A company licensed on or after October 1, 1996 must have Leverageable Capital of at least $2,500,000 and must meet the applicable minimum Regulatory Capital requirement.

To read the SBA Request for Comment printed in the Federal Register, click here.


SBA Request for Comment on SBIC Credit & Risk Management Issues

On July 6, 2015, the SBA released a request for comment on SBIC credit and risk management issues. SBA is seeking input on how it might address its credit concerns with the following:


(1) SBICs with unsecured lines of credit

(2) The determination of “equity capital investments” when calculating an SBIC’s capital impairment percentage 

In consideration of any comments received, SBA does not intend to change any regulations on these issues, but will consider changes to the SBA’s policy guidance. If you could provide answers to the following questions posed by the SBA, that would be very helpful. Comments are due on September 4, 2015.  The request for comment is available here.

Unsecured Lines of Credit

The SBA contends that unsecured lines of credit pose a potential credit risk to SBA because, with certain limited exceptions, the SBA is subordinated to the first $10 million of such debt. SBA is concerned about provisions in unsecured lines that (1) allow a lender to make a capital call directly on the SBIC's investors to repay the line of credit if a certain number of investors in the SBIC fail to fund a capital call within a stated period; and (2) permit a lender to compel  the GP of an SBIC to make a capital call together with remedies including specific performance and/or injunctive relief. If an SBIC enters liquidation, the SBA is concerned that the commitments of the SBIC will already have been used to satisfy a default of the line of credit, rather than paying back the SBA leverage.  

The SBA would like answers to the following questions:

1) What credit concerns should SBA have regarding an SBIC’s credit facility if the maximum extension of credit under such facility is in the amount of $10 million or less?
2) How frequently or what percent of total dollars or lines of credit do lenders provide unsecured credit to an SBIC in an amount above $10 million?
3) What are the typical maturity dates for such credit facilities (e.g., 12 month term) and are they routinely extended?
4) What is the average balance and settlement of credit lines extended to SBICs?
5) Based on SBA’s view that short-term borrowings pose a lower credit risk, what restrictions, if any, should SBA consider placing on the length of time a balance may remain outstanding on an unsecured line?
6) Should SBA permit such facilities only during time periods of an SBIC’s lifecycle when the risk to SBA is lower;for example, during the early years of an SBIC's life or before additional leverage is drawn? If so, what considerations should SBA take into account in determining the timing and duration of these periods?
7) Are there certain provisions in unsecured loan agreements that SBA should be especially concerned about with respect to credit risk (e.g. remedies available to a lender such as specific performance or injunctive relief) and how should SBA deal with those provisions?
8) What type of credit risk policies would be most effective in managing SBA’s credit risk with respect to unsecured lines of credit?

Determination of “Equity Capital Investments (ECI)"

SBA regulations permit a higher maximum allowable capital impairment percentage when the percentage of equity capital investments in an SBIC portfolio is higher, in recognition that equity-type investment strategies are inherently riskier and frequently require a longer holding period relative to debt investments. SBA has observed that SBICs seeking to avoid capital impairment have converted non-ECI investments to ECI solely for the purpose of attaining an increase in maximum allowable capital impairment percentage. This artificially forestalls the SBIC from having a condition of capital impairment. SBA wants to prevent these conversations that are solely intended artificially to increase maximum allowable capital impairment percentage. SBA does not want to create unnecessary burdens for SBICs who may convert an investment for business reasons, and is seeking comment on how to achieve this objective. SBA is seeking general comments or answers to the following questions:

1) Other than the examples provided, what transactions or circumstances can result in an original non-ECI becoming qualified as an ECI?
2) What specific factors should SBA consider in determining that investments are disqualified as ECI for purposes of calculating an SBIC’s maximum allowable capital impairment percentage?
3) Without creating an undue reporting burden on SBICs, how can SBA differentiate between investments converted for legitimate business reasons and those converted for other reasons, including solely to inflate total ECI in the SBIC’s portfolio?

Please contact Chris Hayes, SBIA’s Legislative & Regulatory Counsel by email or at 202.628.5055 if you have any comments on this issue.

New Draft Model Limited Partnership Agreement

On June 26, 2015, the Small Business Administration (SBA) released a new draft Model Limited Partnership Agreement (LPA) for public comment. The new LPA will be utilized by all SBIC funds, and delineates the rights and responsibilities of investors and fund managers. The current LPA can be found here, while the new proposed LPA is available here. A redline outlining the changes in each can be found here

SBIA staff are still reviewing this important document and will be providing comments and feedback on behalf of our membership to the SBA by the comment letter due date of August 10, 2015. If you have any feedback on the changes to the LPA, please contact SBIA’s Legislative & Regulatory Counsel, Chris Hayes, by email or at 202.628.5055.

The SBIA submitted a detailed response incorporating valuable feedback from SBIA members on the SBA's proposal to revise the "SBA Model Form of Agreement of Limited Partnership for an SBIC Issuing Debentures." The SBIA's August 10 Comment Letter highlights ten primary substantive provisions that SBIA recommends should be eliminated or modified in the Proposed Model.

SBA has released a Request for Comment on the SBIC Early-Stage Program 

On March 18, 2015, the SBA released a request for comment and proposed rulemaking to determine whether existing market conditions warrant SBA continuing to license Early-Stage SBICs past fiscal year 2016, and what potential changes might be needed to make the program viable going forward. Since the program was created in 2012, SBA has received 48 applications to this program, but has only licensed 5 Early Stage SBICs due to the perceived quality of the applicant pool and SBA's rigorous licensing standards.

SBA also invites comments on other requirements that may be of interest to Early Stage SBICs, and on the SBA's Valuation Guidelines.The request for comment can be viewed here.

SBIA intends to comment on the proposed rulemaking by the due date and suggest ways the Early-Stage program can be improved to attract more participants and increase efficiency in the licensing process for funds. Comments are due on May 18, 2015.

If you have any comments on these issues please contact Christopher Hayes, SBIA's Legislative & Regulatory Counsel, at or 202.628.5055.

SBIA submitted a Comment Letter on May 18, 2015, presenting a series of recommendations directed at improving the Early Stage SBIC Initiative and the broader SBIC program.


SBA Request for Comment on Updates to the Forms SBICs Sign to Receive SBA Leverage

The SBA is seeking comment on existing Forms 25 PIGP, (Individual General Partner Certificate), Form 25 PCGP (Corporate General Partner Resolution Certificate), Form 25 PC (Corporate Resolution for SBA commitment), Form 1065 (Applicant Licensee’s Assurance of Compliance), SBA Form 34 (Instructions for Bank Identification Form) and Form 34 (Instructions for the Authorization to Disburse Proceeds). SBIC Applicants for SBA-guaranteed leverage must complete these forms as part of the application process. SBA uses the information to make informed and proper credit decisions and to establish the SBIC's eligibility for leverage and need for funds.

Comments were due on November 21, 2014. SBIA's comment letter is available here.

The forms are attached here.

On February 25, 2015, the SBA issued a notice indicating that they had adopted a number of the changes to these forms that SBIA requested in our November 2014 comment letter. These changes included the following:

"SBA received four comments from the public regarding these forms.   The comments received were from one party and were all relative to the SBA Forms 25. Those four comments are summarized below.  SBA’s response is provided after each comment summary:

 1)      The required language “but not less than [an inserted minimum amount]” is unnecessary and should be removed from each version of the SBA Form 25. 

SBA Response:  SBA agrees that this language is no longer necessary and the language has been removed from the SBA Forms 25;

2)      The required language relative to affixing a corporate seal is no longer necessary and should be removed from the versions of the SBA Form 25 requiring it (SBA Form 25 PC and SBA Form 25 PCGP).

SBA Response:  SBA agrees that the practice of affixing a seal is no longer required and such language relative to that requirement has been removed from the SBA Form 25 PC and the SBA Form 25 PCGP ;

3)      The SBA 25 PIGP is longer needed and should be discontinued since there is currently no small business investment company organized as a limited partnership with an individual general partner.

SBA Response:  SBA agrees that the SBA Form 25 PIGP is no longer needed and it is discontinued with this submission; and

4)      A new version of the SBA Form 25 is needed as a model resolution for small business investment companies organized as a limited partnership with a limited liability company general partner.

SBA Response:  SBA agrees and the new version of the SBA Form 25 is included with this submission (SBA Form 25 LLGP).

The new forms can be viewed here.  

SBIA submitted a comment letter on March 26, 2015 to indicate our support and thank the SBA for making the requested changes to improve these forms for SBICs.


SBA Issues Guidance Eliminating Pre-Approval Requirement of Transfers of Limited Partnership Interests under 10 percent, SBIA Issues Letter in Response.

SBIA submitted a letter on January 14, 2015, to senior leadership at the Small Business Administration. The purpose of the letter is the recent guidance released by the SBA in December 2014 removing the requirement that SBICs receive pre-approval from the SBA before making transfers of less than 10% of a limited partner’s (LP) ownership in the fund. While SBIA supports the elimination of the pre-approval requirement -- which was never present in the SBA regulations and was enforced through SBA guidance -- the new guidance requires that funds seek post-approval for these transfers. Post-Approval requests have a 90-day window in which SBA may rescind or prevent the LP transfer, after which is automatically approved. In practice, SBA seldom responds to these requests; thus, activating automatic approval and creating significant uncertainty for funds and their investors during this wait period. SBIA’s letter urged the SBA to replace the post-approval requirement with a “notice” requirement of transfers under 10%, either through additional SBA guidance or a rulemaking open to public comment. 



SBA Issues Final Passive Business Rule
Small Business Administration -  Proposed Rule 

Comments Submitted on January 21, 2014 - Available Here

Final Rule Released on October 21, 2014 - Available Here

Purpose - The SBA released their final rule to allow SBICs to structure an investment utilizing up to two passive holding companies as pass-through entities, as long as the investment proceeds pass through to one or more active subsidiaries. Prior rules allowed the use of only one passive holding company as a pass-through entity. The modification helps place SBICs on a closer to equal footing with their non-SBIC counterparts as multiple holding company structures are common for tax and structural purposes, where often the SBIC does not have the power in the deal to dictate the structure. The SBIA supports the change and appreciates the SBA's efforts to release this rule.

The Final Rule will permit the following activities:

1) Will allow an SBIC to finance a passive business to take advantage of favorable tax treatment under Internal Revenue Code § 338(h)(10), which involves the stock sale of a portfolio company;

2) Will allow an SBIC to invest in an active operating company subsidiary through two levels of passive holding companies so long as the first level passive holding company has enough voting ownership of the second level passive holding company to give it indirect ownership above 50% of the active subsidiary. Here is a helpful diagram:

The following activities will be permitted under the new rule, so long as the ownership requirements set forth in above in (2) are complied with:

- Will allow an SBIC to shield tax exempt investors from receiving UBTI from an investment in a flow-through entity (UBTI Blocker).

- Will allow an SBIC to protect an SBIC's foreign investors from the taxation imposed on income that is considered to be "effectively connected" to a U.S. trade or business (ECI Blocker)

- Will allow an SBIC that is either a licensed BDC, or that is owned by a parent BDC, to avoid jeopardizing the BDC's qualification as a regulated investment company under the Internal Revenue Code (BDC Blocker for Bad Income)

 Some other elements of the rule:

- The rule clarifies that, in the context of the rule, "securities" of a corporation and "interests" of a limited liability company or limited partnership would be treated the same.

- A UBTI blocker can still be utilized with prior approval of the SBA, that would not be subject to the ownership requirements in this final rule.


SBA Proposed Rule to Increase Non-Manufacturing Employee Based Size Standards

The SBA has issued a proposed rule to increase employee based small business size standards for thirty industries and three sub-industries and decrease them for three industries not part of the NAICS system (Manufacturing, Wholesale Trade or Retail Trade).  Comments are due by November 10, 2014.  If you have any comments, please contact Christopher Hayes, SBIA's Legislative & Regulatory Counsel at

The attached proposed rule is available here.

SBIA submitted comments supporting the changes on November 10, 2014, available here.


 SBA Request for Comment on Update to TechNote 9 on Overline Investments

The SBA has released an updated TechNote 9: “Guidance for Obtaining a Regulatory Exemption for Overline Investments” which updates and replaces the April 2002 TechNote 9 to align the TechNote with certain regulatory changes that were enacted in 2009.  The new TechNote 9 updates the following to conform with the 2009 update to the regulation:

 1) An increase to the overline limit from 20% to 30% of adjusted Regulatory Capital for the majority of SBICs;

2)  A requirement to obtain a prior written exemption from the Associate Administrator for any overline investment (this was not required previously);

3)  Clarifies what information must be provided with a request for a prior written exemption and how SBA will assess that information in its decision-making process.

The TechNote is Available Here

SBIA submitted the following comment letter on August 8, 2014. 
SBA Finalized Technote 9 with the proposed language on September 17, 2014.

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