In October 2022, the Small Business Administration (SBA) issued a proposed rule, Small Business Investment Company Diversification and Growth (the Proposal), which would change certain rules governing existing small business investment companies (SBICs) and the process for becoming a licensed SBIC. The most significant changes in the Proposal include the following, among others:
- It would exempt from SBA approval a “Qualified Line of Credit” that meets the following requirements:
- The debt is a line of credit with maximum availability limited to 20% of total unfunded binding commitments from Institutional Investors.
- The term of the line of credit does not exceed 12 months, but may be renewable, provided that each renewal does not exceed 12 months.
- The line of credit is held by a federally regulated financial institution.
- All borrowings under the line of credit:
- Are only secured by unfunded Regulatory Capital up to 100% of the amount of the borrowing and 90 days of interest;
- Are for the purpose of maintaining the SBIC’s operating liquidity or providing funds for a particular Financing of a Small Business;
- Must be fully repaid within 90 days after the date they are drawn; and
- Must be fully paid off for at least 30 consecutive days during the SBIC’s fiscal year so that the SBIC has no outstanding third-party debt for at least 30 consecutive days.
- It would extend the time frame for reporting quarterly valuations by a Leveraged SBIC from within 30 days after quarter close to within 45 days after quarter close.
- It would change the filing deadline for the audited Annual Report on SBA Form 468 from within three months after fiscal year-end to within 90 calendar days after fiscal year-end.
- It would allow the SBA to approve the adoption of a valuation policy that meets GAAP by an SBIC, if the SBIC is non-leveraged.
- It would change the current term “Charge” to “Annual Charge” and set a minimum Annual Charge at 0.50% (not to exceed 1.38%) per annum.
- It would streamline the Examination Fees formula for Leveraged SBICs to $10,000 + 0.035% of the SBIC’s Total Leverage Commitment established at licensing. For existing Leveraged SBICs the formula is $10,000 + 0.035% of the SBIC’s outstanding Leverage plus the SBA’s undrawn commitment amount. For non-leveraged SBICs, the Examination Fee is a flat rate of $10,000, with non-leveraged SBICs with assets over $50 million in cost being charged an additional $20,000.
The Proposal is expected to be one of a series of changes made to the SBIC program, with the final rule involving several rounds of solicitation for comments.