USA Trends and Developments Contributed by: Scott Naidech, Basil Godellas, Alan Roth and Jacqueline Hu, Winston & Strawn
SBA funding, known as leverage, as they believe the receipt of SBA funding will enhance their operations and returns, and that the benefits associated with becoming an SBIC far outweigh the risks and regula - tory oversight and constraints. Description of the SBIC programme The SBIC programme was created by Congress in 1958. SBICs are privately organised and privately managed profit-motivated investment firms licensed by the SBA that, with their own capital and with funds obtained through the federal government, provide capital to small independent businesses, both new and already established. Types of SBICs There are four types of SBICs: (i) leveraged regular debenture fund; (ii) accrual debenture fund; (iii) rein - vestor fund; and (iv) unleveraged fund. Currently, the amount of debentures (regular or accrual) outstanding from a single SBIC cannot exceed USD175 million, and the amount outstanding from a group of common - ly managed SBICs cannot exceed USD350 million. Leveraged regular debenture fund A leveraged regular debenture SBIC receives funding from the SBA in the form of debentures. Each deben - ture received by the SBIC has a ten-year maturity and is not amortised prior to maturity. Interest is paid semi-annually. The interest rate is established when the debentures are issued and is calculated based on a market-driven spread above the ten-year U.S. Treasury rate. Debentures are unsecured, and no per - sonal guarantees are required. Prepayments of the debentures can be made without penalty. Most regu - lar debenture SBICs execute a debt-oriented strategy in later-stage companies that can pay regular inter - est, although a minority of regular debenture funds are control and buyout focused. Accrual debenture fund Funds receiving an accrual debenture licence receive funding from the SBA in the form of accrual deben - tures. Unlike the regular debenture programme, accrual debentures accrue interest over a ten-year term and the interest is reserved by the SBA as part of the leverage issuance. Similar to the regular deben - tures, the accrual debentures are unsecured and the
interest rate is established when the debentures are issued and calculated based on a market-driven spread above the ten-year U.S. Treasury rate. Princi - pal can be prepaid without penalty any time following the two-year anniversary of the settlement date of the accrual debenture. All outstanding interest and annual fees must be paid before principal repayments of the accrual debentures can be made. Funds that have applied to be an accrual debenture SBIC are gener - ally venture capital, growth equity or buyout-oriented where the regular payment of interest by the portfolio companies is not required. Reinvestor SBIC fund A fund receiving a reinvestor SBIC licence receives funding from the SBA in the form of accrual deben - tures, and the reinvestor SBIC is required to invest a majority of its capital (private and SBA leverage) in underserved fund managers. Those underserved fund managers must in turn invest in SBIC compliant transactions. Unleveraged SBIC fund A fund receiving an unleveraged SBIC licence receives no funding from the SBA. Funds that apply to the SBA for an unleveraged licence do so to attract financial institutions as investors. Certain financial institutions may invest in SBICs where they otherwise may be prohibited from investing in other similar vehicles due to a financial institution’s limitations on private equity investments pursuant to the “Volcker Rule” of the Dodd Frank Wall Street Reform and Consumer Protection Act. Licensing A proposed SBIC fund must file a comprehensive licence application (which includes legal documents) with the SBA. During the licensing process, the SBA reviews the applicant’s business plan, projections and legal documents and conducts reference and other background checks on the management team. At the conclusion of the licensing process, a successful applicant is issued a “green light” letter, which certi - fies that the management team will be issued an SBIC licence when the SBA approves final legal documenta - tion, evidence of sufficient investor subscriptions and there have been no adverse changes to the applicant.
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