USA Trends and Developments Contributed by: Scott Naidech, Basil Godellas, Alan Roth and Jacqueline Hu, Winston & Strawn
SBA and Department of Defense partnership The SBA and the Department of Defense (DOD) have established the SBICCT programme, a partnership between the SBA and the DOD to increase investment in the DOD’s designated critical technologies (CTAs). SBIC funds (accrual, regular debenture, and unlever - aged) that qualify for and elect to participate in the programme will be required to enter into a compliance agreement with the SBA which, among other things, requires the SBIC and the SBIC’s general partner to covenant that the SBIC will exercise strategic intent to invest at least 60% of its total invested capital in portfolio companies directly involved in CTA devel - opment and/or supply chain and component-level technologies and processes intended to enable such development. The SBA and the DOD have the right to approve all limited partners of the SBIC and all own - ers and employees of the SBIC general partner and management company. Both the SBIC and its portfo - lio companies will have an obligation to protect their technologies deemed important to US national and economic security in order to prevent unacceptable influence or control of US adversaries. Restrictions on SBIC investments All SBICs must follow certain guidelines with respect to their investments in order to be deemed in good standing and remain eligible for SBA leverage. These guidelines include, but are not limited to: • Restrictions on Size and Types of Businesses in Which the SBIC May Invest: An SBIC may only invest in small businesses which include those entities (i) with a tangible net worth not in excess of USD24,000,000 and an average net income after US federal income taxes (excluding any carry-over losses) for the preceding two completed fiscal years not in excess of USD8,000,000, as may be adjusted from time to time; or (ii) which meet the size standard as established in SBA regulations based on the North America Industry Classification System (NAICS) tables. • Smaller Enterprise Investment Requirement: An SBIC must invest at least 25% of its invested funds in “Smaller Enterprises”. Smaller Enterprises include those entities (i) with tangible net worth not in excess of USD6,000,000 and an average net income after federal income taxes (excluding any
carry-over losses) for the preceding two completed fiscal years not in excess of USD2,000,000, or (ii) which meet the size standard as established in SBA regulations based on the NAICS tables. • The Avoidance of Conflict-of-Interest Issues: An SBIC may not engage in self-dealing to the advan - tage of its associates or related parties. • Overline Limitations: Without written SBA approval, a leveraged SBIC may not invest more than 10% of its private capital commitments and anticipated SBA leverage in a single portfolio company and its affiliates. This limitation does not apply to unlever - aged SBIC funds. • Minimum and Maximum Period of Financing Requirements: Generally, the duration of all financ - ings must be for a minimum period of one year and no longer than 20 years. • There are limits on interest and fees chargeable to portfolio companies. Additionally, SBA regulations generally preclude investments in the following types of businesses: (i) other SBICs (except that a reinvestor SBIC may invest in an unleveraged SBIC); (ii) finance and investment companies or finance-type leasing companies; (iii) unimproved real estate; (iv) companies with less than one-half of their assets and employees in the USA; (v) with certain exceptions, passive businesses; (vi) com - panies that will use the proceeds to acquire farmland; (vii) cemetery subdividers or developers; and (viii) with certain exceptions, investments that are purchased other than from an issuer. An SBIC may not be a gen - There are a number of regulations intended to assure an SBIC’s proper management and operations. If a leveraged SBIC defaults on its payment obligations under the SBA debentures, fails to comply with the applicable SBIC regulations or is otherwise found to be in violation of the SBIC Act, the SBA has a series of remedies that it may impose, including the right to accelerate the maturity of all amounts due under its debentures. Additionally, in such instances, the SBA can remove the general partner of an SBIC, bring suit for the appointment of a receiver for an SBIC and for its liquidation. eral partner of a partnership. Operational requirements
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