THE SBIC PROGRAM: Application Process

The U.S. Small Business Administration (“SBA”) and Investment Division welcome your interest in obtaining a Small Business Investment Company (“SBIC”) License. Since 1958, the program has provided financial assistance to small businesses in need of growth capital. We encourage you to review the information below to better understand the program and application process.

General Information:

The SBIC Program is one of many financial assistance programs available through the U.S. Small Business Administration. The structure of the program is unique in that SBICs are privately owned and managed investment funds, licensed and regulated by SBA, that use their own capital plus funds borrowed with an SBA guarantee to make equity and debt investments in qualifying small businesses. The U.S. Small Business Administration does not invest directly into small business through the SBIC Program, but provides funding to qualified investment management firms with expertise in certain sectors or industries. For more information on accessing SBIC funds for your small business please refer to Entrepreneurs Seeking Financing.

An SBIC can be organized in any state, as either a corporation, limited partnership (LP), or a limited liability company (LLCs must be organized under Delaware law). Most SBICs are owned by relatively small groups of local investors, although many are owned by commercial banks. For more information on investing in a SBIC refer to Private Partners. A few SBICs are corporations with publicly traded stock. SBA requires a minimum private capital investment of $5 million for a debenture SBIC. A minimum of 30% of this capital must come from sources unaffiliated with the fund management. A licensed SBIC in good standing, with a demonstrated need for funds, may receive leverage up to 300% of its private capital (most are approved for a maximum of 200%), but no fund management team may exceed the allowable maximum amount of leverage, currently $150 million per SBIC and $225 million for two or more licenses under common control. (SBA adjusts the allowable maximum amount annually to reflect increases through September in the Consumer Price Index (CPI) published by the Bureau of Labor Statistics. The indexed maximum leverage amount is published annually in a Notice in the Federal Register.) Once leverage is committed to an SBIC, it may be drawn down on a periodic basis over the entire 4 to 5 year commitment period.

SBA leverage is designed to operate on a zero-subsidy basis. To obtain leverage, SBICs issue debentures, which are guaranteed by SBA. Pools of these SBA guaranteed certificates are sold to investors through periodic public offerings. Debentures have a term of ten years and provide for semi-annual interest payments and a lump sum principal payment at maturity. The ten-year debenture allows for prepayment without penalty. However, a debenture must be prepaid in whole and not in part, and can only be prepaid on a semi-annual payment date. The rate of interest on the debenture is determined by market conditions and the rate of the 10-year treasury securities at the time of the sale. For information on past and current debenture rates refer to the Redemption Tables found at the bottom of webpage.

Detailed regulations for SBICs are included in the web site. As stated above, SBICs may invest only in qualifying small business concerns as defined by SBA regulations. Generally speaking, SBICs may not invest in the following: other SBICs, finance and investment companies or finance-type leasing companies, unimproved real estate, companies with less than 51% of their assets and employees in the United States, passive or casual businesses (those not engaged in a regular and continuous business operation), or companies which will use the proceeds to acquire farm land. SBICs may not provide funds for a small concern whose primary business activity is deemed contrary to the public interest. Loans made to and debt securities purchased from small concerns must have minimum terms of one year.

The Process for Obtaining an SBIC License:

The key elements of the process for obtaining an SBIC license are detailed below. This information applies to all parties that intend to seek a license to operate an SBIC, as well as to all existing SBICs that may wish to change ownership or control. If you currently manage an existing SBIC and are seeking another license or wish to convert from one organizational structure to another, please contact your SBA operations analyst for further guidance.
If you are contemplating applying for an SBIC license, your very first activity should be to read this document from beginning to end. Review our web site where you can find additional information and current news on the SBIC Program. The process of becoming a licensed SBIC includes an extremely comprehensive and time consuming review of a team’s qualifications, business plan and fund structure. On average, obtaining a license takes 8 to 12 months from the time of the initial submission of the Management Assessment Questionnaire (see below) to issuance of the license.

Management Team Qualifications & Minimum Requirements:

As found in Statement of Policy, Section 102 of the Small Business Investment Act of 1958, as amended (the Act), the purpose of the program is to stimulate the “growth, expansion, and modernization” of small American businesses. In Section 301(c)(3) of the Act, Congress directs the SBA to determine whether “the management of the applicant is qualified and has the knowledge, experience, and capability necessary to comply with [the] Act…” and to assess “the probability of successful operations of the applicant, including adequate profitability and financial soundness.” The goal of the license application process is to assess teams in light of those requirements. The experience of the Investment Division indicates that highly successful SBICs have historically had management teams with:

• Substantive and analogous principal investment experience;

• Realized track record of superior returns, based on an overall evaluation of appropriate quantitative performance measures;

• Evidence of strong deal flow in the investment area proposed for the new fund;

• Cohesive management team, with complementary skills and history of working together;

• Managerial, operational or technical experience that can add value at the portfolio company level; and

• A demonstrated ability to manage cash flows so as to provide assurance the SBA will be repaid on a timely basis;

SBA considers these characteristics as indicators of whether a team can fulfill the policy and performance objectives of the Small Business Investment Act. The SBA will assess the individual characteristics of every team in terms of its ability to further the purposes of the Act and determine if, overall, the team merits approval for a license.

Regulatory Considerations

SBICs are regulated by the Investment Division of the U.S. Small Business Administration. It is important to familiarize yourself with all of the regulations and requirements to ensure that you can operate your fund comfortably in compliance with these regulations.

• Download Part 107 and Part 121 of the regulations from our web site. Review all of Part 107, plus the definition of a Small Business as found in §121.301(c) as well as §121.101 to §121.103 relating to the sizes of qualified Small Businesses. When reading these sections of the regulations, assure yourself that the companies you want to finance will indeed fall within these size and other eligibility standards of the program.

• Read the definition of Associate carefully in §107.50 and also read §107.730 regarding conflicts-of-interest. Think through all of your relationships with any affiliates to ensure that there are not likely to be any organizational problems or potential conflicts between your SBIC and any related entities.

• Carefully read all of Subpart G of Part 107 that relates to qualifying and structuring investments to be certain that any unique deal structures that you may utilize will comply with SBIC regulations.

• Review §107.150 carefully to determine if there will be sufficient independence of management from investors (“management ownership diversity”).

• As a participant in a government program, you will be required to file regular reports that would not otherwise be required if you were solely a private fund. Your team must be able and willing to comply with SBA regulations governing the SBIC program. Review the operations forms and talk to existing licensed SBICs to better understand the cost and allocation of additional resources associated with these regulatory filings.

If, after considering the management team qualifications and regulations you still have questions, contact the Office of Program Development for assistance at sbic@sba.gov.

Applying for the License- Part I, Program Development.

Applying for an SBIC license is a two-part process, beginning with completion of the Management Assessment Questionnaire or “MAQ”, which consists of SBA Form 2181, together with the exhibits in SBA Form 2183. Please take time to read the Instructions, ReadMe and FAQ documents included with the forms, as we will not review applications that are incorrectly completed or which use expired application forms. Depending on the size of the fund and track record, estimate around 100 hours to complete the MAQ. You can download the MAQ from our website.

Part I, Step 1 – Submit the MAQ: When completed, the MAQ should be emailed to sbic@sba.gov. Please compress large files using WinZip or another compatible program. Please also submit 2 hardcopies of the forms and exhibits along with your private placement memorandum or prospectus, if available, to:

Chief Administrative Officer
Investment Division
U.S. Small Business Administration
409 Third Street, SW, Suite #6300
Washington, DC 20416

Part I, Step 2 - MAQ Review and Approval by Investment Committee: Within three to five business days, you will be notified that it has been received. Your submission will be assigned to a member of the Program Development team who will contact you within two weeks to discuss processing your application, timing and any items that are incomplete or unclear. Program Development will analyze the MAQ in detail, assess your proposal in light of the minimum requirements and management qualifications, perform initial due diligence including reference calls and prepare a written recommendation to the Investment Committee of SBA’s Investment Division (composed of senior members of the Division). If, after a thorough review of the MAQ and Program Development’s evaluation, the Investment Committee concludes, by majority vote at the regularly scheduled meeting, that the management team may be qualified for a license, the entire team is invited to SBA Headquarters in Washington for an interview.

Part I, Step 3 – The Interview: The interview is a discussion based meeting intended to provide the Committee an opportunity to learn more about your proposed fund and team. Should you be invited to interview, Program Development will provide you with guidance regarding content, presentation, location, timing etc.

If, following the interview, the Investment Committee votes to proceed, your team will be granted a “Green Light” letter, formally inviting your fund to advance to the second part of the process by filing a license application. You can expect to receive the Go Forth letter via email within a few days of the Investment Committee’s decision. Note that the Green Light letter is not a determination that you are qualified to receive an SBIC license, but an invitation to proceed to the next step in the process.

Applying for the License- Part II, Licensing

Once you have the Green Light letter and depending on the status of your private fundraising, you may be ready to begin preparing the license application. For your convenience, the MAQ and Licensing application have been integrated, minimizing the need to rearrange and repeat information as applicants move from the MAQ stage to the processing of the formal license application. The formal license application consists of SBA Form 2181 (updated from your MAQ submission if any information has changed), together with all of the Exhibits found in SBA Form 2182. Please note that Form 2183 (MAQ exhibits) is a subset of Form 2182 (license application exhibits). When you submit a license application, review the exhibits you previously prepared and submitted with your MAQ and update them if any information has changed.

Part II, Step 1 – Review the Regulations and Prepare Legal Agreements: Read the regulatory requirements found in Subpart C of 13 CFR Part 107 — Qualifying for an SBIC License — beginning with §107.100. Download the legal documents, such as the “model partnership agreement” which can be used as a starting point. Understand that the extent to which you deviate from the SBA’s model agreement may increase the amount of time required to review, negotiate and finalize your partnership agreements.

Part II, Step 2 – Submit the Application: When you start to complete the application, you should be highly confident that you can meet the minimum capital levels specified in §107.200 and §107.210. A minimum of $5 million of regulatory capital is required to submit an Application.You will file the Application along with a check payable to the U.S. Small Business Administration. The filing fee is nonrefundable, and the charges are:

Base Fee $10,000
Partnership or LLC SBIC $ 5,000 additional

Include an original and two copies of the Application and Exhibits, with each set in a 3-ring, tabbed binder. Zipped electronic versions should be included on cd-rom or via email as well. The entire package and filing fee check should be sent to:

Chief of Licensing
Investment Division
U.S. Small Business Administration
409 Third Street, SW, Suite #6300
Washington, DC 20416

Upon receipt of your application, we will acknowledge receipt by email. Normally, within three weeks, SBA’s licensing staff will make a determination of whether to formally accept your application based on whether or not the application is complete, and meets the minimum capital and management ownership diversity requirements. Once formally accepted, we will immediately forward the fingerprint cards and Statements of Personal History to SBA’s Office of Inspector General for processing.

Part II, Step 3 – SBIC Regulations Training Classes: All SBIC principals must complete the SBIC Regulations training classes. This training is normally held several times per year in Washington, DC. The purpose of this class is to familiarize SBIC principals with the SBIC rules, regulations and compliance procedures. Classes are normally limited in size and a licensed SBIC may not drawdown leverage until all principals have completed the training, so it is best to enroll for training early in the licensing process. Registration for this class is handled by the National Association of Small Business Investment Companies (“NASBIC”) www.nasbic.org. Certain non-principals such as significant investors or members of a board of directors may also be required to take the class. In addition, any employees or consultants whom you have assigned to handle regulatory matters or to interact with the Investment Division should attend the class.

Part II, Step 4 – Pre-Licensing Investments (if applicable): If SBA has formally accepted your license application, you may make one SBA-approved investment in a Small Business and have it included in both Regulatory Capital and Leverageable Capital (as defined in §107.50). This is known as a “pre-licensing investment”. At least 10 business days in advance of the closing of the investment, details must be submitted to Licensing using the appropriate form, which is found in the Exhibits of Form 2182.

All pre-licensing investments must be approved by SBA in order for them to be included in your Leverageable and Regulatory Capital. If at least one principal of the applicant has attended the SBIC Regulations training class, an applicant may make more than one investment, which will count towards Regulatory and Leverageable Capital.

Part II, Step 5 – Formal Review of the License Application: Following a review of your application and legal documents by a licensing analyst and an attorney in SBA’s Office of General Counsel, you will be issued a “comment letter”. You will be asked to respond in writing to the comment letter, via mail, fax or email. The goal is to resolve any and all issues, as expeditiously as possible through written and oral communications. Remember that your promptness in responding is important, and long response times may result in your fund taking a lower priority for processing.

Part II, Step 6 – Approval by Divisional Licensing Committee: Once the SBA’s licensing staff has completed its review and due diligence, your license application is presented to the Investment Division Licensing Committee which generally meets on a monthly basis. This committee is composed of the senior managers of the Division. If your application receives a favorable majority vote, it is forwarded to the Agency Licensing Committee which is comprised of certain senior managers of the SBA.

Part II, Step 7 – Approval by Agency Licensing Committee and SBA Administrator: At this time, you must have on deposit at least $2.5 million. (Please note that any approved pre-licensing investments, as well as approved organizational and operating expenses, can be counted toward this $2.5 million cash deposit requirement.) A certification by the applicant’s selected bank that the funds are in the account and unencumbered is required prior to being presented at the Agency Licensing Committee. The Capital Certificate must be signed and all legal documents must be in “final form”, meaning they are fully agreed and ready to be executed) prior to consideration by the Agency Licensing Committee. If the Agency Licensing Committee votes affirmatively on your license application, as soon as you submit fully executed copies of all legal documents, your application will be forwarded to the SBA Administrator for final action. (Please note that the executed documents must be identical to the “final form” of the documents approved by us.) If the Administrator of the SBA approves your application, your SBIC license is issued.

Thank you for your interest in the SBIC Program. If you have any questions regarding the SBIC Program or the process for obtaining a license, contact us at sbic@sba.gov.