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Early Stage Innovation Small Business Investment Company ("SBIC") Initiative

Overview

As part of President Obama Start-Up America Initiative SBA is proposing a new program that intends to commit up to $1 billion in SBA guaranteed leverage over a five year period to selected early stage venture funds using its current Debenture program authorization.  This initiative is intended to promote American innovation and job creation by encouraging private sector investment in job-creating early stage small businesses. 

Early stage small businesses face difficult challenges accessing capital, particularly those without the necessary assets or cash flow for traditional bank funding.  For high-growth companies, the gap is particularly acute for financing rounds between $1-4 million, commonly referred to as the “Valley of Death”.  Since January 2006, less than 10% all U.S. Venture Capital dollars went to seed funds investing at those levels, and 69% of those dollars went to three states:  California, Massachusetts, and New York (ThomsonOne Moneytree).

The Early Stage SBIC Initiative will target this gap, by licensing and guaranteeing leverage to funds focused on early/seed stage investments.

Proposed Early Stage SBIC Quick Facts

SBA Total Commitment

Up to $1 Billion over 5 years

Maximum leverage per SBIC

Up to $50 million at a maximum of 1 to 1 match with private capital

Early Stage SBIC Focus

Early and seed stage

Licensing Process

Annual call

Estimated Start Date

Spring 2012

 

Proposed Regulations

In order to familiarize the public with the content of the proposed Early Stage SBIC rule, SBA hosted several Webinars on the proposed rule. The presentation materials for the Webinars are located here and the FAQs located here for more detailed information relating to the Webinars.

If you have questions, please contact SBA at startupamerica@sba.gov

In order to familiarize the public with the content of the proposed Early Stage SBIC rule, SBA hosted several Webinars on the proposed rule.

The presentation materials for the Webinars are located here.

Webinars transcripts can be found here.

FAQs are located here.

If you have questions, please contact SBA at startupamerica@sba.gov

What are the proposed key terms for Early Stage SBICs?

Terms

Early Stage Debenture per Proposed Rule
  1. Licensing
  • Annual Call
  • Commitments limited to $150 million in 2012 and $200 million per year thereafter up to $1 billion total
  • SBA has right to diversify across years & geography
  1. Private Capital
  • $20 million minimum
  1. Investments
  • 50% of investment dollars into early stage.  (A business is considered early stage if at the time of the SBIC’s initial investment the small business being financed has not yet achieved positive cash flow from operations for any prior fiscal year.)
  1. Maximum Leverage
  • Up to 1 tier of leverage, no greater than $50 million.
  1. Term
  • Ten year maturity that may be repaid in full at any time without penalty
  1. SBA Fees
  • 1% Commitment Fee
  • 2% Draw Fee
  • Annual fee set at commitment (typically under 1%) and paid quarter-annually with interest
  • Licensing Fee:  $25,000
  • Examination Fees per 107.692 of proposed rule
  1. Leverage Description

Discounted Debenture: 

  • Interest & charges discounted for first 5 years
  • Quarterly after first  5 years

?Or

Standard Early Stage Debenture: 

  • Interest & charges due and payable Quarterly
  • Requires 5 years interest reserve (may be held as unfunded private capital commitments or in restricted cash)
  1. Distribution rules

Per § 107.1180 of Proposed Rules, but in general:

  • Interest & charges must be paid prior to distribution
  • Below 50% Capital Impairment Percentage (“CIP”):  Pro Rata on cumulative basis
  • At or above 50% CIP:  SBA gets distribution priority
  1. Other key SBA rights

Annual Examinations

Above 50% CIP

  • SBA has specific right to require valuations on your investments.
  • SBA takes all distribution priority

Above 70% CIP

  • SBA has right to promptly transfer SBIC to Office of Liquidation

 

What criteria is SBA proposing to use to select Early Stage SBICs?

The proposed rule section 107.305 discusses the criteria that SBA proposes to use to select Early Stage SBICs.   Under the proposed rule, SBA  plans to consider the following 4 factors to evaluate applicants:

  • Manager Qualifications
  • Track Record
  • Proposed Investment Strategy
  • Proposed Fund Structure and  Economics

SBA proposes to reserve the right to diversify across vintage years and geography as part of its licensing process.  SBA also proposes to reserve the right to not license any SBIC if no applicant meets the qualifications.

What process  is SBA proposing to use to select Early Stage SBICs?

SBA expects to issue a call for Early Stage SBIC applicants through a Federal Register notice in Spring 2012.  Applicants must submit their application by the deadline specified in the  notice.  SBA will then evaluate all applications submitted by the stated deadline.

The table below summarizes the general process SBA anticipates using to license Early Stage SBICs.  After the rule has been finalized, SBA will publish a Federal Register notice with further details regarding the licensing process as part of the call notice.

 

Proposed Licensing Step

Remarks
  1. SBA Accepts Management Assessment Questionnaires
  • SBA will publish a call for applications, with a fixed deadline for all applicants
  • All applications need to be in by the deadline to be considered for the evaluation period.
  • Early Stage SBIC applicants will utilize the same management assessment questionnaire and licensing application as other SBIC applicants.  SBA may modify its model limited partnership agreement (“LPA”) with special provisions for Early Stage SBICs.
  1. SBA Performs Initial Review / Investment Committee
  • SBA will review and will consider the management team, track record, strategy, and fund structure and economics in its decision.  SBA’s proposed regulations contain further detail.
  • The Investment Committee will determine whether applicants are preliminarily qualified and should be approved to move to the next step.  SBA will notify all applicants with this decision. 
  1. Selected Applicants Submit Licensing Application
  • Selected applicants will then need to submit Licensing Applications (same application as in standard program), including the non-refundable $25,000 licensing fee identified in the proposed rules.
  1. SBA Due Diligence /  Licensing Phase
  • SBA will perform due diligence and license qualified applicants.

 

The information on this webpage pertains to a Proposed Rule regarding the Early Stage SBIC Program.  Consequently, please note that this webpage contains information that is subject to change.

About the SBIC Program

Attachments: Early Stage 01102012c.pdf

Leadership

Sean J. Greene
Sean Greene
Associate Administrator for Investment and Special Advisor for Innovation

Sean Greene is the Associate Administrator for Investment and Special Advisor for Innovation at the U.S. Small Business Administration (SBA). He is responsible for both the Small Business...

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