On January 12, 2015, the U.S. Small Business Administration (SBA) released a Federal Register Call Notice inviting fund managers to submit preliminary materials in the form of the Management Assessment Questionnaire (MAQ) for consideration by the SBA to be licensed as part of the Early Stage Small Business Investment Company (SBIC) program. The next deadline for filing a MAQ beginning the process to become an early stage SBIC is 5:00 p.m. EST on February 27, 2015. Funds and management teams interested in being licensed as Early Stage SBICs should begin working now to submit the required materials by February 27.
Early Stage SBIC Program Background
The Early Stage SBIC program offers the opportunity for funds focused on investments in “early stage” companies to receive SBA leverage. An “early stage” business is one that has never achieved positive cash flow from operations in any fiscal year. This program is designed to promote early stage investing to expand entrepreneurs’ access to capital and encourage innovation in the U.S. economy. The Early Stage SBIC program is part of President Obama’s Start-Up America Initiative, which committed up to $1 billion in SBA guaranteed leverage over a five year period, beginning in 2012. Of the $1 billion commitment, up to $200 million can be reserved for leverage commitments in fiscal year 2015 and up to $250 million in fiscal year 2016.
An Early Stage SBIC is generally subject to the same regulatory requirements as standard SBICs, except that an Early Stage SBIC must invest in “early stage” businesses, must use the SBA’s Early Stage Model LPA (available on the SBA’s website: https://www.sba.gov/content/model-early-stage-sbic-limited-partnership-agreement), and is subject to a modified licensing process.
The initial step is to submit a MAQ to the SBA, which requires detailed information on the management team, the proposed strategy for the SBIC, the principals’ investment track record and the proposed fund structure and economics. If, after a review of the MAQ, the SBA Investment Committee concludes that the fund may be qualified to be licensed as an Early Stage SBIC, it will invite the fund to participate in the next step in the Early Stage SBIC licensing process, an interview with the SBA Investment Committee.
For funds that pass the interview process, the SBA will conduct further due diligence, and thereafter will issue “Green Light” letters to all funds meeting the Early Stage SBIC program’s criteria, formally inviting the fund to submit a license application to the SBA.
Interviews for applicants whose MAQs pass the SBA’s pre-screening process will take place between April 20, 2015 and May 1, 2015, with Green Light letters being issued by May 7, 2015. For those funds seeking to receive a license in fiscal year 2015, license applications are due by 5:00 p.m. EST on June 5, 2015. All other funds have 12 months from the date of issuance of the Green Light letter to submit their license application.
Regardless of when the fund would like to receive a license, at the time of filing its license application, the fund must have signed commitments of at least $20 million in Regulatory Capital (paid-in capital plus unfunded commitments from Institutional Investors, as defined under the SBA Regulations) to be considered for licensure as an Early Stage SBIC.