On February 2, 2016, the U.S. Small Business Administration (SBA) released a Federal Register Call Notice (2016 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. Fund managers may begin submitting MAQs on April 1, 2016, and the deadline for submitting a MAQ is 5:00 PM Eastern time on September 30, 2016. Applications are considered on a rolling basis as they are received by the SBA.
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. This program is part of President Obama’s Start-Up America Initiative, which promotes American innovation and job creation by fostering private sector investment in startups and small businesses. SBA previously stated that it intends to allocate an average of $200 million per year of leverage commitments to Early Stage SBICs over a five year period from 2012 through 2016.
Under the federal rules implementing the Early Stage SBIC program, the program is scheduled to terminate at the end of fiscal year 2016. However, the 2016 Call Notice states that SBA intends to make modifications to the regulations and make clear SBA’s intent that the Early Stage SBIC program (including issuing new Early Stage SBIC licenses and leverage commitments) will be an ongoing part of the SBIC program.
An Early Stage SBIC is generally subject to the same regulatory requirements as standard SBICs, with some exceptions, including that Early Stage SBICs:
- Must invest at least 50% of their investment dollars in “early stage” businesses, which are defined as those that have never achieved positive cash flow from operations in any fiscal year;
- Must use the SBA’s Early Stage Model Limited Partnership Agreement (LPA), which contains certain limited distinctions from the traditional Model LPA for debenture SBICs; and
- Are subject to a modified licensing process, as described below.
The first required step in the process to becoming an Early Stage SBIC is to submit a MAQ to the SBA between April 1, 2016 and September 30, 2016. The MAQ 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. Prior to submitting a MAQ, although not required, fund managers have the option of submitting a preliminary “executive summary” to the SBA as part of a pre-screening process.
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 an in-person interview with the SBA Investment Committee. For a fund that successfully passes the SBA diligence and interview process, the SBA will issue a “Green Light” letter, which formally invites the fund to submit a license application to the SBA. A fund has 12 months from the date of receipt of the Green Light letter to file its license application with the SBA. License applications for the Early Stage SBIC program are considered by the SBA as they are received.
Regardless of when an Early Stage SBIC applicant would like to receive a license, at the time of filing its SBIC license application, the fund must have signed capital commitments of at least $20 million in Regulatory Capital (paid-in capital plus unfunded commitments from Institutional Investors, as defined under the SBA Regulations).