Effective November 20, 2014, an SBIC fund may now utilize two levels of passive small businesses as pass-through entities before the investment proceeds flow through to an eligible subsidiary that qualifies as a small business.
The Small Business Administration (SBA) finalized rules that modified existing regulations of the Small Business Investment Company (SBIC) program relating to the ability of an SBIC fund to invest in passive small businesses. An SBIC fund may now utilize two levels of passive small businesses as pass-through entities before the investment proceeds flow through to a non-passive subsidiary that qualifies as a small business. Note that the first-level passive entity must own, directly or indirectly, at least 50 percent of the outstanding voting securities of that non-passive subsidiary. Prior to this rule, SBIC funds generally were prohibited from investing in passive small businesses pursuant to the Small Business Investment Company Act of 1958, as amended. One exception, however, allowed an SBIC fund to invest in a passive entity, such as a holding company, if that entity passed through the investment proceeds to one or more non-passive, small business subsidiaries, provided that the passive holding company directly owned at least 50 percent of the outstanding voting securities.
This change was requested by the Small Business Investor Alliance and SBIC funds and offers SBIC funds greater flexibility in structuring transactions. The SBA meant to put SBIC funds on equal footing with the other types of investment funds, making them more attractive to investors. Once implemented, this rule change will allow SBIC funds to compete with other funds because SBIC funds will now be able to participate in a broader range of financial transactions from which small businesses will benefit.