On December 23, 2013, the Small Business Administration (SBA) proposed rules to modify existing regulations to the Small Business Investment Company (SBIC) program. Currently, both the Small Business Investment Company Act of 1958 and SBIC regulations generally prohibit SBIC Funds from investing in passive businesses. One exception exists, however, to this general rule. This exception allows SBIC Funds to invest in a passive small business, provided that the investment passes through to one of its non-passive subsidiaries.

One of the SBA’s proposed rules would allow SBIC Funds to utilize two passive small businesses as pass-through entities. Non-SBIC Funds in the private equity and venture capital sectors commonly utilize this investment structure now. The proposed rule would eliminate this advantage.