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Lisa Green's Files
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[email protected]
09/27/99 11:09:26 AM
Record Type:
Record
To:
Lisa Green/OPD/EOP
CC:
[email protected]
Subject: Kerry on PRIME bill
Date: 09/27/1999 11:06 am (Monday)
From: Lara Muldoon
To: lisa-NEC
CC: levinem
Subject: Kerry on PRIME bill
I just spoke with Kerry's staffer on this bill (S. 900) and the rumors are
true. They have big problems with the PRIME bill as drafted in the Senate
and prefer the House SBC amended language.
Apparently, this has been part of an ongoing discussion for the past two
years. There are signed interagency memoes between SBA/Treasury
on this issue. The small business committee contends that PRIME could
ruin their microloan program and the assertions that the PRIME program
and SBA's microloan program are incompatible are false.
Kerry's staff said they will hold pretty firm on this and feel that they have
been mislead by the Administration and Treasury on this issue.
I am trying to get copies of the memoes to see what is in them.
Lara
SEP. 30. 1999
50PM
SBA CONGRESSIONAL AF
U.S. Small Business Administration
Fax Transmissio 1 Cove Sheet
SBA
The U.S. Small Business Administration offers
opportunities for all Americans to start, build and
grow their own businesses into the 21st century.
LISA CREEN
Did you know that in fiscal year 19
To:
the SBA -
Organization:
maintained a guaranteed loan portfolio of more
than $40 billion in loans to 491.000 small busi-
Phone:
Fax:
nesses that otherwise would not have had such
access to capital?
Date:
Time:
backed more than 47,100 loans totaling a record
$10.8 billion to America's small businesses?
Number of Pages (including this page): 5
:
made a record 3,456 investments worth $3.24 t
lion through its venture capital program?
LOUIS Cupp
provided more than 30,000 loans totaling over
From:
$728 million to disaster victims for residential.
personal-property and business loans?
Office:
:
extended management and technical assistance
to nearly 830,000 small businesses through its
Phone:
Fax:
12,400 Service Corps of Retired Executive
volunteers and 1,000 small business developm
center locations?
Message:
FYF
helped 6,000 small disadvantaged businesses
obtain $5.9 billion in federal contracts?
Did you know that America's
23 million small businesses -
employ more than 50 percent of the private
workforce.
generate more than half of the nation's gross
domestic product, and
are the principal source of new jobs?
Note: Be aware fax machines using thermal paper produce an unstable image
which will deteriorate. Copy messages onto plain paper prior to filing as
Call us at 1-800-U-ASK-SBA
a record!
or visit our website at www.sba.gov
CONFIDENTIALITY and contain information protected by the Privacy Act. 5 U.S.C. 552a, or otherwise confidential. privileged. or non-disclosable violate the law If by the
NOTE: The information contained in this facsimile transmittal sheet and the document(s) that follow are for the exclusive information. use of the
addressee of this may facsimile is not the addressee or is not the person responsible for delivering this facsimile to the addressee. the has recipient received may this facsimile
recipient reading. photocopying. distributing or otherwise using this facsimile transmission or its contents in any way. If the recipient
transmission in error, call the sending office immediately.
SBA Form 959 (04/99) Previous editions are obsolete.
Payment Program
- -
This form was electronically produced by Ellie Federal Forms. Inc.
SEP. 30. 1999
5:51PM
SBA CONGRESSIONAL
09/27/99 MON 14:53 FAX 2022258714
AFNG ALBERT WYNN
NO.559
P.2/5
002
F:\M6\WYNN\WYNN.015
[Discussion Draft]
H.L.C.
[DISCUSSION DRAFT]
106TH CONGRESS
1ST SESSION
H.R.
IN THE HOUSE OF REPRESENTATIVES
Mr. WYNN introduced the following bill; which was referred to the Committee
on
A BILL
To amend the Small Business Act to authorize the Small
Business Administration to participate at an increased
rate with respect to certain small business loans.
1
Be it enacted by the Senate and House of Representa-
2 tives of the United States of America in Congress assembled,
3 SECTION 1. SHORT TITLE.
4
This Act may be cited as the "[to be supplied] Act
5 of 1999".
September 23, 1999
SEP. 30. 1999
5:51PM
SBA CONGRESSIONAL
09/27/99 MON 14:53 FAX 2022258714
9FNG ALBERT WYNN
NO.559
P.3/5
003
F:\M6\WYNN\WYNN.015
[Discussion Draft)
H.I.C.
2
1 SEC. 2. AUTHORITY TO PARTICIPATE AT INCREASED RATE.
2
(a) DEFINITION-Section 3 of the Small Business
3 Act (15 U.S.C. 632) is amended by adding at the end the
4 following new subscction:
5
"(r) DEFINITION OF Low- OR MODERATE-INCOME
6 GEOGRAPIIC AREA.-In this Act, the term 'low- or mod-
7 erate-income geographic area' means-
8
"(1) a census tract, or the equivalent county di-
9
vision as defined by the Burcau of the Census for
10
purposes of defining poverty areas, in which-
11
"(A) the poverty rate is not less than 20
12
percent; or
13
"(B) in the case of a census tract or divi-
14
sion located within a metropolitan area, the me-
15
dian family income for such tract or division
16
does not exceed the greater of 80 percent of the
17
statewide median family income or 80 percent
18
of the metropolitan-area median family income:
19
or
20
"(C) in the case of a census tract or divi-
21
sion not located within a metropolitan area, the
22
median family income for such tract or division
23
does not exceed 80 percent of the statewide me-
24
dian family income; and
25
"(2) any area located within-
September 23, 1999
SEP. 30. 1999
5:51PM
SBA CONGRESSIONAL AF
NO.559
P.4/5
09/27/99 MON 14:54 FAX 2022258714
CONG ALBERT WYNN
0
004
F:\M6\WYNN\WYNN.015
[Discussion Draft]
H.L.C.
3
1
"(A) a HUBZone (as defined in section
2
126.103 of title 13, Code of Federal Regula-
3
tions);
4
"(B) an Urban Empowerment Zone or an
5
Urban Enterprise Community, as designated by
6
the Secretary of the Department of Housing
7
and Urban Development; or
8
"(C) a rural Empowerment Zone or a
9
Rural Enterprisc Community, as designated by
10
the Sccretary of the Department of Agri-
11
culture."
12
(b) PARTICIPATION RATE.-Section 7(a)(1)(A) of the
13 Small Business Act (15 U.S.C. 636(a)(1)(A)) is
14 amended—
15
(1) in clause (i), by striking "or" at the end;
16
(2) in clause (ii), by striking the period at the
17
end and inserting "; or"; and
18
(3) by inserting at the end the following new
19
clause:
20
"(iii) 90 percent of the balance of the
21
financing outstanding at the time of dis-
22
bursement of the loan, if-
23
"(I) such balance is less than or
24
e
equal to $75,000; and
September 23, 1999
SEP. 30. 1999
5:51PM
SBA CONGRESSIONAL AENG ALBERT WYNN
NO.559
P.5/5
4
005
09/27/99 MON 14:54 FAX 2022258714
F:\M6\WYNN\WYNN.015
[Discussion Draft]
HLC.
4
1
(II) such loan is made to a
2
small business concern [located and
3
doing business in] a low- or mod-
4
crate-income geographic area."
e
September 23, 1999
Provision
New Markets Tax Credit
Conference Agreement
Senate
House
H.R. 815
(Administration Budget/
(H.R. 2488)
Rangel Bill - H.R. 2713)
(S. 1429)
(H.R. 2488)
Watts-Talent
Capital gains for sales
No provision.
Zero percent capital gains for
No
Same as
Same as Conference.
of business property
sale of business property and
provision.
Conference.
and assets in a
assets held for more than 5
designated area.
years in renewal communities.
Tax Credit/
Treasury Department allocates
Commercial revitalization
No
Same as
Commercial revitalization tax
Deduction
tax credit for $6 billion of new
deduction: either a 50 percent
provision.
Conference.
credit: a 20 percent allocated
investment in selected
deduction or 10 percent
credit for nonresidential
community development
deduction for 10 years allocated
building investment. Up to S2
investment entities. Investors
for nonresidential building
million per State per renewal
claim a 6 percent credit for each
investment. Up to $6 million
community.
year during the five-year period
per State per renewal
after investment.
community.
Expensing for
No provision.
$35,000 of additional
No
Same as
Same as Conference.
depreciable property
expensing for depreciable
provision.
Conference.
used by small
property used by small
businesses
businesses in certain renewal
communities.
Brownfields
Not included in Rangel bill.
Brownfields expensing
No
Same as
Same as Conference.
Permanent extension of §198
available beyond 2000 in
provision.
Conference.
expensing is included in the
renewal communities.
Administration's budget. H.R
1630 in House (Coyne with
Rangel cosponsor).
Work Opportunity Tax
No provision in Rangel Bill
Renewal community youth
No
Same as
WOTC targeted group added of
Credit (WOTC)
(H.R. 2713).
receive the same treatment as
provision.
Conference.
renewal community residents
The Administration has included
EZ youth under WOTC.
who work in the community.
a one-year extension to the credit
If WOTC expires, WOTC
Credit is more generous
to include those who begin work
targeted group added of
$10,000 of wages at 15 percent
before July 1, 2000. The credit
renewal community residents
for the first year and 30 percent
percentage is 25% of wages for
who work in the community.
for the second year.
at least 120 hours to 400 hours
Credit is more generous
and 40% for more than 400 hours
$10,000 of wages at 15 percent
of employment. The maximum
for the first year and 30 percent
amount of qualified wages paid
for the second year.
to an individual is $6,000.
Provision
New Markets Tax Credit
Conference Agreement
Senate
House
H.R. 815
(Administration Budget/
(H.R. 2488)
Rangel Bill - H.R. 2713)
(S. 1429)
(H.R. 2488)
Watts-Talent
Family Development
No provision.
Family development accounts
No
Same as
Same as House.
Accounts
Leiberman has a proposal for
(FDA) for renewal community
provision.
Conference
Individual Development
residents who receive the EITC.
but in 5
Accounts -- IDA's (S. 895).
Deductible contributions up to
renewal
Treasury has provided technical
$2,000 per year ($1,000 by
communities,
assistance to Sen. Leiberman's
others on behalf of renewal
50 percent
staff but has not endorsed the
residents). Earnings tax-free
match. Tax
proposal.
and no tax on withdrawal if
paid on
used for specific expenses.
withdrawal
for this part
of the FDA.
Designation of new
No provision.
HUD would designate 20
No
Same as
HUD would designate 100
EZ/ECs, additional
(Note: the Administration and
renewal communities of which
provision.
Conference.
renewal communities of which
areas.
Rep. Rangel are seeking to
4 in rural areas. 10 EZs or ECs.
20 in rural areas. 50 EZs or
provide full funding for two
ECs.
round 2 EZs and to extend the
wage credit for these zones for
an additional two years from
2007 to 2009)
Definition of Low
Selected community
Renewal Communities chosen
No
Same as
Same as Conference.
Income Communities
development entities must invest
by competition (as in the EZ
provision.
Conference.
in businesses located in tracts
program). Areas with poverty
with poverty rates of at least 20
rates of at least 20 percent, 12
percent. or the median income
times unemployment rate. and
does not exceed the greater of (1)
70 percent of households with
80 percent of statewide median,
median incomes no greater than
or (2) in the area, 80 percent of
80 percent of the median for the
the area median.
area.
Effective Date
For new investments from 1/1/00
Designation 1/1/01 through
No
Same as
Same as Conference.
through 12/31/04.
12/31/07.
provision.
Conference.
Federal Register/ 64, No. 39/Thursday. September 30, 1999/Rules and Regulations 52641
Accordingly, the OCC has not prepared
Appendix C to Part 30-Supplemental
C. System means an automated system and
a budgetary impact statement or
Guidelines Establishing Year 2000
related applications necessary to ensure the
specifically addressed the regulatory
Standards for Safety and Soundness for
prompt and accurate processing of securities
alternatives considered.
National Bank Transfer Agents and
transactions, including order entry, transfer
Brokers or Dealers
execution. comparison, allocation, clearance
List of Subjects in 12 CFR Part 30
and settlement of securities transactions, the
Table of Contents
maintenance of customer accounts, the
Administrative practice and
A. Introduction.
delivery of funds and securities, or the
procedure. National banks. Reporting
B. Preservation of existing authority.
production or retention of required records.
and recordkeeping requirements. Safety
C. Definitions.
d. Business resumption contingency plan
and soundness.
D. Year 2000 Standards for safety and
means a plan that describes how a bank
soundness.
transfer agent or bank broker or dealer will
Authority and Issuance
continue to perform transfer agent or broker
A. Introduction
or dealer functions. respectively. in the event
For the reasons set out in the
These Supplemental Guidelines are issued
transfer agent or broker or dealer systems fail
preamble. part 30 of chapter I of title 12
pursuant to section 39 of the Federal Deposit
to function because of Year 2000 readiness.
of the Code of Federal Regulations is
Insurance Act (FDI Act) (12 U.S.C. 1831p-1)
e. Year 2000 ready or readlness with
amended as set forth below:
and apply to transfer agent and broker or
respect to a system means the system
dealer systems that a national bank has not
accurately processes. calculates. compares, or
PART 30-SAFETY AND SOUNDNESS
designated as mission-critical. These
sequences date or time data from, into. or
STANDARDS
Supplemental Guidelines are in addition to.
between the 20th and 21st centuries; and the
but do not supersede, the Year 2000
years 1999 and 2000; and with regard to leap
1. The authority citation for part 30 is
Guidelines previously adopted as Appendix
year calculations.
B to 12 CFR Part 30. The Guidelines in
revised to read as follows:
Appendix B continue to apply to efforts of
D. Year 2000 standards for safety and
soundness
Authority: 12 U.S.C. 93a. 1818, 1831p-1,
national banks to achieve Year 2000
3102(b).
readiness of their mission-critical systems.
1. No later than November 1. 1999, each
bank transfer agent and bank broker or dealer
2. In 30.2. the last sentence is
B. Preservation of existing authority
shall identify all transfer agent and broker or
revised to read as follows:
Neither section 39 nor these Supplemental
dealer systems that are not Year 2000 ready.
Guidelines in any way limits the authority of
2. For each system identified pursuant to
§ 30.2 Purpose.
the OCC to address unsafe or unsound
section D.1., each bank transfer agent and
practices. violations of law. unsafe or
bank broker or dealer shall develop and
The Interagency Guidelines
unsound conditions, or other practices of
implement an effective written business
Establishing Standards for Safety and
bank transfer agents and brokers or dealers.
resumption contingency plan by November
Soundness are set forth in appendix A
For example, failure to complete any of the
15. 1999, that, at a minimum:
to this part, the Interagency Guidelines
standards set forth in the Supplemental
a. Defines scenarios for transfer agent and
Establishing Year 2000 Standards for
Guidelines may constitute an unsafe or
broker or dealer systems failing to achieve
Safety and Soundness are set forth in
unsound practice under 12 U.S.C. 1818(b).
Year 2000 readiness;
Action under section 39 and the
appendix B to this part, and the
b. Evaluates options and selects a
Supplemental Guidelines Establishing
Supplemental Guidelines may be taken
reasonable contingency strategy for those
independently of. in conjunction with. or in
systems: and
Year 2000 Standards for Safety and
addition to any other remedy. including
C. Provides for Independent testing of the
Soundness for National Bank Transfer
enforcement action, available to the OCC.
business resumption contingency plan by an
Agents and Brokers or Dealers are set
C. Definitions
objective independent party (such as an
forth in appendix C to this part.
auditor, consultant. or qualified individual
3. In 30.3, paragraph (a) is revised to
1. In general. For purposes of the
from another area of the insured depository
Supplemental Guidelines the following
read as follows:
institution who is independent of the plan
definitions apply:
under review).
$30.3 Determination and notification of
a. Bank transfer agent means a national
failure to meet safety and soundness
bank that provides transfer agent services
Dated: September 17. 1999.
standard and request for compliance plan.
directly or through an operating subsidiary.
John D. Hawke, Jr.,
or a Federal branch that is subject to the
Comptroller of the Currency.
(a) Determination. The OCC may,
provisions of section 39 of the FDI Act (12
[FR Doc. 99-25442 Filed 9-29-99; 8:45 am)
based upon an examination, Inspection,
U.S.C. 1831p-1), if the national bank,
BILLING CODE 4810-33-P
or any other information that becomes
operating subsidiary or Federal branch is a
available to the OCC, determine that a
registered transfer agent whose appropriate
regulatory agency, as that term is defined in
bank has failed to satisfy the safety and
15 U.S.C. 78c(a)(34), is the Office of the
SMALL BUSINESS ADMINISTRATION
soundness standards contained in the
Comptroller of the Currency. The term bank
Interagency Guidelines Establishing
transfer agent does not Include a transfer
13 CFR Part 107
Standards for Safety and Soundness set
agent that qualifies as an issuer or small
forth in appendix A to this part, the
transfer agent. as these terms are defined in
Small Business Investment Companies
Interagency Guidelines Establishing
17 CFR 240.17Ad-13(d) (1) and (2).
Year 2000 Standards for Safety and
b. Bank broker or dealer means a national
AGENCY: Small Business Administration.
Soundness set forth in appendix B to
bank that effects securities brokerage or
ACTION: Final rule.
this part, (if the Guidelines "stablishing
dealer transactions for customers, or a
Federal branch that Insublect to the
metands for Salety and
SUMMARY: In order to encourage small
provish
of the FDI Act (12
bundness National Bard Transfer
U.S.C.D
Desitions Investment companies (SBICs)
bank broker
Agents and Brokers or Dealers are set
deals
In Immer citles and rural areas
forth in appendix C to this part
subs!
...t tear. bank
in sincises that SCEND such areas,
broke
in sale a national
dress
bank
during
than 500 securities
(SBA) is introducing
4. A new appendix C is added to part
brokerage transactions per year for customers
investment category c-1.
and
30 to read as follows:
during the prior three calendar year period.
moderate Income inv
MI
52642
Federal Register/Vol. 64, No. 89/Thursday, September 30. 1999 Rules and Regulations
Investments). For each SBIC financing
development by the Federal Home Loan
3. Enterprise Communities: same as for
that qualifies as an LMI Investment,
Banks. Those markets are set forth in the
Empowerment Zones
SBA is modifying its regulations on
Community Investment Cash Advance
4. Low and Moderate Income areas:
control of the small business. "cost of
regulation of the Federal Housing
www.ffiec.gov/geocode
money" of the financing, and term of
Finance Board. They include any
5. Persistent Poverty countles:
the financing. SBA also will make
project that provides jobs or services for
www.econ.ag.gov/epubs/other/
available a patient form of debenture
individuals with income levels at or
typolog
leverage that may be Issued only by
below certain levels, as well as projects
SBICs that make LMI Investments.
located in geographic areas broader than
Defining LMI Enterprise
DATES: Effective Date: This final rule Is
the locations specified in SBA's
SBA received one comment on the
effective September 30, 1999.
proposed rule.
proposed deflnition of LMI Enterprise.
Applicability Date: The regulatory and
SBA considered the comments, but
Under the proposal, a small business's
financial incentives described in this
has decided to adopt the proposed
qualification as an LMI Enterprise
rule will apply only to investments
definition of LMI Zone without change.
would be determined as of the time the
made after September 30, 1999.
SBA's proposal was designed to bring
business applies for SBIC financing.
Investment dollars Into distressed urban
This would be true whether the
FOR FURTHER INFORMATION CONTACT:
Saunders Miller. Investment Division. at
and rural areas to help revitalize those
business were qualifying under the
(202) 205-3646.
communities and bring jobs to their
"principal place of business" test or the
residents. Given the finite resources
percentage of employees" test.
SUPPLEMENTARY INFORMATION: On
February 9, 1999, SBA proposed a
available to the LMI initiative, any
The commenter pointed out that
expansion of the proposal to include
determining a small business's
program of narrowly-tailored regulatory
groups of individuals without regard to
qualification under the principal place
and financial incentives to encourage
their business locations or their
of business test "as of the time of
SBICs to expand their Investment
residences would dilute the Impact of
application for SBIC financing" would
activity into Inner cities and rural areas.
the benefits SBA hopes will inure to the
exclude those small businesses that
See 64 FR 6256. The incentives were
targeted communities.
would use the proceeds of the SBIC
proposed to be available to any SBIC
SBA also believes that, in order to be
financing to move into an LMI Zone.
making qualified investments (LMI
successful, the definition of the targeted
That is true. Similarly, determining a
Investments) in qualified small
markets must be easy for SBICs and SBA
small business's qualification under the
businesses (LMI Enterprises) located in
examiners to use. SBA therefore
percentage of employees test "as of the
or providing employment for
selected only those geographic areas
time of application for SBIC financing"
economically distressed inner cities and
that are not only distressed. but are also
would exclude those small business that
rural areas (LMI Zones). The incentives
found on a government-operated
would use the proceeds of the SBIC
fell into two categories. First, SBA
electronic address-database. Through
financing to expand their business and
proposed to allow SBICs greater
the use of these user-friendly databases,
hire new employees from LMI Zones.
regulatory flexibility when structuring
SBICs and SBA examiners should be
SBA had thought that determining a
and making LMI Investments. Second,
able to quickly and easily determine
business's qualification based only on
SBA proposed to make available a
whether a given address is located in an
its intention to locate into or hire from
deferred-Interest debenture exclusively
"LMI Zone".
eligible areas would introduce too much
for the financing of LMI Investments.
If SBA learns that other severely
uncertainty into the program.
SBA received four comment letters on
distressed areas are also capable of
Upon reconsideration of the issue,
the proposed rule during the 30-day
identification through a Government
however, SBA believes that the rule can
public comment period. Overall, the
electronic address-database, it might
be modified in a manner that will
four letters were supportive of SBA's
consider expanding the targeted markets
encourage businesses to use SBIC
initiative, although all of the letters
of the LMI initiative at a later date.
financing to locate in LMI Zones or to
contained suggestions for improving the
As mentioned in the proposed rule,
hire residents of LMI Zones, while
proposal. This final rule incorporates
SBA is exploring the possibility of
minimizing the risk that the incentives
certain of the changes recommended in
consolidating the varlous Government
in this LMI initiative will be misused.
those comment letters.
databases Into a single electronic
SBA believes this can be accomplished
Defining Low and Moderate Income
database at SBA. While that possibility
by allowing companies that intend
Zones (LMI Zones)
still exists, any such consolidation is
either to locate in or to hire from an LMI
unlikely to be accomplished this
SBA received two comments on the
Zone a fixed period of time after closing
calendar year. Until SBICs are notified
on their SBIC financing to do so. During
definition of the markets targeted by the
otherwise, they should research
that time, the business would be
proposed LMI Initiative. The proposed
addresses through the various databases
considered an LMI Enterprise. At the
rule defined those markets as small
referenced In this rule, and should
end of the period, though, the business
businesses that are located in certain
document their files accordingly.
would lose Its LMI status if it had not
distressed geographic areas or that have
As was stated in the proposed rule,
located in an LMI Zone or qualified as
of their full time employees
any address located In a HUBZone, an
an LMI Enterprise under the percentage
Empowerment Zone, an Enterprise
of employees test.
comments
sugge
ted
Community, a Low ()) Moderate Income
SBA believes that a company should
historically
area, or a Persistent Poverty county will
be able to establish its principal place of
entrepreneurs, regardless
be considered to be located in an LMI
business in an LMI Zone or hire
location, instead of
Zone. The government databases for
employees from an LMI Zone within
geographic areas. The
those five areas are:
180 days from the date the SBIC
other comment suggested expanding the
1. HUBZones: www.sba.gov/hubzone/
financing closes. Six months should be
geographic areas identified in the
hubqual.html
ample time for a company to resolve any
proposed rule to Include some or all of
2. Empowerment Zones: www.hud.gov/
zoning or other Issues that might delay
the markets targeted for economic
ezec/locator/
the opening of the business in an LMI
Federal Register/Vol. 64. No. Thursday. September 30, 1999/Rules and Regulations
52643
Zone or the hiring of residents from an
full-time employees. The certification
from using their assets to secure third-
LMI Zone.
was to be dated no earlier than the date
party debt. SBA therefore proposed that
Accordingly. the final rule allows a
the small business applied for the SBIC
LMI Investments be defined to include
company to temporarily qualify as an
financing and was to be kept in the
only those SBIC financings that are in
LMI Enterprise if. at the time of
SBIC's files, along with the SBIC's own
the form of equity securities (as defined
application for SBIC financing, the
certification that the small business
in § 107.800) or debt securities (as
company certifies as to its Intent to
qualifies as an LMI Enterprise and the
defined in § 107.815) which are
locate Its principal place of business in
basis for such qualification.
subordinated to all borrowings of the
an LMI Zone or Its Intent to hire the
The final version of § 107.610(e) still
business from financial institutions. The
required number of residents of LMI
requires certifications from both the
proposed rule also required that LMI
Zones, in either case within 180 days
small business and the SBIC, but allows
Investments in the form of debt
after the SBIC financing closes. At the
a small business that is Intending to
securities be unsecured. although the
end of the 180-day period. if the
locate into an LMI Zone or to hire
SBIC would have been permitted to
company does not have its principal
residents of LMI Zones to so certify.
accept a guarantee of the debt security
place of business in an LMI Zone or 35
Any small business that qualifies as an
if the guarantee were itself unsecured.
percent of its employees residing in LMI
LMI Enterprise based on its intention to
SBA received two comments on the
Zones, it will no longer qualify as an
locate in an LMI Zone or to hire
proposed definition of an LMI
LMI Enterprise. This means that the
residents of LMI Zones must also
Investment. Both comments argued in
SBIC's financing of the company will no
provide the SBIC with a later
favor of expanding the definition to
longer qualify as an LMI Investment.
certification, dated within the 180 day
SBA has considered whether the SBIC
include debt securities that are secured
period discussed above, certifying that
or the small business should bear the
by the assets of the small business if the
its principal place of business is located
risk of the small business' loss of
security interest is junior to any other
in an LMI Zone or that It has 35 percent
secured debt of the business. The
qualification as an LMI Enterprise and
of its employees residing in LMI Zones.
the financing's loss of qualification as
The SBIC must make its own
commenters argued that excluding
an LMI Investment. If the loss of LMI
certification(s) contemporaneously with
secured financing of LMI Enterprises
qualification constitutes a default by the
the certification(s) of the small business.
would discourage SBIC support of those
small business under the financing and
SBA has made one final modification
businesses. One commenter further
the SBIC can demand repayment or
to the definition of LMI Enterprise and
argued that an SBIC holding an
redemption of the financing, the small
to § 107.610(e). Since the term
unsecured position in a company might
business bears most of the risk. If loss
"principal place of business" is
take more precipitous action to protect
of LMI qualification does not constitute
its interest than if the SBIC had
susceptible to more than one
a default. the SBIC must continue to
interpretation, SBA has decided to
collateral to protect its position.
hold its Investment in the company and
specify precisely what is Intended by
SBA concurs with the suggested
must revise the terms of the financing to
the term as it relates to LMI Enterprises.
change to the definition. SBA expects
conform to standard (non-LMI) SBA
SBA believes that an LMI Enterprise's
that allowing SBICs to take a junior
regulations (e.g., minimum term. control
principal place of business should be
secured position in the assets of an LMI
restrictions). In that event, the SBIC
determined by reference to the location
Enterprise will not prevent the LMI
alone bears the risk since the small
of Its employees or tangible assets, not
Enterprise from obtaining secured debt
business gets the benefit of SBIC
its books and records or Its corporate
from other sources.
financing on standard (non-LMI) terms.
headquarters. This approach is similar
This change would place SBICs ahead
SBA has concluded that the parties
to the one used in § 107.720(g)(1)(ii)--
of any unsecured debt of the LMI
themselves (the SBIC and the small
SBA's criteria for determining whether
Enterprise. SBA believes, though, that
business) should determine who is to
a business is a non-U.S. business for
unsecured debt is generally unavailable
bear the risk of the loss of LMI
purposes of the prohibition on foreign
to most LMI Enterprises. except from
qualification. The terms of the financing
investments in the SBIC Program.
the principals of the enterprise. Even
agreement negotiated between the small
Under the final rule, SBA will
under the proposed rule, LMI
business and the SBIC should specify
consider an LMI Enterprise to be located
Investments were not required to
whether the loss of qualification as an
where at least 50 percent of Its
subordinate in favor of borrowings from
LMI Enterprise constitutes a default by
employees or tangible assets are located.
the principals of the enterprise.
the small business under the financing.
SBA realizes, though, that the use of the
Accordingly, the final definition of LMI
If the loss of qualification as an LMI
term "principal place of business" may,
Investment includes debt securities that
Enterprise does not constitute a default
itself, cause confusion since that term
are secured by the assets of the small
under the financing agreement, the SBIC
has already been defined differently in
business provided the SBIC's security
must be sure that the terms of the
other SBA programs. Accordingly, the
interest is Junior to any other existing or
financing, going forward, satisfy SBA
final rule replaces the term "principal
future secured debt of the business.
requirements for non-LMI financings
place of business" with the "50% of
(e.g., minimum term: control
Regulatory and Financial Incentives
employees or tangible assets" test in the
restrictions). If the loss of qualification
definition of LMI Enterprise and in
Under the proposed rule, SBA
as an LMI Enterprise does constitute a
$107.610(e).
proposed to modify the regulations
default under the financing agreement,
Defining LMI Investment
governing three subject matters, as they
Sish be entitled to whatever
would apply in LMI ivestments -
remedies are available to It for the
As discussed In
control of the business, the
default.
SBA wants to
of In the calculation
The proposed version of § 107.610(e)
Program is used 10
and minimum term of
required each LMI Enterprise to certify
capital financing in 1141
also discussed its
to the Investing SBIC as to the location
high-Interest lending ShA is also
a new form of
of either Its principal place of business
concerned that LMI Enterprises that
In use by SBICs that make
or the primary residences of all of its
receive SBIC financing not be preclu-
Investments.
52644
Federal Register/Vol. 64, No. /Thursday, September 30, 1999/Rules and Regulations
1. Temporary Control of the LMI
investment vehicle, as permitted under
outstanding LMI Investments applies for
Enterprise
§ 107.720(b). In determining whether a
a draw down of debenture leverage and
SBA proposed to permit SBICs to take
business's performance has Improved,
intends to use the leverage to make an
temporary control of each business in
SBA will look through any holding
LMI Investment, SBA can approve the
which they make an LMI Investment.
company or investment vehicle to the
issuance of an LMI Debenture.
No comments were received on this
performance of the operating business
As stated In the proposed rule, an
portion of the proposal. Accordingly,
itself. It is the improvement in the
SBIC's overall eligibility for an LMI
operating business's performance. not
Debenture will still be determined in
§ 107.865(d) is finalized as proposed.
the improvement in the performance of
two ways. First, the SBIC will have to
2. Royalties and Cost of Money
a holding company or investment
be eligible to issue leverage in an
SBA proposed to exclude royalty
vehicle. which would serve as the basis
amount equal to the face amount of the
payments on LMI Investments from the
for the calculation of the royalty
LMI Debenture. Eligibility for this
calculation of "Cost of Money" under
payment to the SBIC.
purpose is determined under
§ 107.855. Cost of Money is the term for
Since the publication of the proposed
107.1120-107.1160.
the sum of the interest rate and other
rule, the President signed the Small
Second. the face amount of the SBIC's
charges that an SBIC Imposes on a small
Business Investment Improvement Act
requested LMI Debenture, plus the face
business. The Cost of Money to the
of 1999. See Public Law 106-9, 113 Stat.
amount of the SBIC's outstanding LMI
small business must not exceed the
17. April 5. 1999. Section 2(a) of the
Debenture(s). cannot exceed 1.5 times
SBIC's Cost of Money ceiling, as
new law excludes certain royalty
the sum of the SBIC's outstanding LMI
computed under § 107.855(c).
payments from the calculation of Cost of
Investments plus the proposed LMI
Money for all Investments made by
Investment. In other words, under this
To qualify for the proposed exclusion,
the royalty would have to be based on
SBICs. SBA will be publishing a
second test an SBIC would be eligible
improvement In the performance of the
proposed rule to implement this change
for an LMI Debenture with a face
LMI Enterprise after the date of the
In the near future.
amount equal to (a) 1.5 times the sum
financing. The proposed rule explained
3. Minimum Term of LMI Investment
of the SBIC's existing and planned LMI
that the royalty might be expressed. for
Investments at the time of application,
SBA received no comments on Its
example. as a percentage of any Increase
minus (b) the face amount of any
proposal to set a one-year minimum
in an underlying unit of measurement
outstanding LMI Debentures. The 1.5
term for LMI Investments. The proposed
(e.g., revenue or sales) after the date of
multiple takes into consideration the
changes to §§ 107.835 and 107.850(a)
the financing.
zero-coupon feature of the LMI
SBA received one comment on this
are, therefore, adopted without change.
Debenture and allows for an
provision. The comment asked for
4. Deferred Interest Debenture
approximate matching of net proceeds
of LMI Debentures with funds Invested
clarification as to whether a royalty
SBA proposed to allow SBICs to
in LMI Investments.
could be based on an Increase in more
finance LMI Investments with a more
than one unit of measurement and still
SBA will notify all SBICs when LMI
patient-type of debenture (called an LMI
be excluded from the Cost of Money
Debentures are ready for use.
Debenture). No regulatory changes are
The regulatory and financial
calculation. For example. could a
necessary to create the new debenture,
incentives described in this final rule
royalty provide for payment to the SBIC
but SBA is continuing to work on its
will apply only to investments made
if either the revenues or the profits of
design and method of funding.
after the effective date of this rule.
the small business increased?
The LMI Debenture under
SBA was not intending to restrict
development would be a non-amortizing
Compliance With Executive Orders
royalties to increases in a single
debenture with a term of up to 10 years.
12612, 12778 and 12866, the Regulatory
underlying unit of measurement. To do
issued at a discount so as to be, in effect.
Flexibility Act (5 U.S.C. 601, et seq.),
so would force SBICs to determine in
"zero coupon" for the first five years. It
and the Paperwork Reduction Act (44
advance which performance
would require semi-annual interest
U.S.C. Ch. 35)
measurement would be most likely to
payments on the face amount for the
SBA certifies that this final rule may
reflect the improved performance of the
remainder of the term. SBA leverage
constitute a significant regulatory action
small business. A business might have
fees would not be deferred; they would
within the meaning of Executive Order
higher profits but steady or even
be paid as required under § 107.1130.
12866, since it raises a new policy issue
declining revenues, or it might have
The proposed rule explained that an
reflecting the President's priorities.
increased revenues but steady profits.
SBIC's eligibility for LMI Debentures
One of the purposes of the SBIC
Either circumstance could constitute
would be based solely on the SBIC's
Program is to encourage the flow of
improvement in the performance of the
outstanding LMI Investments (made
equity-type Investments Into small
business.
after the effective date of the final rule).
businesses. For the first 35 years of the
If an SBIC and a small business agree
SBA has come to the conclusion that
SBIC Program, however, the only type of
to a royalty that is expressed as a
this approach might discourage SBICs
leverage available to SBICs (other than
percentage of increases in alternative
from making LMI Investments since the
Specialized SBICs) was debt leverage
performance measurements (e.g., profits
LMI Debenture funds would only be
with interest payable every six months.
or revenues), the royalty will be
available after the Investment had
Congress recognized this mismatch of
excluded from Cost of Money. SBA
already been made
source and use of funds reated
believes that the text of proposed
Instead, SBA has decided to
Partici
§ 107.855 is sufficiently broad to cover
determine an digibility for EM!
this possibility. Accordingly, propo
Debentures
§ 107.855 Is finalized without change.
outstanding LAS
SBA would also like to clarify the
after the effective date
on
application of the royalty provision to
plus any LMI Investment
function of
any LMI Investments that an SBIC
intends to make with the of
such
makes through a holding company or an
the LMI Debenture. If an SBIC with no
available only to larger SBICs
Federal Register Vol. 64, No. Thursday, September 30, 1999/Rules and Regulations 52645
that can reasonably project returns-on-
reporting requirements (further
For the reasons set forth above. SBA
investments greater than 20 percent.
discussed below). an SBIC must
is amending 13 CFR part 107 as follows:
While the Participating Securities
ascertain that the company in which it
program has been very successful at
is investing meets the LMI standards,
PART 107-SMALL BUSINESS
encouraging SBICs to do equity
and must report this to SBA on its usual
INVESTMENT COMPANIES
investing in general, SBA wishes to
financing report (form 1031). The cost to
encourage more equity-type investments
the SBIC to obtain this Information is
1. The authority citation for part 107
in underserved areas or "New
continues to read as follows:
nominal.
Markets"-urban and rural areas that
SBA certifies that this final rule does
Authority: 15 U.S.C. 681 et seq., 683,
have severe shortages of equity capital.
not have a significant economic Impact
687(c), 687b, 687d, 687g and 687m.
Unfortunately, investments in these
on a substantial number of small entities
2. Amend § 107.50 to add definitions
areas often are of a type that will not
within the meaning of the Regulatory
of LMI Enterprise, LMI Investment. and
have the potential for yielding returns
Flexibility Act, 5 U.S.C. 601, et seq. This
LMI Zone, to read as follows:
that are high enough to justify the use
final rule will change some
of Participating Securities.
requirements to encourage SBICs to
$107.50 Definitions of terms.
The LMI Debenture is being created to
make additional qualified investments
fill this gap. It is another type of patient
In low and moderate income zones. In
LMI Enterprise means:
capital, with interest deferred for the
FY 1998, SBICs invested in 2700 small
(1) A Small Business that has at least
first 5 years. An SBIC utilizing the LMI
businesses. While the final rule may
50% of its employees or tangible assets
Debenture will not be expected to
increase the number of small businesses
located in LMI Zone(s) or in which at
achieve the high returns expected of
receiving SBIC investments because
least 35% of the full-time employees
Participating Securities users. Thus, the
SBICs may make investments in smaller
have primary residences in LMI Zone(s),
availability of the LMI Debenture is
increments, the number of small
in either case determined as of the time
expected to increase the flow of equity-
businesses eligible for SBIC investments
of application for SBIC financing; or
type capital to New Markets.
would not change.
(2) A Small Business that does not
Some of this increase will come from
For purposes of the Paperwork
existing SBICs which find that the LMI
meet the requirements of paragraph (1)
Reduction Act, 44 U.S.C. CH. 35, SBA
of this definition as of the time of
Debentures, together with the regulatory
has requested approval to require
incentives in this final rule, will
application for SBIC financing but that
participating SBICs to report the
certifies at such time that it intends to
encourage them to make investments
information they are required to
that they may perceive as having greater
meet the requirements within 180 days
maintain by the final rule. The final rule
risk than their typical investments. SBA
requires SBICs that make LMI
after the closing of the SBIC financing.
expects these SBICs to make
A Small Business qualifying under this
Investments to keep track of their LMI
investments in businesses which lie in
paragraph (2) will no longer be an LMI
Investments and report them to SBA in
areas that they have previously
Enterprise as of the 180th day after the
connection with applications for LMI
overlooked.
Debentures. To determine whether an
closing of the SBIC financing unless, on
While it is expected that existing
or before such date. at least 50% of its
SBIC is making an LMI Investment, the
SBICs will participate to some degree in
SBIC will have to verify the location of
employees or tangible assets are located
the LMI program. SBA anticipates that
in LMI Zones or at least 35% of its full-
the LMI Enterprise or its employees
most of the LMI program benefits will
time employees have primary
using the databases discussed in this
derive from new SBICs that are
residences in LMI Zones.
rule. SBA estimates that the time
currently being formed and which will
necessary to verify the location of an
LMI Investment means a financing of
be created in the future. Already, SBA
LMI Enterprise or its employees will
an LMI Enterprise, made after
is seeing an increase in the number of
September 30, 1999. in the form of
average less than one hour per LMI
venture capitalists who are working to
equity securities or debt securities that
Investment. The reporting requirements
form new SBICs with an LMI
are de minimis since current forms will
are junior to all existing or future
orientation.
only be changed to reflect LMI
secured borrowings of the business. The
SBA also believes that an increasing
Investments. SBA further estimates that
debt securities may be guaranteed and
number of banks will actively seek to
SBICs may make approximately 500
may be secured by the assets of the LMI
Invest in SBICs since a bank's
LMI Investments per year. SBA believes
Enterprise. but the guarantee may not be
investment in an SBIC is now presumed
collateralized or otherwise secured.
this information is necessary for the
to satisfy one of the tests under the
proper performance of the function of
LMI Zone means any area located
Community Reinvestment Act (CRA)
the agency.
within a HUBZone (as defined in 13
regulations. SBA expects that many
For purposes of Executive Order
CFR 126.103). an Urban Empowerment
banks will find LMI-oriented SBICs to
12612, SBA certifies that this rule will
Zone or Urban Enterprise Community
be especially attractive. This should be
not have any federalism implications
(as designated by the Secretary of the
true not only because the banks can
warranting the preparation of a
Department of Housing and Urban
receive CRA credit for their Investment,
Federalism Assessment.
Development). a Rural Empowerment
but also because they will find that (1)
For purposes of Executive Order
Zone or Rural Enterprise Community (as
such investments expand their urban
12778, SBA certifies that this rule is
designated by the Secretary of the
and rural markets, and (2) with equity
drafted, to the extent practicable, in
Department of Agriculture), an area of
infusions of capital, small businesses
accordance with the standards set forth
Low Income or Moderate Income (as
can become less risky borrowers.
in Section 2 of that Order.
recognized by the Federal Financial
The LMI Debentures have the same
Institutions Examination Council), or a
subsidy rate as do regular debentures
List of Subjects in 13 CFR Part 107
county with Persistent Poverty (as
and will carry interest rates similar to
Investment companies, Loan
classified by the Economic Research
those of regular debentures. They
programs business, Reporting and
Service of the Department of
I resent no additional cost either to the
recordkeeping requirements, Small
Agriculture).
0: to the SBICs. Regarding
businesses.
**..
52646 Federal Register/Vol. 64, No. 89/Thursday, September 30, 1999/Rules and Regulations
3. In § 107.610, add paragraph (e) to
revise paragraph (e)(3) to read as
to: Federal Aviation Administration,
read as follows:
follows:
Office of Regional Counsel, Attention:
Rules Docket No. SW-006, 2601
§ 107.610 Required Certifications for
$ 107.865 Restrictions on Control of a
Loans and Investments.
Small Business by a Licensee.
Meacham Blvd., Fort Worth. Texas,
**...
76137; or delivered in duplicate to the
(e) For each LMI Investment:
Office of the Regional Counsel at the
(d) Temporary Control permitted.
above address. Comments must be
(1) A certification by the concern,
***
marked: Docket No. SW-006. Comments
dated as of the date of application for
(5) If your financing of the Small
may be inspected in the Rules Docket
SBIC financing, as to the basis for its
Business is an LMI Investment.
qualification as an LMI Enterprise.
(e) Control certification.
***
weekdays, except Federal holidays,
(2) If the concern qualifies as an LMI
between 7:30 a.m. and 4:00 p.m.
(3) Your agreement to relinquish
Enterprise as defined in paragraph (2) of
Control within five years (although you
FOR FURTHER INFORMATION CONTACT:
the definition of LMI Enterprise in
may, under extraordinary
Richard Monschke, Aerospace Engineer,
107.50, an additional certification
circumstances, request SBA's approval
FAA, Rotorcraft Directorate, Aircraft
dated no later than the date 180 days
of an extension beyond five years). In
Certification Service. Fort Worth, Texas,
after the closing of the LMI Investment,
the case of an LMI Investment with a
76193-0110. telephone (817) 222-5116,
as to the location of the concern's
term of less than five years, you must
fax (817) 222-5961.
employees or tangible assets or the
agree to relinquish Control within the
SUPPLEMENTARY INFORMATION: The FAA
principal residences of its full-time
term of the financing.
has determined that notice and
employees as of the date of such
*
opportunity for prior public comment
certification, and
Dated: May 27. 1999.
hereon are impracticable because these
(3) Certification(s) by the SBIC. made
Aida Alvarez,
procedures would significantly delay
contemporaneously with the
Administrator.
issuance of the approval design and
certification(s) of the concern, that the
thus delivery of the affected helicopter.
[FR Doc. 99-25244 Filed 9-29-99; 8:45 am)
concern qualifies as an LMI Enterprise
In addition, the substance of this special
as of the date(s) of the concern's
BILLING CODE 8026-01-U
condition has been subject to the public
certification(s) and the basis for such
comment process in a prior instance.
qualification.
The FAA therefore finds that good cause
4. In § 107.835, redesignate paragraph
DEPARTMENT OF TRANSPORTATION
exists for making this special condition
(d) as paragraph (e) and add paragraph
effective upon issuance.
(d) to read as follows:
Federal Aviation Administration
Comments Invited
§ 107.835 Exceptions to minimum
14 CFR Part 21
Even though comments have been
duration/term of Financing.
[Docket No. SW-006; Special Condition No.
received on this engine special
*
29-006-SC]
condition. interested persons are invited
(d) An LMI Investment with a term of
to submit such additional written data,
at least one year: or
Special Conditions: Garlick
views, or arguments as they may desire.
Helicopters, Inc. Model GH205A
Communications should identify the
5. In § 107.850, revise the
helicopters; 14 CFR Part 21.27(c),
regulatory docket and be submitted in
introductory text of paragraph (a) to
aircraft engines Installed In surplus
duplicate to the address specified above.
read as follows:
Armed Forces aircraft
All communications received on or
$ 107.850 Restrictions on redemption of
AGENCY: Federal Aviation
before the closing date for comments
Administration (FAA). DOT.
will be considered by the FAA. This
Equity Securities.
special condition may be changed in
(a) A Portfolio Concern cannot be
ACTION: Final special condition; request
light of the comments received. All
required to redeem Equity Securities
for comments.
comments received will be available in
earlier than five years (or one year in the
case of an LMI Investment) from the
SUMMARY: This special condition is
the Rules Docket for examination by
date of the first closing unless:
issued for Garlick Helicopters, Inc.
interested persons, both before and after
Model GH205A helicopters. This model
the closing date for comments. A report
helicopter will have a novel or unusual
summarizing each substantive public
6. In § 107.855, add paragraph (g)(12)
design feature(s) associated with the
contact with FAA personnel concerning
to read as follows:
aircraft engines installed in surplus
this rulemaking will be filed in the
$ 107.855 Interest rate ceiling and
Armed Forces aircraft. The applicable
docket. Commenters wishing the FAA to
airworthiness regulations do not contain
acknowledge receipt of their comments
limitations on fees charged to Small
Businesses ("Cost of Money").
adequate or appropriate safety standards
submitted in response to this special
for this design feature. This special
condition must Include a self-addressed.
*
(g) Charges excluded from the Cost of
condition contains the additional safety
stamped postcard on which the
Money.
standards that the Administrator
following statement is made:
(12) Royalty payments received under
considers necessary to establish a level
"Comments to Docket No. SW-006."
of safety equivalent to that established
The postcard will be date stamped and
any LMI Investment if the royalty is
by the existing airworthiness standards.
returned to the commenter.
based on improvement in the
performance of the Small Business after
DATES: The effective date of this special
Background
the date of the financing.
condition Is September 22, 1999.
On December 9, 1993, Garlick
7. In § 107.865, remove the "or" at the
Comments must be received on or
Helicopters, Inc. applied for a transport
end of paragraph (d)(3), replace the
before November 29, 1999.
category type certificate for their Model
period at the end of paragraph (d)(4)
ADDRESSES: Comments on this special
GH205A hellcopters that contain
with "; or", add paragraph (d)(5), and
condition may be mailed in duplicate
military surplus T53-L-13 engines. The
106th Congress
1st Session
A BILL
To amend the Small Business Act and Small Business Investment Act of 1958.
Be it enacted by the Senate and House of Representatives of the United States of
America in Congress assembled.
TITLE I
New Markets Venture Capital Program
Section 101. New Markets Venture Capital Program. Title III -- -- SMALL BUSINESS
INVESTMENT COMPANIES of the Small Business Investment Act of 1958 (15 U.S.C.
661 et seq.) is amended by:
(1) striking the words "SMALL BUSINESS INVESTMENT COMPANIES" after TITLE
III;
(2) inserting in lieu thereof "INVESTMENT DIVISION PROGRAMS";
(3) inserting "PART A- SMALL BUSINESS INVESTMENT COMPANIES" before
section 301; and
(4) adding the following at the end of section 320:
"PART B - NEW MARKETS VENTURE CAPITAL PROGRAM
Sec. 350. DEFINITIONS
As used in this part --
1
(1) the terms "New Markets Venture Capital company" and "NMVC company"
mean a company that has been approved by the Administration under section 353(e) to
operate under the New Markets Venture Capital Program and that has entered into a
participation agreement with the Administration; and
(2) the term "low- or moderate-income geographies" means-
(A) any population census tract if :
(i) the poverty rate for such tract is at least 20%, or
(ii) the median family income for such tract does not exceed 80%
of the metropolitan area median family income (or in the case of a tract not located within
a metropolitan area, 80% of statewide median family income), and
(B) any area located within:
(i) a HUBZone (as defined in 13 CFR $ 126.103),
(ii) an Urban Empowerment Zone or Urban Enterprise
Community (as designated by the Secretary of the Department of Housing and Urban
Development), or
(iii). a Rural Empowerment Zone or Rural Enterprise Community
(as designated by the Secretary of the Department of Agriculture).
In the case of an area which is not tracted for population census tracts, the
equivalent county division as defined by the Bureau of the Census for purposes of
defining poverty areas shall be used for purposes of determining poverty rate and median
family income.
(3) the term "participation agreement" means an agreement between the
Administration and a New Markets Venture Capital company, detailing the company's
2
operating plan and investment criteria and requiring that investments be made in smaller
enterprises at least 60% of which are located in those low- or moderate-income
geographics defined in paragraph 2(A) of this section.
Sec. 351. PURPOSES
The purposes of the New Markets Venture Capital Program are --
(1) to encourage venture capital investment in smaller enterprises located
within urban and rural areas; and
(2) to establish a venture capital program to be administered by the Small
Business Administration --
(A) to enter into a participation agreement with each NMVC
company,
(B) to guarantee debentures of each NMVC company to enable
each such company to make venture capital investments in smaller enterprises within
urban and rural areas, and
(C) to make grants to each NMVC company for the purpose of
providing marketing, management and technical assistance to smaller enterprises
financed, or expected to be financed, by such company.
Sec. 352. PROGRAM ESTABLISHMENT
There is established a New Markets Venture Capital Program, under which the
Administration may --
(1) enter into a participation agreement with each NMVC company for the
purposes stated in section 351;
3
(2) guarantee debentures issued by each NMVC company as provided in
section 354; and
(3) make grants to each NMVC company as provided in section 355.
Sec. 353. SELECTION OF NMVC COMPANIES
(a) ELIGIBILITY TO APPLY. --A company shall be eligible to apply to
participate in the New Markets Venture Capital Program if it --
(1) is a newly formed for-profit entity, which may be a newly formed for-
profit subsidiary of an existing entity;
(2) has a management team with experience in community development
financing or venture capital financing; and
(3) files its application within a time period established by the
Administration.
(b) APPLICATIONS. As part of its application for participation in the New
Markets Venture Capital Program, each applicant shall provide the Administration with --
(1) a business plan that describes how the applicant will make successful
venture capital investments in low- or moderate-income geographies (as such term is
defined by the Administration) within identified geographic areas;
(2) the qualifications and general business reputation of the company's
management;
(3) a description of how the applicant will interface with community
organizations;
4
(4) a proposal describing how grant funds provided under this part would
provide marketing, management and technical assistance to smaller enterprises expected
to be financed by the company;
(5) measurement criteria by which to evaluate the company's performance
in meeting program objectives;
(6) the management and financial strength of any parent or affiliated firms,
or any firms essential to the success of the NMVC company's business plan; and
(7) such other information as the Administration may request.
(c) SELECTION CRITERIA FOR CONDITIONAL APPROVAL. -- The
Administration shall review the applications and shall select companies to be
conditionally approved to operate under the New Markets Venture Capital Program. The
selection shall be based upon the merits of the application and each company's proposed
geographic area of investment so as to promote investment nationwide. The selection
criteria shall include:
(1) the likelihood that the applicant will meet the goals of its business plan;
(2) the experience and background of the company's management team;
(3) the need for equity investments within the investment areas;
(4) the extent to which the applicant will concentrate its activities on
serving its investment areas;
(5) the likelihood that the applicant will be able to satisfy the conditions
under subsection (d);
(6) the extent to which the proposed activities will expand economic
opportunities within the investment areas; and
5
(7) other factors deemed appropriate by the Administration.
(d) CONDITIONAL APPROVAL.-The Administration shall give each
conditionally approved company a period of time, not to exceed 24 months, to satisfy the
following two conditions --
(1) Capital Requirement. Each company must raise at least $5 million of
contributed capital or binding capital commitments from one or more investors (other
than an agency of the Federal government) which meet criteria established by the
Administration; and
(2) Technical Assistance Matching Requirement.
(A) In order to provide marketing, management and technical
assistance, each company:
(i) must have binding commitments (in cash or in-kind)
from any source(s) other than the Administration which meet criteria established by the
Administration, payable or available over a multi-year period acceptable to the
Administration (not to exceed 10 years), in an amount equal to 30% of the capital and
commitments raised under subsection (d)(1); or
(ii) must have purchased an annuity from an insurance
company acceptable to the Administration, using funds (other than the funds raised to
satisfy subsection (d)(1)) from any source other than the Administration, which would
yield cash payments over a multi-year period acceptable to the Administration (not to
exceed 10 years), in an amount equal to 30% of the capital and commitments raised under
subsection (d)(1); or
6
(iii) must have binding commitments (in cash or in-kind) of
the type described in subsection (d)(2)(A)(i) and must have purchased an annuity of the
type described in subsection (d)(2)(A)(ii), which in the aggregate make available, over a
multi-year period acceptable to the Administration (not to exceed 10 years), an amount
equal to 30% of the capital and commitments raised under subsection (d)(1); or
(B) In the discretion of the Administrator and based upon a
showing of special circumstances and good cause, the Administrator may consider an
applicant to have satisfied the requirements of this subsection (d)(2) if it has a viable plan
that reasonably projects its capacity to raise the amount (in cash or in-kind) required
under subsection (d)(2)(A).
(e) APPROVAL TO OPERATE AS AN NMVC COMPANY. -- The
Administration shall grant final approval to operate as an NMVC company to any
company selected under subsection (d) that --
(1) has satisfied the conditions under such subsection; and
(2) has entered into a participation agreement with the Administration.
Sec. 354. DEBENTURES
The Administration is authorized, when authorized in appropriations Acts, to
guarantee the timely payment of principal and interest as scheduled on debentures issued
by NMVC companies. Such guarantees may be made by the Administration on such
terms and conditions as it deems appropriate. The full faith and credit of the United
States is pledged to the payment of all amounts which may be required to be paid under
any guarantee under this part. Such debentures may be issued for a term of not to exceed
fifteen years and shall bear interest at a rate approved by the Administration. The total
7
face amount of guaranteed debentures that may be outstanding at any one time shall not
exceed 150 percent of the contributed capital of the NMVC company, as determined by
the Administration. Contributed capital shall include capital that is deemed to be Federal
funds contributed by an investor other than an agency of the Federal government. The
debentures shall also contain such other terms as the Administration may require.
Sec. 355. TECHNICAL ASSISTANCE GRANTS
(a) GRANTS. -- The Administration is authorized to make grants to each NMVC
company subject to the following:
(1) IN GENERAL. -- Each NMVC company shall be eligible to receive
grants to be paid upon the direction of the Administration over a multi-year period not to
exceed 10 years, containing such terms as the Administration may require, to provide
marketing, management and technical assistance for the benefit of smaller enterprises
financed, or expected to be financed, by the NMVC company.
(2) GRANT AMOUNT. -The amount of the grant(s) provided by the
Administration to each NMVC company under this subsection (a) shall be equal to the
NMVC company's technical assistance match (in cash or in-kind) under section
353(d)(2) unless the Administration determines, in the best interests of the program, that
the grant(s) should be paid despite the NMVC company's failure to provide the matching
amount.
(3) PRO RATA REDUCTIONS. - If the amount made available to carry
out this section is insufficient for the Administration to provide grants in the amounts
8
required under subsection (a)(2), the Administration shall make pro rata reductions in the
amounts otherwise payable to each NMVC company under such subsection.
(b) SUPPLEMENTAL GRANTS. - The Administration is authorized to provide
supplemental grants to any NMVC company, containing such terms as the
Administration may require, to provide additional marketing, management and technical
assistance for the benefit of smaller enterprises financed, or expected to be financed, by
the NMVC company. The Administration may require, as a condition of any
supplemental grant made under this subsection (b), that the NMVC company provide a
match (in cash or in-kind) from sources other than the Administration equal to the
amount of the supplemental grant.
Sec. 356. ISSUANCE AND GUARANTEE OF TRUST CERTIFICATES
(a) The Administration is authorized to issue trust certificates representing
ownership of all or a fractional part of debentures issued by NMVC companies and
guaranteed by the Administration under this Act: Provided. That such trust certificates
shall be based on and backed by a trust or pool approved by the Administration and
composed solely of guaranteed debentures.
(b) The Administration is authorized, upon such terms and conditions as are
deemed appropriate, to guarantee the timely payment of the principal of and interest on
trust certificates issued by the Administration or its agent for purposes of this section.
Such guarantee shall be limited to the extent of principal and interest on the guaranteed
debentures which compose the trust or pool. In the event that a debenture in such trust or
pool is prepaid, or in the event of default of a debenture, the guarantee of timely payment
9
of principal and interest on the trust certificates shall be reduced in proportion to the
amount of principal and interest such prepaid debenture represents in the trust or pool.
Interest on prepaid or defaulted debentures shall accrue and be guaranteed by the
Administration only through the date of payment of the guarantee. During the term of the
trust certificate, it may be called for redemption due to prepayment or default of all
debentures.
(c) The full faith and credit of the United States is pledged to the payment of all
amounts which may be required to be paid under any guarantee of such trust certificates
issued by the Administration or its agent pursuant to this section.
(d) The Administration shall not collect a fee for any guarantee under this section:
Provided, That nothing herein shall preclude any agent of the Administration from
collecting a fee approved by the Administration for the functions described in subsection
(f)(2) of this section.
(e)
(1) In the event the Administration pays a claim under a guarantee issued
under this section, it shall be subrogated fully to the rights satisfied by such payment.
(2) No State or local law, and no Federal law, shall preclude or limit the
exercise by the Administration of its ownership rights in the debentures residing in a trust
or pool against which trust certificates are issued.
(f)
(1) The Administration may provide for a central registration of all trust
certificates sold pursuant to this section.
(2) The Administrator may contract with an agent or agents to carry out on
behalf of the Administration the pooling and the central registration functions of this
section including, notwithstanding any other provision of law, maintenance on behalf of
10
and under the direction of the Administration, such commercial bank accounts or
investments in obligations of the United States as may be necessary to facilitate trusts or
pools backed by debentures guaranteed under this Act, and the issuance of trust
certificates to facilitate such poolings. Such agent or agents shall provide a fidelity bond
or insurance in such amounts as the Administration determines to be necessary to fully
protect the interests of the Government.
(3) The Administrator is authorized to regulate brokers and dealers in trust
certificates sold pursuant to this section.
(4) Nothing in this subsection shall prohibit the use of a book-entry or
other electronic form of registration for trust certificates.
Sec. 357. FEES
Except as provided under section 356(d), the Administration shall charge such
fees as it deems appropriate with respect to any guarantee or grant issued under this part.
Sec. 358. BANK PARTICIPATION
Any national bank, or any member bank of the Federal Reserve System or
nonmember insured bank to the extent permitted under applicable State law, may invest
in any 1 or more NMVC companies, or in any entity established to invest solely in
NMVC companies, except that in no event shall the total amount of such investments of
any such bank exceed 5 percent of the capital and surplus of the bank.
Sec. 359. FEDERAL FINANCING BANK
11
Section 318 does not apply to any debenture issued under this part by an NMVC
company.
Sec. 360. REPORTING REQUIREMENTS
Each NMVC company will provide such information as the Administration may
request, including reporting on the measurement criteria that the NMVC company
proposed in its program application.
Sec. 361. EXAMINATIONS
Each NMVC company shall be subject to examinations made at the direction of
the Investment Division of the Administration, which may be conducted with the
assistance of a private sector entity that has both the qualifications to conduct and
expertise in conducting such examinations, and the cost of such examinations, including
the compensation of the examiners, may in the discretion of the Administration be
assessed against the company examined and when so assessed shall be paid by such
company. Fees collected under this section shall be deposited in the account for salaries
and expenses of the Administration and are authorized to be appropriated solely to cover
the costs of examinations and other program oversight activities.
Sec. 362. INJUNCTIONS AND OTHER ORDERS
(a) Whenever, in the judgment of the Administration, an NMVC company or any
other person has engaged or is about to engage in any acts or practices which constitute
or will constitute a violation of any provision of this Act, or of any rule or regulation
12
under this Act, or of any order issued under this Act, the Administration may make
application to the proper district court of the United States or a United States court of any
place subject to the jurisdiction of the United States for an order enjoining such acts or
practices, or for an order enforcing compliance with such provision, rule, regulation, or
order, and such courts shall have jurisdiction of such actions and, upon a showing by the
Administration that such NMVC company or other person has engaged or is about to
engage in any such acts or practices, a permanent or temporary injunction, restraining
order, or other order, shall be granted without bond.
(b) In any such proceeding the court as a court of equity may, to such extent as it
deems necessary, take exclusive jurisdiction of the NMVC company and the assets
thereof, wherever located; and the court shall have jurisdiction in any such proceeding to
appoint a trustee or receiver to hold or administer under the direction of the court the
assets so possessed.
(c) The Administration shall have authority to act as trustee or receiver of the
NMVC company. Upon request by the Administration, the court may appoint the
Administration to act in such capacity unless the court deems such appointment
inequitable or otherwise inappropriate by reason of the special circumstances involved.
Sec. 363. UNLAWFUL ACTS AND OMISSIONS BY OFFICERS, DIRECTORS,
EMPLOYEES, OR AGENTS; BREACH OF FIDUCIARY DUTY
(a) Whenever an NMVC company violates any provision of this Act or regulation
issued thereunder by reason of its failure to comply with the terms thereof or by reason of
its engaging in any act or practice which constitutes or will constitute a violation thereof,
13
such violation shall be deemed to be also a violation and an unlawful act on the part of
any person who, directly or indirectly, authorizes, orders, participates in, or causes, brings
about, counsels, aids, or abets in the commission of any acts, practices, or transactions
which constitute or will constitute, in whole or in part, such violation.
(b) It shall be unlawful for any officer, director, employee, agent, or other
participant in the management or conduct or the affairs of an NMVC company to engage
in any act or practice, or to omit any act, in breach of his fiduciary duty as such-officer,
director, employee, agent, or participant, if, as a result thereof, the NMVC company has
suffered or is in imminent danger of suffering financial loss or other damage.
(c) Except with the written consent of the Administration, it shall be unlawful -
(1) for any person hereafter to take office as an officer, director, or
employee of an NMVC company, or to become an agent or participant in the conduct of
the affairs or management of an NMVC company, if -
(A) he has been convicted of a felony, or any other criminal
offense involving dishonesty or breach of trust, or
(B) he has been found civilly liable in damages, or has been
permanently or temporarily enjoined by order, judgment, or decree of a court of
competent jurisdiction, by reason of any act or practice involving fraud or breach of trust;
or
(2) for any person to continue to serve in any of the above-described
capacities, if -
(A) he is hereafter convicted of a felony, or any other criminal
offense involving dishonesty or breach of trust, or
14
(B) he is hereafter found civilly liable in damages, or is
permanently or temporarily enjoined by an order, judgment, or decree of a court of
competent jurisdiction, by reason of any act or practice involving fraud or breach of trust.
(d) The Administration may serve upon any person identified in this section a
written notice of its intention to remove him from office whenever, in the opinion of the
Administration, such person --
(1) has willfully and knowingly committed any substantial violation of-
(A) this Act,
(B) any regulation issued under this Act, or
(C) a cease-and-desist order which has become final, or
(2) has willfully and knowingly committed or engaged in any act,
omission, or practice which constitutes a substantial breach of his fiduciary duty, and that
such violation or such breach of fiduciary duty is one involving personal dishonesty on
the part of such person.
15
(c) The Administration may remove or suspend any person upon whom the
Administration has served a notice under subsection (d) by following the procedures set
forth in section 313 of this Act.
Sec. 364. MISCELLANEOUS
The Administration is authorized to issue such regulations as it deems necessary
to carry out the provisions of this part in accordance with its purposes.
Sec. 365. AUTHORIZATIONS
The Administration is hereby authorized to be appropriated such subsidy budget
authority as may be necessary to guarantee up to $100 million of debentures, and up to
$30 million to make technical assistance grants, for the purposes pursuant to this part, to
remain available until expended. This authority shall be in effect for the period
commencing with fiscal year 2000 through fiscal year 2005."
Section 102. Bankruptcy Exemption for New Markets Venture Capital Companies.
Section 109(b)(2) of title 11, United States Code, is amended by inserting after
"homestead association," the following: "a New Markets Venture Capital company as
defined in section 350 of the Small Business Investment Act of 1958,".
Section 103. Federal Savings Associations.
Section 1464 (c) (4) of title 12, United States Code, is amended by adding at the
end thereof the following: "(F) New Markets Venture Capital companies. A Federal
savings association may invest in stock, obligations, or other securities of any New
16
Markets Venture Capital company as defined in section 350 of the Small Business
Investment Act of 1958. A Federal savings association may not make any investment
under this subparagraph if its aggregate outstanding investment under this subparagraph
would exceed 5 percent of the capital and surplus of such savings association."
Final Version - 5/17/99
17
DRAFT
September 18, 1999
Dear Mr. Speaker:
I was very pleased this summer when you expressed an interest in working together on
meaningful legislation to address the investment needs that our nation's underserved
urban rural areas - or New Markets - currently face. I am writing to ask you to join me in
a good faith effort to pass legislation that meets this objective.
As you know I have proposed the New Markets Initiative, which is designed to spur
equity capital investment, build jobs, and create economic opportunities in America's
underserved communities. I am aware that several members of your party have proposed
the American Community Renewal Act, which is designed to accomplish some of the
same goals. We also appreciate last week's Republican introduction of H.R. 2848, the
New Markets Initiative Act, by request.
We owe it the American people to work out a good faith bi-partisan proposal. I am sure
you understand that we may have some good faith disagreements about certain provisions
of the American Community Renewal Act such as the zero capital gains tax. However,
there are many provisions of the Talent-Watts bill that we believe could be incorporated
into the New Markets Initiative. There are elements we would be willing to accept,
specifically:
Brownfields Expensing;
Family Development Accounts;
Work Opportunity Tax Credit; and
Commercial Revitalization Tax Credit.
It is my hope that we can work together to find common ground and reach agreement on
ways to meet the needs of America's economically distressed communities. There is no
time to waste. We are ready to negotiate with whomever you designate, as soon as
possible. I look forward to hearing from you shortly.
Sincerely Yours,
President William Jefferson Clinton
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Community Development Venture Capital Assistance Act of 1999 (Introduced in the House)
HR 2812 IH
106th CONGRESS
1st Session
H. R. 2812
To provide for a community development venture capital program.
IN THE HOUSE OF REPRESENTATIVES
September 8, 1999
Mr. MCGOVERN (for himself, Mr. DAVIS of Illinois, Ms. EDDIE BERNICE JOHNSON of Texas,
Mr. HINCHEY, Mr. FROST, Mr. FATTAH, Mr. MARTINEZ, Ms. LEE, and Ms.
MILLENDER-MCDONALD) introduced the following bill; which was referred to the Committee on
Small Business
A BILL
To provide for a community development venture capital program.
Be it enacted by the Senate and House of Representatives of the United States of America in
Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the Community Development Venture Capital Assistance Act of
1999'.
SEC. 2. FINDINGS.
Congress finds that--
(1) there is a need for the development and expansion of organizations that provide private
equity capital to smaller businesses in areas in which equity-type capital is scarce, such as
inner cities and rural areas, in order to create and retain jobs for low-income residents of
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those areas;
(2) to invest successfully in smaller businesses, particularly in inner cities and rural areas,
requires highly specialized investment and management skills;
(3) there is a shortage of professionals who possess such skills and there are few training
grounds for individuals to obtain those skills;
(4) providing assistance to organizations that provide specialized technical assistance and
training to individuals and organizations seeking to enter or expand in this segment of the
market would stimulate small business development and entrepreneurship in economically
distressed communities; and
(5) assistance from the Federal Government could act as a catalyst to attract investment
from the private sector and would help to develop a specialized venture capital industry
focused on creating jobs, increasing business ownership, and generating wealth in
low-income communities.
SEC. 3. COMMUNITY DEVELOPMENT VENTURE CAPITAL ACTIVITIES.
The Small Business Act (15 U.S.C. 631 et seq.) is amended--
(1) by redesignating section 32 as section 33; and
(2) by inserting after section 31 the following:
'SEC. 32. COMMUNITY DEVELOPMENT VENTURE CAPITAL ACTIVITIES.
'(a) DEFINITIONS- In this section:
'(1) COMMUNITY DEVELOPMENT VENTURE CAPITAL ORGANIZATION- The
term community development venture capital organization' means a privately-controlled
organization that--
`(A) has a primary mission of promoting community development in low-income
communities, as defined by the Administrator, through investment in private business
enterprises; or
`(B) administers or is in the process of establishing a community development
venture capital fund for the purpose of making equity investments in private
business enterprises in such communities.
'(2) DEVELOPMENTAL ORGANIZATION- The term developmental organization'--
'(A) means a public or private entity, including a college or university, that provides
technical assistance to community development venture capital organizations or
that conducts research or training in community development venture capital
investment; and
`(B) may include an intermediary organization.
'(3) INTERMEDIARY ORGANIZATION- The term `intermediary organization'--
`(A) means a private, nonprofit entity that has--
(i) a primary mission of promoting community development through
investment in private businesses in low-income communities; and
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`(ii) significant prior experience in providing technical assistance or financial
assistance to community development venture capital organizations;
'(B) may include community development venture capital organizations.
`(b) AUTHORITY- In order to promote the development of community development venture
capital organizations, the Administrator, may--
'(1) enter into contracts with 1 or more developmental organizations to carry out training
and research activities under subsection (c); and
'(2) make grants in accordance with this section--
'(A) to developmental organizations to carry out training and research activities under
subsection (c); and
`(B) to intermediary organizations to provide training and assistance under subsection
(d) to community development venture capital organizations.
'(c) TRAINING AND RESEARCH ACTIVITIES OF DEVELOPMENTAL ORGANIZATIONS-
'(1) IN GENERAL- Subject to paragraph (2), a developmental organization that receives a
grant under subsection (b)(2)(A) shall use the funds made available through the grant for 1
or more of the following training and research activities:
'(A) ENHANCEMENT OF PROFESSIONAL SKILLS- Creating and operating
training programs to enhance the professional skills for individuals in community
development venture capital organizations or operating private community
development venture capital funds.
'(B) INCREASING INTEREST IN COMMUNITY DEVELOPMENT VENTURE
CAPITAL - Creating and operating a program to select and place students and recent
graduates from business and related professional schools as interns with community
development venture capital organizations and intermediary organizations for a
period of up to 1 year, and to provide stipends for such interns during the internship
period.
(C) PROMOTING `BEST PRACTICES'- Organizing an annual national conference
for community development venture capital organizations to discuss and share
information on the best practices regarding issues relevant to the creation and
operation of community development venture capital organizations.
'(D) MOBILIZING ACADEMIC RESOURCES- Encouraging the formation of 1 or
more centers for the study of community development venture capital at graduate
schools of business and management, providing funding for the development of
materials for courses on topics in this area, and providing funding for research on
economic, operational, and policy issues relating to community development
venture capital
'(2) LIMITATION- The Administrator shall ensure that not more than 25 percent of the
amount made available to carry out this section is used for activities described in paragraph
(1).
'(d) USE OF GRANT FUNDS BY INTERMEDIARY ORGANIZATIONS- An intermediary
organization that receives a grant under subsection (b)(2)(B) shall use the funds made available
through the grant to provide training and assistance with respect to marketing, management, and
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technical issues to promote the development of community development venture capital
organizations, which assistance may include grants to community development venture capital
organizations for the start up costs and operating support of those organizations.
`(e) MATCHING REQUIREMENT- The Administrator shall require, as a condition of any grant
made to an intermediary organization under section (b)(2)(B), that a matching amount equal to the
amount of such grant be provided from sources other than the Federal Government.
'(f) REGULATIONS- The Administrator may promulgate such regulations as may be necessary to
carry out this section, which regulations may take effect upon issuance.
(g) AUTHORIZATION OF APPROPRIATIONS- There is authorized to be appropriated to carry
out this section a total of $20,000,000 for fiscal years 2000 through 2003.'.
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SBA Administrator Aida Alvarez has met with the following Members of Congress:
SENATE
HOUSE
Senator Christopher "Kit" Bond (R-MO)
Representative Jim Talent (R-MO)
Senator John F. Kerry (D-MA)
Representative Nydia Velazquez (D-NY)
Senator Conrad Burns (R-MT)
Representative Danny Davis (D-IL)
Senator Spencer Abraham (R-MI)
Representative Jose Serrano (D-NY)
Senator Judd Gregg (R-NH)
Representative Lucille Roybal-Allard (D-CA)
Senator Byron Dorgan (D-ND)
Representative James Clyburn (D-SC)
Senator Paul Wellstone (D-MN)
Representative William Jefferson (D-LA)
Representative lke Skelton (D-MO)
Additionally, Administrator Alvarez has addressed both the Congressional Hispanic Caucus
and the Congressional Black Caucus on New Markets.
SBA staff has met with the following Members of Congress' staff:
SENATE
Senator Christopher "Kit" Bond (R-MO)
Senator John F. Kerry (D-MA)
Senator Olympia Snowe (R-ME)
Senator Paul Wellstone (D-MN)
Senator Mike Crapo (R-ID)
Senator John Edwards (D-NC)
Senator Conrad Burns (R-MT)
Senator Frank Lautenberg (D-NJ)
Senator Thad Cochran (R-MS)
Senator Patrick Leahy (D-VT)
Senator Mike DeWine (R-OH)
Senator Jeff Bingaman (D-NM)
Senator Spencer Abraham (R-MI)
Senator Blanche Lincoln (D-AR)
Senator Judd Gregg (R-NH)
Senator Ted Kennedy (D-MA)
Senator Ben Nighthorse Campbell (R-CO)
Senator Ernest F. Hollings (D-SC)
Senator Pete Domenici (R-NM)
Senator Daniel K. Inouye (D-HI)
HOUSE
Representative Jim Talent (R-MO)
Representative Nydia Velazquez (D-NY)
Representative Jim Leach (R-IA)
Representative Stephanie Tubbs Jones (D-OH)
Representative Ralph Regula (R-OH)
Representative Danny Davis (D-IL)
Representative Tom Latham (R-IA)
Representative David Phelps (D-IL)
Representative Zach Wamp (R-TN)
Representative Mark Udall (D-CO)
Representative Jan Schakowsky (D-IL)
Representative John J. LaFalce (D-NY)
Representative Julian C. Dixon (D-CA)
Representative Alan Mollohan (D-WV)
Representative Silvestre Reyes (D-TX)
Additionally, SBA staff has participated in staff briefings of the following: House and Senate
Small Business Committees, House Banking Committee, and the Congressional Hispanic
Caucus and Congressional Black Caucus.
New Markets Briefings
Sen Sarbanes
4/22
APICs
Sen Rockefeller
4/8
Lead sponsor
Sen Robb
4/13
Lead sponsor
Sen Kennedy
8/5
Sen Jeffords
3/30
Sen Edwards
4/8
Sen DPC*
4/27
Sen DeWine
8/5
Sen Cochran
8/5
Rep Rangel
ongoing discussions
Has taken lead on cosponsors
and has previously asked us
not to offer one-on-one
briefings (before the bill was
dropped).
Rep. Kanjorski
5/26
Rep Talent
5/25
Rep LaFlace
8/5
Rep J.C Watts
5/25
*
Attending the Senate DPC briefing were staff to Senators Durbin, Rockefeller, Edwards, Robb,
Kerrey (D-NE), Leahy, Kennedy, Dodd, Daschle, Harkin, Johnson, Biden, Senate Finance
Committee, Bayh, Toricelli., Boxer, and Baucus
"David S. Kass" <[email protected]>
08/12/99 10:24:49 AM
Record Type:
Record
To:
Lisa Green/OPD/EOP
CC:
Xavier Briggs <[email protected]>
Subject: APIC briefings
Xav reminded me this morning that HUD also did APIC briefings for Senator
Edwards' staff and Rep. Jesse Jackson Jr.
-David
"David S. Kass" <[email protected]>
08/11/99 05:59:02 PM
Record Type:
Record
To:
Lisa Green/OPD/EOP
CC:
Subject: APIC briefings
Hi Lisa. We did an APIC briefing for our two committees, the House Banking
Committee (attended by Rep. LaFalce) and the Senate Banking Committee
Democrats (which I think you attended). We've also met w/ staff for
Senators Lugar, Jeffords, and Hagel, and Rep. Kanjorski. We recently did
a HUD budget briefing for the Congressional Black Caucus and the Hispanic
Caucus where we spent a fair amount of time on APIC and the New Markets
Initiative. We will follow up with the Senate offices and the sponsors in
the House and Senate. Just to let you know, I'll be on vacation next week
and the week after. I hope you're well. -David
NEWS NEWS
CONGRESSMAN WILLIAM J. "JEFF" JEFFERSON
240 CANNON HOUSE OFFICE BUILDING * WASHINGTON, D.C. 20515
202/225-6636
FOR IMMEDIATE RELEASE
9 p.m., July 14, 1999
WAYS AND MEANS COMMITTEE OKAYS
JEFFERSON'S EQUITY CAPITAL
FORMATION PROPOSAL TO HELP
MINORITY & DISADVANTAGED BUSINESS
Washington, D.C. - The House Ways & Means Committee late Wednesday
adopted an amendment by U.S. Rep. William J. Jefferson, D-LA, to enhance tax
incentives that could spur $1 billion worth of private investment into venture capital
funds that serve minority and disadvantaged businesses in the next decade.
"By enhancing the tax incentives for private investment in minority and
disadvantaged business venture capital funds, financial experts think we can
generate $1 billion that will reduce the major equity capital gap that continues to
hinder growth of minority and disadvantaged businesses in America, "Jefferson
said.
Jefferson's proposal modifies and expands existing tax incentives, which the
five-term New Orleans congressman championed for Specialized Small Business
Investment Companies (SSBICS's) in the historic 1993 Balanced Budget Act.
The Ways and Means Committee adopted Jefferson's proposal to expand
and modify the 1993 tax incentives as part of new tax legislation under
consideration in the 106th Congress.
Current tax incentives permit individuals to shield $50,000 worth of annual
capital gains from the sale of publically traded securities from income tax (up to a
$500,000 lifetime limit), if proceeds are reinvested in an SSBICS. Corporations
were permitted to shield $250,000 annually with a $1 million lifetime cap. Also, an
investors can exclude 50 per cent of their gains in return for a minimum five-year
investment in an SSBIC.
-more-
2/2
Jefferson's modifications will allow:
- The annual cap for individual and corporate capital gains excluded from
income is eliminated and the lifetime cap on the amount of capital gains excluded
from income is increased from $500,000 to $750,000; the corporate lifetime cap,
from $1 million to $2 million.
- The period allowed for reinvestment of the excluded capital gains is
increased from 60 to 180 days.
- Investors can exclude 60 per cent of their gains in return for a minimum
five-year investment in an SSBIC.
Jefferson's legislative proposal also permits a tax-free conversion of an
SSBICS into a partnership or regulated investment company.
Since its inception almost 30 years ago as the only federal program aimed at
addressing the capital gap faced by small disadvantaged businesses, the SSBIC
program has invested more than $1.8 billion in disadvantaged businesses, or about
$65 million a year.
In contrast, Jefferson noted that the current incentives allowed SSBICs to
double annual investment in 1996 to more than $134 million for a variety of
industries, ranging from computer technology and health care to franchises, retail
outlets and telecommunications.
-30-
For more information, contact: Mr. Jean LaPlace at 202/225-6636.
TALKING POINTS FOR PHONE CALL WITH VELASQUEZ
Thank you for your hard work and the hard work of Michael Day on the New Markets
Venture Capital bill. The Administration is very appreciative of your efforts.
We also appreciate and understand your desire to make the bill as acceptable as
possible to both parties to ensure its passage. I understand that you may be making some
headway in obtaining Republican support for your bill, which would be a tremendous boost
for the entire New Markets Initiative.
I know that your staff has been working closely with Patty Forbes from Senator Kerry's
office, SBA and my staff to come up with language that will ensure that this program is used
to serve those businesses and communities in need.
We want to be sure that the funds from the New Market Ventures Capital program are
used to finance the hardest to serve areas and those businesses that are not currently
being served by traditional markets and those not being served by the existing SBIC
programs.
As you know the New Market Ventures Capital program will provide needed technical
assistance and guaranteed debt to make Community Development Venture Capital funds
viable.
The research prepared by SBA (see attached summary) for your staff indicated that the
current SBIC program is not providing funds broadly to New Markets or to the type of
Community Development Venture Capital funds that will utilize this program. The
venture capital funds that will be eligible for this program must have a social mission and a
commitment to serving distressed communities.
Note: We have heard that the conventional SBIC industry has some concerns about the
NMVC proposal and they have been lobbying Velasquez heavily. They are worried that the
NMVC program will compete with the existing program and take business away from them.
The attached evidence shows that these are not overlapping markets because
1) the size of the investments that will made by NMVC firms are much smaller than
those made by existing SBICs in low and moderate income areas and
2) existing SBIC investments in Low and Moderate Income areas are primarily
concentrated in high income states (such as California, New York and Massachusetts)
and in urban areas. Conventional SBICs can find extremely profitable investments in
these markets however these are the cream of the crop deals and not the tough
deals that will be done by Community Development Venture Capital funds with a
social mission.
We are looking forward to working with you and your staff to come up with legislative
language that accomplishes our mutual goal of creating a program to serve those businesses
and communities that are most in need.
SBIC 1998 EQUITY AND NEAR-EQUITY INVESTMENTS OF $1 MM AND
LESS
IN LOW AND MODERATE ZONES
Total capital invested equaled $58,955,856, including approximately $3MM
invested by Developmental SBICs. This is 1.84% of total SBIC investments
made during 1998.
Four state, CA, TX, NY and MA, accounted for 55% of the $59 million. California
alone accounted for 28% of the $59 million, with Silicone Valley accounting for
81% of that total.
Only 2 investments were in rural areas. These investments totaled $1.1MM,
1.9% of the total capital invested.
35 states received a total of $1 MM or less in financing.
28 states received a total of $500 K or less in financing.
20 states received no capital at all.
SBIC 1998 EQUITY AND NEAR-EQUITY INVESTMENTS OF $1 MM AND LESS
(IN LOW AND MODERATE INCOME ZONES)
1 CA
$
16,692,152
28.31%
2 TX
$
6,240,714
10.59%
3 NY
$
4,685,472
7.95%
4 MA
$
4,623,350
7.84%
5 FL
$
2,785,327
4.72%
6 OH
$
2,741,335
4.65%
7 KS
$
2,296,370
3.90%
8 MD
$
2,220,000
3.77%
9 PA
$
1,950,000
3.31%
10 TN
$
1,519,045
2.58%
11 HI
$
1,411,111
2.39%
12 MO
$
1,200,001
2.04%
13 LA
$
1,200,000
2.04%
14 KY
$
1,100,000
1.87%
15 UT
$
1,030,858
1.75%
16 NH
$
1,000,000
1.70%
17 NJ
$
850,000
1.44%
18 VA
$
800,000
1.36%
19 AZ
$
780,880
1.32%
20 ND
$
751,040
1.27%
21 CO
$
573,448
0.97%
22 NC
$
519,499
0.88%
23 MN
$
500,000
0.85%
24 OK
$
460,001
0.78%
25 CT
$
400,000
0.68%
26 AL
$
300,000
0.51%
27 IL
$
176,220
0.30%
28 DC
$
100,000
0.17%
29 OR
$
49,032
0.08%
30 WA
1
0.00%
TOTAL
$
58,955,856
100.00%
TOTAL OF TOP FOUR STATES
54.69%
SBIC 1998 EQUITY AND NEAR-EQUITY INVESTMENTS OF $1 MM AND LESS IN LMI ZONES
CITY
STATE
AMOUNT OF
TYPE OF
RURAL
FINANCING
FINANCING
FINANCING
Birmingham
AL
$
300,000
Equity
$
300,000
Tucson
AZ
$
187,580
Debt
Phoenix
AZ
$
133,300
Debt
Phoenix
AZ
$
460,000
Debt
AZ
$
780,880
Campbell
CA
$
103,000
Debt
Campbell
CA
$
639,999
Equity
Irvine
CA
$
500,000
Equity
Los Angeles
CA
$
200,350
Debt
Los Angeles
CA
$
474,764
Debt
Menlo Park
CA
$
845,500
Equity
Mountain View
CA
$
30,000
Debt
Mountain View
CA
$
32,000
Debt
Mountain View
CA
$
250,000
Debt
Mountain View
CA
$
600,000
Equity
Mountain View
CA
$
984,275
Equity
Oakland
CA
$
7,365
Debt
Orange County
CA
$
499,999
Equity
Palo Alto
CA
$
500,000
Equity
Palo Alto
CA
$
680,000
Equity
Redwood City
CA
$
475,000
Equity
Sacramento
CA
$
100
Equity
San Diego
CA
$
500,000
Equity
San Francisco
CA
$
150,000
Equity
San Francisco
CA
$
250,000
Debt
San Francisco
CA
$
1,000,000
Equity
San Jose
CA
$
50,001
Equity
San Jose
CA
$
100,000
Equity
San Jose
CA
$
200,000
Equity
San Jose
CA
$
275,000
Equity
San Jose
CA
$
300,000
Debt
San Jose
CA
$
483,000
Equity
San Jose
CA
$
750,001
Equity
Santa Ana
CA
$
800,000
Debt
Santa Barbara
CA
$
210,000
Equity
Santa Clara
CA
$
150,000
Debt
Santa Clara
CA
$
176,693
Equity
Santa Clara
CA
$
300,000
Debt
Santa Clara
CA
$
412,284
Equity
Santa Clara
CA
$
425,320
Equity
Santa Clara
CA
$
487,500
Equity
Santa Clara
CA
$
750,000
Equity
Santa Clara
CA
$
1,000,000
Debt
Sunnyvale
CA
$
400,000
Equity
Sunnyvale
CA
$
700,000
Equity
$
16,692,151
SBIC 1998 EQUITY AND NEAR-EQUITY INVESTMENTS OF $1 MM AND LESS IN LMI ZONES
CITY
STATE
AMOUNT OF
TYPE OF
RURAL
FINANCING
FINANCING
FINANCING
Boulder
CO
$
140,643
Equity
Boulder
CO
$
432,805
Equity
$
573,448
West Haven
CT
$
200,000
Debt
West Haven
CT
$
200,000
Debt
$
400,000
Washington DC
DC
$
100,000
Debt
$
100,000
Ft. Lauderdale
FL
$
200,000
Debt
Jacksonville
FL
$
159,378
Equity
Jacksonville
FL
$
194,377
Equity
Jacksonville
FL
$
717,199
Equity
Melbourne
FL
$
400,000
Equity
Ocala
FL
$
50,000
Debt
Orlando
FL
$
750,000
Equity
Sarasota
FL
$
100,000
Debt
Tampa
FL
$
214,373
Debt
$
2,785,327
Honolulu
HI
$
111,111
Debt
Honolulu
HI
$
300,000
Debt
Honolulu
HI
$
1,000,000
Debt
$
1,411,111
Harrisburg
IL
$
43,900
Debt
Chicago
IL
$
132,320
Equity
$
176,220
Kansas City
KS
$
496,330
Debt
Kansas City
KS
$
600,000
Debt
Kansas City
KS
$
600,000
Debt
Kansas City
KS
$
600,040
Debt
$
2,296,370
Louisville
KY
$
500,000
Debt
Louisville
KY
$
600,000
Debt
$
1,100,000
New Orleans
LA
$
200,000
Equity
New Orleans
LA
$
1,000,000
Debt
$
1,200,000
SBIC 1998 EQUITY AND NEAR-EQUITY INVESTMENTS OF $1 MM AND LESS IN LMI ZONES
CITY
STATE
AMOUNT OF
TYPE OF
RURAL
FINANCING
FINANCING
FINANCING
Boston
MA
$
119,725
Debt
Boston
MA
$
240,000
Equity
Boston
MA
$
246,644
Debt
Boston
MA
$
250,000
Equity
Boston
MA
$
260,001
Equity
Boston
MA
$
378,511
Debt
Boston
MA
$
401,331
Equity
Boston
MA
$
927,138
Equity
Boston
MA
$
1,000,000
Equity
Somerville
MA
$
50,000
Debt
Worcester
MA
$
750,000
Equity
$
4,623,350
Baltimore
MD
$
200,000
Debt
Baltimore
MD
$
670,000
Debt
Baltimore
MD
$
850,000
Equity
North Bethesda
MD
$
500,000
Equity
$
2,220,000
Rochester
MN
$
500,000
Equity
$
500,000
Kansas City
MO
$
700,000
Debt
St. Louis
MO
$
500,001
Equity
$
1,200,001
Charlotte
NC
$
100,000
Equity
Durham
NC
$
100,000
Equity
Ralleigh
NC
$
319,499
Equity
$
519,499
Fargo
ND
$
105,280
Debt
Fargo
ND
$
131,040
Debt
Fargo
ND
$
200,000
Debt
Fargo
ND
$
314,720
Debt
$
751,040
Manchester
NH
$
1,000,000
Eqity
$
1,000,000
East Rutherford
NJ
$
850,000
Equity
$
850,000
SBIC 1998 EQUITY AND NEAR-EQUITY INVESTMENTS OF $1 MM AND LESS IN LMI ZONES
CITY
STATE
AMOUNT OF
TYPE OF
RURAL
FINANCING
FINANCING
FINANCING
Bronx
NY
$
750,000
Debt
Hempstead
NY
$
500,000
Debt
Ithaca
NY
$
500,000
Debt
New York
NY
$
82,500
Equity
New York
NY
$
182,972
Debt
New York
NY
$
650,000
Debt
New York
NY
$
500,000
Debt
New York
NY
$
650,000
Debt
New York
NY
$
820,000
Equity
Rochester
NY
$
50,000
Debt
$
4,685,472
Cleveland
OH:
$
735,334
Debt
Dayton
OH
$
52,000
Debt
Dayton
OH
$
234,000
Debt
Dayton
OH
$
250,000
Debt
Dayton
OH
$
870,001
Debt
Youngstown
OH
$
300,000
Debt
Youngstown
OH
$
300,000
Debt
$
2,741,335
Oklahoma City
OK
$
210,001
Debt
Oklahoma City
OK
$
250,000
Debt
$
460,001
Portland
OR
$
49,032
Equity
$
49,032
Philadelphia
PA
$
900,000
Equity
Pittsburgh
PA
$
750,000
Equity
Upper Darby
PA
$
300,000
Debt
$
1,950,000
Memphis
TN
$
105,000
Equity
Nashville
TN
$
764,045
Equity
Springfield
TN
$
650,000
Debt
$
1,519,045
Arlington
TX
$
20,000
Debt
Austin
TX
$
450,000
Equity
Barry
TX
$
335,706
Equity
$
335,706
Dallas
TX
$
260,000
Debt
Dallas
TX
$
740,000
Debt
El Paso
TX
$
476,777
Debt
Houston
TX
$
399,000
Equity
Houston
TX
$
440,000
Debt
Houston
TX
$
600,000
Equity
SBIC 1998 EQUITY AND NEAR-EQUITY INVESTMENTS OF $1 MM AND LESS IN LMI ZONES
Houston
TX
$
750,000
Equity
San Antonio
TX
$
1,000,000
Debt
Smithville
TX
$
769,231
Debt
$
769,231
$
6,240,714
CITY
STATE
AMOUNT OF
TYPE OF
RURAL
FINANCING
FINANCING
FINANCING
Provo
UT
$
100,000
Debt
SLC
UT
$
17,636
Equity
SLC
UT
$
39,152
Equity
SLC
UT
$
239,066
Debt
SLC
UT
$
300,000
Equity
SLC
UT
$
335,004
Equity
$
1,030,858
Charlottesville
VA
$
800,000
Equity
$
800,000
Seattle
WA
$
1
Equity
TOTAL INVESTMENTS
$
58,955,856
TOTAL RURAL INVESTMENTS
$
1,104,937
http://thomas.loc.gov/cgi-bin/query/D?r106:1:./temp/-r106e62uoN:e334497.
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STATEMENTS ON INTRODUCED BILLS AND JOINT RESOLUTIONS (Senate - August 05,
1999)
NEW MARKETS TAX CREDIT
Mr. ROCKEFELLER. Mr. President, I rise today to introduce a new tool, the 'New Markets Tax Credit,'
to be used to expand economic development opportunities in low-incorne communities in West Virginia
and across this country. I'm very pleased that my good friends, Senator Robb, Sarbanes, Kennedy, and
Kerry, are joining me in this effort.
Despite the unprecedented period of expansion of the U.S. economy, many urban and rural areas
continue to be held back by stubborn problems such as high unemployment and underemployment,
insufficient affordable housing, shortages of services such as day care and shopping centers, and perhaps
most importantly, by a chronic shortage of the private investment capital needed to stimulate and
support community development.
For example, in West Virginia, we have counties where the official unemployment rate is as high as
14%. Counties like Mingo, McDowell, Logan and Boone have seen devastating job losses in the past
two decades. For these rural communities, the nation's current economic boom is a distant echo. It's not
that these people do not want to work, or that the entrepreneurial spirit is lacking. A major factor is the
lack of private sector equity investment for business growth.
I have been pursuing economic development opportunities for my state for over 30 years, and perhaps
the largest problem I've encountered is the lack of venture capital. America's most depressed economic
areas desperately need private investment. They get very little not only because they are unattractive, but
also because of misperceptions and market failures. A lack of information, for instance, means that many
companies may have an exaggerated idea of the risk of investing in deprived areas, and often have no
idea of potential markets. Yes, it is true that private venture capital investment rose 24% in 1998, 76% of
the total went to technology-based companies--primarily in California's Silicon Valley and New
England's high-tech corridors. But only 5.7% of all venture capital in 1998 went to South Central,
Southwest and Northwest regions combined. Obviously, this is a huge disparity that needs to be
corrected.
The New Markets Tax Credit is designed to encourage $6 billion in private sector equity investment for
business growth in low and moderate income rural and urban communities. It would do that by
providing tax credits for investments of $1.2 billion annually. The investments would be made by banks,
foundations, companies or individuals. These investors would acquire stock or other equity interests in
selected community economic development entities whose primary mission is serving distressed
communities. Urban and rural communities with high poverty and low median income would be
targeted.
The tax credits would be issued by the U.S. Department of Treasury to the selected entities. These
entities in turn would sell or syndicate the credit to investors. The tax credit ultimately delivered to the
investor would be in the amount of 6 percent annually of the amount of the investment, for an
approximate aggregate value to the investor of 25 percent of the `present value' of the original
investment over the 7 years. A qualified investment' by an investor would be a cash purchase of stock
1 of 2
8/11/99 5:12 PM
http://thomas.loc.gov/cgi-bin/query/D?r106:1:./temp/r106e62uoN:e334497.
or other equity in a selected entity, which must be held for at least 7 years. Substantially all of the
investment would be required to be used by the community economic development entity to make
qualified low-income community investments,' which would be equity investments in, or loans to,
qualified active businesses in the low-income communities.
The goal of this tax credit will be to encourage private investors who may have never considered
investing in high-risk areas to do so. By investing in the community through local businesses private
investors can explore new markets and improve the quality of life for the people in the area. Community
development organizations may use the funds from private investors to develop micro-enterprise,
manufacturing businesses, commercial facilities, communities facilities, like child care facilities and
senior centers and co-operatives. It has the potential to encourage $6 billion in venture capital to these
high-risk areas. And because community development vehicles may not redeem the equity interest for at
least seven years, capital stays in the community. The New Markets Tax Credit will create new
relationships between investors, community development vehicles, and small businesses, which will
foster continued support and lasting investment.
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2 of 2
8/11/99 5:12 PM
All 17 '99 06:41PM OFFICE OF THE CFO
P.1/4
TO:
LISA GREEN
FROM:
TED WARTELL
NOTE:
For Wednesday's Michael Day Meet.
P.S. Remind me to ander some
more afficial waking FAX come whate.
Sed
1999
4:55PM
GENERAL COUNSEL SBA
No. 9706 P.
U.S. Small Business Administration
Fax Transmission Cover Sheet
SBA
The U.S. Small Business Administration offers
opportunities for all Americans to start, build and
grow their own businesses into the 21st century.
To: Lisa Green
Did you know that in fiscal year 1998
the SBA -
Organization:
NEC
maintained a guaranteed loan portfolio of more
than $40 billion in loans to 491,000 small busi-
Phone: 456-2803
Fax: 456-2223
nesses that otherwise would not have had such
access to capital?
Date: 9/21/99
Time:
backed more than 47,100 loans totaling a record
$10.8 billion to America's small businesses?
Number of Pages (including this page):
11
made a record 3,456 investments worth $3.24 bil-
lion through its venture capital program?
From:
Elizabeth O. Kim, Assistant General Counsel
provided more than 30,000 loans totaling over
$728 million to disaster victims for residential.
personal-property and business loans?
Office: Office of General Counsel
extended management and technical assistance
Phone: (202) 205-6440
Fax: (202) 205-6848
to nearly 830,000 small businesses through its
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Paper
1999
4:55PM
GENERAL COUNSEL SBA
No. 9706
F. 2
Congressional Record
September 16, 1999
By Mr. KERRY (for himself, Mr. Wellstone, Mr. Bingaman, Mr. Sarbanes, Mr. Levin and Mr.
Cleland):
S. 1594
A bill to amend the Small Business Act and Small Business Investment Act of 1958; to the
Committee on Small Business. community development and venture capital act of 1999
Mr. KERRY. Mr. President, the bill that I am sending to the desk is the Community
Development and Venture Capital Act of 1999. I am pleased to share the introduction of this
with Senators Wellstone, Bingaman, Sarbanes, Levin, and Cleland as cosponsors of it. This small
business legislation is designed to promote economic development, business investment,
productive wealth, and stable jobs in new markets.
It establishes a New Markets Venture Capital program that is part of President Clinton's
New Markets Initiative that he mentioned in the State of the Union Address" and promoted on
a 4-day tour this summer.
New Markets are our country's low- and moderate-income communities where there is
little to no sustained economic activity but many overlooked business opportunities. According
to Michael Porter, a respected business analyst who has written extensively on competitiveness,
inner
[[Page S11055]]
cities are the largest underserved market in America, with many tens of billions of dollars
of unmet consumer and business demand." Many rural areas also contain low- and moderate-
income communities
Think of the inner-city areas of Boston's Roxbury or New York's East Harlem, or the
rural desolation of Kentucky's Appalachia or Mississippi's Delta region. These are our neediest
communities--urban and rural pockets that are so depleted that no internal resource exists to
jump start the economy. These are places where there have been multi-generations of
unemployment and abandoned commercial centers and main streets.
To get at this complex and deep-rooted economic problem, this legislation has three
parts: a venture capital program to funnel investment money into our poorest communities, a
program to expand the number of venture capital firms that are devoted to investing in such
communities, and a mentoring program to link established, successful businesses with businesses
and entrepreneurs in stagnant or deteriorating communities in order to facilitate the learning
curve.
The center piece is the New Markets Venture Capital Program. Its purpose is to stimulate
economic development through public-private partnerships that invest venture capital in smaller
businesses that are located in impoverished rural and urban areas or that employ low-income
people.
Both innovative and fiscally sound, this legislation creates a new venture capital program
within the Small Business Administration that is built on two of the agency's most popular
programs. It is financially structured similar to the Agency's successful Small Business
1999
4:56PM
GENERAL COUNSEL SBA
No. 9706 P.3
Investment Company program, and incorporates a technical assistance component similar to that
successfully used in SBA's microloan program.
However, unlike the SBIC program which focuses solely on small businesses with high-
growth potential and claims successes such as Staples and Calloway Golf, the New Markets
Venture Capital program will focus on smaller businesses that show promise of financial and
social returns--what we call a double bottomline." These businesses tend to be higher risk, need
longer periods to pay back money, need intensive, ongoing financial, management and marketing
assistance, and have more modest prospects for return on investment than SBIC investments. For
example, the returns on investments typically range from five to ten percent for community
development venture capital funds versus SBIC's expected 20 to 30 percent rates of returns.
To balance out the equation, they also provide quality, stable jobs, create productive
wealth in and among our neediest communities and need a smaller equity investment. Equity
investments for community development investment funds will range from $50,000 to $300,000
versus the $300,000 to $5 million of typical deal sizes in the Agency's SBIC program.
Among other conditions, in order for an organization to be eligible to participate and
approved as a New Markets Venture Capital company, it must have a management team with
experience in community development financing or venture capital financing, be able to raise at
least $5 million of non-SBA money for debentures, and raise matching funds for SBA's technical
assistance grants.
Community development venture capitalists, we should be reminded, use all the
discipline of traditional venture capitalists.
At the Small Business Committee roundtable we held in May on the Agency's SBIC
program and other venture capital proposals, community development venture capital groups
from Massachusetts to Minnesota to Kentucky talked about profit. Like traditional venture
capital funds, community development funds have to make prudent investments to earn profits in
order to attract and keep investors. But they balance that with social objectives. One of the most
important social goals for Boston Community Venture Fund is job creation and job quality.
Elyse Cherry, who is President of the Boston Community Venture Fund, invited me,
former Treasury Secretary Robert E. Rubin and former Congressman Joseph P. Kennedy II and
others to tour a company her Fund invested in called City Fresh Foods. Located in Roxbury, one
of Boston's neediest neighborhoods, Glynn and Sheldon Lloyd started a company that
manufactures prepares African-American and Hispanic meals for the community and corporate
clients. And through the Meals-on-Wheels program, this company serves the elderly in Roxbury
and Dorchester districts. In addition to providing a needed service, City Fresh Foods has created
20 jobs, hires from the community, pays its employees from $8 to $16 per hour, and offers
training and opportunity for them to move from entry-level jobs to supervisory positions.
There are more success stories like this around the country. The Community
Development Venture Capital funds across the country have a proven track record in making
smart, responsible investments in small businesses in their communities, but the capital needs of
firms in economically distressed areas far outweigh the existing capacity of these organizations.
Compared to the more than 1, 143 traditional and SBIC venture capital firms in the U.S., only
some 40 funds nationwide concentrate on investing in companies that show promise of financial
and social returns. We simply need more community development venture capital funds to reach
more of these underserved communities.
The second component of this bill, the Community Development Venture Capital
Assistance Program," recognizes that need and is designed to increase the number and expertise
.Srep.
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GENERAL COUNSEL SBA
No. 9706
P. 4
of community development venture capital funds, such as New Markets Venture Capital
companies, around the country. A Community Development Venture Capital organization has a
primary mission of promoting community development in low-income communities through
investment in private businesses.
Senator Wellstone has carried the water on community development venture capital
concept and deserves special credit for educating the Small Business Committee about this
important economic development tool. He introduced this initiative in March It is virtually
identical to the bill he introduced in the last Congress and passed the full Senate as part of a
comprehensive small business bill, H.R. 3412.
First, the Community Development Venture Capital Assistance program would authorize
$15 million for SBA grants to private, nonprofit organizations with expertise in making venture
capital investments in poor communities. These organizations would use these grants to provide
hands-on technical assistance to spawn and develop new and emerging CDVC or NMVC
companies. The intermediary organizations would match the grants dollar-for-dollar with non-
Federal sources.
Second, this program would provide $5 million in SBA grants to colleges, universities,
and other firms or organizations--public or private--to create and operate training and intern
programs, organize a national conference, and fund academic research and studies dealing with
community development venture capital.
Finally, to complement the venture capital investments and the program to foster the
emergence and growth of more community development venture capital companies, this
legislation would build on the BusinessLINC grant program. Already a successful public-private
partnership that the SBA and Department of Treasury launched last June, it encourages larger
businesses to mentor smaller businesses, enhancing the economic vitality and competitive
capacity of small businesses located in the targeted areas. This Act will authorize $3 million a
year to further promote and expand this program.
It's easy to stare past the broken inner cities and boarded up rural towns to the intrigues
and fantasies of a booming Wall Street, flourishing suburbs and record-low national
unemployment But as we trumpet the successes of our economy, we must be smart and leverage
that prosperity to jumpstart and strengthen our communities that are struggling. This legislation
aims to do just that.
The PRESIDING OFFICER The Senator's time has expired.
Mr. KERRY. Mr. President, I ask unanimous consent that letters of support be printed in
the Record.
[[Page S11056]]
There being no objection, the letters were ordered to be printed in the Record, as follows:
Boston Community Capital
Boston, MA
July 16, 1999
Hon. John F. Kerry, Ranking Member
Committee on Small Business
U.S. Senate
Washington, DC
Step. 1999 4:56PM
GENERAL COUNSEL SBA
No. 9706
P.
5
Dear Senator Kerry:
I am writing to you as president of Boston Community Venture Fund, an affiliate of
Boston Community Capital, and as a Board Member of the Community Development Venture
Capital Alliance (CDVCA), in strong support of your leadership regarding the Administration's
New Markets Venture Capital legislative proposal. I appreciate your positive public remarks
concerning New Markets, including at your Committee's recent ``roundtable." It is my
understanding that you plan to introduce the administration's proposal soon, and I will be
extremely pleased and proud to have you as our leading advocate in the Senate. CDVCA has
worked closely with the Small Business Administration as they have drafted their proposal, and I
have enjoyed working with Patty Forbes of your Small Business Committee staff, as well.
As you know, a New Markets Venture Capital program would help to direct private,
equity financing to small, high- potential growth firms in economically distressed urban and rural
areas. As the nation's leading practitioners of community development venture capitalism, the
Alliance and its member organizations have begun to establish a strong record of effectively
promoting such investment through what we call social entrepreneurship--equity investing with a
double bottom-line" mission of creating jobs and wealth among economically disadvantaged
populations.
CDVCA strongly supported the Senate's action last year in passing community
development venture capital `capacity- building" legislation. Unfortunately, that effort, initiated
by Senator Wellstone, did not pass in the House before the end of the last Congress. We continue
to believe that capacity-building assistance for the community development venture capital field
would be crucial to the success of a New Markets program at SBA We urge you to consider
adding a provision to incorporate this capacity-building, or "Wellstone," concept into any bill
you might introduce.
CDVCA also believes that a New Markets Venture Capital program could be more
workably and effectively targeted if the Administration's discussion draft were modified.
CDVCA's member-organizations all have a primary mission of serving low-income people.
Indeed, we would prefer that such a mission be a requirement for eligibility for applicants to
become New Markets Venture Capital companies in the bill. However, even as our organizations
pursue that mission, none of our member-funds restricts itself to investing within geographical
bounds as narrow as those suggested by the Administration. Serious pockets of poverty exist
outside the census tracts which are the primary basis for that Administration proposal's
geographical targeting. We have provided your staff with suggestions for amending that
provision, and we would appreciate it if you could consider such changes before introducing a
bill.
We strongly support the Administration's proposal, and we are especially hopeful
regarding its prospects for enactment following the President's important recent tour of low-
income urban and rural communities. I look forward to continuing to work with you and your
office, and I hope you will feel free to contact me or Bob Rapoza, who represents our Alliance in
Washington, should you have any questions. Bob's number is 292-393-5225.
Thank you for your attention to this issue. I hope to be discussing it further with you in
the very near future.
Sincerely,
Elyse D. Cherry, President
Boston Community Venture Fund.
Sep.
1999
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GENERAL COUNSEL SBA
No. 9706
P.
6
September 15, 1999.
Dear Members of Congress:
We urge you to support the President's proposal for a "New Markets Venture Capital
Companies" program to be administered by the Small Business Administration. The program
would help establish 10-20 new venture capital investment funds with a mission of creating good
jobs and new businesses in economically distressed communities across America
The remarkable prosperity now enjoyed by much of the country unfortunately is leaving
large numbers of Americans behind. One reason is lack in many urban and rural communities of
the needed equity capital and technical assistance which are key to starting and expanding new
businesses.
An emerging industry of community development venture capitalists is addressing this
need. Committed to a "double bottom-line" of rigorously promoting profit-making growth
companies while also creating large numbers of good jobs in low-income communities, these
funds have demonstrated impressive results. The same model of business development that has
driven economic expansion in the Silicon Valley and Route 128 in Massachusetts, coupled with
a focus on poor communities and job creation, is beginning to make a powerful difference in
areas such as rural Appalachia, Minnesota's Iron Range, inner-city Baltimore, Boston and
elsewhere.
We need to build on the success of this grassroots model to help ensure that all of
America's communities have a chance to participate in current growth. A modest public
investment, leveraging significant private capital, would yield tremendous national benefits.
The Administration's proposal is contained in the President's FY 2000 budget request.
Bills to be introduced by Senator John Kerry and Representative Nydia Velazquez, the Ranking
Members of their respective Small Business Committees, faithfully embody the same concept.
We are very hopeful that this idea, grounded in local self-help principles and targeted to where it
is most needed, can be enacted as a bipartisan legislative accomplishment.
A New Markets Venture Capital program would allow participating funds to issue SBA-
guaranteed debentures for urgently needed equity capital and to receive matching technical
assistance grants to allow the intensive, hands-on management and direction which is key to the
success of community development venture capital. A $45-million Federal investment would
match other sources on a dollar-for-dollar basis and be directed over 10 years to generate
hundreds of millions of dollars in economic activity.
All this would take place in communities that currently have the most trouble attracting
private investment, despite numerous potential business opportunities with good returns and
outstanding social benefits. Participation would be on a competitive basis and geared toward
funds with a combination of a strong financial track record and a mission of community
development. The program would be community-based to meet the specific needs of each area in
which it operates.
Community development venture capital funds are proving that the tools of venture
capital can fuel business creation and expansion, create good jobs and improve the lives of
people in low-income communities. We hope you can give a boost to this extremely promising
new tool for genuine economic development by supporting and passing New Markets Venture
Capital legislation this year.
Sincerely,
Sre p. 1999 4:57PM
GENERAL COUNSEL SBA
No. 9706 P.7
African-American Venture Capital Fund, LLC, Louisville, KY
Alternatives Federal Credit Union, Ithaca, NY
Appalachian Center for Economic Networks, Athens, OH
Arkansas Enterprise Group, Arkadelphia, AR
Association for Enterprise Opportunity, Chicago, IL
Banc of America SBIC Corporation, Charlotte, NC
Bank One, Chicago, IL
Boston Community Capital, Boston, MA
Carras Community Investment, Inc, Fort Lauderdale, FL
Cascadia Revolving Fund, Seattle, WA
CDFI Coalition, Philadelphia, PA
CEI Ventures, Inc, Portland, ME
Center for Community Self-Help, Durham, NC
Commons Capital, Nantucket, MA
Community Loan Fund of Southwestern Pennsylvania, Inc, Pittsburgh, PA
Development Corporation of Austin, Austin, MN
DVCRF Ventures, Philadelphia, PA
Enterprise Corporation of the Delta, Jackson, MS
Enterprise Foundation, Columbia, MD
First Nations Development Institute, Fredericksburg, VA
Gulf South Capital, Inc, Jackson, MS
Illinois Facilities Fund, Chicago, IL
Impact Seven, Inc, Almena, WI
Intrust USA, Wilmington, DE
J.P. Morgan Community Development Corporation, New York, NY
Kentucky Highlands Investment Corporation, London, KY
Karen H. Lightman, Senior Policy Associate, Carnegie Mellon University Center for
Economic Development, Pittsburgh, PA
Local Economic Assistance Program, Inc, Oakland, CA
LEAP, Inc, Brooklyn, NY
Millennium Fund, LLC, Seattle, WA
Minnesota Investment Network Corporation, Minneapolis MN
Mountain Ventures, Inc, London, KY
MSBDF A Management Group, Inc, Baltimore, MD
National Association of Affordable Housing Lenders, Washington, DC
National Community Capital Association, Philadelphia, PA
National Congress for Community Economic Development, Washington, DC
National Cooperative Bank Development Corporation, Washington, DC
National Council of LaRaza, Washington, DC
New York City Investment Fund, New York, NY
New York Community Investment Company L.L.C. New York, NY
Northern Community Investment Corporation, St. Johnsbury, VT
Northern Initiatives, Marquette, MI
Northeast Ventures Corporation, Duluth, MN
Pioneer Human Services, Seattle, WA
Resources for Human Development, Philadelphia, PA
Sep.
1.
1999
4:58PM
GENERAL COUNSEL SBA
No. 9706 P.8
The Roberts Enterprise Development Fund, San Francisco, CA
Rural Development & Finance Corp, San Antonio, TX
[[Page S11057]]
Silicon Valley Community Ventures, San Francisco, CA
Southern Development Bank, Arkadelphia, AR
Southern Tier West Regional Planning and Development Board, Salamanca, NY
Sustainable Jobs Fund, Durham, NC
Woodstock Institute, Chicago, IL
Vermont Community Loan Fund, Inc, Montpelier, VT
Virgin Islands Capital Resources, Inc, St. Thomas, USVI
Northeast Ventures
Duluth, MN
September 16, 1999
Senator John F. Kerry
Small Business Committee/Democratic Staff
Washington, DC
Dear Senator Kerry:
I am writing in support of the New Markets Venture Capital bill, which I understand you
are introducing today. I serve as chair and chief executive officer of Northeast Ventures, a $12
million community development venture capital firm investing in northeastern Minnesota, a
restructured iron mining area of the country. Over the last ten years, we have invested almost $10
million in 21 growth companies which would not exist but for the presence of our equity capital
We apply market disciplines along side a frankly stated social purpose of intervening in this
distressed area.
I also serve as chair of the Community Development Venture Capital Alliance, a national
alliance of community development venture capital funds. We have 40 funds throughout the
United States and eastern Europe. All these funds have a mission of poverty alleviation through
the disciplined use of venture capital in distressed areas and among distressed populations.
The New Markets Venture Capital legislation has the potential of providing significant
additional funding and catalyzing the creation of a significant number of new funds for this
important purpose.
We thank you very much for your support. Nothing could be more important than job and
wealth creation in the most distressed urban and rural areas of our country.
Respectfully submitted,
Nick Smith, Chairman
4:58PM
GENERAL COUNSEL SBA
No. 9706
F.
Mr. SARBANES. Mr. President, we have spent a lot of time in the Senate praising the
booming American economy and low unemployment rates. I, like the rest of the colleagues, am
proud to see our country benefitting from such prosperity, but all Americans are not participating
in these benefits.
In reality, Americans that live in low income areas, either in cities or rural areas, are not
experiencing today's prosperity. This is largely because they do not have the economic
infrastructure in their communities to take advantage of it. Poor communities frequently lack
local businesses to employ residents and provide services, creating no point of entrance for
participation in the larger American economy.
It is for these reasons that I am co-sponsoring the Community Development and Venture
Capital Act of 1999 introduced by Senator Kerry. This legislation is part of President Clinton's
New market Initiatives Proposal. As my colleagues know, I have already introduced America's
Private Investment Companies Act of 1999, or APIC, which is another part of the New Market
initiative.
The Community Development and Venture Capital Act makes a three pronged effort to
infuse capital into distressed communities, and establish small businesses in our nations most
needy neighborhoods. First, the bill will use federal money to leverage private funding for
venture capital companies with a commitment to community development, referred to as New
market Venture Capital Companies (NMVC). This will help to nurture new businesses in poor
areas. The companies funding by this bill will function much like the successful SBIC program
that the Small Business Administration sponsors, but will focus on businesses in targeted
neighborhoods that need more patient, long term capital funding, and added technical assistance
to ensure success
Furthermore, the bill will increase the number of community development venture capital
funds so that more communities can be served by the program and expand the successful
business mentoring program, BusinessLINC, already in place.
I have long argued that the best social policy is a job. This legislation, combined with the
APIC bill and the New Markets Tax Credit introduced by Senator Rockefeller, will be a catalyst
to the creation of new businesses and the jobs and economic opportunities they bring in those
areas most in need.
THE COMMUNITY DEVELOPMENT AND VENTURE CAPITAL ACT OF 1999
Mr. WELLSTONE. Mr. President, I speak today in support of the Community Development and
Venture Capital Act of 1999 introduced today by Senator Kerry. I am proud to be an original
cosponsor of this measure which, if enacted, will make a real difference in the growth of small
business, and the creation of quality jobs, in underdeveloped areas around the country.
I think the critical issue in communities which experience enduring poverty is job
creation through promotion of business opportunities and entrepreneurship. This has been my
experience when I have traveled to places like rural Appalachia, inner city Minneapolis or
Chicago or the Iron Range in Minnesota. I also believe that an area can be made as pro-business
as possible though tax policies and zoning ordinances, but at some point businesses simply need
capital so that they can grow and create good jobs.
No business can grow without infusions of capital for equipment purchases, to conduct
research, to expand capacity, or to build infrastructure. At some point all successful ventures
1999
4:58PM
GENERAL COUNSEL SBA
No.
9706
F.
10
outgrow incubation in the entrepreneur's garage or living room; additional staff must be hired
and the complexity of managing supply and demand increases. Yet it is clear that throughout the
country there are small business owners who are being starved of the capital necessary to take
this step. They have viable businesses or ideas for businesses but cannot fully transform their
aspirations into reality because of this financial roadblock.
Businesses can secure capital through loans, but there is a limit to the amount of debt that
a business can safely carry and lenders are wary of businesses with low equity. Equity
investment also differs from lending in that the equity investor acquires an ownership stake in
the business. The fortunes of the investor rise and fall with the success of the venture. This
means making an equity investment is riskier than making a loan, and it also means that the
investor has a greater vested interest in promoting healthy growth. Investment of equity capital
into an enterprise has a multiplier effect in that it allows the business owner to access necessary
credit.
Traditional venture capital firms are not meeting the need for equity capital in
disadvantaged communities. In addition, the Small Business Administration's Small Business
Investment Companies program--with a few exceptions--has not reached into the most
economically backward communities in the country. Such investments are risky in the best of
circumstances, but they can and do succeed with adequate time and attention. These
communities need patient investors who are willing to work closely with small business owners
to realize a financial return over the long term. Often, the investments needed are smaller than
those made by traditional sources.
There is no question that the lack of access to equity capital in disadvantaged areas
around the country is a prime reason why those communities have been left behind by the
historic economic expansion that the rest of the nation has enjoyed. But there are success stories
in many states which I
[[Page S11064]]
believe that we can emulate and build on to allow distressed communities to reach their full
potential.
Throughout America, organizations known as Community Development Venture Capital
funds are making these kinds of equity investments in communities and are producing excellent
results. CDVC funds make equity investments in small businesses for two purposes: to reap a
financial return to the fund, and to generate a social benefit for the community through creation
of well paying jobs. This ``double bottom line" is what makes CDVC funds unique. There are
around 40 CDVC funds currently operating throughout the country, in both rural and urban
areas. These funds are demonstrating the success of socially conscious investment and
entrepreneurial solutions to social and economic problems.
My own state of Minnesota is home to a good example of a seasoned, and successful
CDVC fund: Northeast Ventures Corporation of Duluth. NEV serves a seven country rural area
and focuses on creating good jobs in high value-added industries. NEV targets 50% of the jobs
created through investments to women, and to low-income and structurally unemployed persons.
In 1990 a group a entrepreneurs approached Northeast Ventures about setting up a car
wash equipment manufacturing facility in Tower, a town of 508 people, in one of the poorest
parts of northeastern Minnesota. While NEV thought that the market opportunity was attractive,
Sep. 11. 1999 4:59PM GENERAL COUNSEL SBA
No. 9706 P. 11
the company, called Powerain, had an incomplete business plan and lacked a Chief Operating
Officer. NEV also felt that the business provided a good opportunity to create jobs and bring
some economic vitality to an area that needed it badly.
Other assistance was needed before NEV could provide financing for the effort.
Northeast worked closely with Powerain's founders to revise the business plan and identify a
strong CEO candidate for the company. Northeast also invested $200,000 in equity into the
business.
NEV staff conducted the strategic planning sessions of Powerain and continue to be
essential in developing the company's strategic plan. They assist in identifying the need for key
personnel; recruit the necessary staff, and are integral in qualifying the short list of candidates.
Over a multi-year period, NEV has talked daily with the Powerain CEO regarding subjects as
diverse as sales, distributor relationships and the financial structure of loans. Over an eight year
period, NEV has assisted Powerain in all subsequent rounds of financing totaling $826,932
Powerain had a record sales year in 1998 and is expecting another record year in 1999.
The company currently employs 20 full-time people, and expects to increase that number
significantly in the future. The company provides ongoing training to its staff and entry level
positions begin at $8 an hour-with full benefits. Most employees earn well in excess of $10 per
hour.
The Community Development and Venture Capital Act of 1999 is designed to build on
the successful CDVC model by promoting equity investment in economically distressed
communities. The first title of this legislation would create the New Market Venture Capital
Companies Program, a new program within SBA that will fund at least ten venture capital
companies dedicated to new markets--low- and moderate-income communities. $15 million in
annual appropriations would support a $100 million program level for SBA-guaranteed
debentures, and $30 million in matching technical assistance grants.
Title II of the bill basically consists of legislation I introduced last year, and again this
year, entitled the Community Development Venture Capital Assistance Act. Last year, the
Senate passed this legislation as part of a SBA technical amendments bill. This title is intended
to build the capacity of the existing CDVC industry through technical assistance and SBA grants
to colleges, universities, and other firms or organizations--public or private--to create and operate
training programs, intern programs, a national conference, and academic research and study
dealing with community development venture capital.
Title III would build on the BusinessLINC grant program which is a public-private
partnership that the SBA and Department of Treasury launched last June It encourages larger
businesses to mentor smaller businesses, promoting the viability of small businesses located in
disadvantaged areas.
I think this legislation speaks to the heart of reversing persistent poverty in America by
promoting entrepreneurship, and encouraging responsible equity investment. The small business
growth sparked by this legislation would in turn create jobs and wealth in those communities
which have heretofore been overlooked. It is an absolutely essential addition to the SBA's current
program offerings and I urge my colleagues to support it.
Tablett
July 22, 1999
New Markets Tax Credit Issues
The New Markets Tax Credit (NMTC) is an extremely promising concept, but experience
with low-income community development investments over the last dozen years instructs
that refinements to the draft legislation are necessary for successful implementation. All
section and page references are to the Rangel draft bill.
Term of Credit -- Sec 45D(a)(2) - p. 2. As currently drafted, the NMTC is too modest
an incentive to make a decisive difference in the feasibility of economic development
investments in distressed urban and rural communities. The credit base, term, and
percent are all much smaller than those for the Low Income Housing Credit, and (unlike
the Housing Credit) the investor's basis is reduced by the NMTC amount. Moreover,
investors perceive economic development as far riskier than housing. A longer credit
period would increase the power of the Credit to attract the long-term low-cost capital
that economic development requires. Recommendation: The credit period should be
expanded to permit up to 10 years of credits.
Bridge Financing Precluded - Sec. 45D(b)(1) - p. 3. An important and common
practice in the Low Income Housing Tax Credit is for investors to pay a portion of their
investment up front and sign promissory notes to pay the remainder over several years.
The investment underwriter then obtains a commercial "bridge loan" by assigning these
promissory notes to the bridge lender. This structure enables investment underwriters to
increase the efficiency of the tax incentive, maximize the funds available for immediate
investment, and provide a market yield to investors. There is no potential for abuse
because the cash proceeds of the bridge loan are used to fund the housing. The same
technique should be available in connection with the NMTC. However, Sec. 45(b)(1)(A)
appears to preclude this technique by requiring that a qualified investment be acquired
"solely in exchange for cash". Recommendation: Change this language to "solely in
exchange for cash or an unconditional commitment to pay cash.." " In Sec. 45D(b)(1)(B),
the word "cash" should similarly be changed. The requirement that the funds must be
invested in qualified activities is sufficient to prevent any abuse.
Investment-Related Costs - Sec. 45D(d) - p. 6. Community development entities
("CDEs") will need to retain a reasonable portion of the investment proceeds for cash
flow and loss mitigation reserves and to pay reasonable salary and other overhead costs.
Investors will reasonably require that funds to cover such investment related costs be set
aside in order to assure prudent management over the entire investment period. It is
critical that such funds not be excluded from the credit base or, worse still, that an
investment is disqualified because the requirement at Sec. 45D(b)(1)(B) that
"substantially all" of the investment is used to make qualified investments cannot be met.
Recommendation: The term "qualified low-income community investments" [Sec.
45D(d)] should include funds held for reserves or management expenses in connection
with any other such investment under subparagraphs (A), (B), (C), or (D).
2
Participation of Limited Liability Companies - Sec. 45D(b)(6)(B) -- p. 4. Limited
liability companies are neither corporations nor partnerships, but should be included as
eligible investment vehicles. Recommendation: The term "equity investment" should be
amended to include "any capital interest in a qualified community development entity
which is a partnership or limited liability company.
Entities Controlled by Qualified CDEs - Sec 45D(b)(3) - p. 4. and (c) - p. 5. Nonprofit
CDEs cannot directly accept investments or use the tax credits. As such, nonprofit CDEs
will generally set up entities they control (such as partnerships or LLCs) that can accept
and manage investments and pass the tax credit through to the investors. However, the
bill does not explicitly accommodate this approach. For example, it appears that the
investment vehicle, and not the nonprofit that creates and controls it, would have to be
certified as a CDE, which includes maintaining community accountability, and apply for
the tax credits. Similarly, depending on the situation, it may be appropriate for the safe
harbor for use of funds [Sec. 45D(b)(3)] to apply either to the nonprofit parent or the
investment entity established to raise and manage NMTC investments.
Recommendations: (1) In Sec 45D(c), a CDE should be permitted to establish an
investment entity it controls, such as a partnership or LLC, to accept and manage
investments. (2) In Sec. 45D(b)(3), the safe harbor should apply to the qualified CDE
"or, at its election, an investment entity it controls".
Direct Development by CDEs - Sec. 45D(d) - p. 6. We understand that the NMTC is
intended, among other things, to help CDEs develop and rent real property (except for
rental housing). However, it does not appear that the bill accommodates this direct
development role. Instead, the bill appears to accommodate only the investment by a
CDE in an unrelated business, e.g., an unrelated real estate developer. Recommendation:
The subsection on qualified low-income community investments should be clarified to
permit CDEs to undertake direct development activities or business operations to the
extent they would be permissible for unrelated qualified active low-income community
businesses to undertake.
Preference for Experienced CDEs - Sec. 45D(f)(2) - p. 10. While an allocation
preference for experienced CDEs may be appropriate, the bill limits the preference to
business assistance experience. The NMTC is designed to stimulate both business
assistance and real estate development, and many CDEs have real estate development
experience in disadvantaged communities. The allocation preference should not favor
business assistance over real estate development. Recommendation: The preference
packs
should go to CDEs with successful records of assisting "disadvantaged businesses or
communities."
Recapture Events - Sec. 45D(g)(3) - p. 12. The bill makes investors subject to
recapture of the tax credits for actions outside their control. Only the CDE itself, and not
the investors, can affect whether it ceases to be a qualified CDE and how the investment
proceeds are used. Moreover, funds might continue to serve their intended purpose even
if the CDE itself fails to maintain certification or even goes out of business. If such
3
noncompliance can trigger recapture, the result will be to discourage many investors from
investing and drive up the rates of return that other investors require to offset the risk of
recapture. Recommendation: The bill should delete subparagraphs (A) and (B) and
authorize the Secretary to take appropriate actions directly against a CDE that ceases to
be a qualified CDE or ceases to use funds as required.
Basis Reduction - Sec. 45D(h) - p.13. The bill would reduce an investor's basis by the
amount of the tax credit claimed. This will reduce the power of the NMTC as an
investment incentive. The NMTC is already quite modest in size, and should be
effectively diminished. The Low Income Housing Tax Credit does not reduce the
investor's basis. Similarly, a noncorporate taxpayer can exclude 50 percent of any gain
from the sale of exchange of qualified small business stock held for more than five years
(Code Section 1202(a)). Recommendation: Delete subsection (h). Alternatively, phase
out the basis reduction for investments held longer than five years, e.g., so that it phases
out entirely by the end of ten years.
Other Federal Subsidies - Sec. 45d(i)(1) - p. 13. The bill authorizes the Secretary to
limit the credit for investments, which are directly or indirectly subsidized by other
Federal benefits. While we appreciate the desire to prevent "excessive" subsidy, we do
not believe that reasonable regulations are possible. The presence of other subsidies
plays only a modest role in whether an investment is "excessively" profitable. First, it
will be impossible to determine with any precision just what would be a reasonable rate
of return - and, hence, whether and what other subsidy will be appropriate. The answer
will ultimately be determined by the market place. The nature of the specific investment
will determine what types and amounts of other subsidies are appropriate. It is possible
for a low-risk investment with no other subsidy to be "excessively profitable". It is
equally possible for a high-risk investment with substantial other subsidies to generate the
same rate of return and not be "excessively profitable." Second, the number of subsidies
may less important than the total amount. Third, some activities may require additional
subsidies to generate a target yield, and some high public benefit activities may require
(and merit) greater subsidy. Fourth, CDEs must have the flexibility to assemble
portfolios of investments, some of which may yield different rates of return and different
subsidy mixes. Fifth, a prudent portfolio manager will plan for the likelihood that not
every investment will perform as projected, and therefor project a higher yield than is
promised to investors. Sixth, the market's acceptance may change over time; market
yields on Housing Credit investments have dropped dramatically over the past several
years. Finally, there are several ways of measuring rates of return, depending on the
needs of the investor and the structure of the investment itself. In sum, it would be
fruitless to attempt to regulate this matter. The result will only be to complicate further
the already formidable challenge of low-income community economic development.
Recommendation: This provision should be deleted.
Section 183 Applicability - not addressed in bill. It is important to set explicit policy
that Section 183 (prohibiting the deduction of losses in connection with "hobbies" and
other activities not engaged for profit) will not apply to NMTC investments. In the past
there has been enormous confusion and disruption with respect to the applicability of
4
Section 183 to investments in connection with Low Income Housing Tax Credits and
other targeted tax credits. It was ultimately decided not to apply Section 183 to Housing
Credit investments because the Housing Credit's purpose is to stimulate investments that
would otherwise be uneconomic. The same policy should apply to the NMTC.
Recommendation: The bill should include language similar to Housing Credit
regulations (Reg. 1.142-4), which states,
"
section 183 does not apply to disallow
losses, deductions, or credits attributable to the ownership and operation of the [section
42] building."
Central Business Districts - not addressed in the bill. In many cases, the central
business district of major cities will be eligible for NMTC investments since, though they
are primarily not residential areas, their few residents may well have low incomes. These
central business districts are typically healthy, and sometimes thriving, regional business
centers. They are generally not the distressed neighborhoods or isolated rural areas for
which the NMTC is intended. Recommendation: The Secretary should be directed to
identify central business districts where investments will not be eligible for NMTCs.
CONGRESS
NATIONAL
FOR
COMMUNITY
NATIONAL CONGRESS FOR COMMUNITY ECONOMIC DEVELOPMENT
NCCED
1030 15th Street, NW, Suite 325, Washington, DC 20005
DEVELOPMENT
Tel: 202/234-5009
Toll Free: 1-877-44-NCCED
http://www.ncced.org
Fax: 202/234-4510
ECONOMIC
1998/99
BOARD OF DIRECTORS
ABDUL Sm RASHEED
October 6. 1999
Chairman
Raleigh, North Carolina
MARVA SMITH LE-BEY
Vice Chairperson
Los Angeles, California
Lisa Green
JON COLVIN
Treasurer
Senior Advisor
Chinle. Navaho Nation
National Economic Council
SYLVESTER HOLMES
The White House
Assistant Treasurer
Kansas City. Missouri
1600 Pennsylvania Avenue, NW
DAN HORVATH
Washington, D.C. 20050
Secretary
Pensacola, Florida
PAULA PEEBLES
Re:
Comments on the New Market Tax Credit Initiatives
Assistant Secretary
Philadelphia, Pennsylvania
Dear
Ms
Green:
MARY NELSON
fisa:
Past Charperson
Chicago, Illinois
Thank you for attending the National Neighborhood Coalition's September Forum to
LEE BEAULAC
Rochester New York
discuss the President's New Markets Initiatives. The National Congress for Community
LYNNE CUNNINGHAM
Development (NCCED) helped put this forum together as part of our work as the nation's
Chicago. Illinois
trade association for community-based nonprofit development organizations. NCCED
JOYCE DICKENS
recognizes the enormous economic potential in America's low-income inner city and
Rocky Mount. North Carolina
rural communities. We are hopeful that New Markets Tax Credit legislation and related
MARC DRAISEN
Boston, Massachusetts
proposals can enable business growth and community empowerment in these untapped
RICK DYSON
and underserved markets.
Houston, Texas
GILBERT GRUALVA
We appreciated your willingness to discuss these issues with nonprofit community
Calexico, California
groups and their representative associations. We believe that community involvement
KEMO JABBAR-BEY
Wilmington, Delaware
and the wisdom of community organizations will ensure that the President's commitment
ROY KENNIX
to low-income communities results in legislation that impacts targeted communities.
Fort Myers, Florida
RALPH LIPPMAN
We were also pleased to hear you state that the New Markets Initiative will not replace
Los Angeles, California
the Administration's commitments to affordable housing, community reinvestment, or
DONALD MAXWELL
Kansas City Missouri
Enterprise Zone/ Empowerment Communities, or reduce any resources from existing
ROBERT MOORE
programs.
Washington, DC
RONALD PHILLIPS
At the meeting, you requested sites to highlight the investment potential in new markets
Wiscasset. Maine
as part of President Clinton's tour in November. As we work with the nation's 3,600
DAPHINE SLOAN
Chattanooga, Tennessee
CDCs, we would be able to make recommendations in any community in the country.
ANDRE STEPHENS
Some options could include: Bethel New Life in Chicago, IL; Appalachian Center for
Little Rock, Arkansas
Entrepreneurial Networks in Athens, OH; PPEP in Tucson, AZ; Greater Germantown and
LEONARD TELLER
Navajo, New Mexico
Allegheny West in Philadelphia, PA; Neighborhood Housing Services in Fort Wayne,
IN: Sacramento, CA; Saint Paul and Minneapolis, MN; Portland, OR; and the southern
PAMELA MARTIN TURNER
Deboit. Michigan
rural communities that joined together as part of a nine-state empowerment zone process.
J. CARNELL WALLACE
Kansas City, Missour
DEE WALSH
Portland, Oregon
PRESIDENT AND CEO
ROY (). PRIEST
NCCED believes that a few changes to the current legislation would increase the
likelihood of a successful program: technical assistance, population and place, longer-
terms, and a process for community involvement.
First, we recommend including a technical assistance component for the NMTC program.
NCCED staff are some of the most knowledgeable about community revitalization tax
credit programs in the country. We have learned that tax credits require a new mindset
for both community groups and their corporate partners. Some training and technical
assistance are both required to make these partnerships workable.
Second, we prefer the Senate bill that includes low-income segments of the population as
eligible entities. We prefer this to the House version that only includes low-income
census tracts.
Third, it is also important to note that a longer term for the credit may prove very
important in promoting economic growth in low income communities. It is likely that the
credit will be used in at least two important ways: real estate development and
community development venture capital. For example, resources from the credit may
used to finance a share of a grocery, day care facility or industrial building. Experience
has shown that such projects need financing of ten years or longer. Similarly, working
with someone with a good idea, starting a business from the ground up, will take a longer
time. The Senate bill makes strides in this regard by setting the term of the credit at
seven years. It is our recommendation that the term be set at ten years.
Finally, we encourage you to consider a long-term process for increasing the involvement
of community groups in the organizing and implementing of this exciting new project.
NCCED and our members want the New Market Initiatives to be an asset-building
approach for community residents, not a dislocation strategy. In short, we do not want
the aftermath of a New Markets Initiative to be the replacement of Uncle Willie's
Barbecue with a Starbucks Coffee shop.
Thank you again for your hard work in ensuring that the nation's prosperity extends to all
American communities.
Sincerely,
Gayd Print
Roy O. Priest
President and CEO