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Regulatory Proposals SBIA Has Commented On

SBA Request for Comment on Changes to Limited Partnership Agreement

Small Business Administration: Request for Comment, Available Here

Comment Letter Submitted by SBIA to the SBA on June 23, 2014: Available Here

On April 22, 2014, the SBA issued a notice requesting comments on the SBA Model Form of Agreement of Limited Partnership for an SBIC Issuing Debentures Only.  SBIA submitted the comment letter above with suggested changes to the agreement.

SBIA SEC Private Equity Examination Compliance Update

On May 6, 2014, Andrew J. Bowden, the Director of the Office of Compliance Inspections and Examination of the Securities & Exchange Commission, gave a speech at Private Equity International highlighting the concerns the SEC has seen in their examinations of private equity funds since the registration requirement was instituted under the Dodd Frank Act.  SBIA has composed a comprehensive outline and summary of the concerns highlighted by Director Bowden to help prepare our members for what to expect from SEC examinations.

The Compliance Update can be viewed here

SBIA Efforts on Acquired Fund Fee & Expense (AFFE) Issue for Business Development Companies & Removal of BDCs from S&P and Russell Indices

On April 14, 2014, SBIA staff organized a meeting with the Division of Investment Management, including Deputy Chief Counsel Elizabeth Osterman at the SEC to discuss the imminent removal of all Business Development Companies (BDCs) including a large number of SBIA members, from the S&P 500 and Russell 2000 indices.  The reason for the removal from these indices, as indicated by S&P and Russell is the result of reporting requirements under the Acquired Fund Fee & Expense (AFFE) rule.  These reporting requirements distort the expense ratios of index tracking mutual funds, making investors appear to be paying a higher number of expenses to own these mutual funds.  SBIA organized the meeting with the SEC to encourage them to take action on this important issue, which could result in a significant loss in institutional investor holdings and oversight of BDCs. Attending the meeting to represent SBIA were SBIA members Main Street Capital (MAIN), Triangle Capital Corporation (TCAP) and the Sutherland law firm.  The SEC was receptive to the issue and the impact it would have on investors and we are hopeful for a positive resolution and action by the SEC.

On June 3, 2014, SBIA sent a follow-up letter to the SEC on the AFFE issue to address concerns raised in the meeting regarding the differences between BDCs and Closed End Funds and further justification for the SEC to grant relief on this issue.  We intend to continue to pursue this issue and encourage action by the Commission or in Congress. 

The follow up letter to the SEC on June 3, 2014 is: Available Here.

SBA Request for Comment on Proposed Changes to Form 1031 and Form 468

Small Business Administration:

Proposed Changes to Form 468- Available Here
Proposed Changes to Form 1031 - Available Here

Comment Letter Submitted by SBIA to the SBA on April 28, 2014 - Available Here

Comments are due on April 28, 2014.

On March 27, 2014, the SBA released changes to form 468 and Form 1031.  We would like to see if you have any feedback that we can add to our comment letter. The following changes are outlined below. 

Form 468: SBIC Financial Reports:

  • Deletion of Part IIa (Schedule of Regulatory & Leverage Capital): Deletion of Part IIa from Forms 468.2 (annual) and 468.3 (quarterly) for partnerships, and deletion of lines 14 and 15 of Part IIa from Forms 468.1 (annual) and 468.4 (quarterly) for corporations.
  • Schedule 1 Changes (Loans & Investments): Removes portfolio company information designated as “unaudited” and moves it to a separate schedule that will be designated as “unaudited” in its entirety.  This new schedule will be called Schedule 8.  The goal is to lower audit costs for SBICS which were caused by the mixing of “audited” and “unaudited” information in the Schedule.
  • Creation of New Schedule 8 (Unaudited Portfolio Company Information):  As indicated above, a new Schedule 8 will be created with existing information provided in Schedule 1.  However, some of the information required in Schedule 1 currently will be changed in the following way:
    • Removal of “rounds of financing/waterfall” fields previously in Schedule 1:   Schedule 8 removes the Rounds of financing/waterfall fields and allows SBICs to upload a PDF copy of this information in any layout they have available.  Once information has been uploaded for a given portfolio company, SBIC will not need to submit unless there is a material change, such as a new round of financing.
    • Removal of fields applicable to portfolio companies in Office of Liquidation:   SBICs can upload a PDF copy of this information in any layout they have available.  The following fields will be removed: Negative covenants (ROFR/COA/Other); Board Rights (Whether the SBIC holds a Board seat, has board observation rights or appoints the Board Chairperson); and, Other Rights (Whether the SBIC has any of the following rights: Veto and Springing).
  • Annual Form 468.2 (Partnerships Only), Schedule 9 (Cumulative Investment Performance):  In Annual Form 468.2, which is completed by partnerships, current Schedule 5 will be renumbered as Schedule 9, so it will be grouped with other unaudited information.  This schedule will be designated as “unaudited” to reduce SBIC compliance costs. This information will be required only on a going-forward basis. This information will now only be required annually, rather than quarterly.  The schedule will apply only to partnership SBICs with issued leverage or  outstanding leverage commitments.

Form 1031: Portfolio Financing Report:

  • New data collection regarding SBIR/STTR programs: New Question 17b in Part B of Form 1031 will ask respondents to check a box to indicate that the reported financing is in a portfolio company with an underlying technology that received Small Business Innovation Research (SBIR) and the Small Business Technology Transfer (STTR) programs.


SEC Rules on Implementation of JOBS Act Section 401, Updating & Expanding Regulation A Offerings (Regulation A+)

Securities & Exchange Commission Proposed Rules

Comment Letter Submitted by SBIA to the SEC on March 24, 2014 - Available Here

Comments Are Due On March 24, 2014

SBIA is seeking general comments from members as well as specific comments.  Please contact Chris Hayes, SBIA's Legislative & Regulatory Counsel ( if you have any thoughts on this proposal.  The specific comments we are seeking are set out below:

1. Do Business Development Companies (BDCs) wish to be able to access the Regulation A exemption?

2. Should the SEC amend Regulation A to make BDCs eligible to rely on it? Why or why not? Would it raise particular concerns about investor protection? If so, please explain.

3.  Would extension of Regulation A issuer eligibility to BDCs be inconsistent with the exemption's current prohibition on use by reporting companies? If so, should we limit the extension of Regulation A issuer eligibility to only non-Exchange Act reporting BDCs? If not, should we permit BDC ongoing reporting under the Exchange Act to satisfy their reporting obligations under Regulation A?  If Regulation A eligibility were extended to BDCs, should other rules be amended to require additional disclosure about such issuers? If so, what specific additional disclosure should we require about BDCs?

The Proposed Rules Currently Do Not Contemplate Allowing Business Development Companies to Utilize Regulation A+.

Purpose - the SEC released their proposed rules to implement changes to Regulation A, which would increase the amount of capital that can be raised under the Regulation A exemption from $5 million annually to $50 million annually (this is called Regulation A+).  The current Regulation A exemption has been little used as a result of the low amount of capital that can be raised.  The SEC proposes two levels for Regulation A+: Tier 1 (up to $ 5 million) in any 12-month period, including up to $1.5 million for the account of selling securityholders) and Tier 2 ($50 million and 15$ million respectively).  Other benefits include:

- Eligible issuers under Tier 1 and Tier 2 can submit draft offering statements to the SEC on a non-public basis for review prior to filing;

- The rules would permit use of "test the waters" solicitation materials both before and after the filing of the offering statement;

- The rules would modernize the offering process, requiring electronic filing of offering materials and permitting issuers and intermediaries to satisfy prospectus delivery requirements under an "access equals deliver" model. 

- Tier 2 offerings would be limited to purchasing an amount of securities that do not exceed 10% of the greater of the investor's annual income or net worth;

- Tier 2 offerings would require that financial statements included in the offering circular would have to be audited;

- Tier 2 issuers would be required to file annual and semi-annual reports and current event updates that are similar to those of a public company

- State Securities Regulation would be preempted for Tier 2 offerings.


SEC M&A & Private Business Broker No-Action Letter:

On January 31, 2014, the Securities & Exchange Commission (SEC) released a no-action letter that allows M&A and private business brokers (M&A Broker) to be compensated for facilitating a transaction involving the transfer of ownership of a privately-held company without requiring broker-dealer registration under the Securities Exchange Act of 1934 ("No-Action Letter”). This No-Action Letter specifically sets out the guidelines by which any M&A Broker will receive safe harbor from registration requirements. One should keep in mind that a M&A Broker may be required to register or be licensed at the state level and will only be exempted from SEC registration requirements.

What is an M&A Broker?:

According to the No-Action Letter, an M&A Broker is:

"a person engaged in the business of effecting securities transactions solely in connection with the transfer of ownership and control of a privately held company through the purchase, sale, exchange, issuance, repurchase or redemption of, or a business combination involving, securities or assets of the company, to a buyer that will actively operate the company or the business conducted with the assets of the company. A buyer could actively operate the company through the power to elect executive officers and approve the annual budget or by service as an executive or other executive manager, among other things.”

What does the SEC consider a Privately-Held Company Under the No Action Letter?:

"A company that does not have any class of securities registered or required to be registered, with the Commission under Section 12 of the Exchange Act, or with respect to which the company files, or is required to file, periodic information, documents, or reports under Section 15(d) of the Exchange Act…[This] would be an operating company that is a going concern and not a ‘shell’ company.”

Activities an M&A Broker May Engage In Without Registering with the SEC as a Broker Dealer:

· Advertising: M&A Brokers may advertise a privately-held company for sale with information such as the description of the business, general location and price range.

· Valuation: M&A Brokers may assess the value of any securities being sold.

· Negotiations: M&A Brokers may participate in the negotiations surrounding an M&A Transaction.

· Advise Buyers & Sellers: M&A Brokers may advise the buyer and seller to issue securities and can effect the transfer of a qualifying company by means of securities.

· Financings:  M&A Brokers may assist buyers in obtaining financing from 3rd parties as long as they disclose to buyers any compensation they receive for these services [so long as they comply with applicable requirements under Regulation T (a regulation that governs the extension of credit by broker dealers)].

· Represent both Parties: M&A Brokers may represent both buyers and sellers, as long as they provide clear, written disclosure of the joint representation and obtain consent in writing.

M&A Broker Information & Guidelines:

· No Size Restrictions: There are no size restrictions on the privately-held companies in which an M&A Broker may facilitate a merger, acquisition, business sale or business combination ("M&A Transaction).

· Cannot Bind Parties: M&A Brokers may not bind a party to an M&A Transaction.

· Cannot Provide Financing: M&A Brokers may not, directly or indirectly through an affiliate, provide financing for an M&A Transaction.

· Cannot Have Custody of Funds or Securities: M&A Brokers cannot have custody, control or possession of, or otherwise handle funds or securities issues or exchanged in connection with an M&A Transaction or other securities transaction for the account of others.

· No Public Offering: The M&A Broker cannot engage in an M&A Transaction that will involve a public offering. Any offering or sale of securities must be conducted in compliance with an application registration exemption under the Securities Act of 1933.

· No Shell Companies: No party to an M&A Transaction can be a shell corporation, other than a business combination related shell company (defined under Rule 405 to the Securities Act of 1933)

· Group of Buyers Restrictions: M&A Brokers may facilitate a M&A Transaction with a group of buyers, only if that group is formed without the assistance of the M&A Broker.

· Control/Active Operation: The buyer or group of buyers in any M&A Transaction must control and actively operate the company or the business conducted with the assets of the business. This ability to control can be demonstrated by the buyer or group of buyers through certain tests set out by the SEC in the No Action Letter.

· No Passive Buyers: Any M&A Transaction facilitated by an M&A Broker must not result in the transfer of interests to a passive buyer or a group of passive buyers.

· Restricted Securities: Any securities received by the buyer or M&A Broker in an M&A Transaction will be restricted securities under Rule 144(a)(3).

· The M&A Broker Must Be Reputable: The M&A Broker must not have been barred from association with or suspended from association with a broker-dealer by the SEC, any state or self-regulatory organization.


SBA Double Holding Company Proposed Rule


Small Business Administration -  Proposed Rule 

Comments Submitted on January 21, 2014 - Available Here

Purpose - The SBA released their proposed rule to allow SBICs to structure an investment utilizing up to two passive small businesses as pass-through entities, as long as the investment proceeds pass through to one or more subsidiaries. Current rules allow the use of only one passive small business as a pass-through entity. The modification will help place SBICs on a closer to equal footing with their non-SBIC counterparts in which multiple holding company structures are common for tax and structural purposes. The SBIA supports the change 

Expected Future Action - The SBA will issue a final rule at some point in the future.  SBIA expects the final rule to be substantially similar to the proposed rule.


SEC Rule on Implementation of JOBS Act Allowing Private Funds to Advertise and Solicit for Fundraising

Proposed Rule on Amendments to Form D for General Solicitation and Advertising

SBIA Comments Submitted on September 23, 2013 Regarding Form D

Innovation Coalition Comments to the SEC on October 30

The SEC also issued proposed rules requiring any issuer to file Form D in Rule 506(c) offerings before the issuer engages in general solicitation and requires the filing of a closing amendment to Form D after the termination of any Rule 506 offering.

Proposed Rule on Verification of Accredited Investor Status

Final Rule on Verification of Accredited Investor Status

SBIA Comments Submitted on October 5, 2012 - Available Here

The SEC issued the proposed Rule on September 5th, 2012, to implement the provision in the JOBS Act to allow private funds to advertise and solicit to the public for fundraising purposes.  The Act states that Funds must verify the accredited investor status of its investors in order to be allowed to advertise or solicit to the general public.  SBIA commented to the SEC to take into consideration new administrative burdens on PE funds, particularly smaller funds, and asks for several safe harbors.

Expected Future Action:  Final Rules on verification of accreditation status went into effect on September 23, 2013.  Final Rules on Form D have not been finalized.


Volcker Rule Implementation

Financial Stability Oversight CouncilProposed Rule

Financial Stability Oversight Council - Final Rule

Comments Submitted on February 13, 2012 – Available Here

Purpose: The Federal Deposit Insurance Corporation ("FDIC”), the Board of Governors of the Federal Reserve System ("Board”), the Securities and Exchange Commission ("SEC”), and the Department of Treasury ("Treas.”) have issued their proposal for implementing the Volcker Rule, which sharply restricts the ability of banks to engage in proprietary investing in private equity funds. According to the proposed rule, banks can still invest in SBIC funds without restrictions.

Expected Future Action:
The four agencies overseeing the implementation of the Volcker Rule have not yet released a Final Rule.


Early-Stage Small Business Investment Companies

Small Business AdministrationProposed Rule

Comments Submitted on February 7, 2012 - Available Here

Purpose: The SBA has proposed the guidelines for a new type of Small Business Investment Company called an Early Stage SBIC. This type of SBIC is being created as a vehicle to access SBA leverage and make investments through the newly-formed SBIC Innovation Fund aimed at providing early-stage capital to companies that have not yet achieved positive cash-flows.


Exemption from SEC Registration for Private Funds with less than $150 Assets Under Management

Securities and Exchange Commission - Proposed Rule

Comments Submitted on January 24, 2011 - Available Here

Purpose: As required by Title IV of the Dodd-Frank Act – the Private Fund Investment Advisers Registration Act of 2010, for the purpose of being exempt from SEC registration requirements, the proposed rules would define "venture capital fund” as well as define elements related to the exemption for advisers with less than $150 million in private fund assets under management in the United States. The proposed rule would also clarify the meaning of certain terms included in a new exemption for foreign private advisers.

Expected Future Action: According to the Dodd-Frank Act, the provisions involving SEC registration requirements were effective on 7/21/2011.


Proposed Revisions to SBIC Reporting Form 468

Small Business Administration – Notice of Submission to Office of Management and Budget

Comments Submitted on February 3, 2011 - Available Here

Purpose: In order to ensure the collection of SBIC financial data that is most relevant to the SBA’s Investment Division while attempting to reduce redundancy, the SBA proposed various changes to reporting form 468.  SBIA commented and the SBA took into consideration many of our concerns and issues.

Frequently Asked Questions: The SBA has compiled a list of FAQs for the updated changes to the Form 468. Click here to access the FAQS. 


Study on Volcker Rule

Financial Stability Oversight Council- Notice and Request for Information

Comments Submitted on November 5, 2010 - Available Here

Purpose: Under Section 619, the Office of the Comptroller of the Currency ("OCC”), the Federal Deposit Insurance Corporation ("FDIC”), the Board of Governors of the Federal Reserve System ("Board”), the Securities and Exchange Commission ("SEC”) and the Commodity Futures Trading Commission ("CFTC”) must consider the recommendations of the FSOC study in developing and adopting regulations to implement the Volcker Rule. To assist the FSOC in conducting the study and formulating its recommendations, the FSOC is issuing this request for information through public comment.

Expected Future Action: The above-referenced study is available here. Agencies are required, not later than nine months after the completion of this study (completion date was January, 2011), to adopt rules to implement the Volcker Rule and must consider the recommendations of the Council in developing and adopting such regulations (The Proposed Rule was released in October 2011 and Alliance commented on it, as seen above).

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