SBIA Update: April 10, 2020
SBIA Update is a way to stay up-to-date on the latest industry news, SBIA member information, and policies that impact the lower middle market. Below are a few articles featured in this edition of SBIA Update. For the full news update, please refer to the SBIA Update email in your inbox.
If you want to receive the SBIA Update, please sign up.
Legislative & Regulatory Update
Emergency Economic Efforts: Latest Updates
- The Emergency Stabilization Fund, which includes a Main Street facility and other capital platforms, may provide resources to businesses that are not able to access the PPP.
- The Federal Reserve has released an initial term sheet on the Main Street Expanded Loan Facility. Download the term sheet >
- The Paycheck Protection Program (PPP) — which includes $349 billion in funding for forgivable loans to small businesses and nonprofits — had received nearly 200,000 loan applications as of Tuesday.
- Lawmakers, including Senate Majority Leader Mitch McConnell, have said they plan to push for more funds. The Office of Management and Budget has requested an additional $251 billion for PPP loans.
- PPP loan applications for individuals who are sole proprietors, self-employed or independent contractors are live as of April 10, 2020.
- Treasury is working to broaden access to PPP loans by increasing the participation of online lenders, including PayPal. Find the non-bank lender application here >
- For BDCs, the Securities and Exchange Commission (SEC) issued an emergency order providing business development companies (BDCs) with temporary relief from certain provisions of the Investment Company Act (ICA).These exemptions “will provide additional flexibility for BDCs to issue and sell senior securities” and allow for participation in co-investment transactions. The SEC recognized that “many BDCs may face challenges absent these exemptions in providing capital to their affected portfolio companies.”
The SEC is undertaking operational initiatives, market-focused actions, and investor protection efforts in response to COVID-19 that will affect private equity and BDCs.
- SEC quick reference guide to actions taken for various market participants.
- SEC summary of operational initiatives, market-focused actions, guidance and targeted assistance and relief.
Additional regulatory, tax and programmatic measures will be necessary to address the economic impacts of the pandemic. SBIA is working with Congress and regulators to provide ideas and technical assistance for the next package.
SBIA will continue to update information on the implementation of these measures via emails to our members and via SBIA’s resources website.
Small Business Investor Tax Parity Act Introduced
Congress has introduced the Small Business Investor Tax Parity Act, bipartisan legislation to give fair and equitable treatment to shareholders in small and medium size American businesses. BDCs are operationally similar to S-Corp Banks and BDC retail shareholders have a profile similar to REIT retail shareholders. For this reason, income from BDC and REIT investments have historically been taxed in the same way as those entities. Sec. 199A of the Code generally allows taxpayers a deduction up to 20% of total qualified business income (“QBI”) from a domestic flow-through entity. This 20% deduction was extended to REITS, S-Corp Banks and most other pass-through entity shareholders, with the exception of RICs. This bill would ensure that BDC investors continue to receive the same tax treatment as similar entities.
SEC Takes Key Action for BDCs
On April 8, the Securities and Exchange Commission (SEC) held an open meeting to adopt rules pursuant to the Small Business Credit Availability Act and the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018. These rules include reforms to the registration, proxy process, and offering process for business development companies to bring them in line with requirements for other investment companies. A fact sheet summarizing the rules is available here. The SEC adopted the rules by a 3-1 vote with Chairman Clayton, Commissioner Roisman, and Commissioner Peirce voting in support. Commissioner Lee opposed the rulemaking. There were differences of opinion amongst the commissioners both on the substance of the rulemaking itself and also the timing.
SBIA Submits Comments to Federal Regulators on Community Reinvestment Act and Volcker Rule
The SBIA recently filed comments on behalf of its membership in two important federal rulemakings:
Community Reinvestment Act. The Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) have proposed regulatory changes to the CRA program. SBIA, among other points, thanked federal regulators for continued recognition of bank investments in SBICs and Rural Business Investment Companies (RBICs) as a “qualifying activity” for CRA credit purposes. The CRA requires federal regulators to assess how well FDIC-insured depository institutions fulfill their obligations to meet the credit needs of low- and moderate-income communities. Regulators use the CRA score for national banks, state-chartered banks, and savings associations in evaluating applications for future approval of bank mergers, charters, acquisitions, branch openings, and deposit facilities.
Volcker Rule (“Covered Funds”). Federal regulators have proposed revisions to the Volcker Rule that generally prohibits banking entities from engaging in proprietary trading or from acquiring or retaining an ownership interest in, sponsoring, or having certain relationships with “covered funds” like a hedge fund or private equity fund. Bank investments in SBICs are excluded from the Volcker Rule, and SBIA’s comment letter applauded federal regulators for accepting SBIA’s November 2019 recommendation to extend the exclusion to include SBICs that voluntarily surrender their licenses and do not make new investments after surrender. Without the proposed exemption extension, if an SBIC voluntarily surrenders its license prior to termination of the fund, it may be viewed as no longer exempt from the definition of a “covered fund” under the Volcker Rule.
Dubin Clark’s Portfolio Company United Safety Pivots to Provide PPEs
United Safety & Survivability Corporation (United Safety), a manufacturer of custom seating and fire suppression products for the transit, military and first responder markets, has pivoted its manufacturing assembly lines in an effort to help meet the demand of life saving PPE (Personal Protective Equipment) by creating face shields and reusable N95 type masks to send to our first responders, doctors, nurses and others on the front lines helping to defeat the COVID-19 Pandemic.
Century Park Capital Partners’ Covercraft Industries to Produce PPE for Healthcare Workers
Covercraft Industries, a manufacturer of car and seat covers and windshield sunscreens, is lending its manufacturing and engineering expertise to quickly expand production of urgently needed Personal Protective Equipment, mainly gowns and masks, for healthcare workers and first responders fighting the coronavirus pandemic.
Brookside Mezzanine Partners “Leads the Way” with an investment in Barrington Media Group
Brookside Mezzanine Partners announce its investment in Barrington Media Group (“BMG”). Founded in 2003 and headquartered in Shelton, CT, BMG is a technology-enabled marketing services business that focuses on direct response advertisements in traditional media channels, including television, audio and direct mail. Brookside Mezzanine Partners provided subordinated debt and an equity co-investment to facilitate the leveraged buyout of BMG by Fort Point Capital.
Riverside Continues Its Focus on the Gold Standard
The Riverside Company has invested in Pyxa Systems (Pyxa or DirectusPro), a software development company focused on process-enabled technology solutions for regulatory and compliance functions within the global pharmaceutical industry. Pyxa is an add-on investment to Riverside’s latest platform Red Nucleus Enterprises, LLC, (RN), a premier provider of learning, performance and process solutions for the life sciences industry.
SBIA is the voice and advocate for the lower middle market. Go to www.SBIA.org/about to learn more about the Small Business Investor Alliance.