SBIA Update: April 24, 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.
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Legislative & Regulatory Update
Small Business Investment Companies = American Jobs
The Small Business Administration’s SBIC program has a long history of success helping small U.S. businesses access long-term, patient capital for growth and job creation. Through the SBIC program, SBA licenses privately and publicly managed investment funds that raise capital from private investors and then combine it with capital obtained through the SBIC’s issuance of a taxpayer-backed debenture guaranteed by the SBA.
Recently, there has been heightened interest from members about forming a Small Business Investment Company (SBIC). In order to help answer questions and provide resources, wSBIA has launched a new SBIC portal on our website.
SBICs are primarily formed as limited partnerships and they provide equity, long-term loans, or debt-equity investments along with management assistance to small businesses across a range of sectors, geographic locations, and stages of growth. Some SBICs specialize in an industry sector, region, or specific stage while other SBICs invest more broadly.
Phase 3.5: New coronavirus relief signed into law
On Friday, April 24, President Trump signed into law another coronavirus relief package (“CARES Act 3.5”) to help American businesses stay afloat. The bill includes an additional $310 billion for the Paycheck Protection Program (PPP), of which $60 billion is set aside specifically for small depository institutions, credit unions, and community financial institutions. However, many anticipate that these additional funds will be exhausted within 72 hours. The bill also provides an additional $60 billion ($10 billion in grants and $50 billion in loans) for the Emergency Economic Injury Disaster (EIDL) program and opens those funds to certain agricultural institutions with less than 500 employees.
New FAQs and new interim rules from Treasury on PPP: What to do?
The new FAQ guidance from Treasury has generated anxious questions about which small businesses should access PPP. Per the spirit of the law authorizing PPP, all small businesses should first do the best they can with the resources available to them individually so as not to crowd out the thousands of small businesses who do not have access to other resources. However, if there is a good faith need for PPP capital because of the economic uncertainty caused by the Covid-19 pandemic to keep low and moderate income employees economically secure, or to avoid significant detriment to a small business’s operation, then the small business clearly qualifies for a PPP loan and should be able to make the necessary certifications to access it. Small businesses should be documenting their disruption and how the PPP funds are being used to fulfill the legal mandate of the law. Congressional authors of the program are not going to question small businesses for using the program for the purpose of keeping people employed and saving American jobs.
New rules released Friday are explicit that the PPP is not intended for conventional private equity or hedge funds, which is consistent with the affiliation rules. This makes clear what SBIA has been telling our members all along — no management company of a VC/PE/Hedge/SBIC/RBIC/BDC/family office/LP fund should be taking PPP loans. We expect that SBA will be releasing additional guidance clarifying that SBIC-assisted small businesses are not prohibited from PPP and will share additional guidance with members as soon as it is released.
SEC Proposes to Modernize Framework for Fund Valuation Practices
The SEC announced a proposed a new rule to establish a framework for fund valuation practices. The proposed rule would establish requirements for satisfying a fund board’s obligation to determine fair value in good faith for purposes of the Investment Company Act of 1940. The rule would require a board to assess and manage material risks associated with fair value determinations; select, apply and test fair value methodologies; oversee and evaluate any pricing services used; adopt and implement policies and procedures; and maintain certain records.
According to the SEC, “the rule is designed to clarify how fund boards can satisfy their valuation obligations in light of market developments, including an increase in the variety of asset classes held by funds and an increase in both the volume and type of data used in valuation determinations.”
The comment period for this rule is open until July 20, 20202. SBIA will carefully review and circulate draft comments to members prior to the deadline.
Brookside “Electrifies” its Portfolio with an Investment in Worldwide Electric Corporation
Brookside Mezzanine Partners has invested in Worldwide Electric Corporation LLC, a developer, importer and value-added distributor of a wide range of industrial electric motors, motor controls and gear reducers. Brookside provided subordinated debt and an equity co-investment to support the growth strategy of WWE, a portfolio company of Graycliff Partners.
Riverside’s Latest Investment Helps Law Enforcement Manage Evidence
The Riverside Company has invested in QueTel, the technology leader in digital and physical evidence management that also helps law enforcement agencies handle back-office processes, such as forensic request processing, and the management of equipment, uniforms and supplies. QueTel is an add-on to Riverside’s Omnigo Software platform. Omnigo is the leading provider of public safety, incident reporting and security management solutions for law enforcement, education, healthcare, gaming, hospitality and other enterprises.
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.