SBIA Update: December 20, 2019

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

Carranza Commits to Addressing SBA Management Challenges

On December 11th, the U.S. Senate Committee on Small Business & Entrepreneurship held a hearing to consider the nomination of U.S. Treasurer Jovita Carranza to lead the Small Business Administration. In advance of the hearing, many Senators on the Committee held private meetings with Carranza, and SBIA worked hard to inform them on the impact SBICs have on the U.S. economy and asked them to get assurances from Carranza that the SBIC program would run efficiently on her watch. We met face-to-face with many of the Senators multiple times and followed up with their staffs to provide data and questions to discuss with the nominee.

Hearing highlights:

  • When questioned by Sen. James Risch (R-ID) about the pace of licensing for SBICs, Carranza responded that the issue “has been expressed by all of the Senators that I had the opportunity to meet” and expressed that one of her priorities is to look into the SBIC program. She also mentioned that she had watched both the House and Senate hearings on the SBIC program and understands that there are areas of concern.
  • Sen. Todd Young (R-IN) started his questioning by stating that he enjoyed his visit with Carranza prior to the hearing and told her he “was really encouraged that you are going to make focusing on Small Business Investment Company program improvement one of your top priorities.”
  • During Committee Chair Marco Rubio’s second round of questioning, he asked for quick answers from Carranza

The Committee has scheduled another hearing for December 18, at which they will vote on Carranza’s nomination. If she is confirmed by the Committee, her nomination will then go before the full Senate. No timeline has been announced for a full Senate vote, but President Trump is eager to get her confirmed.

Rubio: “If you are confirmed, will you commit to addressing the management challenges at the Office of Investment and Innovation to ensure the programmatic integrity of the SBIC program?”

Carranza: “Yes.”

Rubio: “If you are confirmed, will you commit to appearing before this committee within 90 days for an oversight hearing to report on your progress in addressing these problems?”

Carranza: “I look forward to meeting with you, yes.”

Treasurer Carranza was confirmed by the Committee on December 18th, and her nomination likely will go before the full Senate in January. SBIA sent out a press release congratulating her on the Committee vote.

 

SEC Proposes to Update Accredited Investor Definition to Increase Access to Investments

The Securities and Exchange Commission voted to propose amendments to the definition of accredited investor. According to the SEC, “the proposal seeks to update and improve the definition to more effectively identify institutional and individual investors that have the knowledge and expertise to participate in our private capital markets.”

On Sept 25th, SBIA sent a comment letter to the SEC in general support of proposals that expand the pool of available capital for small business investment, and opposing proposals that would reduce the pool of potential investors in small business funds. SBIA also encouraged the Commission to consider changes that would improve secondary trading opportunities for BDCs, including exempting BDCs from the definition of an “Acquired Fund” for purposes of calculating Acquired Fund Fees and Expenses (“AFFE”).

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SBA Issues Final Rule on Small Business Size Standards

The Small Business Administration (SBA) has issued a final rule on the implementation of the Small Business Runway Extension Act of 2018. The legislation amended the method SBA uses for calculating a small business’s gross receipts by going to a 5-year averaging period from a 3-year averaging period. The intent of the legislation is to allow additional runway for growing small businesses who are close to exceeding their size standard and losing their small business classification. It applies only to the calculation of gross receipts and will not affect SBA’s employee-base size standards.

According to the House Small Business Committee’s report that accompanied the bill, the legislation’s stated purpose is “to help advanced-small contractors successfully navigate the middle market as they reach the upper limits of their small size standard…this modest modification of SBA’s size formula is designed to reduce the impact of rapid-growth years which result in spikes in revenue that may prematurely eject a small business out of their small size standard. This legislation will allow small businesses at every level more time to grow and develop their competitiveness and infrastructure, before entering the open marketplace.”

The final rule is effective January 6, 2020, but it provides a transition period. Firms may choose between a 3-year or 5-year averaging period through January 6, 2022, after which, the three-year option ends. The opportunity to choose a calculation time frame will help prevent businesses with declining revenues from being harmed during the transition.

Community Reinvestment Act (CRA) Regulators Announce Proposed Rulemaking

Federal regulators responsible for the Community Reinvestment Act (CRA) released on December 12 a proposed rule that would revise the CRA program comprehensively.

The proposed rulemaking is additive and, most importantly for SBIA members, it preserves bank investments in SBICs as a “qualifying activity” for CRA credit. CRA is a 1977 law that encourages federally-regulated banks and depository institutions to make loans and invest in the communities they serve including low and moderate-income neighborhoods. The proposed rule targets four areas for CRA reform: (i) clarity about what activities qualify for CRA credit; (ii) update where those activities count for CRA credit; (iii) improved, objective measurements of a bank’s CRA performance; and, (iv) more consistent and transparent CRA data collection, recordkeeping and reporting.

Public comments on the proposed rulemaking will be accepted for 60 days after the regulators publish the proposal in the Federal Register, which has not yet occurred. SBIA intends to file comments and will seek SBIA membership input during the process.

New NFA Filing Obligations for Investment Advisers to BDCs Trading Commodity Interests Require Action as Soon as Practicable After January 9, 2020

The Commodity Futures Trading Commission published in the Federal Register on December 10, 20191 amendments to five different aspects of the regulatory framework applicable to certain commodity pool operators (CPOs) and commodity trading advisors (CTAs) that the CFTC had proposed in October 2018. Part of this rulemaking effort will directly affect investment companies that have elected to be exempt from registration under the Investment Company Act of 1940 as a business development company (BDC). Specifically, the CFTC amended CFTC Rule 4.5(a)(1) and (b)(1) codify a CPO exclusion under CFTC No-Action Letter No. 12-40 (Letter 12-40)2 for investment advisers to BDCs that trade in commodity interests (BDC exclusion). For more information please see this Dechert legal alert.


 

Member Deals 

Aldine Capital

Aldine Invests in Automated Pet Care Products

Aldine is pleased to announce its investment in Automated Pet Care Products (AutoPets). AutoPets is an international leader in developing highly functional Internet of Things pet products that make pet care easier and more enjoyable. AutoPets is the producer of the Litter-Robot, the highest-rated self-cleaning cat litter box on the market, and Litterbox.com, the destination for cat parents. AutoPets markets its products exclusively via direct-to-consumer ecommerce channels. Aldine provided a growth capital investment alongside Pondera Holdings.

 

Centerfield Capital

Centerfield Invest in Western Shelter

Centerfield is pleased to announce its investment in WS Acquisition, LLC which operates two integrated product lines: Western Shelter and Crew Boss. Centerfield supported the acquisition of the company by Guardian Capital Partners, providing subordinated debt and an equity co-investment to finance the transaction.

Headquartered in Eugene, OR, Western Shelter designs and manufactures high quality shelters and support systems built to withstand harsh environments for military, emergency response, industrial and entertainment applications. Western Shelter provides a turnkey, modular solution that addresses all aspects of a military or disaster recovery camp, including tents and other physical structures, as well as support systems such as HVAC, power generation, lighting, water purification, medical equipment and furniture. Crew Boss designs and manufactures National Fire Protection Association compliant personal protective equipment for wildland and structural firefighters. Crew Boss sells protective pants, jackets, face protectors and others accessories, as well as offering rehab trailers and carts for storing medical equipment and other gear.


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.

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