The Small Business Investor Alliance, which lobbies for mid-market buyout and mezzanine shops, including many SBIC funds and BDCs, helped to secure member-friendly legislation as part of two appropriations bills this fall, including a provision that makes it easier for firms to raise additional SBIC funds.
SBIA wants the momentum to continue. Among its 2016 objectives, the organization may push for legislation to raise the AUM threshold for SEC registration to $1 billion from $150 million. It will also press to pass two pieces of legislation already introduced. One would lift the maximum ratio of leverage available to business development companies, or BDCs, from 1:1 to 2:1. The other would create a permanent advocate at the SEC for small businesses and their backers.
On the legislative wins front, Congress folded into the $1.1 trillion spending bill signed by President Barack Obama in December a provision that raises the amount of government-guaranteed leverage available to SBICs from $225 million to $350 million.
Brett Palmer, president of SBIA, said that, just as before, many individual SBIC funds will still top out at $225 million in size — $75 million in private capital supplemented with $150 million in borrowing under the SBIC debenture program of the U.S. Small Business Administration. However, the previous $225 million cap on total leverage across funds meant firms could secure just $75 million more in government-guaranteed loans for an additional SBIC fund. The new law ensures that the SBA doesn’t “punish” firms for being good enough to raise more than one SBIC fund, said Palmer.
The SBIA successfully lobbied to attach two additional riders to the spending bill, while also getting a rider attached to the highway bill that was signed into law in December. The result:
- Investors in qualified small businesses organized as C-corporations won’t have to pay taxes on at least a portion of their gains. This marks a permanent extension of a tax break that had expired at the end of 2014. According to Palmer it represents good news for buyout firms that invest in companies with less than $50 million in gross assets, that hold them for at least five years, and that have taxable limited partners, such as high-net-worth investors.
- Foreign investors in regulated investment companies, including BDCs, won’t be subject to tax withholding requirements on their dividends. As above, this outcome stems from the permanent extension of a buyout-industry-favorable tax treatment that had expired at the end of 2014.
- Firms that raise SBIC funds no longer have to worry that money counts toward the $150 million AUM threshold for registration as investment advisers. SBIA helped secure this result as part of a handful of “technical corrections” made to the Dodd-Frank financial reform legislation.
Looking ahead to 2016, SBIA believes the time is ripe to a launch an assault on several other regulations imposed on many buyout firms by Dodd-Frank. Such requirements have been widely criticized by smaller shops as overly taxing. Palmer said raising the $150 million AUM threshold for having to register as an investment adviser with the SEC is “worth a look,” adding that Republicans are willing to go “much higher” than Democrats. SBIA is still surveying members on the question of the right cut-off, but Palmer called $1 billion a more “reasonable” number.
Meantime, SBIA plans to press Congress to move forward with two pieces of legislation that have already passed the House Financial Services Committee by large majorities. One, which passed the committee on a 53-4 vote in November, would raise the debt-to-equity ratio for BDCs to two to one from one to one. A higher cap would let BDCs earn better returns for investors, although not without higher risks for investors — a point of concern repeated this fall by SEC Chairwoman Mary Jo White in a letter to the committee. The proposed legislation would also let BDCs issue more than one kind of preferred stock.
The second piece of legislation, dubbed the “SEC Small Business Advocate Act,” would create an independent office at the SEC — with a single person appointed to run it — to make sure regulators take into account the impact of proposed rules on small businesses. Its establishment would echo that of the Office of the Investor Advocate, which Dodd-Frank created to give investors a greater say in decision-making at the SEC and in Congress. The House Financial Services Committee passed the small business advocate legislation by a 56-0 vote earlier this month.
“That bodes very well for ,” said Palmer.
Action Item: See the SEC Small Business Advocate Act here: http://1.usa.gov/1QSA4Tu