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Uncle Sam Wants You To Raise An Early-Stage VC Fund: UPDATED

The federal government played nursemaid to the venture capital market through its SBIC program launched in 1958. Now it’s looking to the same program to help guide VC through its mid-life crisis—and it wants your feedback on how to do it.

The original Small Business Investment Company program aimed at financing startups, called the participating-securities SBIC program, has been in wind-down mode since the mid-2000s, a victim of losses and its own complexity. But its less flamboyant cousin, the debentures SBIC program, is alive, well and growing.

While the debentures program, run by the Small Business Administration, has mainly been used by mezzanine firms, Sean Greene, the founder and former venture capitalist who’s run the SBIC program for the last two years, is supervising the carve-out of a $1 billion allocation for the Early-Stage Innovation Fund. The pool would be allocated, $200 million per year over the next five years, to match money raised by venture capital firms from private investors.

Expect at least four venture firms to be awarded licenses each year, and, given the tight fundraising market, the SBA is likely to be inundated with applications. Said Greene in an interview late last month: “Interest level in this has been incredibly high.”

The SBA plans to solicit comments starting this month on proposed regulations governing the program, with an eye toward accepting the first batch of applications in 2012, Greene said. (UPDATE: The proposed rules were published in the Federal Register on Dec. 9.) Here are some of the broad elements of the Early-Stage Innovation Fund, as described to me by Greene:

–The SBA would award up to $50 million per fund in the form of debentures. It’s essentially low-cost leverage that would help firms expand their funds and boost their returns. The last pool of 10-year debentures carried an interest rate of 2.9 percent, although recipients also must pay fees, both upfront and annual—money that the SBA uses to guarantee the return of principal and interest to bond-holders. (The SBIC program is designed to be self-funding, with no help from taxpayers.)

–Up to 1:1 leverage would be available for any one fund. Distributions, in turn, would be paid out 1:1 until the bond-holders get their money back.

–At least 50% of the money deployed by participating firms would have to be invested in seed or Series-A stage transactions. The SBA is not likely to have any geographic requirements, although Greene said the SBA is concerned about the concentration of venture capital investing in California, New York and Massachusetts.

–Firms would not have to draw down the leverage right away, an appealing element for venture firms looking to have a reserve of money available for follow-on financings.

–Instead of rolling admissions as in the past, this program would have annual application deadlines.

The Early-Stage Innovation Fund is part of the Startup America initiative launched by the White House in early 2011 as a way “to celebrate, inspire, and accelerate high-growth entrepreneurship throughout the nation.” For more information about the fund visit the SBA’s Web site.