On February 12, 2013, the SBA issued SBIC TechNote 17, which provides guidance on the criteria the SBA will consider in determining whether two or more SBICs are under "Common Control".
The Small Business Investment Act of 1958, as amended, and the regulations promulgated thereunder (collectively, “SBA Regulations”), provide that a single fund may obtain a maximum of $150 million of outstanding SBA leverage through the SBIC program. However, if the SBIC is under Common Control with one or more other SBICs, the total outstanding leverage among such SBICs is limited to $225 million. Therefore, if SBIC I and SBIC II are under Common Control and SBIC I has $150 million of leverage outstanding, SBIC II is limited to drawing $75 million of leverage. In addition to the limitation on outstanding leverage, an SBIC is prohibited from being under Common Control with another SBIC without the SBA’s prior written approval.
Common Control is defined in 13 CFR §107.50 as “…a condition where two or more Persons, either through ownership, management, contract, or otherwise, are under the Control of one group or Person”. Thus, the definition of Common Control hinges on what constitutes “Control” under SBA Regulations. TechNote 17 provides guidance on the matter by discussing the circumstances under which the SBA will generally consider a Person (which may be an entity or an individual under SBA Regulations) to have Control. TechNote 17 explains that the SBA will generally determine Control over an SBIC by looking at whether the Person meets certain thresholds of ownership and/or management of the SBIC or its general partner. In addition, TechNote 17 provides some general considerations that the SBA will examine when making the determination.
According to TechNote 17, the SBA will generally consider a Person to have Control over an SBIC if:
- The Person has significant direct or indirect ownership in the SBIC or general partner as follows:
- The Person owns or controls (by contract or otherwise) 33% or more of an SBIC; or
- The Person owns or controls (by contract or otherwise) 10% or more of any SBIC and participates in its investment decisions; or
- The Person owns or controls (by contract or otherwise) any portion of the general partner, except as a non-managing member solely for the purpose of receiving carried interest no greater than 25%; or
- The Person’s participation in carried interest is over 25%.
Therefore, in the event an SBIC has a limited partner whose ownership level meets (a) or (b) above, the SBIC will have to confirm that the limited partner does not qualify under (a) or (b) in any other SBIC. If it does, then the SBA would have to approve in writing such Person becoming a Limited Partner in the SBIC, and the amount of outstanding SBA leverage among such SBICs would be limited to $225 million.
The TechNote also provides that the SBA will generally consider a Person to have Control if:
- The Person is part of the general partner’s management team; or
- The Person participates in the investment decisions of the SBIC, unless it can clearly be demonstrated to SBA’s satisfaction that the Person does not have significant influence in those decisions. Such considerations may include:
- Whether the remainder of the investment committee would qualify for an SBIC license without that Person.
- Whether the Person has veto power or a significant voice in the investment committee’s decision making
Therefore, the straightforward management trigger is where one or more managers of a general partner of an SBIC are also managers of the general partner of another SBIC. In addition, the guidance provided by TechNote 17 indicates that if a person sits on the investment committee of an SBIC, but is not a manager of the general partner and does not otherwise exercise Control, that person may be deemed not to exercise Control if the listed considerations are present.
In addition to the specific ownership and management considerations discussed, TechNote 17 states that the SBA will consider other relevant factors for determining whether a Person has Control over an SBIC, which may include:
- Whether a Person’s ownership in the SBIC, its general partner or management company is large when compared to other ownership interests.
- Whether the Person qualifies as an “Associate” (under SBA Regulations) of the SBIC or its general partner.
- Any indications that the Person may have significant influence over members of the management team.
The SBA will determine whether a Person has Control of an SBIC based on the totality of the circumstances. However, TechNote 17 provides valuable guidance as to how it will make the determination. Given the consequences of a determination that two SBICs are under Common Control, SBICs are well-served by familiarizing themselves with TechNote 17 and understanding how the SBA will perform its analysis of Common Control.
If you have questions regarding TechNote 17 or the SBIC program in general, please contact any of the attorneys listed on this page.