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SBIC TechNotes Number 14 - November 2009

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Introduction

The Office of Investment has instituted a Fast Track process for reviewing applications for Small Business Investment Company ("SBIC") licenses for successor funds to be operated by managers of current SBICs that have met certain criteria.  The Fast Track applies only to (i) applicants whose previous SBICs have been licensed to issue Debenture leverage only ("Debenture SBIC Applicants") or (ii) applicants who are not seeking leverage for their subsequent SBIC ("Non-leveraged SBIC Applicants").

This TechNote describes the criteria for Fast Track.  Please note that management teams may be licensed for a subsequent SBIC even if they do not qualify for the Fast Track process.  Similarly. qualifying for a Fast Track does not guarantee that the applicant will be licensed.

Process

SBA uses a three step process to license an SBIC: Phase I - Initial Review; Phase II - Capital Raising; and Phase III - Licensing.  The Fast Track is anticipated to shorten the Phase I process to 2 weeks from receipt of SBIC notification and the Phase III process to 60 days from the date SBA accepts the licensing application.  (Note: Due to the shortened timeline, Fast Track applicants will not be allowed to make pre-licensing investments)

Phase I: Initial Review (2 Weeks)

Debenture SBIC Applicants and Non-leveraged SBIC Applicants should notify their Operations Analyst in writing (email is acceptable) with a copy to the Area Chief, providing the following information:

  • Name of new fund;
  • Amount of leverage being sought;
  • Anticipated private capital size (include hard-circled and soft-circled commitments, if any);
  • Minimum targeted capital required to execute strategy;
  • Anticipated closing date to raise minimum targeted capital required to execute strategy;
  • Estimated date applicant expects to file application, if known (specifically identifying if you expect to file immediately)
  • Any anticipated changes in the management team from the current SBIC(s); and
  • A brief description of the proposed fund's strategy with regards to industry, geography, size of investments, investment structure, portfolio company initial stage/revenue range/EBITDA range; and a discussion regarding how this strategy differs from its current strategy

 

The Operations Analyst will review the information submitted and the current SBIC(s) using criteria A through C in Attachment 1. The Operations Analyst will prepare a written memo concerning his/her review for the Investment Committee. The Investment Committee will consider the memo and other issues that might impact the Fast Track process and licensing decision. If the Investment Committee concludes by majority vote that the applicant satisfies the Fast Track criteria at this stage and the Investment Committee has identified no other concerns about other issues that impact the Fast Track Process, the applicant can expect to receive a “Fast Track Green Light” letter within 2 weeks from the date the Office of SBIC Operations receives the notification. If the Investment Committee does not conclude that the applicant satisfies the Fast Track criteria or the Investment Committee requires further information, SBA will notify the applicant within 2 weeks.
 
If an applicant is denied “Fast Track” status at this stage, SBA will continue to evaluate the application to determine whether the applicant should be provided a “Standard Green Light” letter. If the Investment Committee decides by majority vote to approve a “Standard Green Light” letter to the applicant, when the applicant submits its application in Phase III, the Licensing Analyst will
re-evaluate the applicant against the Fast Track Criteria A through C in Attachment 1 to determine if the applicant qualifies for Fast Track at that point.

 

Phase 2: Capital Raising Process

An applicant who receives either “Green Light” letter has up to 1 year from the date of the letter to raise capital and submit its licensing application. The SBIC application remains the same regardless of whether an applicant qualifies for Fast Track processing. Applicants seeking to qualify for the Fast Track need to raise the minimum targeted capital required to execute the strategy prior to submitting its licensing application to the SBA. Applicant managers should keep their Operations Analyst updated on their capital raising progress and advise them at least 30 days prior to filing the application as to when they expect to file. (This will allow Operations to provide current information on the applicant to the Licensing staff prior to filing.)

 

Phase 3: Fast Track Licensing Process

Upon receipt of the application, the Licensing Analyst will determine whether any material adverse information or changes have occurred or become known since Phase I and verify that all requirements identified in Attachment 1 have been satisfied. The Licensing Analyst and the Office of General Counsel (“OGC”) will preliminarily assess the organizational structure, legal documents, and capitalization to ensure they meet conformance requirements identified in Attachment 2. (Note: SBICs will not be allowed to modify their organizational documents for 6 months after being licensed.) If the applicant meets all Fast Track requirements, the applicant can expect to be notified of the final Fast Track qualification within 10 days after the SBA accepts the application.
 
If an applicant is removed from Fast Track, the applicant will be notified within the 10 day period with the reason(s) for removal. The Associate Administrator for Investment (“AA/I”) must approve any removals from Fast Track. Applicants that are removed from Fast Track for non-conformance due to issues concerning qualifications A.1, A.2, and/or D in Attachment 1 will be sent a Notice of Non-conformance and be given 30 days to respond from the date of the notice. If the applicant cures within the 30 days, they will be placed back on Fast Track. (Applicant time to respond for non-conformance will not be counted towards the 60 day licensing time goal.)
 
The SBA transmits security documents to the Federal Bureau of Investigation (“FBI”) for two criminal history checks: fingerprint and name checks. The fingerprint clearance must be completed before the applicant can receive leverage, a process which typically takes 2 to 3 weeks (although it should be noted that the SBA has no control over the length of the process). This will not impact the Fast Track process.
 
During the Phase III process, the SBA will perform due diligence including telephone reference calls, electronic public records searches, strategic/business plan validation, regulatory diligence, and financial analysis. If any material adverse information arises during this timeframe, the SBA may remove the applicant from Fast Track. If this should occur, the applicant will be notified within 10 days of identifying the issue.
 

Within 3 to 4 weeks after submitting its application, the SBA will send a “comment letter” to the applicant containing any comments, questions, and concerns. Applicants will be given 1 week from the date of the letter to respond. During the response timeframe, the applicant must also provide SBA with an executed capital certificate and bank letter showing the minimum $2.5 million of leverageable capital, as well as fully executed legal documents. If the legal documents have been signed under a power of attorney, executed copies of each power of attorney must also be submitted. If the applicant requires more time than 1 week to provide the capital certificate and bank letter and respond to the comment letter or the applicant provides an insufficient response, additional time to resolve these issues will not be counted towards the 60 day licensing goal.

Once all issues are resolved and documents are submitted, the application will be presented to the Divisional SBIC Licensing Committee and then to the Agency Licensing Committee.

Page Title: 
Fast Track Process for Small Business Investment Companies Seeking a Subsequent License
SBIC Spotlight: 
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