under the Small Business Investment Act of 1958 to purchase securities issued by, or to make loans to, or extend or renew existing loans to, a small business concern if such purchase, loan, extension or renewal is lawful under the Small Business Investment Act of 1958 and if not later than ten days following the day upon which such purchase, loan, extension, or renewal was effected such investment company shall report to the Commission the material terms and conditions thereof, unless the Commission shall find, after notice and opportunity for hearing that the terms of such transaction are unreasonable and unfair or involve overreaching on the part of any person concerned."

Section 17(d) of the Investment Company Act of 1940 (15 U.S.C. 80a–17 (d)) is amended by adding at the end thereof the following sentence:

"Nothing contained in this subsection shall be deemed to preclude any investment company operating under the Small Business Investment Act of 1958 and any affiliated person or persons of such investment company from effecting any transaction in which such investment company, or a company controlled by such investment company, is a joint and several participant with such affiliated person or persons if such participation by such investment company is not on a basis different from or less advantageous than that of such other participant or participants and if not later than ten days following the day on which such transaction was effected such investment company shall report to the Commission the material terms and conditions thereof."

In addition, section 18 of the 1940 act should be amended as provided in S. 902 and H.R. 6672 to permit SBIC's to issue restricted stock options and to eliminate the prohibition against further borrowings from private sources when the SBA has purchased subordinated debentures of, or made loans to SBIC's; and section 30 of the Investment Company Act of 1940 should be amended as proposed by the National Association of Small Business Investment Companies so as to permit an affiliated dealer to maintain an orderly market. If deemed necessary, provision could be added to require such a dealer to make monthly reports of such transactions to the SEC similar to those made under rule X-17a-3 of the general rules and regulations under the Securities Exchange Act of 1934.

WASTE KING CORP.,
Los Angeles, Calif., August 8, 1961.

SMALL BUSINESS SUBCOMMITTEE OF THE
COMMITTEE ON BANKING AND CURRENCY,
U.S. Senate, Washington, D.C.
(Attention: Mr. Reginald Barnes).

GENTLEMEN: This letter is submitted with the request that it be incorporated in the record of the hearings held last week before your committee on the bill proposing further amendments to the Small Business Investment Act of 1958. Waste King Corp. is a west coast appliance manufacturer, with sales of 1960 of more than $30 million. We presently propose to organize, as a subsidiary, a small business investment company to invest in small wholesale appliance distributing concerns. We believe that, in the course of considering the pending bill, this committee may be interested in our concept of a major contribution SBIC's can make to this significant area of our Nation's economy.

Having spent the post-World War II years participating in the building of a business which has faced all the problems inherent in small businesses that compete with major appliance manufacturers, I was impressed and gratified to learn that Congress had taken steps to help the small entrepreneur by establishing the concept of the small business investment company.

As a result of my experience, it was clear to me that one area in which SBIC's could be of particular value is that of financing wholesale distributors. Waste King had, however, barely taken the first steps preparatory to organizing an SBIC for this purpose when the SBA published proposed regulations which would effectively prohibit such a plan.

I therefore wish to advise the committee of the problem raised by the SBA's action and the disservice I believe it will do to the SBIC program, which the pending legislation is seeking to improve.

Basic to this problem are the economic facts of life of the appliance industry. The relatively new appliance manufacturer is faced with the problem of finding capable distributors, with the initiative, imagination and motivation necessary to compete in the sale of appliances today. The distributor must be financially capable of stocking inventory and be able to carry the accounts receivable of jobbers, dealers, and builders.

7

The few presently well-established distributors have in most cases been associated for many years with large long-established appliance manufacturers who are able to cement their relationships with the offering of multiproduct representation.

New manufacturers therefore have an extremely difficult time finding capable distributors to handle their products. Most often the organizations which have the prerequisites in terms of experience and motivation, and are available from the standpoint of not carrying competing lines, are not financed properly to handle the business involved. They finance themselves generally by borrowing ľ from private sources, paying extremely high interest rates, in addition to borrowing against their inventories and accounts receivable. The total interest they pay for the funds used in the operation of their business narrows the profit margin to the point of almost negating the business motivation.

Since distribution is such a fundamental key to the success of emerging manufacturers we look upon the small business investment company as an excellent way for the Government to assist in the maintenance of the American business atmosphere with its challenge to the individual in terms of the profit potential, to take advantage of opportunities to express his individual inventiveness by presenting in competitive markets new products, refinements and innovations. This basic orientation historically has resulted in the predominance of U.S.-manufactured goods in an increasingly competitive world market. We felt that a small business investment company could offer capable young aggressive distributors:

(1) Financial support at reasonable interest rates, the difference from the excessive rates now paid thereby creating increased business incentive and motivation;

(2) Long-term, sympathetic capital designed to accommodate growth, vital both to the house of distribution and to the organizations which it represents;

(3) Sophisticated financial and management counseling to insure prudent use of capital;

(4) The proper long-term financing the distributor needs in order to broaden his representation, so that he would not be dependent on any one manufacturer for support.

The Small Business Administration, however, now proposes by regulation to preclude the formation of SBIC's to accomplish these purposes by the very persons who would be most interested and effective in channeling long-term sympathetic capital to such wholesale distributors. Proposed Regulation No. 197.715(g) dated July 8, 1961, would prohibit a small business investment company from providing funds to

"A small business concern which is a customer of a vendor which owns or controls the licensee, if the funds (or funds of the small business concern released by such financing) are used by the small business concern to purchase items or services sold to the small business concern by such vendor."

This proposal would, we are convinced, totally eliminate the opportunity to take the first concrete step through the SBIC program in assisting independent distributors who qualify as small business concerns, the small businessmen who struggle on a daily basis to compete with the distribution of the manufacturing giants of their industry.

The original intention of the proposed regulation is clear. It seeks to prevent the abuses that might result if, for example, a wholesale grocery firm were to set up an SBIC which would in effect finance the accounts receivable of the wholesaler by lending money to the individual grocery stores which purchase from the wholesaler. Typically, the wholesaler has a large amount of money tied up in accounts receivable, since he is in effect financing his customers, and by the use of an SBIC he might relieve himself of much of this burden. Obviously, this is not an appropriate use of an SBIC, and we wholeheartedly agree with the SBA's intention to prevent it.

The proposed regulation, however, would in effect "throw out the baby with the bath water." For the regulation as presently proposed would operate to preclude not only the wholesale grocery situation, which simply substitutes one form of credit for another, but also our proposed SBIC, and others like it, which seek to provide hitherto unavailable sources of sympathetically oriented long-term capital, thus permitting independent wholesalers to compete on a more nearly equal basis with the established giants of their industry.

The abuses present in the wholesale grocery example, however, would in no ( way result from the type of operation we have in mind. Our SBIC would stand on its own feet as an independent, profitseeking enterprise. It would offer financial and management assistance to all such distributors, whether or not 'they handled Waste King products. The purpose of forming our SBIC thus would not be to finance our sales to distributors, but to enable distributors to set themselves up on a sound and realistic financial basis, so that they can deal not only with our products but with the products of all of the other medium-sized and small appliance manufacturers. We believe that by assisting these distributors in this way, not only Waste King, but the entire appliance manufacturing industry, would benefit as well as the whoelsale distributors themselves. This use of SBIC funds would broaden the base for a strong competitive economy. We further believe that independent wholesale distributors established on sound financial bases could be extremely profitable and accordingly, the long-term investments in such distributors by an SBIC could have a substantial profit potential.

SBIC's of this type could also be formed to serve wholesale distributors in other industries which have similar problems. In this way, SBIC's could fill a major gap in small business financing in the United States. It must be realized, however, that the manufacturers themselves are the people who would be most interested in establishing SBIC's to assist the wholesale distributors in each industry, and thus help to create effective channels of distribution for their products. Moreover, it is these people who would have the experience and knowledge of the industry which would be most likely to make such an SBIC and the small business concern which it finances, operate successfully.

Finally, our SBIC would not be confined to investments in wholesale distributors, but would stand ready as a source of financing to all small business concerns, specializing in distributors only as desirable investment opportunities arose in that particular field. By precluding us from this field of specialization, however, the principal motivation for forming our SBIC is taken away, and thus not only wholesale distributors but other small business concerns as well are deprived of a potential source of capital from our company and the many others similarly situated.

We believe, therefore, that the SBA is making a serious mistake in cutting off this potential source of capital for new SBIC's by its proposal. We believe that the problems of abuses at which the SBA's proposed regulation is directed can easily be obviated without, at the same time, precluding this type of SBIC operation. Specifically, we suggest that the SBA be encouraged to modify the proposed regulation to provide a formula under which, for example, the financing by a licensee of small business concerns which are customers of the owner of the licensee would be prohibited only where the SBIC invests the major portion of its assets in small business concerns which purchase more than 25 percent of their products from the owner of the licensee. If necessary, further safeguards could also be adopted to insure that all dealings between the small business concern and the licensee with respect to the products of the licensee's owner are at arm's length, and that no preferential treatment is either requested or afforded. The SBIC could readily operate under such restrictions, and, at the same time, these uses of SBIC funds at the proposed regulations are directed. Companies such as Waste King, which are immediately prepared to move ahead and form SBIC's, would be able to do so and to provide a source of equity capital in an area where it is so greatly needed.

On the other hand, the SBA's "blunderbuss" attempt to avoid abuses in this area by totally prohibiting the formation of SBIC's of the type that we suggest would do a serious disservice to the SBIC program, and is totally unnecessary in order to attain the desired goals.

The Small Business Investment Act provides a useful and extremely versatile tool for providing long-term sympathetic financing to many types of small businesses. We urgently request the committee to make clear to the SBA the necessity for keeping its regulations under the act as broad as possible, consistent with the prevention of abuses, and that an absolute position should not be taken in order to preclude an undesirable activity that could effectively be curtailed by a more carefully drawn regulation which would strike only at the evil to be avoided without, at the same time, seriously impairing the efficacy of the act in areas where it could be of great benefit.

Sincerely,

HOWARD C. GIVEN.

Senator DOUGLAS. The record will be kept open for a reasonable time for further additions.

Thank you very much.

(Whereupon, at 3:05 p.m., the subcommittee adjourned, subject to

the call of the chairman.)

(The following were received for the record :)

Hon. WILLIAM PROXMIRE,

SMALL BUSINESS ADMINISTRATION,

Chairman, Subcommittee on Small Business,
Banking and Currency Committee,

U.S. Senate, Washington, D.C.

August 17, 1961.

DEAR SENATOR PROXMIRE: Following the testimony of Mr. Charles E. Salik, president, Electronics Capital Corp., before your subcommittee on August 2, 1961, this Administration requested permission to comment to you on this testimony. Mr. Salik testified, inter alia, that it was the large publicly held small business investment companies (SBIC's) that were carrying the burden of this program. He stated that the minimum-sized companies were not active, that they could not operate profitably, and that small business concerns were not being supplied funds by these minimum-sized companies. In response to this statement, you indicated that you would like to have some facts and figures from the Small Business Administration to determine or illustrate just what these small- or minimum-sized SBIC's were doing in this program.

In the absence of the Administrator, I have looked into this matter and should like to comment upon Mr. Salik's testimony.

As the Administrator and I testified, the minimum-sized companies are having a difficult time with regard to overhead, personnel, etc., and there is a need for increasing the capitalization of these companies through the amendments to the Small Business Investment Act of 1958, as proposed by this agency.

Over 90 percent of the SBIC's licensed by this agency have been minimumsized companies (capitalization of $150,000 private funds and $150,000 subordinated debentures purchased by SBA). This ratio of 9 to 1 in minimum companies has continued during the past several months, even as the larger publicly held companies have continued to obtain a substantial amount of the publicity generated from this program.

During the past year, 152 minimum-sized companies have invested in 807 small business concerns, as follows:

During this same period, 19 publicly held or large SBIC's having capitalization above $1 million, made a total of 232 investments in small business concerns as follows:

Section 306 of the Small Business Investment Act of 1958 restricts the investment of an SBIC in any small business to 20 percent of its capital. So long as there are minimum-sized companies, funds will be made available on a regular basis to smaller business. In this regard, it is interesting to note that Mr. Salik informed me the smallest investment his company had made in any busi

ness was $300,000. While there is certainly a need for this type of investment, there is equally a need for the type of investment made by the minimumsized companies.

I trust that this information will be of assistance to you. sonal regards, I am,

Very truly yours,

With sincere per

PHIL DAVID FINE, Deputy Administrator.

SMALL BUSINESS ADMINISTRATION,

OFFICE OF THE ADMINISTRATOR,
Washington, D.C., August 17, 1961.

Hon. WILLIAM PROXMIRE,

Chairman, Subcommittee on Small Business,
Committee on Banking and Currency,

U.S. Senate, Washington, D.C.

MY DEAR MR. CHAIRMAN: On July 31, 1961, the Administrator submitted to your subcommittee a draft bill revising S. 902 to reflect all of the changes which he believes should be made in the Small Business Investment Act of 1958. In his testimony before your subcommittee on that day, he gave his reasons for each of the provisions of this draft bill. However, with respect to section 10 thereof, dealing with enforcement procedures, it is believed that further explanation is desirable. In the absence of the Administrator, I am submitting on his behalf the following comments on section 10 of the proposed legislation:

ANALYSIS OF PROPOSED LEGISLATION FOR ENFORCEMENT PROCEDURES

Section 10 of the draft bill would add a new section, designated as section 310 to the act and would set forth enfocement procedures under the legislation. Paragraph (a) of proposed section 310 would authorize the Small Business Administration to revoke a license (1) for false statements knowingly made; (2) for willful or repeated violation of, or willful or repeated failure to observe, any provision of the act or regulation; or (3) for violation of, or failure to observe, any cease and desist order issued by the Small Business Administration under this section.

Paragraph (b) of proposed section 310 would authorize the Small Business Administration to order a licensee, where such licensee has not complied with any one or more of the provisions of the act or regulations, to cease and desist from such action or failure to act; and would authorize the Small Business Administration to further order such licensee to take such action or to refrain from such action as the Small Business Administration may deem necessary to insure compliance with the act and regulations. Also, the Small Business Administration may suspend the license of such licensee until the licensee has complied with such order.

Paragraph (c) of proposed section 310 sets forth administrative processes which must be adhered to by the Small Business Administration prior to revoking a license pursuant to paragraphs (a) and (b) of this section, or issuing a cease and desist order pursuant to paragraph (b) of this section. Paragraph (d) of proposed section 310 would give the Small Business Administration the right to subpena witnesses and documents in accordance with generally accepted practices by other Government agencies.

Paragraph (e) of proposed section 310 provides that any order issued by the Small Business Administration under this section shall be final and conclusive unless appealed to the appropriate U.S. court of appeals within 30 days after service thereof and further provides for court review of such orders.

Paragraph (f) authorizes the Small Business Administration to apply to the appropriate U.S. court of appeals for the enforcement of any order issued by the Small Business Administration under this section.

THE PROBLEM OF ENFORCEMENT

The task of the Small Business Administration under the Small Business Investment Act of 1958, as amended, after the licensing of small business investment companies, is to assure that such licensees adhere to their responsibilities and to the principles of faithful performance concomitant with their