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SMALL BUSINESS INVESTMENT ACT AMENDMENTS

OF 1961

TUESDAY, AUGUST 1, 1961

HOUSE OF REPRESENTATIVES,

COMMITTEE ON BANKING AND CURRENCY,

SUBCOMMITTEE No. 2,
Washington, D.C.

The subcommittee met at 10 a.m., Hon. Wright Patman, chairman of the subcommittee, presiding.

Present: Messrs. Patman (presiding), Multer, Reuss, Vanik, Moorhead, Miller, Gilbert, St. Germain, Harvey, and Scranton.

Mr. PATMAN. The committee will please come to order.

We are meeting this morning to hear testimony on H.R. 6672, a bill which I introduced to stimulate investments in small business concerns through amendments of the Small Business Investment Act of 1958 and the Investment Company Act of 1940.

The bill was introduced in an effort to solve some of the difficulties encountered in forming and operating small business investment companies under the 1958 act.

(H.R. 6672 is as follows:)

[H.R. 6672, 87th Cong., 1st sess.]

A BILL To amend the Small Business Investment Act of 1958, and for other purposes Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That this Act may be cited as the "Small Business Investment Act Amendments of 1961".

SEC. 2. The second sentence of section 302(a) of the Small Business Investment Act of 1958 is amended to read as follows: "In order to facilitate the formation and growth of small business investment companies, the Administration is hereby authorized, notwithstanding any other provisions of law, to purchase the debentures of any such company in an amount not to exceed the lesser of $1,000,000 or the amount of the capital and surplus of the small business investment company from other sources."

SEC. 3. Section 303 (b) of the Small Business Investment Act of 1958 is amended by striking out "50 percent" and inserting in lieu thereof "100 percent".

SEC. 4. Section 304 of the Small Business Investment Act of 1958 is amended by adding at the end thereof the following new subsection:

"(d) Equity capital provided to incorporated small-business concerns under this section may be provided directly or in cooperation with other investors, public or private, incorporated or unincorporated, through agreements to participate on an immediate or deferred basis."

SEC. 5. Section 305(b) of the Small Business Investment Act of 1958 is amended by striking out "other lending institutions" and inserting in lieu thereof “other lenders, public, or private, incorporated or unincorporated, including the Small Business Administration,".

SEC. 6. Section 308(a) of the Small Business Investment Act of 1958 is amended to read as follows:

"(a) Wherever practicable the operations of a small business investment company, including the generation of business, may be undertaken in cooperation with banks or other investors or lenders, public or private, incorporated or unincorporated, and any servicing or initial investigation required for loans or

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acquisitions of securities by the company under the provisions of this Act may be handled through such banks or other investors or lenders on a fee basis. Any small business investment company may receive fees for services rendered to such banks or other investors or lenders."

SEC. 7. The last sentence of section 308(b) of the Small Business Investment Act of 1958 is amended by striking out "guaranteed as to principal and interest by" and inserting in lieu thereof "insured by instrumentalities of".

SEC. 8. Nothing contained in this Act, the Investment Company Act of 1940, or any other Act shall be construed as preventing any small business investment company from issuing "restricted stock options" qualifying under section 421 of the Internal Revenue Code of 1954, and such "restricted stock options" are hereby specifically authorized.

SEC. 9. Section 502 of the Small Business Investment Act of 1958 is amended by striking out paragraph (6).

SEC. 10. (a) Section 17 of the Investment Company Act of 1940 (15 U.S.C. 80a-17) is amended by adding at the end thereof the following new subsections: "(j) Investment companies operating under the Small Business Investment Act of 1958 shall not be barred, by subsection (a) of this section, from making additional loans to small-business concerns which have previously issued debenture bonds to such investment companies as security for equity capital provided pursuant to section 304 of such Act.

"(k) Lending institutions which organize or are affiliated with investment companies operating under the Small Business Investment Act of 1958 shall not be barred, by subsection (d) of this section, from making loans to small-business concerns to which such investment companies have provided equity capital pursuant to section 304 of such Act or have made loans pursuant to section 305 of such Act."

(b) Section 18 of such Act (15 U.S.C. 80a-18) is amended by adding at the end thereof the following new subsection:

"(1) Investment companies operating under the Small Business Investment Act of 1958 shall not be barred, by subsection (c) of this section, from obtaining funds, through the offering of senior debt securities, not in excess of the ratio of four to one over their equity, as permitted by regulation of the Small Business Administration, in addition to the funds received by such companies from the Small Business Administration pursuant to section 303(b) of such Act."

(c) Section 30 of such Act (15 U.S.C. 80a-29) is amended by adding at the end thereof the following new subsection:

"(g) Notwithstanding subsection (f), a person who is an officer, director, member of an advisory board, investment adviser, or affiliated person of an investment adviser of a registered closed-end company which is an investment company operating under the Small Business Investment Act of 1958, or who is directly or indirectly the beneficial owner of more than 10 per centum of any class of outstanding securities (other than short-term paper) of which such a company is the issuer, shall in respect of profit realized from transactions in securities of such company be subject to the duties and liabilities imposed by section 16(b) of the Securities Exchange Act of 1934 only to the extent that such profit exceeds 5 per centum of the difference between the purchase and sales prices in such transactions within a six-month period. Copies of the statements required by section 16(a) of such Act shall, in the case of persons to whom this subsection applies, be furnished to the Small Business Administration."

Mr. PATMAN. Our witnesses this morning represent the National Association of Small Business Investment Companies and can tell us from their practical experience what difficulties they have encountered and what solutions they propose. They are Mr. Alan K. Ruvelson, of Minneapolis, president of the National Association of Small Business Investment Companies; Mr. Stewart W. DeVore, of Fort Worth, Tex., first vice president of the National Association of Small Business Investment Companies; and Mr. James W. Howard, of Cleveland, chairman, NASBIC's committee on publicly owned SBIC's. I suggest that we have the three gentlemen appear together and each one present his testimony in the order in which they appear on the agenda. Then, after they have concluded, we will interrogate them. Is there any objection to that procedure?

Without any objection, we will proceed in that way. So, Mr. Ruvelson, if you will, you may proceed in your own way and present your testimony, sir.

STATEMENT OF ALAN K. RUVELSON, PRESIDENT, NATIONAL ASSOCIATION OF SMALL BUSINESS INVESTMENT COMPANIES

Mr. RUVELSON. Thank you, Mr. Chairman. My name is Alan K. Ruvelson. I am president of First Midwest Small Business Investment Co., of Minneapolis, one of the first two companies to be licensed under the Small Business Investment Act of 1958.

I appear before you today in my capacity as president of the National Association of Small Business Investment Companies. Two-thirds of all the licensed companies are members of our association, and our membership accounts for more than three-fourths of the funds committed to the SBIC program by licensees. I can, therefore, state that the views which I am about to present on H.R. 6672 reflect the views of the great majority of licensed companies.

I am sure that you, Mr. Chairman, and all members of this subcommittee who played such an important role in enacting the law which established the SBIC program back in 1958 are proud of the manner in which your offspring has grown. You have every right to be. Furthermore, those of us now in the industry feel that we are fortunate indeed to be among the pioneers in such an important endeavor.

As you know, there are today over 325 small business investment companies licensed to do business and their potential resources for investing in and lending to small businesses totals nearly half a billion dollars. Already nearly 2,000 independent firms have been assisted by SBIC's, and we estimate that at least $150 million is at work for these small businesses. This, we feel, is a fine start; but the program is only now getting underway, and we must not lose the momentum which has been generated.

Therefore, all of the provisions contained in H.R. 6672 have the enthusiastic support of our membership. We are deeply grateful to the distinguished chairman of this committee, Mr. Patman, for introducing this bill in the House of Representatives.

In our view the SBIC program is ideally suited to the President's aim of stimulating the national economy from the grassroots level. I am mindful also of the President's address to the Nation last Tuesday evening and his message to the Congress on Wednesday on the international situation.

We fervently hope this country will not be drawn into another war; but if that should occur, we know from experience that small business concerns are essential in meeting national emergencies. By means of the SBIC program, we would hope that our industry could give the necessary strength and stability to small business concerns to enable them to remain productive and competitive in any emergency.

Turning now to H.R. 6672, sections 2 and 3 of the bill would increase the Government funds to be made available to small business investment companies, both those now licensed and operating, and others to be licensed in the future. We regard sections 2 and 3 as the most important provisions of H.R. 6672. The enactment of these sections as proposed is, in our view, essential to the accomplishment

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